Contracts for Difference

I have signed up with CMC Markets as my trading platform and they have a deal, at the moment, that when you sign up with them you get some educational cd’s thrown in for free. I am currently working my way through the 6 or so cd’s and they seem to be quite good. At least for an amateur like me.

The first CD is “Detox: Psychology of Trading” and is presented by Mark Sear and the aim of this cd is to “teach you how to prepare phsyically and mentally for trading, how to control your emotions and effectively manage your trading capital”

Each CD is broken down into 3 parts, Mechanics Strategy, and Advanced Strategy. I’m just going to pick up a few things that caught my interest while studying this section.

Mechanics

What is a CFD? “A contract for difference is a contract between you and your CFD provider to settle the difference between the price at which you buy the CFD and the price at which you sell.” (p.9)

The Benefits of trading CFDs:

• Liquidity
• Traded on margin
• Traded long or short
• Traded online
• Low transaction cost
• Access to international markets
• Dividend and stock split

Interesting to note that a “dividend is credited to your account on the day the stock goes ex dividend not weeks later.” (p.12)

There is discussion on the advantages and disadvantages of trading different markets such as the US, UK and EU. Also the need to be careful of gappy trades such as commodities like gold or ooil as they can gap up or down by large amounts. This can be particularily hazardous for amateur traders.

Page 37 discusses the major trading styles:

• Scalping, extremely short term trades with very small price movements
• Intra-day position, short term within the day where trades could last for a few hours
• Intra-day zonal, trading intra day at a preset price zone
• Intra-day news trading, react to a news item or event
• End-of-day positional, based on the end of day closing price
• End-of-day news trading, based on big news events of the day
• Swing trading, trading up and down movements of the market
• Weekly (and longer) trades, using big trends that may last several weeks
• Trend trading, similar to swing
• Pairs trading, trade two stocks or indices simultaneously
• Shorting

I’m thinking at this stage I’ll probably be weekly trading.

Strategy

The first part that caught my attention in this section were the lists of characteristics describing winners and loser.

First the winners:

• Properly capitalized
• Low risk tolerance
• Trade only when there is an opportunity
• Actually trades when there is an opportunity
• Treats trading like a business
• Emotional control
• Has a trading plan
• Focused
• Has a trading system

Loser characteristics

• Under capitalised
• Lacks discipline
• Doesn’t study the markets
• Chases the market
• Stubborn
• Always looking for one big trade
• Afraid of missing a move
• Misinterprets news
• Lets losers get too big
• Takes profits too quickly
• Sees trading as simple
• Takes larger risks
• Lacks emotional control

Discipline is obviously a very big part of trading, and this is emphasised in the course. Some tips to becoming discipline (p.11):

• Review trades
• Set sensible goals
• Sort out easy problems before big ones
• Have a strategy to follow
• Always ask “is this a good trade?”
• Work at trading
• Just do it

Tied in strongly with discipline is control of your emotions. Some warning sign that you are losing control includes:

• Phone a friend syndrome
• Head in sand syndrome
• “I’m hoping syndrome”
• Doubling up
• It can’t go any higher/lower

Rudyard Kipling wrote a poem called IF which is well worth a read.

Money Management Styles:

• Fixed contracts
• Fixed sum
• Fixed percentage of capital
• Optimal F
• Secure F
• Kelly

And most importantly of all – NEVER trade without a stop loss.

Advanced Strategy

Make sure you develop a trading plan.

Ensure you review all trades, and with your open trades ask the following questions:

• Has it reached your target?
• Is it close to target?
• Should you be adding to it?
• Is it prudent to cut some?
• Is the trade working out as planned?
• Could you make better use of your capital elsewhere?
• Should you close the trade or hold onto it?
• Is the trade close to your stop?

Review closed trades weekly when the market is closed.

Keep a trading diary including trades you take and trades you don’t.