Designing a Trading Plan with CFDs

The Foundation of a Successful CFD Trading Plan

The goal of trading is of course to exit positions with a net profit overall, which is to say we want to make and not lose money from our trading. In order to do this, we’re going to need a plan, a set of rules of some sort which will guide our decisions in actions while seeking this goal from trading.

Designing a Trading Plan with CFDsGiven that CFD trading is highly leveraged, having a good plan becomes even more important, or at least having a plan to get us to the point where we are profitable. This might seem far less exciting to new traders than shooting for the huge returns with CFD trading that they may dream about, turning a few thousand dollars into millions and so on, earning one’s living trading on the beach in some exotic location, the big houses and expensive cars and all the other things that fantasies are made of.

Some traders so live such lavish lifestyles, but they didn’t get there in a flash and they didn’t reach these vaulted heights without putting in a lot of work. It’s not a bad idea to have these aspirations but it’s also important to realize that progress in trading takes a lot of effort and discipline and time, and you just won’t have success handed to you.

Successful trading plans need not be all that complex, and there are some rather simple ones that tend to do very well, and simplicity is for the most part a virtue. Simple and effective is what we’re shooting for here, not simple and not so effective or not effective at all.

The first and most important step in designing any trading plan is to come up with one that manages risk well enough, otherwise you just won’t be around very long to see your plans through.

One should be prepared to only risk an appropriate amount of your account balance on each trade, and this isn’t just the 1% or 2% that traders generally recommend, it is what would be appropriate for your trading expectations. If these expectations are negative, one must minimize their trade sizes to minimize risk, as there is no other sensible way.

New traders, and perhaps in particular, new CFD traders, tend to be far less patient than they need to be, and the need for patience with CFD trading is very high indeed. Those who lack enough patience simply end up running their ships on the rocks and drown. While this may seem like a harsh way to put it, if you want to be the 1 in 10 traders that this does not happen to, you are going to need to be prepared to manage things in a way that has you avoiding this fate.

Perhaps sadly, no one with even a minimal level of skill needs to have this happen to them, and if one is truly inept and follows a sensible plan, they should never even make it to trading with real money, as their failures with simulated trading over long periods of time should make it plain enough that this is not for them or they need to work harder and be even more patient.

Tailoring your trade size, anything from zero to an amount appropriate for an experienced and proven trader, is the actual foundation of any good trading plan, and without this, one is very likely to fail, and fail quickly at that.

Successfully Predicting Price Movement

Once that is in place, we can now move on to the actual nuts and bolts of the trading plan, which will involve setting up a set of trading rules as far as which trades to enter, when to enter, and when to exit.

There is no secret out there involving any great precision as far as coming up with trading signals goes, and while we may refine our approach over time as we get better at this, the best we can shoot for is to be in situations where the probabilities are in our favor and to avoid situations when the probabilities are against us.

Since there is really no long and short with CFD trading, as you are just betting on something either going up or going down, it just becomes a matter of determining which direction that the price may move in to be on the right side.

Some traders will be in a position with an asset full time, either betting it will go up or down, although other traders may choose to be more selective with their entries and may decide to be flat during times of less predictability or less volatility.

All we want with CFD trading is something to move, we don’t care what direction it moves in, although we want it to move in a way that is predictable enough. If markets were truly random like some people think, there would be no way to determine this with enough accuracy, but due to things like large positions being accumulated over time as well as the effect of momentum, there are indeed patterns that manifest, patterns that can be taken advantage of.

While we can discover and program our rules to let a computer trade for us, this is generally inferior to a seasoned and skilled trader becoming involved in the decisions as well, although newer traders will lack the proper experience and skill and should rely on more cut and dried rules in the earlier phase of their trading experiences.

A big reason for failure among newer traders is their desire to override their plans while trading, and while it can be a good idea to do that, if you don’t know enough about what you are doing this will just having you flailing around and trading very badly most of the time.

It’s important that your trading plan not have you do that either, and if it is not good enough, this can certainly happen pretty easily. One must pay particular attention to not allowing signals within the last bar to affect them, where a plan may work well by looking back at charts but this used completed bars, not pending ones, and pending bars can shake you out if you are not careful.

This is an example of how we need to match our actual trading with the data we are using to decide the trading rules, and if it is based upon this or that indicator doing this or that we need to make sure that this actually happens and that we follow the rules and not look to change them in the middle of a trade without a good reason.

One of the beauties of CFD trading is that we can become intimately familiar with certain assets and look to match our trading rules with the way that a certain asset may behave, instead of a one size fits all approach that other traders tend to use more.

Reading books on designing trading rules that present advantages can help, but there really isn’t anything that great out there that someone can just pick up and make work well enough, and those who are truly successful don’t tend to share their secrets, nor do they have to because they are making way more money from trading than selling a few books on the internet and such.

Therefore, there is what we could call a practicum component to learning to trade, and while having a decent to good theoretical understanding of technical analysis and being familiar with the basics of it is a good foundation and perhaps even necessary, there is no substitute for the learning you can get on the job so to speak, whether this be looking at past data or gaining experience trading live.

What We’re Really After Here

The price of assets moves in cycles, back and forth, and while it may move more in one direction than another, there is always an ebb and flow involved, and nothing moves in one direction continually.

What we need to do in order to take advantage of this is to look to match the cycles of our trading as best we can to the cycles of the asset we’re looking to trade. We will not be able to do this with great accuracy, but we only need decent accuracy to allow us to profit from this cycle matching.

One of the best ways to train for this is to look at patterns and seek to figure out how we may have been able to take advantage of this move, which will result in our starting to set up our set of rules. As we go along, we’ll be able to refine these insights to capture more of the moves to the point where we’re right more than we’re wrong, and this is all we’re shooting for here, to be on the side of probability enough.

There will always be moves against us in every trade, of some magnitude at least, and the trick is to weed out the insignificant moves and stay in the trade when they occur, and decide which moves are significant enough that the tide may actually be turning to the point where we should exit the trade and perhaps even start betting in the other direction.

It is not a matter of being wrong on a particular trade negating our plan or even speaking against it at all, and this is a rookie mistake, thinking that it needs to be adjusted merely based upon the outcome of a trade or even a few trades. We do need a meaningful sample to make adjustments, and this certainly isn’t something you want to do without enough thought and especially not in the midst of a trade.

It is very wise to keep a journal, especially as you are learning, and instead of adjusting like you probably want to do when something doesn’t seem to work, you instead make a note of it, and make a note of what works as well.

Later, when patterns do emerge, and they will, you will be much better prepared to adjust your trading plan and its rules based upon more significant samples, the size we need to decide with the right amount of knowledge.

With CFD trading, the stakes are higher, or at least we can make them higher, and we can magnify whatever trading advantages we come up with many times. Just be sure you acquire these trading advantages first, which will require both time and effort to formulate.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

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