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Why is a trading strategy vital? A trading plan is the center of your business. Without a business plan most businesses will be unsuccessful, the exact same philosophy applies to trading plans.
A well defined and executed trading plan will permit you to stay flexible whilst being regimented.
What’s a trading plan?
A good trading strategy is a guideline to assist you in making good trading decisions.
It’s comprised of two basic parts:
1. Trading system or technique for buy/sell indicators
2. Money management parameters
Developing a trading plan can be very time consuming, because of this, many people don’t bother. In far too many cases the instant satisfaction of trading simply overpowers the trader.
A trading plan does not have to be complex, in actual fact it is often better not to be so.
An example of a minimal trading plan is:
“Buy 1000 share CFDs in XYZ Corp on open the day after my entry criteria has been met.”
You could possibly follow this day-after-day and never have to think very hard. That is in itself a bonus. It means it is simple to follow and straightforward to stick to.
Professional trading plans are almost always more complicated than this. Why? Because to trade professionally you have got to be able to convince people to part with their funds. This is of course not always easy!
The kind of questions that a professional will be asked when they begin raising funds to trade with will include questions like:
1. How do you intend to trade?
2. What sort of system will you utilize?
3. Which markets will you trade?
4. How much will you risk?
5. Just how much is it possible to lose?
6. What can you reasonably expect to make?
7. How much are your trading costs?
8. How will you prevent yourself from losing all the money invested?
9. Just how much will you risk at one time?
10. What number of markets will you trade?
11. What will be your typical hold time?
12. How will you minimize risk?
These seem like simple questions, but be honest with yourself and write the answers down.
Ingredients of a trading strategy
Trading plans can be very individual things. If one system worked for everybody then the markets would of course cease to exist, which is why they do not. A couple of pointers that will help you pick a trading system include:
1. Disregard the “secret” systems, they don’t work
2. You could have different systems for a number of markets, avoid this if possible
3. Your system does not need to be mechanical, many would argue mechanical systems can not work
4. Should have the flexibility for being long and short
5. It should have a money management plan to help you control risk
Perhaps the best advice is to purchase something utilized by experts and learn to trade it. Professionals know that the best systems to trade exhibit a number of simple characteristics:
1. Have a positive expectancy of winning
2. Adapt to different markets
3. Have understandable entry and exit rules
4. Are usually not overly optimized
5. Utilize effective wealth management rules
Most of these systems are inherently good to trade as there’s a clear understanding that in the long run they make money. They do however require some effort to learn how to trade them, which tends to put off a number of traders.
To find out how you to build a winning trading plan for CFDs you will need to read our trading CFDs handbook. Once you have decided on a trading plan you will need to choose a CFD broker that can help you apply your plan.
Tags: cfd broker, CFD provider, cfd trading, cfds, trading CFDs
Posted in Stocks · July 22nd, 2010 · Comments (0)
There are two main types of Contracts for difference, these are:
1. Direct Market Access (DMA) and;
2. Market Made (MM).
Some Contract for difference brokers only offer one variety of Contract for difference others offer both. The most common style of Contract for difference is the market made variety, generally this type of Contract for difference is offered by CFD providers that also offer spread betting and originate in the United Kingdom where spread betting is popular.
All Contract for difference traders or would-be Contract for difference traders need to be aware of the differences between the workings of both types of CFDs and the fee structures associated with each variety.
Direct Market Access (Direct market access) Contracts for difference:
Direct Market Access (DMA) CFDs mirror the price and liquidity of the underlying instrument on which the CFD is based. DMA Contracts for difference are the most fair and transparent variety of Contract for difference available. When trading Direct market access CFDs the trader is a “price maker”. Direct market access Contract for difference traders can enter and see an equal order flow onto the underlying exchange, this guarantees that at all times the trader receives true market prices on every trade. DMA CFDs offer traders real time execution, guaranteed market prices and involvement in the order book and opening and closing phases of the market, this provides a major benefit for scalpers.
Direct market access CFD providers do not gain directly from performance of the Contract for difference trader, as all client CFD positions are 100% hedged. This means that if the trader buys the CFD, the broker will immediately purchase the underlying equity as their hedge trade.
Points to take notice of:
1. The quoted price of Direct market access Contracts for difference is the same as the price quoted on the underlying exchange;
2. DMA Contract for difference orders flow immediately onto the underlying exchange;
3. DMA CFD traders can be a price takers or makers and participate in the market depth on the exchange, and;
4. Direct market access Contract for difference traders can take part in opening and closing market auctions.
Market Maker (MM) Contracts for difference:
A Market Made Contract for difference does not emulate the price on the underlying market. Market Makers that offer Market Made Contracts for difference take their CFD prices from the underlying instrument over which the CFD is derived rather than quoting the exact exchange price of the instrument like DMA Contract for difference providers. Market Makers act as an go-between for the Contract for difference trade and have the ability to change the price of the CFD, price changes often occur in their favor, resulting in stop orders being triggered and slippage which can add a substantial cost to the trade.
Market Makers do not hedge 100% of their CFD positions, usually they hedge only the resultant amount after their clients long and short positions net each other off, however in many cases they do not hedge at all and often directly profit from their client’s losses. When trading Market Made Contracts for difference trades do not flow directly onto the exchange, trades are filled at the discretion of a dealer as a result orders are filled slower and at inferior prices.
Points to make a note of:
1. MM CFD traders do not receive the same prices as those quoted on the exchange;
2. MM CFD spreads are often widened and orders re-quoted;
3. Market Makers are price takers not price makers, this means MM Contract for difference traders cannot participate in the underlying order book;
4. MM CFD traders cannot take part in the opening and closing market auctions and;
5. Some Market Makers profit from the performance of their clients positions.
Market Made Contracts for difference do have some benefits over Direct market access Contracts for difference in that they are normally offered over a larger choice of stocks and indices. Market Makers are also able to offer additional liquidity in biggerstocks, the reason for this is because they have positions on their internal order book which they would like to clear out.
Market Makers often re-quote clients when they attemptto buy or sell a CFD, re-quotes take placeas a result of the Market Marker adjusting their internal order book to compensate for a lack of liquidity at a specificprice level on the underlying exchange.
So which type of CFD should you decide on:
When evaluating the two varieties of CFDs you should take into account whether you’re trading style and the instruments that you trade suit either a Market Made or Direct Market Access model. Normally scalpers and frequenttraders go for DMA Contracts for difference over MM Contracts for difference as there are no re-quotes and the trader can be a “price maker” through participatingin the underlying order book of the stock which they are trading. Market Made CFDs are common with longer term traders and those that chooseto trade indices and forex. The reason for this is than often Market Markers offer both indices and forex commission free. Often Direct market access CFD providers do not offer indices and forex on a DMA basis as by their very nature they are a market made product and cannot be traded on an exchange.
Before choosing a CFD provider you ought to analyse your trading strategyand decide onthe variety of CFD that fitsyou best. If you are unsure of your trading planor would like save the hastle of having multiple Contract for difference accounts with multiple providers you must pick a CFD providerthat is able to offer you both Market Made Contracts for difference and Direct market access CFDs.
Other varieties of Contracts for difference:
It is also worth noting that there is a third variety of Contract for difference, these are exchange traded or ASX CFDs and are offered by the Australian Stock Exchange (ASX). ASX CFDs are not popular amongtraders or investors due to their lack of liquidity and wide spreads. ASX Contracts for difference are only offered over a small rangeof securities, indices and foreign exchange pairs. ASX CFDs do have the advantageof being cleared and traded on an exchange, however as there are no considerableadvantages of this variety of Contract for difference traders favoreither the Market Made or Direct Markets Access Contracts for difference.
With IC Markets you can trade either Market Made Contracts for difference or DMA CFD. IC Markets understand that traders have varying styles and strategies that suit each variety of Contract for Difference.
Tags: DMA CFDs
Posted in Stocks · July 20th, 2010 · Comments (0)