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The very first question that newbie traders usually ask is “Why bother?” Portfolio management is usually a complex subject and can take plenty of time and energy. Surely it is much better to simply focus on trading and let the money look after itself?
In an ideal world obviously that would be the case. But this is not a perfect world.
Portfolio management allows you to diversify your risk. Poor portfolio management would be to have 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 might be wiped out. A much better approach to capital allocation would be to construct your portfolio in similar way to banks. That is to “spread your risk”.
Some CFD traders would argue that portfolio management isn’t essential. Many CFD traders do not even use portfolio management, and they can go on to have long and profitable trading careers. However, it is prudent for most novice traders to practice prudent money management. The discipline of portfolio management will help protect you and your online CFD trading account from catastrophe.
One drawback of portfolio management is that it is probably going to require more capital. A $5,000 account will always find it difficult to diversify and allocate capital in a diverse manner. The simple reason for this is because $5,000 just isn’t enough to diversify.
Before you start you must always consider putting slightly more money into your CFD trading account, this will enable you to diversify your portfolio. This may sound unpalatable, but when you consider who else is looking after your capital for you (fund managers), you’d be far better off managing it yourself.
Timeframes
It is difficult to rely on one timeframe. A lot of people describe themselves as “15 minute chart” traders, others as “end of day”. In truth a mixture of techniques is what will generally work best.
Many people are much longer term CFD traders, actually they are not actually traders at all but simply investors. “Buy and hold” is the maxim used by many of these people (sometimes called “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 stock 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 are trading styles as varied as scalping and weekly swing trading that on the same CFD will yield the difference between making 200 trades each day versus 12 trades a year.
The important thing thing about timeframes is that your optimal timeframe is a personal thing. What works for one person may be totally wrong for the next. No single timeframe is right or wrong. Just go along 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 an important thing to be aware of. The financial markets trade almost 24 hours a day. You ought to use this to your benefit.
Trade while 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 plenty of time to analyse the picture, so use it. You should not be lazy. Do your groundwork.
Leverage
Leverage truly is a ‘double-edged sword’. Used wisely it can be the edge that gives you a massive return on restricted funds. Used incorrectly and it can destroy your trading account in minutes. Put it to use 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 after your first few weeks CFD trading it is more likely to take 6 months to 2 years before you become a profitable CFD trader.
Remember it takes a good doctor no less than 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 simply 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 got a huge advantage with the leverage available to you, but bear in mind it is like a sharp knife, best used carefully. The more skillful you become, the more you will learn how to use 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 company.
Tags: cfd broker, cfd online, cfd trading, cfds, contracts for difference
Posted in Stocks · July 10th, 2010 · Comments (0)
Contract for difference traders are not just competing with each other in the market. They are competing with themselves. Traders can be emotional and irrational, and that can make them their own worst enemies.
Emotions and instincts can provide trading successes, but they are more likely to deliver trading losses unless we learn to control them. This is why understanding trading psychology is critical.
Many Contract for difference traders would like to distance themselves from their feelings. Unfortunately, this is not possible, and some feelings may even add to their trading successes. Therefore, it is more useful to learn to understand yourself as a trader, identifying your own strengths and weakness, so that you can decide a trading style that suits you.
In this section, you will learn about four psychological biases that may adversely have an effect on your trading results, and you will learn what you can do to overcome them. The biases are:
1. Overconfidence
2. Anchoring
3. Confirmation
4. Loss aversion
1. Overconfidence Bias
Overconfidence bias is an overstated belief in your competence as a investor. Any investor who finds themselves thinking that they know the business inside-out and that they have nothing more to learn and that fortunes are theirs for the taking, may well suffer from an overconfidence bias.
Risks of Overconfidence
Overconfident traders tend to get themselves into trouble by trading too regularly or by placing exceedingly large trades with the goal of making a killing. It’s not inevitable, but an overconfident investor invites misfortune.
Are You Overconfident?
If you want to identify whether you have a tendency to be overconfident, ask yourself, “Have I ever delayed or reversed a decision because I couldn’t believe I was wrong?” Likewise, you could ask yourself, “Have I ever placed more on a trade than what I know is really sensible?”
Overcoming Overconfidence
One way to overcome an overconfidence bias is to stick to a strict set of risk management rules. These rules should limit the number of markets you invest in, the number of Contracts for difference you trade at one time, how much you are willing to risk on any one trade and how much of your account are you willing to lose before you take a break from trading and re-evaluate your trading strategy.
2. Anchoring Bias
Anchoring bias is a belief that the future is going to look particularly similar to the present. When you anchor yourself too closely to the present, you may fail to notice dramatic changes in the offing.
Dangers of Anchoring
Anchored traders tend to get themselves into trouble because they wrongly believe that present trends will never end or that companies they’ve always followed will never let them down. Because they are emotionally attached to a Contract for difference, they continue to invest in a way which is not optimal in changed circumstances. With each trade, they lose more money because they are bucking the trend.
Are You Anchoring?
If you want to know if you have any anchoring tendencies then ask yourself, “Have I ever lost money because I couldn’t accept that a trend had ended?” If you have done this, you need to be aware of that tendency.
Overcoming Anchoring
One way to overcome anchoring is to seek a new point of view. Look at different time-frames on your charts. If you usually rely on hourly charts for data, look instead at the daily and weekly charts to explore long-term trends as well as levels of support and resistance. You could also examine shorter-term charts to see if trends are reversing.
Broadening your point of view in this way will help you to avoid anchoring yourself to any one point.
3. Confirmation Bias
Confirmation bias is the habit of only looking for information that supports your beliefs. If you anticipate the price of BHP Billiton (BHP) is going to rise, for example, you will only really take in news and data that bolster your belief.
Risks of Seeking Confirmation
Traders who pursue affirmation of their beliefs tend to miss warning signs that would otherwise protect them from unnecessary losses. Ultimately, this can only lead to losing money because decisions to buy or sell, or even to do nothing, are being made on false premises.
Do You Seek Confirmation?
To know if you have any confirmation bias tendencies, ask yourself, “How often do I look for signs that I may be wrong in my analysis?” If your answer is rarely or never, you may be a confirmation seeker and you need to actively work to ensure that such a bias never influence your better judgment.
Overcoming Confirmation Bias
One way to overcome confirmation bias is to find an individual or group with whom you can talk about your trading. You don’t need somebody who will simply flatter you or perpetually agree with you. Traders with different perspectives and thoughts will help you to be more careful. Sometimes your convictions will only be reinforced by talking with other traders, but at other times, they may force a total and timely rethink.
4. Loss Aversion Bias
Loss aversion bias is based on the theory that losing $1,000 will have a larger impact on you emotionally than gaining $1,000 will. In other words, fear is a more powerful motivator than greed.
Dangers of Loss Aversion
Ironically traders who fear losses are much more likely to hold onto losing positions than traders who are able to accept short-term losses and exit their trades. A reluctance to give up a losing position will not only result in you incurring bigger losses but also stop you from finding better trades.
Do You Fear Losses?
If you want to know if you have any loss aversion tendencies, ask yourself, “Have I ever held onto a losing position, beyond the point where I knew I should have quit, because I hoped the trend would reverse and wipe out my losses?” If you have, then you need to be aware of that tendency.
Overcoming Loss Aversion
One way to overcome a loss aversion bias is to trade with automatic stop-loss orders. Many traders trade with just a mental stop-loss that, when it comes to the crunch, they fail to honor. They let their feelings interfere with their better judgment as they try to justify irrational decisions that prevent them from quitting and cutting their losses.
In conclusion, as soon as you buy a CFD you should set your stop-loss order. It should be physically set, operate automatically, and you should appreciate it.
The Author Ben McGrath is a professional CFD trader trading with Australia’s most innovative CFD provider, IC Markets. Ben has published a number of articles on CFD education including guides and ebooks which you can download for free.
Tags: cfd trading
Posted in Stocks · July 9th, 2010 · Comments (0)