Best CFD Broker

Today we are going to have a look at the best way to control our risk when trading contracts for difference. Controlling our risk with CFDs comes down the three critical components, let’s have a look at those now.

1. Keep leverage to a minimum

2. Always use stop losses

3. Avoid stocks that have a tendency of gapping

1. Keep leverage to a minimum

The very first thing you need to consider when trading contracts for difference is the amount of leverage you use. In order to control your risk you need to keep your leverage to a minimum. Whilst it is very exciting having huge wins, protecting your losses should be your 1st priority. One of the most well-known sayings in the stock market is “if you look after the downside, the upside will take care of itself.” So the very first thing you must master is ensuring you have very small losses. If you trade at low levels of leverage your losses should never get out of hand.

So what does it mean to trade at low levels of leverage?

People who trade at low levels of leverage never trade at more than three times their account size. So if you had $5000 in your account then you would not exceed more than 2 to 3 times that amount in total positions.

2. Always use stop losses

The second point to keeping your risk to a minimum is to ensure you always use stop losses. It is only with your stop loss that your profit or loss can be determined. So prior to entering a trade, your trading plan should dictate where your stop-loss will be and the amount of risk you are willing to take on that trade.

One of the most sensible position sizing rules is that fixed percentage risk per trade. This position sizing rule ties in your risk amount with your stop-loss size. Here is how it works;

Account size: $20,000

Fixed % risk per trade: 2%

Risk in $: $400

CFD price: $20.00

Stop loss size: $1

Formula for position size = Risk per trade / stop loss size

= $400/$1

=400 CFDs on the $20 CFD = $8,000 position.

As you can see in the example above we would buy 400 CFDs of the $20 stock giving us a total position of $8000. If the position moved against us and hit our stop-loss at $19 then we would lose $400. This ensures we never lose more than a small percentage of our total account size.

3. Don’t trade stocks that gap

Lastly we need to consider the stocks that we are trading. In order to minimise our risk we would try to avoid CFDs that have a tendency of gapping. For example dual listed stocks like BHP and RIO have a larger than normal tendency of gapping. The other types of stocks that have a tendency of gapping are commodity-based stocks like gold companies Newcrest Mining and Lihir Gold. As the commodities move on the futures market overnight these stocks will gap open up or down depending on what happened the previous night.

You see the ads in the magazines, on television in the newspapers. People just like you are making a fortune from day trading. Why shouldn’t you? So you get your free trading platform, play pretend trading for a few weeks, develop a false sense of your abilities, start real trading and next thing you have blown up your account, and you limp away from trading forever.

This is an all too common scenario. Every day hopeful people are drawn to the big profits of day trading only to be disappointed and in many cases financially much worse off.

Why?

Imagine you decided to start a brand new career in an area you have little or no expertise in. You pay some money and you start this new venture with much hope, but quickly find you are not equipped emotionally or educationally to run the business. But you press on regardless because you were told that its really easy and that anyone could do it.

This is exactly what happens to many people who start day trading. What makes you think you can just pick up the skills to enter a multi trillion dollar market, full of very clever and experienced traders.

The right training.

You need the right training. Now many people want to bypass this because it may cost you a few thousand dollars. You may have to go to some seminars, do some study, and worst of all you may have to delay your entry into making money. If you don’t want to, or can’t afford $5000-10,000 for education and another $5000-$10,000 to fund your account then perhaps this isn’t the right time to start your trading career. Your education is the cost of doing business.

You know how much an university education costs, and there aren’t any guarantees that you will get the job you desire. But with a trading education you should be properly equipped to trade after 2 two or three months. Your course should provide you with DVD’s and written manuals, to suit all learning styles. You should have access webinars where you can follow live trading.

You should get a free training platform, to practice your entries, exits and seeing the technical setups. You should have access to a live trading room, so that when you start trading for real you can be guided in your trading selections. You should be given the option of an SMS cell phone alerts, so that you don’t have to be tied to your trades.

Your entire course should be covered by a full money back guarantee or a reasonable period. So that if you find that day trading really isn’t for you then you have no risk. If you are not offered a guarantee, then question their confidence in their training. You should have access to your broker at least in the learning phase to answer your questions.

You should be offered advanced training, so that you can continue to grow and develop as a trader. This is critical as you will increase your level of trading and your risk and you will need the skills to do that. You should receive as part of your training very specific stress management. Trading success is 80% emotionally, if you can’t get your head around it, you won’t succeed.

The most common question I hear around trading Contracts for Difference is what is the best time frame when day trading CFDs. Today we’ll have a look at the three most important factors to consider when finding your ideal time frame to trade CFDs.

1.What size wins compared to your losses are you after?

2.Always use three different time frames to trade safely

3.Share CFDs versus Forex or index CFDs. The Various time frames to consider

What size wins compared to your losses are you after?

One of the most critical and overlooked component to day trading success is identifying the appropriate win:loss ratio or what some people refer to as risk:reward ratio. Every day trader needs to have the idea firmly planted in their mind of how important it is to locate day trading opportunities where the chance of reward is the least 1.5 to 2 times the size of their risk.

By keeping this ratio firmly planted in your mind it will ensure you locate high probability opportunities and totally disregard the need to trade just for the sake of trading. Trading for the sake of trading not only loses you valuable time and money it can drain your confidence level to the extent that you hesitate or are reluctant to jump on any other trade. In light of this you want to select the time frame that gives you ample opportunity for profit once your setup has been established.

Using three different time frames to locate high probability day trades

It is vital for day traders to have a success ratio or the probability of winning in excess of 60%. This comes as a result of trading over a short time frame thus reducing the chance of letting winners run. In order to locate high probability set-ups that win more than 60% of the time you would be best to identify short term, medium-term and long-term time frames to put the chance of success in your favour.

If you trade using a 30 minute chart you would be best trading in the direction of the trend and having the five minute chart and one hour chart trending in the same direction as your 30 minute chart. The five minute chart will identify the early set up, the hourly chart will ensure you are trading with the most dominant trend and you can use the 30 minute chart to time your entry. The combination of three different time frames will put the odds of day trading success greatly in your favour.

Day Trading Share CFDs versus Forex or index CFDs. What time frames to consider?

Depending on the type of CFD broker you use and the charts they give you access to, you will find the best time frame for day trading share CFDs is to use the one minute chart for the first 35 to 40 minutes, then move to the two-minute chart over the next two hours and move into the close using a five minute chart. When trading Forex or index CFDs you will find ample opportunity and liquidity using anything from a one minute chart up to the one hour chart.

Futures Markets, Options Trading, Foreign Exchange (FX 0r FOREX), Contracts For difference(CFD), Exchange Traded funds (ETF). Name your day trading poison, which financial instrument do you trade, and how do you decide?

Most people come to trading through the recommendation of a friend or colleague or by attending a trading seminar. You will develop a bias depending on your initial exposures and the compelling sales pitch of the presenter.

Firstly there are no right or wrong choices. Even within brokerage houses there is much divided opinion. My brokers, all of which are very experienced differ widely. My broker trades Futures and ETF’s as a surrogate.

His colleagues express differing opinions, one only trades options, another CFD’s and then there is the Forex guy. This is not an accident as the principal has brought together a team of traders with different interests and experience. One thing for sure is they don’t change from one instrument to the other. They have learnt one system and they stick to it.

They all have valid arguments. The futures guy, says why trade a gold mining CFD or stock, just trade the futures contract. The Forex guy says why trade the futures currency contract when you can trade the FX and not pay commission, the futures guy argues back that the spread is too wide on the FX contract.

They are all right. They are each experts in their own field. This is what you need to become, if you are to succeed in day trading.

So back to you.

If you have access, I would strongly recommend that you attend a trading expo, have a look at all the methods, and importantly do not commit to anything at the expo. You need to go home and access the pro’s and con’s of each instrument.

You will also be presented with software, live trading rooms and educational packages and brokers promising you the earth. Take a step back and a few deep breaths, do not allow yourself to be pressured. Remember you have to work with these people for a long time, if you feel uncomfortable with them in a short encounter then move on. Of course you will be offered all kinds of incentives that you can only get at the show.

Don’t fear, you can get that offer anytime. Just call them say you were offered X price at the expo, if they say the offer has expired, tell them that you will only pay the expo price and that you are prepared to do so only for the next 48 hours after witch you will buy another product.

If they won’t budge on price then go elsewhere, they probably weren’t worth working with anyway.

Read trading magazines and if you attend a few seminars find people already using that system and ask their opinion

One of the most dangerous tools available to Day Traders trading Contracts for Difference, Futures or Forex is that ability to access wild amounts of leverage. Leverage is that incredible ‘double edged’ sword that gives you the opportunity for incredible gains on small amounts of money or unforgiveable losses with small amounts of money. Fortunately, when it comes to leverage, you the trader are always in control providing you know how to trade on leverage sensibly.

Is control really in my hands as the trader?

As the trader you have your trading account of say $10,000 which on some trading accounts like forex, will give you the opportunity to trade up to $1 million in total positions. This is referred to as 100 times leverage and if you think about it, is absolutely crazy and the closest thing you are ever going to experience to gambling without being at the casino.

Fortunately for those who trade sensibly, you’ll understand that you actually do control the leverage on your account and with $10,000 you could trade up to $10,000 in total value which means you are using no leverage. The key point to illustrate here is that you can trade ridiculous levels of leverage and wipe your account out overnight, or you could trade sensibly and use the leverage to your advantage.

Can I triple the results of a trading system using leverage?

When you begin using leverage in a sensible way you’ll begin to appreciate that you can maximize your returns whilst only increasing the chance of drawdown in a small way. Let’s say you had a trading system that made 10% per year with no leverage. That means on your $10,000 account you would make $1,000 gross by the years end.

Imagine then if you traded that same system at 3 times leverage, which means instead of trading just $10,000 worth of position you are now trading $30,000 in total positions. Now you simply apply the exact same trading system which historically has been making 10% per year. The main difference now is that you are using a total portfolio size of $30,000 and 10% of that figure is $3,000. When you work out your return you need to base it on your $10,000 capital since that is exactly what you have. Now you can see that you are making 30% per year instead of 10% and all you did was increase the leverage to 3 times your account size.

My trading systems drawdown is not tripled…

Always remember that trading on leverage amplifies your wins and losses. In relation to your trading system making 10% per year you may have experienced a 4% drawdown at its worst point. If you trade at 3 times leverage then you can expect that your worst case drawdown will be approximately 3 times more than the unleveraged result. As a general rule, always trade smaller than what you are currently trading at.

The competition between CFD brokers is an intense one and nearly all of them now offer incredible giveaways just to open a free trading account. You’ll get offers ranging from free education, free trading books to actual cash. So how do you decide which CFD broker is going to be best for your day trading needs?

Market Maker or Direct Market Access?

The 2 main CFD brokers you have the choice between are the Market Maker or Direct Market Access (DMA) brokers. Essentially the DMA CFD broker offers you the chance to trade the exact underlying prices as they happen in the real market whereas a Market Maker will suggest they reflect the underlying market but can in fact give you requotes. This doesn’t mean they are bad but it is something to keep your eye out for.

Which markets do you want to trade?

When starting out it is always best to concentrate on those markets that you know best and if you don’t have any experience, then stick to just one or two local markets. This way you can concentrate on what you know and potentially generate the best results. A good rule is that if you are looking to trade all the worlds markets from the one trading account then a Market Maker CFD broker would be the best generally and if you are just looking to trade direct on your local exchange then a DMA broker might fit the bill.

As you gather more experience you’ll find that many professional day traders actually have more than one CFD broker as the reality is not all CFD providers have everything you need in the one trading platform.

The bottom line is trading like any form of high performing investment has a higher risk factor which matches its higher returns. If you want safety buy bonds or deposit your savings in a bank for next to no interest. Although the recent history of banking might call that strategy into question!

Your biggest risk lies in not having sufficient knowledge about your chosen investment field. It might be OK to buy a blue chip stock and then forget about it, but day trading is a hands on, in the moment activity which takes your entire attention for short periods of time.

One difference with day trading is that you control the level of risk. You decide how much you wish to invest, and how much you are prepared to lose should the trade go against you.

Most people who invest in stocks in a traditional way wouldn’t consider day trading because its too risky, but they are prepared to hold stocks even when the market falls. They just fool themselves that they haven’t taken a loss. The only difference is that they haven’t realised that loss yet. They hope that the market will come back.

But history has shown some so called very sound stocks can go all the way out the back door.

If you are prepared to study the field of day trading, when the time comes to actually take a trade you can do so from a position of being able to analyse, access and calculate the probabilities.

In trading the term mark to market means that your account shows in real time exactly how much you are winning or losing. So there is no excuse for a day trading to let a position become a big loser.

Unless, the other big risk we haven’t mentioned yet comes into play. That is you, your emotions, your beliefs, your personality and your ability to cope under pressure.

One of the riskiest things you can ever do is not know your risk. If you take a trade, your risk is the difference between where you entered the market and where your stop loss is placed plus any brokerage and tax.

This means you need to know the exact point value of any commodity or currency you are trading, if you don’t then you can’t calculate your risk. If you can’t make this calculation then you certainly shouldn’t be trading.

PS If you do not know what a stop loss is, then do not trade until you not only clearly know what it is, but you will always use them.

Day trading follows the practice of active purchasing and selling of the stocks, options, futures and currencies inside a trading day. All trades are finished within a day to ensure that following the closing of the market the day trader will never maintain any open positions and as a result will not be subjected to any overnight dangers. The traders trade against very little changes in price from the monetary instruments. Day trading is generally a vigorous trading activity requiring higher focus and time during trading sessions.

Day traders can be grouped into two broad groups; scalpers and momentum traders. Scalpers trade in large quantities completing each trade inside seconds or minutes. Most scalpers are generally big monetary firms or investors like institutional traders. Momentum traders are usually solo traders who trade according to the stock market trends. The trading volume of momentum traders usually is dependent on market conditions. Some other well-known trading methods consist of; range trading, news playing and rebate trading.

Day trading could be considered as an offspring of high speed electronic communication networks. Most day traders these days trade markets from a removed location such as their house or work place. They use trading software, which is an immediate access trading platform, set up on their computer connected to the internet to execute trades in real-time. So that you can qualify to execute trades, the investor should sustain a margin within the corresponding market. It’s the day trading broker who maintains the margin for that trader and provides the direct access trading platforms. Even though you will find web-based trading platforms available, they aren’t appropriate for day trading.

The most important thing, (other than the money, trading program and market account) that a day trader needs is the market info. Market data allows day traders to pick suitable products to trade. Day traders require live or real-time market quotes, as a little delay in information can trigger them huge losses. It is the trading program that they use which serves this purpose. Sophisticated systems provide this info as graphics and generally have alerts and triggers to automate trades. Day trading systems also use technical indicators and various mathematical resources to facilitate the picking of stocks, futures, currencies, etc.

As told earlier, you will find a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others consist of options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures. Day trading faciliesy are purchasable for most stock, options and futures market, but note that most brokers provide solutions for restricted markets/exchanges. The investor also should be keen to choose markets relating to the product they’re trading, their financial status, the brokerage they’re affiliated to, the trading program they utilise, and their geographical location.

The advantages of day trading include higher profit making chance, no overnight dangers, high leverage, rapid returns, no margin interests and so on. The disadvantages consist of greater opportunity of loss (particularly to new traders) and also the necessity of higher concentration levels and time. The requirement to payoff interest on margin and transaction expenses can make the scenario more severe. It’s estimated that over 80% of day traders have to afford loss.