So, you have decided to trade. Now, you want to know how to do it well.
But in the absence of either instinctive genius or an enormous helping of luck, having no trading plan is an almost certain guarantee of failure.
First rule: know yourself
Your trading plan will set out the basis on which you formulate those views and act on them. It will be your shield against chaotic trading and consequent losses. Starting to trade without a trading plan is about as advisable as taking off in an aircraft without a flight plan.
So what should be the first item on this all-important founding document of your trading career? Before even thinking about what to trade, it would be advisable to frankly assess your likely strengths and weaknesses as a trader, so the first step should be to examine your character and characteristics to weigh up what sort of trading would suit you best.
The popular image of the trader is of an adrenalin junkie frantically piling in and out of market positions. Maybe that style would suit you. Or perhaps you are temperamentally inclined to a cool-headed trading strategy based on in-depth research, one in which you can have confidence.
This takes us to the second step, which is to do your homework – yes, even if you favour the abovementioned manic trading style. Remember, CFD trading, and in fact all trading to an extent, is about taking a view. But where do your views come from and on what are they based?
Choose your assets
In parallel with researching the trading opportunities to which you are drawn, to see if they make sense, you ought also to be deciding the level of risk that you will be prepared to take on. The third step is all about building a winning trading strategy. In a sense, this is complementary to the first step, in that setting the risk level depends on the same sort of self-awareness as does assessing your likely trading skills.
Your risk level can be altered over time, in light of experience, but ought not to be simply abandoned for the thrill of the chase that may go badly wrong. It will inform how you go about the fourth step, which is to select the assets and the trades that you will be conducting. Your risk strategy will tell you not only the types of assets to which you will allocate funds but also the percentage of your available funds that can be apportioned to each trade.
A critical fifth step is to set a stop/loss level for each trade, and stick to it. In trading jargon, this is called “limiting your downside”, and gives effect to a key trading imperative, to cut losses. Many traders use a stop/loss also to protect profits, in that the stop/loss level is set as a percentage not of the purchase price but of the highest price ever achieved by the asset in question.
In other words, it is lifted up in the slipstream of a rising asset.