Benefiting From Your Contract For Difference Trading Account
The 1st question that novice traders normally ask is “Why bother?” Portfolio management can be a complex subject and can take plenty of time and energy. Surely it is better to simply concentrate on trading and let the money take care of itself?
In a perfect world naturally that would be the case. But this is not an ideal world.
Portfolio management enables you to diversify your risk. Poor portfolio management would be to have all your account leveraged in three Contract for difference trades, all long and all in one sector. Should all CFDs drop by just a few per cent, your trading account may very well be wiped out. A much better method of capital allocation would be to construct your portfolio in similar way to banks. Which is to “spread your risk”.
Some CFD traders would contend that portfolio management is not essential. Many CFD traders do not even use portfolio management, and they can go on to have long and successful trading careers. However, it is always prudent for most newbie traders to practice sensible money management. The discipline of portfolio management will help protect you and your online CFD trading account from disaster.
One disadvantage of portfolio management is that it is likely to require more capital. A $5,000 account will always find it hard to diversify and allocate capital in a diverse manner. The simple reason for this is because $5,000 isn’t enough to diversify.
Before you start you should consider putting a little more money into your CFD trading account, this will enable you to diversify your portfolio. This may sound unpalatable, but when you think about who else is looking after your capital for you (fund managers), you’d be far better off managing it yourself.
Timeframes
It is hard to depend on one timeframe. A lot of people describe themselves as “15 minute chart” traders, others as “end of day”. In reality a mixture of methods is what will normally work best.
Some people are much longer term CFD traders, in actual fact they are not actually traders at all but simply investors. “Buy and hold” is the maxim used by most of these people (often referred to as “buy and hope” by shorter term CFD traders).
Two of the great longer term investors in history have been WD Gann – who spoke of there being “more money in the long pull” and of course Warren Buffett – who advises anyone not to put money into a share if they are worried about its price declining 50%.
This timeframe argument actually becomes an issue of trading style a lot more than anything. There can be trading styles as diverse as scalping and weekly swing trading that on the same CFD will produce the difference between making 200 trades each day versus 12 trades a year.
The key thing about timeframes is that your optimal timeframe is a personal thing. What works for one individual could be totally wrong for the next. No single timeframe is right or wrong. Just go with what works for you.
Risk diversification
When diversifying your risk think international. Don’t confine your trades purely to one market. Most of the biggest share CFDs trade large daily volumes overseas (e.g. BHP is traded in the UK as BLT – Billiton).
This is a vital thing to be aware of. The financial markets trade almost 24 hours a day. It is advisable to use this to your benefit.
Trade whilst you sleep, with orders protecting your capital and taking profits. If your analysis is correct you won’t need to worry about being awake, trades will run themselves.
Make end of day judgments on these trades, you have lots of time to analyse the picture, so use it. Do not be lazy. Do your groundwork.
Leverage
Leverage truly is a ‘double-edged sword’. Used wisely it may be the edge that gives you an enormous return on restricted funds. Used incorrectly and it can obliterate your trading account in minutes. Utilize it wisely. No good CFD provider wants you to lose. CFD providers offer leverage because they know skillful clients can benefit from it.
Always remember Rule number 1- You must stay in the game. It’s unrealistic to expect to be making millions following your first few weeks CFD trading it’s more more likely to take 6 months to 2 years before you become a profitable CFD trader.
Remember it takes a good doctor at least 5 years to qualify and they still have patients die on them. There is no reason why learning how to trade should be a 5 minute thing. It just won’t happen.
Don’t over leverage – make this your mantra. Don’t use leverage just because it’s there (Your car has an air bag and you don’t want to use it on every journey, right?)
Used wisely you have a tremendous advantage with the leverage available to you, but be aware it is like a sharp knife, best used with care. The more skillful you become, the more you will learn how to apply it and that’s what your evolution as a CFD trader will be all about.
Before you start using CFDs in your trading strategy you should decide whether CFDs are the right financial product for you. If you are a novice trader you can get additional education on using CFDs from any CFD provider.
Tags: CFD broker, cfd online, cfd trading, CFDs, Contracts for Difference