In the early days in London where CFDs started out they were commonly known as SWAP contracts. It wasn’t until around 2001 that CFDs became well loved with retail investors. It was CMC Markets and IG Markets, two large spread betting businesses based in London that bought CFDs to the forefront in the retail trader’s arsenal. CFDs quickly became well loved in the United kingdom as they didn’t attract any stamp duty.

In 2002 both CMC Markets and IG Markets opened offices in Australia and started to actively promote CFDs to Australian traders, the popularity of CFDs peaked in 2007. Because of their popularity amongst Australian traders and investors many international CFD providers saw the potential in Australia and opened up offices. There are over 13 CFD providers operating in Australia and an estimated 35,000 retail CFD traders.

In recent times CFDs have received much negative media hype because of traders incurring losses due to overexposing themselves to the market during volatility. This combined with the recent folding of CFD provider Sonray Capital Markets has led to increased scrutiny by the Australian financial Services Regulator ASIC relating to how CFD providers handle client money.

At present CFDs continue to be probably the most widespread financial product for retail traders in Australia, although unconfirmed it’s estimated that CFD volumes account for around 35% of ASX exchange turnover. As CFDs are an over-the-counter product it is hard to verify this figure.

CFDs in Australia are largely traded over the internet through a variety of proprietary CFD trading platforms offered by the major companies. Many of these platforms had been initially developed for forex CFD trading but due to the similarities between share CFDs and forex CFDs the platforms have be tailored to suit share CFD traders.

As Australia has the highest proportion of share ownership in the world on a per capita basis it’s not unexpected that nearly all CFD traders have experience buying and selling stocks online. The past growth of the Australian share market has made share and CFD trading a widespread pass-time for Australians.

Before you run out and join the 35,000 Contract for Difference traders in Australia you must make sure that you are fully aware of the risks involved in CFD trading. Like all leveraged financial product CFDs offer considerable rewards but these don’t come without risk. You should make sure that prior to jumping into CFD trading you know the Product Disclosure Statement (PDS) available from your CFD provider that outlines the negative aspects and benefits of trading CFDs.

Prior to trading CFDs you should know that CFDs are a leveraged product and can work for you as well as against you. Like all leveraged products a small price movement can result in large returns but also considerable losses. The variety of order types offered to CFD traders permit the risks associated with adverse price movements to be considerably reduced as CFD traders are able to set their order at a price which they are prepared to close out their position and realize a loss. Everyday order varieties used to mitigate risk are stop-loss orders, trailing stop-loss orders and guaranteed stop-loss orders.

Stop-loss orders
This is one of the most well loved order type employed by traders to deal with risk. A stop-loss order is simply an order to close an existing open position that is placed at a price beneath or greater than the current market price. The order is placed at a price that the CFD trader is prepared to shut out their open position. It’s vital to note stop-loss orders are usually vulnerable to slippage should the price of the CFD gap, this is a regular occurrence when trading share CFDs.

Trailing Stop-loss orders
Trailing stop-loss orders are comparable to stop-loss orders with the exception that the price of the order moves in accordance with a pre-determined distance from the present trading price, this distance is set by the trader at the time of placing the order. It’s essential to note that the price of the order will only alter if the price of the instrument moves in a favorable direction, should the price go against the trader the price of the trailing stop-loss order is not going to vary. This order type works in a similar way to a ratchet, in that it can be utilized to lock in gains as the position moves in favor of the CFD trader without the need for the trader to continually change the price of the stop-loss order.

Guaranteed Stop-Loss orders
Guaranteed stop-loss orders have grow to be commonplace in recent times because of traders having the ability to predetermine their losses. This order type is generally used when trading share CFDs simply because share CFDs are prone to slippage and gapping during the opening phase of the market. It is vital to note that when using guaranteed stop-loss orders your CFD provider will often charge you a premium, this is exactly like an insurance premium guaranteeing that you’ll be filled at the price your stop-loss order is placed.

Other than using orders to manage your risk when trading CFDs many traders use other financial products such as shares and options to hedge their CFD positions.

Shares are generally utilized to hedge CFD positions or vice versa, these are often utilized by traders that hold a portfolio of stocks and also a small term CFD trading account. CFDs are used to trade the small term price movement of the stocks within their portfolio without needing to sell the stocks and realize any capital gains.

Options are employed by some CFD traders as a type of guaranteed stop-loss. Options have an advantage over guaranteed stop-loss orders in that they’re often cheaper. Hedging CFD positions using options is a common strategy utilized by more advanced traders that know the core components of an options contract and know how to pick the most suitable contract to hedge their CFD position with.

Aside from managing risk using order varieties and hedging methods all CFD traders should make sure that they adopt strict money management strategies, meaning that they must not utilize too much leverage or over expose themselves to one individual CFD or sector. Utilizing excessive leverage is the single most well loved error made by novice CFD traders.

Prior to opening a real CFD account you ought to ensure that you practice buying and selling on a demo account to so that you are familiar with how to utilize the various order types available that will enable you to manage risk. Remember CFD trading is often very satisfying if the risks are controlled.

DMA CFDs offer complete order transparency. Traders are able to participate in the market depth of the underlying equity over which the CFD is based by joining a bid or offer queue and also the open and closing auction phases of the market. DMA CFDs offer all the benefits of buying and selling shares with the additional leverage that CFDs offer.

Buying and selling DMA CFDs is very similar to trading shares, traders are able to hit the bid or offer or join the buy or sell queue. DMA CFD traders have significant advantages over traders using market made CFDs for the reason that they have got the potential to enter and exit trades at better rates.

When trading DMA CFDs you will be required to subscribe to exchange data, the price of data varies from exchange to exchange. Once subscribed you will have access to real time rates and market depth allowing you to see the amount of buyers and sellers at each different price level and take part in order queues allowing partial fills and better execution.

One shortcoming of DMA CFDs is that guaranteed stop loss orders are not offered, but these are not always necessary as generally DMA CFDs traders use options to deal with their downside risk but these are usually overly complex for the amateur trader.

When buying and selling DMA CFDs traders have the ability to be price makers meaning that when an order is placed it’s transmitted to the real market and can affect the value of the stock on which the Contract for difference is based.

Trading CFDs using a Direct Market Access (DMA) model is best suited for frequent traders that trade on an intra day basis. Frequent traders will find that Direct market access CFDs will allow them to buy and sell freely without dealer intervention and obtain better prices when buying and selling. DMA CFDs are suited to active day traders and scalpers who are looking to make the most of small price changes quickly.

There are a variety of CFD platforms that you can trade DMA stock CFDs on, the two most common platforms in Australia are webIRESS and ProDeal. Both platforms allow customers to take part in the market depth of the DMA CFD on which they are trading. The webIRESS platform is also extremely well loved throughout the share trading community, largely because of the diversity of order types on offer, whereas ProDeal is very common amongst CFD traders, this is because of the broad range of CFDs on offer and its superior charting functionality.

It’s vital to note that prior to starting to trade DMA Contracts for Difference you you reckon about whether this sort of Contract for Difference fits your trading style, choosing the incorrect CFD variety will have an effect on the success of your trading plot.

Deal book 360
Deal book 360 is the CFD and Forex trading platform offered by GFT, the software is a downloadable application. Once you open the trading platform the original thing that you will notice are the charts, this platform has fantastic charting functionality. I tested the graphs for both Forex and CFDs and found the foreign exchange graphs to be right and consistent with those on other CFD trading platforms in the group. When evaluating the CFD graphs to others in the group I observed that the rates did not always reflect what the others showed, this is probably because GFT is a market marker and their rates are not an accurate reflection of the underlying instrument on which the CFD is based. If you searching for a respectable Forex charting package that is free GFT can offer you this in their deal book 360 software, but I recommend that you stay away from the CFDs on the software.

Pure Deal
Pure deal is the internet based CFD trading platform used by IG Markets, the software is web based, straightforward and simple to use. I gave this trading platform a excellent trial run, what I liked about this software was that there were so many instruments to trade, the downside of this but was that a lot of of them did not suit my trading plot and after a while the complicated instrument search tree grew to become frustrating especially when I wanted to get a CFD position on quickly and the CFD was not in my watch list. The charts on this software are incredibly plain and if you want more complex charts you have to pay for them. Aside from the distress with the CFD instrument tree the software is a first-class all round trading platform for the novice trader that wants web based software. For someone that requirements that small extra in their platform Pure Deal would not be a sensible option.

Web IRESS
The web IRESS platform is obtainable from Comsec and Etrade in Australia, this trading platform was one of most suitable in the group when it comes to trading DMA CFDs. The trading platform is web dependent and simple to use, it has various advanced order types like trailing stop loss orders which are fantastic for CFD trading. The downside of this software are its charts, they are basic with very the minority indicators. If charts are not vital to you and you are searching for a CFD trading platform that will offer you DMA CFDs on ASX listed CFDs over the internet this would be a fantastic selection, though it comes at a price. Equally Comsec and Etrade will charge you around $55 per month to use this software, this combined with $38.50 in exchange royalties makes this software an expensive proposition given there are other trading platfroms out there can offer you the similar and even better features for free.

Market Maker
The Market Maker platform is offered by CMC Markets, the trading platform is downloadable and has some terrific features like being able to back test on 10 years worth of past price data. This was the most hard trading platform of those reviewed to install, the download file was huge. Once I was up and running, I found the interface very user friendly and the charts simple to use, but after being logged into the software for 30 minutes the charts froze. Once I was back up I checked the prices of some ASX CFDs against the other trading platforms and noticed that price changes on the platform lagged by about 2 seconds. My experience with the market marker platform was less than enjoyable and I can’t imagine that the troubles were isolated to my PC. This is a trading platform that I recommend you stay away from, from my personal experience it is plagued with technical issues, the worst nightmare for any online CFD trader.

Pro Deal
The Pro Deal trading platform is offered by International Capital Markets (IC Markets), the platform is downloadable but also has web and mobile versions. This was the simplest CFD trading software of the lot to set up. Once the software was established the quick start videos guided me through the workspace setup. The workspace was effortless to navigate and not cluttered with CFDs that I would never trade. The platform has both DMA CFD as well as over-the-counter (OTC) CFDs, with both varieties I was able to trade the ASX cash and day trade using DMA CFDs watching my orders flow onto the underlying market. The charts on the trading platform have multiple indicators, and are not overly complicated to use. The best thing about this trading platform is that it is free.

So which CFD trading platform is for you?
Following my evaluation all five platforms it is simple to see that every trading platform has their niche. If you trade Foreign exchange Deal Book 360 would be the one for you, if you like uncomplicated web based software go for Pure Deal, if you just trade ASX CFDs then web IRESS (although expensive) may well be for you, but if you want an simple to use and reliable all round online trading platform you can not go past IC Markets Pro Deal software package.

Before trading contracts for difference you must always know how to use the CFD platform you choose on, bear in mind that the best CFD software for you will depend completely on your trading style. You should Install a Pro Deal CFD demo, the trading platform that I have chosen to use, and see if it is the right CFD platform for you.

CFDs are geared financial products. This means that you will be fully exposed to price actions of the underlying instrument without needing to pay the full price for that instrument. Leverage means that CFDs offer the possibility to make a higher return from a smaller initial cost than investing directly in the underlying stock.

Leverage, but, usually involves more dangers than a direct investment in the underlying instrument. It is imperative to recognize that this effect may work against as well as for traders. The use of leverage can lead to large losses in addition to large gains.

Benefits of dealing in CFDs
CFDs have been used by professional traders for over twenty years and emerged originally as an over-the-counter (OTC) product. CFD related dealing and hedging is one of the fastest developing areas in the Australian and European derivatives markets. This acceptance has arisen as a result of the following main features:

Leverage
CFDs enable you to gain full exposure to a share, commodity, FX cross or index for a fraction of the price of buying the underlying. CFDs call for only a small initial margin to secure a position.

The capability to go ‘small’
CFDs permit traders to take advantage of falls in prices. This means that investors can profit when prices are going down, not just up. CFDs are thus an brilliant investing and hedging instrument.

Simplicity
Non-expiry: The majority of CFDs do not have an expiry. They are perpetual in nature. For CFDs that do not expire, the only way to close a trade is to trade the opposite side of the position.

The CFD mirrors the price of the underlying: Unlike other forms of derivatives (i.e. options and futures), cash flows such as carry costs and dividends are not mirrored in the cost of a CFD. Instead, cash flows are paid whilst the trade is open, allowing CFD prices to follow the underlying instrument rather than trade at a discount or premium, as can be the case in other varieties of derivatives.

Advantages of ASX Listed CFDs
Market Independence
ASX is obliged under the Corporations Act to ensure that its markets are honest, orderly and transparent. ASX ensures a sound operational and front-line regulatory environment for its exchange-traded markets and clearing and settlement facilities, providing effective systems and infrastructure together with services designed to preserve and improve the integrity, efficiency and effectiveness of its trading, clearing and settlement facilities. For the ASX Listed Contract for difference trader, this means being able to participate in the market with assurance.

As the principal market operator, ASX is independent of the parties with whom you are receiving recommendations and dealing through enabling it to act honestly and independently. This separation of accountability between broker and exchange also offers traders with selection as to whom they wish to do their business through.

Going through a central market also means there is one standard contract specification for all ASX Listed Contracts for difference, not a different product depending on who you do through. It’s a fundamentally better Contract for difference market.

Transparency
Transparency is a main ingredient in a well informed market. ASX reports on all ASX Listed CFDs transacted, open positions, bid, offers and their volumes. In fact, all the market information you are used to seeing from the ASX. This means a better informed market.

ASX Listed CFDs are traded in the same way as other ASX traded contracts:
1. All prices are formed in a fully transparent manner in the ASX’s CFD central market order book. Each trader’s order is pooled in the ASX Listed CFD central market order book with those from other market members, including market makers, and becomes an integral part of the price discovery process.
2. All deals are executed on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in everyone in the central market order book being dealt with honestly and consistently, no matter how huge or small a trader you are.
3. Importantly, whilst prices are transparent, the individual investor remains anonymous, which minimizes market impact expenses (especially those related to other people recognizing an individual’s investing patterns and trading ahead of him/her).
4. Anyone can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is forced to accept the price offered in the market. But, once an order is executed, you are committed to settle the trade. All prices in the market are firm in the amount indicated.
5. The ASX Listed Contract for difference central market order book incorporates orders from market makers. Their actions help guarantee the ASX Listed CFD market has competitive prices and deep liquidity.

Risk Management
ASX Listed Contracts for difference trade in a centrally cleared marketplace. The Clearing House offers central counter party clearing for the ASX Listed CFD market. This involves the Clearing House managing risks to ensure that the interests of its Participants and clients are protected and that the integrity of the marketplace is maintained.

Through a method called novation, the Clearing House becomes the principal to all trades and liable to perform against all contracts to which it is a party and effectively ‘guarantees’ performance to other Clearing Participants. Novation and thus the clearing guarantee become effective on registration of the agreement connecting a buyer and seller.

This exposure is then handled and the clearing guarantee established in a variety of ways. Initially this is often achieved by the collection of the various margins. The collection of these moneys protects against extreme price changes and prevents participants from accumulating large unpaid losses that could possibly impact on the financial position of other market users. This is a key element that differentiates exchange-traded markets from over-the-counter (OTC) markets, where such a strict margining regime is not in place.

The ASX Listed CFD market also has access to the Clearing Guarantee Fund designed for use in the event of failure of one or more Clearing Participants.

Transacting in the ASX Listed CFD Market
When trading ASX Listed CFDs, your order is entered directly via a participant into the ASX Listed CFD central market order book. This order book is available for the market to see. All orders are executed on a strict price/time priority. This means that the first order with the best bid or offer price is always executed first. Trading in the ASX Listed Contract for difference central market order book also ensures “customer instructions” are always given priority above a broker’s “house orders”.

In contrast, customers executing CFDs using an Over-the-counter broker, do not have their orders in the ASX Listed CFD central market order book. These orders are transacted with the Over-the-counter CFD counterparty (typically described as a Contract for difference Broker). The customer’s order is not protected by the ASX’s price/time precedence or customer order precedence rules.

To find out more about ASX contracts for difference you ought to download this CFD education which clarifies ASX contracts for difference in detail as well as how they are margined, priced, cleared and how you can go about finding a broker that is able to offer you the world’s first exchange listed CFD contract.

Most traders buy Contracts for difference with the view that the market will rise, few traders take sold positions with the expectation the market will fall. Pairs traders do not care about market trend and do not mind which direction the market moves so long as they choose a strong pair of related stocks.

Pairs trading has become well loved since the introduction of CFDs, prior to this it was not simple for a investor to small sell. CFDs have made pairs trading simple and accessible to the everyday trader.

Most investors take up pairs trading strategies when there is uncertainty as to the trend of the market. The rationale for this is that it eliminates market risk, whether the trade generates profits will depend on whether the trader goes long a Contract for difference that will outperform or sells a CFD that will under perform. A common example of this would be buying Commonwealth Bank (CBA) and going small ANZ Bank (ANZ), because the trader expects that CBA will outperform ANZ. Should both stocks rise or fall the trader will be indifferent, but should CBA rise and ANZ fall as the trader anticipated, the trader will generate profits. If CBA falls less than ANZ the trader will make money likewise if CBA rises more than ANZ the trader will also make money.

There are a number of benefits of using Contracts for difference in your pairs trading strategy. One of the main benefits is the financing offset that will be achieved when the trader earns a financing revenue on their small position. Take the above example for instance, when the trader opens the long Contract for difference position on CBA they will pay a small financing charge but when the trader sells the ANZ CFD they will receive financing income. Although the offset is not 100% it will most certainly reduce the cost of the trade. In many ways pairs trading as a small to medium term strategy and can be cheaper and less perilous than simply opening a naked long or small position.

Pairs trading is not only commonly used when trading equity Contracts for difference it has also become extremely common for use with indices. When using Contracts for difference over indices investors can take the view that one index will outperform the other. An illustration of this may be the US market versus the Australian market. In this example you would buy the ASX 200 index Contract for difference and sell the S&P 500 index CFD with the expectation that the Australian market will outperform the US market.

Pairs traders adopt a number of strategies, one of the more common strategies used is to pick pairs that are associated, for example Stockland against Mirvac or Rio Tinto against BHP Billiton. It is also common for investors to use sector Contracts for difference in their strategy such as the health care sector versus the materials sector or energy sector versus the ASX 200 index.

An example of sector trading would be the resources sector versus the ASX 200 index. The trader might be of the expectation that the resources sector is overvalued relative to the market and will under perform the market, the trader would small the resources sector and buy the ASX 200 index. Alternatively the trader may feel that the market will retreat and funds will go back into the defensive stocks, in this case the trader would buy the health care sector and sell the energy sector. When choosing sectors the trader should consider their weighting within the total index as this will help the trader choose the sectors correlation to the overall market. Pairs trading can be done on nearly any financial instrument but currencies which by their very nature are allready a pairs trade.

To find out more about Contracts for difference visit our pairs trading page and download our educational guide.

Initial Margin
Initial Margin is the initial deposit required to open a position. For Australian equity CFDs, this ranges from between 5% to 50% of the entire notional value of the trade. Therefore, if you bought 10,000 XYZ CFDs at $1.35, you would be required to have no less than $1,350 within your account to cover the minimum margin prerequisite (10% of your total position size of $13,500). The margin prerequisite for index and foreign exchange CFDs can even be as low as 1%.

Variation Margin
Variation Margin relates to the difference between the initial margin and the margin required to maintain the position open as the position value changes. Here is an example if bought 2,000 XYZ CFDs, at $5.60 it would give you a position value of 2,000 x $5.60 = $11,200. Assuming XYZ is margined at 10% you would need no less than $1,120 initial margin to open this position. If XYZ falls to say, $5.40, you will now have a loss of $400 ($0.20 x 2,000). This loss (often known as variation margin) is subtracted from the initial margin of $1,120, leaving a deposit of $720. Since you still hold 2,000 XYZ contracts at $5.40 you will have a margin requirement of $1,080 (i.e. 2000 x 5.40 x 10%). There’s now a paper loss of $400 also, the initial margin has been reduced to $720. This is $360 lower than the margin required to maintain the position open, which means more margin is needed to top up the account. The shortfall in margin is called a shortage in equity. If you cannot maintain your margin requirement you won’t be able to increase your position but you’ll always have the ability to reduce or close a position.

Equity Balances
The equity (or balance) of your account will rise and fall based on the cash you have deposited or withdrawn from your account, the profits or losses within your account and the size of the positions held. Throughout the trading day your account balance, including all open positions, are valued against the prevailing market rate. Therefore your equity balance is constantly calculated in-line or marked-to-market with market movements. Your end of day account balance is calculated using the mid-closing rates (or the last traded price). The equity balance is used to assess your available margin against current positions, and possible new positions you may need to take. Your cash balance is used to ascertain if there’s a requirement for additional margin deposits in your account. Once a CFD trade is opened, variation margin requirement should always be maintained on your open positions. It is your responsibility to make sure that your account is satisfactorily margined at all times, particularly during volatile trading periods. You’ll only be allowed to trade and retain open positions on the premise of cleared funds in your account, not on promised money or funds in transit as a result it’s essential to permit sufficient time for funds to clear when depositing cash into your account.

If a position turns into profit, the increase in the equity of your account allows for further positions to be opened.

Shortage in Equity
A shortage in equity occurs when the account balance falls below the required initial margin. Accounts with a shortage in equity are usually only allowed to scale back open positions, until the equity balance is in excess of the specified deposit. No new positions can be opened until this situation is rectified.

Margin Calls
If the market moves against you and your equity balance falls below your initial margin you normally have the choice of:
i. close a number of of your open position(s), to reduce your initial margin to the required level; and/or
ii. add more money to your account to maintain the initial margin.
This is the initial trigger level for margin, known as the ‘Margin Call’, which you need to add additional funds to maintain your open positions.

Stop Out Level
You will be at risk that your open positions will generally be closed when you have less than 40% of the required initial margin (i.e. 40% of the position size) but this may vary between CFD providers.

Margin, leverage and risk
Margin plus the associated leverage can be very useful if you use it correctly. It can also be devastating to the inexperienced trader that has small understanding of the hazards of using leverage and not using a defined risk management plot. There are several ways of using the leverage available by trading CFDs, from the most conservative to the most aggressive. The way in which you utilize leverage will depend on your personal circumstances.

Prior to trading CFDs be certain to read the Product Disclosure Statement (PDS) that your CFD provider issues as this will clarify in detail how your CFD provider deals with margin. You must also read this free guide to CFD investing, which clarifies leverage and margin in detail.

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Congestion areas and trading range areas are nothing more than an area where the bulls and bears are in near equilibrium. These areas can be as small as a few ticks, up to several points wide depending on what time frame chart you are currently viewing. For the sake of a mental picture for this article, let’s assume we are looking at a 2000 tick intra-day trading chart, which is somewhat similar to a 5 minute trading chart. I prefer tick charts to time charts for the simple reason that I believe that I can see more details in the price movement, but that’s for another article and another time. Let’s concentrate on trading rages for today.

One of my most vital trading rules is that I can NEVER buy or sell the break out of a trading range. The reason for this rule is that most trading range breakouts fail at least once, if not more than once, before prices will truly start trending again. Remember, a trading range is nothing more than a temporary point of equilibrium in the market. If prices go too far to the bottom of the range, the buyers tend to swamp the sellers, and prices go back up. When prices go near the top of the range, the sellers swamp the buyers and prices start to go down again.

At some point, enough buyers or sellers will join in to push the market slightly higher than the former high, or slightly lower than the previous low, and this will usually make a failed breakout. These failed breakouts, by a tick or so, are very common in the ES and the other mini indexes. One of the most common entry traps will occur when enough buyers or sellers join in to really push prices out of the trading range with a very strong bullish bar, or a very strong bearish bar. Even then, it is very likely that the break out will fail first, and prices will pull back again. The point I’m trying to make here is that most trading range breakouts, no matter how weak or strong they look, will fail the first time out in most cases.

Nothing is ever written in stone when it comes to trading, so sometimes, you will get a break out that never checks up and simply moves strongly in the direction of the break out. It is my opinion that this is the exception though, rather than the rule. A strong breakout will happen only often enough to keep you trying to perfect it, and your trading account funds will more than likely be reduced while trying to figure out how to make it work in your favor. At the very least, you will usually be forced to ride out a pull back with a much larger stop than you would prefer in order to survive the trade.

Now that we have discussed what happens with most trading ranges, let’s talk about how to beat or outsmart other traders when it comes trading these formations. If the overall trading day is simply a larger trading range type day, then it is usually best to fade all breakouts. On the other hand, if the day is a trending day, at some point, prices are likely to break out with the dominant trend, but again, we don’t enter during the break out. The smart entry will be to wait on the break out to fail and start to pull back. Once the pull back starts to lose momentum, we will look to join in if prices turn back with trend again. This is known as a breakout pullback entry, and this strategy is the optimum way to enter a trading range breakout if you want to get on board in the direction of the actual breakout.

By using this strategy, you will occasionally miss a strong break of a trading range, so don’t let that entice you to join in when you see it happening, as it will only happen often enough to keep you joining in on a losing entry strategy. Most trading range breakouts will give you a pull back opportunity to join in later, and if not, the worst that can happen is that you will miss a rare profit opportunity. It’s my opinion that you will lose more money taking first time breakouts than you will ever make trading them, because most will fail shortly after prices break out of the range.

I feel it is vital that we discuss a few additional nuances of trading ranges and congestion areas as well. In most instances, trading ranges will normally start trending at some point in the same direction that they were moving in when they went into the trading range. That doesn’t mean that prices will always resume trending in the same direction, but that is the more common scenario. So, based on this theory, be particularly on guard when prices break out counter trend, as this is most likely going to become a fantastic opportunity to simply fade the break out.

The ES is well-known for failed breakouts with trend, which immediately go to the opposite side of the range, and fail out that side as well, before prices start back moving with the original trend. Stop running is rampant around these trading ranges, and it is best to avoid most entries until prices offer a failed breakout opportunity, or a breakout pull back entry.

While I have given you some vital information on how to go about trading breakouts, there simply is not enough room in one article to discuss this strategy in enough detail to make you an expert trader of ranges or congestion. But, you are now provided with enough information to have a better understanding of what is going on around these formations. There really are only a few basic rules to remember when trading ranges. One, you must never take the original breakout. Two, either fade the breakout, or wait on a breakout pull back before entering. If you start with these basic entry rules, and study what happens closely going forward, you can improve your trading results tremendously. Review a few intra-day trading charts and see if you don’t agree! If you want to learn more about these system trading entries, follow our links to our web site.

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You’re probably asking yourself why you’d need a trading plot. A trading plot will help you deal with your emotions, manage risk, and budget your time. You can’t control the market, but you can control yourself. This is the essence, the reason for having rules.

The trading plot is vital to help you reckon through and manage the risk you’re about to assume. A trading method is the manner in which you react to set-ups and signals to really take a trade. Discussing trading methods will occur in Part II of this article series.

A sound plot coupled with a successful method will propel you toward the success you’re hoping to achieve in any market from forex to stocks. Here’s an example of a trading plot and trading method working together. Imagine you had bought 100 shares of AAPL at $200 per share – no small cash commitment, but only 1% of your total trading capital. What if AAPL fell $5.00 per share, how would you feel? But what if you had a trading plot that said you’d cut your losses if price exceeded the lowest low of the last three days, at $192.50. Of course you’d be nervous, but you obey your rules and stick with AAPL. The next day AAPL climbs $15.00 on news that Steve Jobs signed a new multi-year contract! Your method dictates that you sell ½ of your position when the stock moves greater or equal to %5 in one day. You sell 50 shares at $215 and bank $750 in profit before commissions.

Conversely, if AAPL fell to $191.75 your method instructs you to cut your losses because the three day low was broken. You immediately place an order to sell all shares. AAPL continues to fall as news is learned the Steve Jobs is leaving the company. Over the next few days the stock settles at $179.33.

These two contrived examples demonstrate that a excellent plot will keep you from losing all your capital – you risked only 1%. A sound method can make you profitable. When both components are in place and utilized you’re on your way to success.

A trading plot will also allow you to monitor your progress and forex Seeing a mistake is simpler to right than guessing what went incorrect or chalking it up to “terrible luck”. For example, maybe you’ll choose that1% of your capital is too much to risk per trade.

When you control your actions and reactions by following your plot you’ll have more success quicker than someone without a plot. Rules will eliminate stress, confusion and knee-jerk reactions. A sound trading plot will lead to consistent profitability, discipline, and repetition — hallmarks of successful traders.

Know Thyself

This list is not complete, but here are some vital questions you need to seriously consider.

The most vital question is “how much can you afford to lose?” Don’t ever trade money that would alter your life if you lost it. Trading capital is expendable capital. Choose the amount of money you could afford to lose.

Consider what part of the overall capital you’ll have at risk in the market at one time. For example, some traders will risk 1% of their total capital per trade. Others might risk a total of 20% of trading capital at one time on all open trades.

Money mangement and risk are the most serious aspects that you must consider. If you can manage your risk and obey the rules of your trading plot you will have success. Fail to manage your risk and lose your trading capital your trading career will come to an end.

What kind of a trader do you want to become? If you want to day trade you nearly need to be in front of the monitor during market hours. Maybe you have a full-time job and can only devote a part of your time to trading. Reckon about how many hours per day you can devote to researching and analyzing data. This will tell you realistically what type of trading you can manage.

Does your personality allow for discipline and repetition? Or are you looking for a heart-pounding, adrenaline rush? Increasing your heart rate by trading is a fantastic way to decrease your capital. Make sure you’re aware of this.

Knowing the answers to these questions will save you a lot of grief. Trading is not as glamorous as the media describes – it’s a lot of work and repetitious behavior. If you want to make money, can follow rules without question, then you can become a successful trader.

What market(s) are you going to trade? Are you going to trade options, stocks, currency, or cotton? Successful traders concentrate and learn to trade well only a couple of markets – new traders try all the markets thinking they will eventually find success.

What broker and platform will you use? Your account size will probably determine this answer. Make sure the platform (supplied by the broker) has what you need. For example, if you trade from fundamental analysis or technical tools make sure they’re available from your broker.

Also know the level of support and customer service you’ll receive. How simple is it to contact support and how responsive are they? Are there any “Getting Started” tutorials you can watch in advance of signing the account agreement?

Know your pre-market and post-market ritual. Both take time. Pre-market might include updating stops, assessing the market’s pre-opening numbers, and writing trade orders.

Post-market work is vital to success – you can’t prepare your day the morning the market opens. So how much time will you allot for market analysis, monitoring your open trades, finding new trade candidates, looking for set-ups?

You’ll need to keep records. Don’t rely only on your broker to record the trades you’ve made. Keep your own records and you’ll have a better understanding of profit and loss. You’ll also see the cost of doing business, i.e. commissions, exchange fees, etc.

Your trading plot is an unbreakable set of rules. When you first start you’ll reorganize, re-reckon, and restructure your plot as you find problems. That’s normal. Keep fixing the weak points and you’ll soon have a decent plot.

Remember, successful traders are all about discipline and repetition. If you can master those attributes, you too can become a successful trader.

Excellent luck!

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One of the largest keys to being successful is simply keeping your losses small. By doing this you increase your chances of being profitable. It can also give you these five benefits.

1. Don’t Lose Everything On one Trade

If you are risking too much then all you have to do is lose once to take your account down to zero. And it is just not possible to be right all the time. So if you are always risking a large percentage of your account on any one trade then you are going to be in for a shook when you experience your first losing streak.

This is even more right right if you are trading stock options because you can really lose huge here if you do it incorrect.

2. Losing Streaks Happen

Everybody has excellent times and terrible times. This is a fact of life, sometimes you win and sometimes you lose. Well the stock market is one of those places that you can lose everything during your down times. To counter this it is really vital to keep your losses as small as possible.

This way you can to lose 3 or 4 times in a row and you still have money left over in your account for your next winning streak.

3. Less often You Need to Be Right

How often do you need to be right if you make $2 every time you are and lose $1 every time you are incorrect? Over a third of the time, right? With a risk to reward ratio of 2/1 you can be incorrect 60% of the time and still be profitable in the long term.

That sounds pretty excellent, and if you are really terrible at picking stocks and are only win around say 30% of the time then you can always increase your risk to reward to give you a profit.

4. Less Emotions

This is not taken into consideration very much by new traders. But if you have ever attempted to learn stock trading you have probably realized that it is a very thing. These emotions often times can make you jump and do things that you normally would not do.

But if you are only risking a small percentage of your account on a trade, then you will not have as much emotional pressure on your shoulders this lets you make some better decisions.

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