By: Ic Markets
Submitted: 2010-06-14 05:44:03 | Word Count: 1121
Step 1 - Know Your Market
Share CFDs, sector CFDs and indices all have different margin requirements, trading times and spreads. ‘Know the rules of engagement’, should be the 1st law of trading. Trading without a thorough understanding of the basics is like attempting to drive a manual car when all you’ve ever driven is an automatic. Things can stall if you become overwhelmed.
Before you begin there are 3 key facts you should learn about the CFD you intend on trading:
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Liquidity - There is no point in any trader attempting to buy or short sell over and above what is deemed to be normal market size. There have been instances where new CFD traders try and 'take -on' a thinly traded market. This usually ends in losses.
Spread - The difference between the buying price 'the offer' and the selling price 'the bid' of any given security is a product of the prevailing law of supply and demand and not generally a function of 1 market maker. Any market participant should base market analysis on realistic outcomes. Often new traders assess a profitability of a potential trade on one price outcome. This is looking for the result that they want, not what is realistically obtainable.
Typical Price Action - different securities have their very own distinct price action. Prepare yourself by studying the standard trading activity in the day for a share or index. In case your trading plan is determined by the closing price only, be sure that you are able to 'wear' the intra day losses on the open positions within your account. It's great to look at a group of closing prices and see the 'trend' intact; when before the close the market in question was 15% against you from the previous closing price. This factor is amplified when dealing a geared product like CFDs.
Step 2 - Become skilled at using the trading platform
Fat fingers are usually not something exclusively suffered by private traders. Institutional dealers make errors of monumental proportions that dwarf anything seen in the CFD market.
In the long run, taking time to understand the constraints and extra features of the trading platform can make you money by saving you money in errors. Practice makes perfect; so a suggestion is to trade a docile security in the minimum trade size, using all orders types including market orders, limits, and stoploss orders. Also be sure you are familiar with the times of the day these orders can be entered, cancelled or amended and the way an executed trade will appear on screen.
Step 3 - Understand the trade sequence plus your position
Every trader should have their own reconciliation process and not rely solely on the software to report your position. One suggestion is to print or write your own personal dealing tickets like an institutional trader. Should you maintain your trading records with the same efficiency as an institutional dealer inside a bank, you will have a great advantage over the typical private trader who is generally lax in the record-keeping department.
Step 4 - Maximise technology
Make sure that you do not make the 200 versus 56 mistake - i.e. open a $200k account with a PC that has a 56k modem. Broadband has never been more affordable. Stick the dealing room number to your PC. If you only have one phone line then, yes, you will have to log-off to call. At a minimum you need a second phone, whether that is a land line or a mobile. When a trader has lost internet connection trading opportunities can be missed. Don’t make a technological glitch the reason for losing money in the markets.
Step 5 - Expect stress and deal with it
Give yourself a break. Trading is stressful. Remember the market is always right, so if you are wrong, don’t take it personally. The reality is that a few of your trades are going to be wrong, figure out how to take your losses. Every trader has heard this a thousand times and yes it is difficult to cut a losing trade only to see it drift back on side minutes later.
The best trading philosophy is to minimise losses over time and not to work on the 'I hope' school of trading. Make sure of one thing- survival. If you lose all you money by breaking your special rules then you can't stay in the game. Staying in the game even with a reduced trading account balance beats having to walk away completely.
Step 6 - Look forward not backwards
Crying regarding the past is one of the most common mistakes of private traders. Regretting trades that weren’t taken is as common as regret for those bad trades that were taken. Get used to the concept that you'll be prone to making unprofitable trades and these cannot be avoided. How often have you heard expressions from traders like "I should have, I could have ".
In the financial markets it comes down to the simple truth - ‘did’. The rest is irrelevant. Always assess why you've got a position in any given security on your books, write on the big white board your stoploss and take profit levels, take time out to ask repeatedly why you are long X or short Y.
Step 7 - Plan your trade, trade your plan
One of the biggest differences between a gambler and an expert trader is the existence of a plan. A trading plan shouldn't only be a goal list for your trading but should provide enough details to provide the trader exact rules for just about any possibility that may arise. The greater detailed your plan, the less emotional involvement can enter your trading procedure, especially when a position goes against you.
There are no golden rules for making money consistently. Be wary of anyone offering a seminar claiming they could show you a method of consistently 'beating the market'. Most of these people do not trade or make money themselves. A few of them do make money trading but you need to ask for their trading statements prior to you hand over your cheque. This is often how any bank or hedge fund hires traders; the traders have to show their track record first.
Author Resource:-
John Masterton is a professional CFD trader trading with Australia's largest and most popular CFD broker, IC Markets. Ben has published a number of articles on CFD education including guides and ebooks which you can download for free.
