A 16-point guide to trade CFDs with consistency
Even when a trader has a strategy, which statistically offers an edge, then mindset and psychology play a pivotal role, where the trader's ability to follow the plan/process with discipline and focus will constantly be called into question.
However, for those willing to become a student of the markets it is not impossible to take what the market is offering and to grow the capital in the trading account.
As we roll into 2024, I have put together a 16-point guide on what I’ve learned over the years, what has worked for me, and what I’ve observed from traders who have held a consistent performance and an enviable equity curve.
You may disagree on some/many of the points and your experience may differ greatly from mine, but trading is unique in so many regards. Let me know what works for you.
- Playing the long game, where survivorship is essential. Knowing that most traders (CFD, futures, options, equity) fail in the first year, if you can stay solvent through years 1 & 2, then the prospect of obtaining a positive expectancy and more consistent returns increases exponentially
- CFD traders are risk takers – embrace and accept risk but manage it above all else
- All that matters is YOU – the merits of someone else’s fundamental, quant, tactical or technical strategy matter little – the best traders are myopically focused on their own strategy and seldom judge others
- Understand your edge and then exploit it – the markets offer constant opportunity to take from weaker hands
- Think only in probabilities, skew, and distributions – this helps with our risk to reward trade off and seeks out higher probability outcomes.
- Be dynamic and adapt to changes in volatility and range expansion/contraction – volatility dictates potential hold times, the cost to trade (notably spread), how much risk to take in a trade and the position size
- A rules-based approach to CFD trading can significantly increase one’s discipline in trading, resulting in:
- Limiting taking trades that don’t ‘follow the rules’.
- Overconfidence – where increasing one’s position size after a run of form can have significant consequences.
- Overtrading, which can radically increase the risk of ruin.
- An open mind will serve you well – liquidity, sentiment and flow drive markets - Don’t try and justify a move in price – why a market moves from A to B doesn’t have to make sense
- Fighting the flow of capital and trading against market sentiment needs to be timed perfectly and while it seems compelling for new traders, it often leads to low-probability outcomes – countering a move just because it's rallied for 5 consecutive days rarely leads to positive outcomes - follow the flow
- Price is the final arbiter of truth – dynamically reacting to price changes can be more important for traders than prophesying where you think it's headed.
- Targeting a high risk-to-reward trade-off is often more important than targeting a high win rate – this is determined by the strategy (e.g trend following, momentum, mean reversion etc), but in most strategies targeting a high reward relative to the risk taken in a trade is where you’ll grow the capital in the account.
- Successful CFD traders are incredibly comfortable taking a loss, but they take it early and without emotion. They are at peace with loss, knowing it's part of the game. They remove ego, knowing ego results in holding losers into deeper drawdown.
- CFD traders can go broke by taking small profits, especially if they hold losing trades. Consistently profitable CFD traders attempt to remove unemotional attachment to a position and look at systematic methods to let profitable trades run. Your job is to extract as much juice out of winning trades.
- Trade price and not your P&L – holding a losing position with the idea of exiting at breakeven is a sign of ego and a level where you’re no longer wrong. Take a small loss and use the capital for the next, potentially profitable trade.
- Adopt strict controls around one’s account management - Leverage allows for increased positions within the account. But the larger the net notional exposure the greater the P&L swings, which can have a significant impact on the ‘margin level’ (total equity/margin) which can increase the potential for automatic close out.
- Become familiar with the sequencing of market opens and key times of the day (such as S&P500 futures open or rollover) – this affects liquidity, spreads and our overall trading environment
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