CFD Trading Guide
CFDs came onto the Australian and European markets from practically nowhere and provided for skilled traders a host of opportunities that were not available in other derivative products. They are a cheap and highly leveraged product for new traders starting with a small capital base. There is a flip side though and that is that you can lose more money than you originally put in. The product has its own quirks to catch the unsuspecting trader and particularly for new traders it can be like learning to drive on an autobahn in peak hour – you may survive but the odds are slim that no damage will be done and you are at risk of being destroyed.
This guide is simply that – a guide. I have learnt many of the lessons the hard way and seen many traders come and go without as much as even an understanding of the basic rules and strategies of the game. Some people have started with lofty aspirations and many have lost over $100,000 thinking they can beat the game and yet often disappear just as spectacularly as they arrive.
You may find that some of the lessons contained within this guide are more applicable to your individual situation than others, and that is to be expected. I have always found that there can be a couple of crucial points that can make the difference between success and failure. Most importantly this guide may save a good man or woman from ruin that is sadly quite probable were they to just blindly start trading without knowing what they were getting themselves in for.
In examining the situations where people get themselves into deeper trouble than they thought possible, it always involved one or more of the following:
1. Poor preparation
2. Poor information
3. Decisions compromised by ego or overconfidence
4. Under skilled relevant to the challenge
5. Insufficient/ incorrect tools
6. Bad luck
7. Insufficient or no contingency plan
Many traders only have the patience to read the first points of any instructional guide – they just seek the quick answers to making money. In life we don‟t always need to be well prepared, however when things go wrong, preparation is the first step to survival. In essence I would suggest that it is better to be over-prepared (if indeed this is possible) rather than under-prepared.
Information about trading comes from newspapers, magazines, newsletters, gurus, advertisements, enthusiastic neighbours and often from dubious or unreliable sources. With an eclectic mix of sources like this it is difficult to sort the good from the bad but from your larger life experience you know that you wouldn’t go on an arduous trail walk without reliable and current information? With this same analogy in mind remember that someone else‟s idea of what is steep, safe, easy or hard may bear little resemblance to your own.
Overconfidence can come from any number of sources but in trading, overconfidence will generally be a result of a series of winning trades. Maybe you are a positive thinker to begin with but be sure that you don’t confuse an optimistic outlook with a sure fire recipe for success. Overconfidence helps fuel our growth and makes us do things we might not normally do – this is one of the many things that needs to be recognised early because confidence in the form of shrewd trading is a help whilst confidence in the form of ego is always a hindrance. Forget the idea that trading will turn you into an overnight success. This is a marathon not a sprint which means that a cool head will win out every time.
When it comes to simple tasks being under skilled is not always a problem – this is not one of those cases. The nature of trading means that by the time the problem arises then it‟s usually too late to do much about it. So good preparation and suitable confidence will reduce the likelihood of getting into trouble. In this instance you should realise that when I talk of trouble it always relates to the loss of money and naturally enough this is the thing that you will want to keep to a minimum. Sometimes you can improvise and luck works for you, but other times disaster can strike and if its financial or emotional disaster, it can be hard to recover from. One of the certainties of trading is that if you are riding on luck alone then it won’t last forever. Mix this with overconfidence and you are in for some financial and emotional devastation.
Finally, you will need to consider the problems associated with an insufficient or complete lack of contingency plan. We don’t want to over think every situation (unless it‟s life threatening) but we do need to have some well thought through safety plans, backups or people/systems to help us if we do get stuck.
These points are proven to help us in many major endeavours whether they are significant personal tests, adventure challenges, major business growth, sporting competitions or a new skill that may change your life forever – such as becoming a good trader.
The following points come from going through the challenges, knowing many others that have done so as well and seeing where others failed. The following is your brief on the challenges ahead as discovered and overcome by those before you and it is hoped that it will smooth your path, give some direction, warn you of the obstacles and give you the basic tools required. The rest will be up to your ingenuity and skill, plus a little luck so let‟s start on your preparation.