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CHAPTER 4:
GETTING REAL – YOUR FIRST CFD TRADE

 

The Value Of A Demo Account
Differences To Be Aware Of – Live Demo vs. Actual Trading
What Kinds Of Orders Can You Place?
  Market Orders
  Limit Orders
  Stop Orders
  OCO Orders
 If Done Orders
What The Heck Is a Requote, Anyway?
Chapter 4 – Key Points To Remember 

 

At long last, you’re ready to start trading! You’ve got a basic system in place, and all the prep work has been done. You’ve found a broker you feel is a good fit, your account is funded, and you’re ready to begin. Now what?

 

 

The Value Of A Demo Account

Almost all brokers these days offer a free demo account, and you owe it to yourself to spend some time playing with it to master the basic operation of the platform. There are no hard and fast rules here, but our advice would be to simply keep using it until you’re comfortable navigating through the system and can quickly and easily find every piece of information you need in order to conduct trades.
Your chief goal is to master the following basic operations:

  • View a Chart
  • Place a Market Order
  • Place a Stop Order
  • Locate Your Trading Instruments
  • View The Market Depth
  • Save Your Layout

Once you’ve done that, you’ve pretty well reached the outer limits of what the demo can teach you, and you’re ready to make an actual trade.


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Differences To Be Aware Of – Live Demo vs. Actual Trading

While many, if not most demo accounts offer the ability to make “fake” trades to get a feel for it, these are of limited value. It’s just not the same. Until and unless you’ve got actual money on the line, you’re not going to get the kind of experience you need to be successful.

Our recommendation then is that after you’ve mastered the platform’s basic operation, it’s time to just jump in. Of course, do so with care, and make sure your initial trades are small, so that you’re only risking a tiny fraction of your account’s value, but the simple truth is that there’s just no substitute for real world experience, and there’s only one way you can get that. 

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What Kinds Of Orders Can You Place?

While the particulars of each broker’s system will vary, one of the first things you’ll see is a place where you can execute different kinds of buy/sell orders. Broadly speaking, the kinds of orders you’ll be able to place are as follows:

  • Market Orders
  • Limit Orders
  • Stop Orders
  • OCO Orders
  • If Done Orders
  • Guaranteed Stop Loss Orders

We’ll take a closer look at each of those, right now.


Market Orders

This is the most basic type of order you can execute. They give you the ability to buy or sell at the current market price, whatever it happens to be.
If you place a “buy” market order, then your broker will execute the trade from the first available seller at the lowest price possible, provided that the volume you’re buying is available. The inverse is also true. If you issue a sell order, then your broker will execute it, selling your CFDs to the first available buyer at the highest possible price, provided that the correct volume of CFDs is being requested by some other buyer.


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Limit Orders

This type of order allows you to buy at a lower level, or sell at a higher level than the current price. So for instance, if the current price of a CFD you’re interested in is $10, you could set an automatic buy order at some price lower than this (set by you), or, if you are currently interested in selling your CFDs and closing out your position, you can set a price that you would sell at that’s at some value higher than the current price (again, set by you).
When that price is met, the order will be executed automatically. This is excellent, but it brings to light a philosophic difference in trading, and a debate that has been raging for as long as markets have existed.
On the one hand, there’s a school of investment thought that says you should buy when the price is low and falling, on the thinking that you’ll get in at a good price, and stand to make money when it rises again.
The other, competing school of thought is that you want to enter the market just when the share price begins to rise, and ride the wave up, selling just as it crests to lock in your profits.
There are no “right” answers here, and both strategies can be used to make you money. Ultimately, it comes down to which school of thought is a better fit for your personal trading style.


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Stop Orders

Broadly speaking, there are two “types” of stop orders.
The first type is a stop to close out a long or short position, and this is probably the most important type of order you have at your disposal, because it’s the mechanism by which you mitigate losses.
Before you ever enter into any position, you should have a clear understanding about when you want to exit a trade if something goes sideways and you start losing money. That’s the price you use to define your stop order, and it will limit the amount of money you lose.
The second is a stop designed to open a new long or short position. This sub-type of the stop order is perfect for breakout traders who want to buy above the current price or sell short below the current price.
Breakout traders focus primarily on resistance. That is to say, if you’ve been studying a stock’s price for a while, and you notice that it often flirts with a given high, but never quite manages to hit it, it can be said that the stock encounters resistance at that price.
If something changes and it suddenly breaks out of that price boundary, then it’s a clear sign that the company has done something radical and different that has shifted the paradigm, which means opportunity for you.
That’s when you’d want to use a stop order to open a position. To take advantage of a company that has suddenly broken through a price barrier it has struggled to achieve, because it almost always means that big things are afoot for the company in question.

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OCO Orders

OCO, or “One Cancels The Other” orders are a great tool designed for people who can’t sit in front of their computers and watch the ebbs and flows of market activity all day long.
Here’s how you would use it:
Let’s say you’re currently holding a position of 5,000 CFD shares in a given company. You purchased them at $50. You know you’re not going to be in front of your computer, but you want to either lock in profits or mitigate losses, depending on how the market moves, so you issue an OCO, which says (for example):
I want to sell if the price hits $60, OR, if the price falls to $46. That way, whatever happens, if the price hits either of your target, that “side” of the order is executed, and the other “side” of the order is canceled out.

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If Done Orders

These are flexible orders that combine entry point and stop loss. So for instance, you establish a price you want to buy in at. Your order will only be executed IF the price hits your desired level, and if that does happen, then the stop order will automatically be executed, in the event that the stock price falls, thus limiting your losses.

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What The Heck Is a Requote, Anyway?

Trading is a very precise activity, and the numbers really matter. To give you a simple example, if you’re anxious to buy 5,000 shares of a given CFD at a set price, and that number of shares isn’t available, then you simply cannot conduct your trade at that price.
If you want the shares, you’re going to have to be willing to purchase at some higher price, which is a requote. This is something that happens every single day on the market. As the demand for a given company’s stock rises, so too does the price.
NOTE If you’re using a DMA (Direct Market Access) broker, then requotes aren’t available. You only find them in Market Maker systems. If you’re using a DMA CFD broker, then what you’ll find in their stead is a Volume Weighted Average Price (VWAP)

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Chapter 4 – Key Points To Remember

  • Most brokers offer live demo accounts, and these are useful in terms of mastering the basic function and navigation of the system. Having said that, nothing is better than live trading in terms of experience. Even if you keep your initial trades tiny, so you’re only risking a fraction of your account balance, that’s still hands-down the best way to get real world experience you just can’t get any other way
  • When trading CFDs, you’ve got a wide range of options and order types. It pays you to practice with the demo account before you actually make your first trade so you’ve got a clear understanding of how (and when) to make use of each of the order types
  • Stop Orders are your best friend, and absolutely essential in terms of managing your risk and mitigating losses. They ensure that when a trade goes south, you only lose a small amount of your account value, enabling you to stay in the game and recover
  • OCO (One Cancels the Other) and “If Done” orders are ideal for people who don’t have a lot of time to devote to trading and can’t watch the market like a hawk all day long.
  • GSL Orders (Guaranteed Stop Loss)

 

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CHAPTER 5: Important CFD Trading Skills