Stock market: Trading equity CFDs - contracts for difference in the values of a share
This article deals with trading equity CFDs. You will learn about trading the martingale way, soft martingale and averaging in the stock market. You will also learn about the efficiency of automated trading.
CFD is a tradable contract between a client and a broker, which provides profits from the difference in the current value of a share, or another trading instrument, and its value at the contract end; it was introduced on the London Stock Exchange.
CFDs provide a broker’s clients with the opportunity to trade equities of different exchanges from the same account, applying the intraday strategy, as well as the middle-term and position trading. On the exchanges, they don’t often apply day trading strategies to securities.
The obstacle is large commission fees, limited number of sell trades and the leverage, not higher than 1:3. CFD is not limited by short-selling rules, a trader’s costs consist of only spread, and the leverage can be as high as 1:20.
The key to successful day-trading is the price changes for the instruments you select. The stock prices should quickly respond to the news, following the general trend during the day session. The features of such securities are: volatility and average daily or annual price change, expressed in percentage.
When an outsider becomes a leading stock
Equity CFDs are distributed among global exchanges; each of them has its own index, calculated based on liquid securities. It is the indicator of general economic trend, which corresponds to almost all stock assets of the exchange. A speculator, looking for outsiders before a trading session starts, can identify the “rocket-stocks”. These outsiders, confirmed by the correlation after the divergence from the general trend, can feature an impressive rally.
Trade in the “familiar environment”
Not to suffer from your ignorance, which destroys any technique or methodology, you should trade the stocks of the companies you know. Negative or encouraging data on the corporation profits, a change in its management, mergers will result in the changes of stocks price by a few percent per day. So, the selection should always contain famous brands. International corporations are always discussed; any event, both positive and negative, will be covered in the media. A speculator can “pick up the spike” inside the day, without identifying the reason for the drop of CFDs of an unknown company.
Martingale and “soft” martingale
This trading system suggests doubling the bet in case the trade is losing. If martingale is relatively often applied in forex, though engaging some risks, then, it makes no sense to use it in the stock market. “Soft” martingale suggests, in case of a failure, you not double the lot; rather, you increase it by 20%, 30%, or 50%. But this approach still won’t be always successful.
Averaging in the stock market is less dangerous than in forex. Sometimes, averaging yields quite good results. It is extremely dangerous to average your positions and got to a bearish market. Imagine, you have bought some shares for 140 each; next, you buy more at $135. The equity price can well resume growing, and you will finally increase the capital on your trading account. If the stocks are getting cheaper, and you are buying more and more, each time the price is 5 dollars less, there will be nothing on your trading account in the end. But still, if you for some reasons decided to use averaging, go all the way to the end, and don’t exit the trade with huge losses. This advice is also relevant for trading the martingale way.
Analysis, based on Japanese candlestick patterns
Japanese candlesticks are said to be the signs of future. They were introduced by a Japanese, who used the patterns to predict the future rice prices. By their means, he was trying to predict the crop yields, the weather forecast, the stock prices for rice, foreign exchange rates, commodity prices, and so on. “Morning star”, “evening star” formations are traders’ favourite patterns in the daily chart. The combinations of a bullish belt hold and a bearish belt hold patterns are also quite informative.
It is not reasonable to trade with some unknown software, you’ve found on the Internet. As a rule, those “super-systems” are based on martingale trading. It is not surprising that such kind of trading often ends badly. It is easy to find a free trading robot on the Internet. It is much more difficult to find something really good. Advanced traders claim that, among all free programs on the Internet, less than 1% of them can be somehow interesting for speculators. If you are vulnerable to stress during trading, you can develop your own trading system and record it in the form of software. You’d better hire a trained computer programmer, rather than do it by yourself. Trading robots are quite efficient at the start of a bullish market. Next, they are getting less and less efficient.
Hope when trading CFDs
What should a trader trust in the market? In self-discipline and their winning trading systems. Have you tested your trading strategy in long time periods? Have got any advantages over the market? If you don’t know, the market will beat you. Is everything going not according to your scenario? It makes no sense to trust in good luck: you need to respond to the price movements. The market has puzzled you: reduce your trade volumes. Do it again and again. You may not like cutting down you trades, but you must. Otherwise, the market will destroy you. Remember: hope is your enemy!
Greed when trading CFDs
As a rule, forex speculators are greedier than stock traders. Broker provides much higher leverage in forex than it is in the stock market. Therefore, more gamblers go straight to the foreign exchange market. If you trade CFDs, you are not likely to a gambler. And that is the first step towards success!
Stress when trading CFDs
It hardly differs from stress in forex trading. However, the stock market is thought to be less stressful than Forex. How can you overcome stress? First, you need to reduce your trade volume. It makes some sense to build safe pyramids in the price trend. You can occasionally take some anti-anxiety medicine, but not always. If you are medicated all the time you will hardly succeed in trading.
Technical analysis in the stock market
Most traders apply technical analysis to CFD trading. It is because the price charts are moving according to certain regularities. If you know the history of the price changes in the past, you can predict the future price movements.
Fundamental analysis in the stock market
If you want to achieve sustained success in trading, you will also need to apply news (fundamental) analysis. However, the released information is instantly responded by the prices, and traders rarely make any profits from the news. You need to learn how to analyze the news background.
Psychologists and mathematicians in the market
According to statistics, there are quite many psychologists among successful traders. However, successful stock traders can have various jobs: form a flight attendant to a priest
What do “Turtles” keep quiet about?
Turtles are traders, who trade according to certain patterns. They are rather successful in trading. Turtles are usually trading in the stock market. They utilize the same methodologies to identify the growing stocks. They don’t share their secrets of trading. Although some writers managed to interview some of them, there was a talk about nothing special. The Turtles were speaking about common things, like “the stocks are either growing in price or falling down”. Any trader knows about this. What do Turtles keep silent about? And there is the answer. If some trading system is widely applied, it becomes useless. It may be argued, but many advanced traders have told it directly more than once. If you find an efficient trading system, don’t tell anyone about it.
NLP and Hypnotherapy
If you are afflicted by gambling, NLP may help you. Unfortunately, there aren’t many true professionals. You can easily find a hypnotherapist in any big city, but you need to clearly explain what you need. Hypnotherapists, as a rule, can help you get rid of gambling addiction. If a doctor by chance compels you “never trade in the financial markets”, you are going to spend much time, look for the reason why you feel sick when you see charts.
Lose with a smart system or gain with a stupid one?
What is better? Most professionals will tell you that it is better to lose with a smart system. No one is safe from errors. It is important that they don't result in bankruptcy.
My own story
I started forex trading in 2005. A year later, I realized that trading equity CFDs was much more interesting and stable. In 2006, I managed to double my capital without real risks, trading only the shares of McDonald's.
The bearish market started in late 2007. It was very difficult to trade, and my capital was slowly but steadily decreasing. I was going short, but it didn’t help, as the falling market used to surge rather high, followed by deep drops. It was much harder to predict the price moves than it had been for the bullish market. The stock market started rising in 2009, and I increased my capital manifold. Unfortunately, at that time there wasn’t much money on my trading account to start again. Nevertheless, I experienced the joy of success and was living on the money, made in the market. In 2011, the dealing center, I was trading with, removed many instruments, including equity CFDs. I was a real pain for me.
But even greater pain was caused me by my own self. Instead of withdrawing the money earned and starting trading with a reliable broker, I chose buying gold. There were really positive forecasts for gold at that time. Analysts suggested gold should have been up to new record highs. But, instead of that, gold price crashed. And so, I went bankrupt.
How can you avoid bankruptcy?
Despite the certain losses when the dealing center closed the access to stocks for me, I should have withdrawn all the money left and started to trade with another broker. I was quite good at CFD trading but understood nothing in trading gold. I should have selected rising stocks and increase my trade volumes by means of pyramid attacks on the market. Would such strategy have yielded profits? Certainly! The stock market has much risen since then. I knew that it was natural for the market. At the same time, I strongly accounted on the gold price surge. Experts and world-famous analysts were constantly talking about that in their articles and forecasts. There is a joke among traders, “The most important in Wall Street is to stop your ears”. Unfortunately, not everybody follows it.
Price chart of AA in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.