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Developing a Robust CFD Trading Plan

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Contracts for Difference (CFDs) have captivated investor interest wherever they have been offered. The reason for this is not difficult to understand. CFDs are a fascinating and powerful product, simple to understand and use. They offer some amazing features such as a wide range of markets to trade, low entry cost, and built-in leverage. However, investors could be easily carried away by the simplicity of the product and would perhaps be tempted to take a deep dive without fully understanding the product. The most important thing to learn is to plan your CFD portfolio.

 

Devising a plan takes time and effort

One of the most important features of trading successfully in CFDs is establishing a trading plan. Not having a trading plan in place would mean that a CFD trader could make ill-judged choices with regard to entry and exit points and the types of strategies that will be used. Unplanned decisions could adversely affect the profitability of trading. The first point an investor should remember is that preparing a CFD plan is not something that can happen in a hurry. It takes time to build robustness and flexibility into the portfolio so that it can withstand the shock of abrupt market change.

 

Know what you want

It is essential that you know what type of market participant you are so that you can establish a plan which draws the boundaries within which you can operate. You should first decide what you are looking to achieve from your market activities. The existing market conditions and your level of acceptable risk will partly determine your trading plan. Preparing a trading plan also requires market knowledge and information. Let us assume you want to play on a particular sector that shows signs of volatility in the short term and you want to benefit from it. In such a scenario, you will first establish a clear overall trading objective, make the groundwork for the trading plan, and define the risk parameters. Thus, you will define the timeframe and build a portfolio of stocks that fall within the framework of your objectives.

 

Planning imparts robustness to your portfolio

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Since you have defined your objective and established the parameters within which you will function, you have created the first level of risk mitigation measures. This preliminary preparation could take you weeks, but it is time well invested. By understanding the stocks and their movements and the fundamental factors that could act as negative and positive triggers, you are well prepared for these events and you would be leaving nothing to chance. You will be ensuring that there is no scope for negative surprises, barring unforeseen events. You need not worry about these since even the most astute investor would not be able to anticipate such surprises.

Knowledge plays a very important role in planning. You should have knowledge of corporate events, the earnings calendar, market expectation for the stocks in your portfolio, and likely dividend announcements. These factors have a direct bearing on stock prices. For instance, if you are following broker research reports and you learn that the company is sitting on a cash pile and it could either announce a dividend or a buyback, you need to be ready to benefit from this action. Further, you need to be aware of the relative performance of your instrument vis-à-vis other instruments in the same sector.

 

Respect market conditions

The stock markets are in constant mode of change throughout the trading day. So, depending on whether you are a long-term or a short-term investor, you would be factoring in such events into the expected targets for your portfolio. However, something unexpected can come and hit you. Sudden changes in market movement could spell doom for a CFD trader who has not had a chance to close open CFD limit position above or below the market level. For instance, President Trump’s outburst on North Korea wiped a trillion dollars off the value of shares in stock markets worldwide. You should be aware of the strategies astute traders deploy in case of such sudden events and try to protect your portfolio in the best possible way.

In summary, a well-designed CFD trading plan has all the elements that mitigate risk and impart robustness to the portfolio. Defining the time frame, selecting the trade, choosing the time to enter, and exiting the trade are the crucial elements of a trading plan.

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Stephen studied Accounting & Finance in London. He then completed an internship at an accountancy firm, before realising that his true passion lay in writing and decided to combine his two skill sets.

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