Dan AtkinsonMany may doubt that it is possible to reduce all the various tips and guidelines on successful trading in contracts for difference (CFDs) to just three overarching and all-important CFD rules. Three? you may ask. Why, I have found on-line advice running to five, ten or even more points, so how can you get by with just three CFD trading tips?
As with anything else, three well-chosen rules may be worth any number of less useful tips, especially if they concentrate on the essentials of sound trading behaviour within fairly broad but distinct categories.
The three rules are, of course, connected. For example, getting your timing right ought to be a direct consequence both of your preparation and your ability to behave logically in the market. An ill-prepared, over-emotional trader is unlikely to time their trades successfully. None of these three rules is an optional extra, all need to fit together in a smoothly-running and efficient trading style.
Laying the groundwork
You won’t need telling that, before plunging into CFD trading, you need to get a firm grasp of what it is, how it works, what the costs are likely to be, how to go about it and what, if successful, are likely to be the benefits to you. But painstaking, thorough preparation is about much more than this.
Why are you considering trading CFDs? Do you have the right mentality for a trader? We tend to the view that the majority of people, properly prepared and focused, have the potential to trade successfully, but preparation is key.
Then there is the market itself. Which assets are you planning to trade, and how much do you know about them? If the answer is “not much”, then the time for deep research is now, before you go into the market.
Trial and error is not an advisable learning strategy, and it can be very expensive.
Read widely on the assets you plan to trade: their past behaviour, the current factors affecting their prices, likely future developments. You want to trade oil. When’s the next summit meeting of the oil producing states and what is it likely to decide in terms of production limits?
Or if you fancy yourself as a currency trader. How are the dollar or the euro likely to react to forthcoming changes in monetary policy?
Maybe trading stock indices is more your thing. What are commentators saying about the Dow Jones Index, the FTSE 100 or the Nikkei 225?
Finally, and critically, put all your preparation into drawing up an investment plan, one that details what you intend to trade, how you expect the trade to work out and what limits you set on each trade in terms of upsides and downsides.
Logical behaviour: a trader’s best friend
Your investment plan leads us neatly to the second of our golden rules, the absolute need for logical behaviour when trading in the market. You may think this is unnecessary advice, that you would keep a clear head at all times and act as a cool, unemotional trader with a gimlet eye for both profit and loss.
Really? It is surprising how many times traders fall into one of three major types of illogical behaviour.
The first is to assume that their trade “owes them”, that it has to “come good” and that hanging on will be rewarded. In plain language, forget it. Your trade neither knows nor cares about your loyalty to it. It has no idea what you paid to enter it and no interest in what you take out of it.
The second is, in some ways, the mirror-image of the first, the mistaken belief in “hot streaks” and your ability to continue to ride them. Set yourself a target for gains and sell when that target has been achieved. If exiting an apparently-endless winning run seems too painful, just remind yourself that the professional traders may well be long gone.
What do they know that you don’t?
Third and finally, blurring the line between trading and gambling is a sure-fire way to leave your logic at the door and lose money. Trading is about the careful apportioning of your resources to different assets and trades. Gambling – the “everything on red” mentality – may succeed in James Bond films and similar, but it has no place in serious trading.
Watching the clock
Timing is everything – in acting, in comedy, in military strategy…and in trading. You may be 100% right about the prospects for the yen, the gold price or the Frankfurt stock market, but piling in, or out, at the wrong time means your brilliant forecasting will count for nothing and, no, you won’t be “owed” anything by the market because of your prescience (see the previous section on logical behaviour).
While not a cast-iron rule, this is a good general principle.
To sum up, our three rules are broad umbrella headings with a number of topics beneath each of them. Taken together, we believe, they provide some key principles of successful CFD trading strategies.