CHAPTER 3:
HOW TO GET STARTED TRADING CFDS
Direct Market Access CFDs
Advantages of DMA CFDs
Disadvantages of DMA CFDs
Market-Maker CFDs
Advantages of Market Maker CFDs.
Disadvantages of Market Maker CFDs
DMA Vs. Market Maker – Which One Is Right For You?
Finding The Right Broker
Questions t o Ask Of A Potential Broker
Opening An Account
Types Of Accounts
Individual Account
Joint Account
Company Account
Trust Account or SMSF
Limited Risk Account
Funding Your Account
Self-Assessment – Which CFD Market Is The Best Fit For You?
Before You Make Your First Trade
Defining A Basic Investment Strategy
Market Entry Criterion
Your Money Management Plan
Understanding The Risk vs. Reward Tradeoff
Your Exit Criterion – Know When To Hold ‘em, Know When To Fold ‘em
Fine Tuning Your Strategy
Controlling Leverage
Tools Of The Trade
Chapter 3 – Key Points To Remember
Everything to this point has been background information so you’ve got a clear picture of what you’re getting into, should you decide to invest in CFDs. In this chapter, we’ll be talking about getting your account set up and preparing you to make your first trade.
If, after having read everything to this point, you’re on board with the idea and have decided that CFDs are for you, then this section will tell you everything you need to know to get started. Ready? Let’s do this!
Direct Market Access CFDs
This is the first of two basic kinds of market access you can get, depending on the broker you choose to work with. DMA CFDs offer a number of compelling advantages that you might find too strong to ignore. Having said that, there are some shortcomings too, but don’t worry, we’ll go over the pros and cons, just below.
Advantages of DMA CFDs
- Complete Transparency - This is the biggest single advantage of DMA CFDs. The reason you get such good transparency is the fact that your orders are placed directly into the underlying market. In other words, you’re cutting out the middle man, and plugging your orders directly into the ASX (the Australian stock market), or the market of whatever country you’re trading in, if you’re not in Australia. Your orders are replicated exactly as you place them by your broker.
When you place orders, you can view your trades in the market depth, so you know exactly where your orders sit at literally any point in time, and that’s a huge advantage.
- No Requotes – The best way to describe this is to tell you what it doesn’t mean. Sometimes, you place an order to buy a share CFD at, say, $30, but when you put the order in, your broker comes back and tell you that no shares are available at that price, and quote you another rate, say, $30.25. That sucks, and it can hurt your profits and limit your opportunities.
Fortunately, that never happens in the DMA CFD world, because of the aforementioned transparency.
- Pre-Market Auction – Since your orders are going straight into the underlying market, the DMA CFD model also gives you the opportunity to participate in the pre-market auction, which opens up opportunities you normally wouldn’t have access to.
Note that the Australian market staggers its starting time alphabetically, according to the following schedule:
|
Shares Beginning With
|
Opening Bell
|
|
A-B
|
10:00:00
|
|
C-F
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10:02:15
|
|
G-M
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10:04:30
|
|
N-R
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10:06:45
|
|
S-Z
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10:09:00
|
**Note: All start times are +/- fifteen seconds
- It should also be noted that the Australian market temporarily halts trading around 4pm and allows all participants one final opportunity to buy or sell in a closing auction.
- Increased efficiency – one of the side effects of your orders being placed directly into the underlying market is speed. There’s no middle man, so there’s no time lost. While it’s true that CFDs are not great investments for capturing micro-profits and holding positions for mere minutes, it’s also true that speedy execution of trades can be a compelling advantage that can often increase your profits.
- Ability To “Improve The Quote” – This is (or can be) another compelling advantage. You can improve the current bid or offer by placing limit orders within the current spread. So for instance, if the current bid/offer is $50.00/$50.18, then you can place your orders within that range and gain a tactical advantage by essentially moving you to the head of the line.
Disadvantages of DMS CFDs
Clearly then, DMA CFDs offer some pretty compelling advantages, but it’s not pure upside. There are some disadvantages too, and you should be aware of them. They include:
- A Somewhat Limited Range Of Opportunities – Data feeds that link brokers to international markets are expensive. Because of that, DMA CFD brokers don’t typically offer as much in the way of exposure to global markets, which can limit your opportunities
- Higher Platform Charges and Expenses – Because DMA CFD brokers use prices that come direct from the underlying exchange, you get better visibility and more complete, real-time data…at a cost. The added cost can be worth it, provided you’ve got the skills to make good use of it
- Higher Trading Costs – Because DMA CFD brokers are hedging your orders directly into the underlying market, they incur market-based fees, which are reflected in higher brokerage costs.
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Market-Maker CFDs
A CFD market maker “makes the market” on a whole range of products on several markets, worldwide. They have the ability to set their own price, but not with perfect freedom. The price still reflects (somewhat imperfectly) the price of the underlying asset.
Here are the major advantages of using this type of broker:
Advantages of Market Maker CFDs
- A global range of options – You get broad, truly global market access when you use this type of broker, which gives you trading options you’d otherwise be shut out of entirely. Consider this to be one-stop shopping. From a single control panel, you have access to a world of opportunity!
- Super Easy To Use – Simplicity is one of the hallmarks of Market Maker CFD brokerage systems. You get an intuitive interface, making it easy to buy, sell, and track your trades.
- Extras! – The two biggest extras you get here are free charting, allowing you to get (and keep) a bird’s eye view on all your positions, and access to software to help you do research and enhance your trading strategy. Note that some brokers charge a nominal fee for accessing local charts and data. These charges are most often reimbursed after a certain monthly trading quota is met, but this varies from one broker to the next, so you’ll want to read the terms and conditions closely so you’ve got a good understanding of the fee structure.
- Low margins – this is huge, but as we’ve mentioned before, it can be a bit of a two-edged sword. Leverage can help dramatically improve your ROI, but it can also come back to bite you if you don’t use it well and correctly.
Disadvantages of Market Maker CFDs
There’s really only one disadvantage to talk about here, and it can be a pretty important one. Trades are executed more slowly because you’re essentially dealing with a middle man, and you don’t have as much transparency or depth of information because the pricing isn’t perfectly reflective of the underlying market.
DMA Vs. Market Maker – Which One Is Right For You?
Ultimately, working out which of these is right for you comes down to what you’re looking for in a broker. To answer that question, you’re going to need to ask yourself some hard questions, and get honest answers back.
If you value convenience, ease of use, and global reach, then a Market Maker CFD broker is going to be a natural fit for you. This is also true if your interests run to international Index CFDs commodities and forex.
On the other hand, if you’re only trading in your local market, then you have to really ask yourself if the added advantages offered by a Market Maker broker are going to be things you’ll make regular use of. If not, then you have your answer!
Note: If you’re wondering what the prevailing trends are, according to a recent Investment Trends survey, 47% of respondents indicated that they preferred the DMA model, while 14% said they preferred the Market Maker model. Which one will you prefer? Only time will tell!
Then again, there’s a third option. Why not have your cake and eat it too? After all, most CFD brokers, regardless of type, only ask for a starting balance of $1000 or so, which means that it should pose no special challenge to open both types of accounts and try them out to see which one you like better.
It won’t take many trades on each system to get a good feel for where your preferences lie.
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Finding the Right Broker
This is both more complicated, and much simpler than it first seems. The simple truth is that there are a lot of brokers to choose from. It’s a pretty crowded market place, and because of that, a lot of brokers use freebies and giveaways to lure you into choosing them.
This helps you in two ways: First, you’ll get lots of great extras and incentives, which is always nice, but there’s a much more straightforward benefit. More competition means lower rates as brokers cut their prices (and profits) to the bone to stay competitive, and that helps your bottom line.
One thing you should be aware of is that while your choice of broker is important and definitely matters, it’s not something that will make or break your trading career. If you find that your first pick isn’t everything you had hoped it would be, it’s a fairly simple matter to move on to some other broker that meshes better with your needs and trading style.
Another point here is that over time, your needs are going to evolve and change, so the first broker you select may not be the one you stay with in the long run, and that’s okay. When you’re first starting out, you don’t really have the tools and experience you need to pick the “perfect” broker for you, so your primary goal should be to find one with low commissions and a simple interface that makes it easy for you to get started.
As you gain more experience, you’ll start to get a better feel for what you need, and can begin comparing other brokers with the one you started out with to see if there might be a better fit somewhere out there.
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Questions To Ask Of A Potential Broker
Once you’ve gained some trading experience, you’ll have a much better sense of what you’re looking for in your “perfect broker.” Once you have that experience under your belt, the following pointed questions will help you narrow the field and ultimately make a good decision on that front. Bear in mind that you may find that the broker you initially decided to go with is the one you decide to stay with. It happens, but if it doesn’t don’t be alarmed by that either.
One final thing to consider is your chosen broker’s position on hedging trades.
DMA CFD brokers automatically hedge every trade, which means that they adopt the opposite position in the market, but Market Maker brokers manage their own hedging strategy, based on their knowledge of their clients’ experience.
- What are your fees, commissions and trading costs?
- Is mobile trading allowed?
- Do they provide DMA or Market Maker CFDs?
- How many markets can be accessed from the platform?
- What’s the range of their products and markets?
- What kind of software do they offer?
- Do they have demo accounts available?
- And most importantly – what kind of research tools are available?
This last one is probably the single most important question you can ask. The ability to get eyes on detailed, timely research is huge, and can dramatically improve your ability to make winning trades, and thus, enhance your ROI.
While you’re on the topic of quality data to guide your decision-making process, it’s also worth asking about educational materials.
The quality of your chosen broker’s customer service and support is also critical, but that’s not something you can really ask your broker, because of course, according to just about everyone, their customer service is world-class.
No, to find that out, you’re going to either have to call in and see for yourself, or do some research and see what other people are saying about it. If you do ask about it, the one thing you definitely want to hear is that 24-hour support is offered, either six or seven days a week.
Finally, and this isn’t a question really, but it’s something you’re going to want to do for every broker on your semi-finalist list: You’re going to want to carefully read two documents:
- The FSG (Financial Services Guide)
- And the PDS (Product Disclosure Statement)
All brokers will have both of these documents, and make them readily available. The first document describes the range of services offered by the broker in question, and gives you full details on how the company operates, including how they get paid and how they handle customer complaints.
The second document outlines what products they offer and any additional charges and fees that trading in those products may introduce to the equation. You’ll also get full details on the risks and advantages of investing in specific products, and all the information you’ll need to determine whether or not a given investment opportunity is a good fit for you.
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Opening An Account
Opening an account is almost always a simple, straightforward process that will only take a few minutes of your time. It’s simply a matter of creating a login, selecting the type of account you want to open, and verifying your identity.
Identity verification is usually as simple as providing a copy of a picture id like your driver’s license, though the exact requirements will vary slightly from one broker to the next. Just follow their simple, step-by-step instructions and you’ll be done in no time!
Types Of Accounts
One of the first, important questions you’ll need to answer though, revolves around the type of account you want to open. We’ll describe each of these in turn, just below.
Individual Account
These are the most common types of accounts, and are the easiest to open. You’ll just need to read and agree to the terms spelled out in the FSG and PDS, and provide your identity verification (photo id – driver’s license, passport, etc.) and fund your account, which we’ll go into later.
Note that some brokers might require a certified copy of an original document for identification purposes, but this isn’t always the case.
Joint Account
Joint accounts are great if your goal is to open an account with a business partner. In this case, both parties can execute trades and both can add or withdraw funds from the account. In this case, the ID verification requirements apply to both users.
Company Account
Company accounts are a bit more complex to set up, and there are a few more hoops to jump through.
These accounts do share some traits with joint accounts, in the sense that all Directors much fill out the forms and prove their identity. In addition to that though, you must prove the formal existence of the company itself, and name the parties who will be authorized to make trades and changes to the account, and to make a declaration of liability in the event that something goes wrong.
Trust Account or SMSF
Trust accounts are functionally similar to company accounts in that all trustees (if there are several) must fill out the forms and provide identification, with one trustee being named as the manager of the account, with that person being in full control over any and all decisions about what trades are made, and having the ability to add or withdraw funds.
As with the company account, the Trust itself must be proved to exist and be authentic.
Limited Risk Account
Not all brokers offer these, but a few still do. These types of accounts offer some protection in the event of a worst-case scenario, and guarantee that you can’t lose more than your starting balance.
This added security comes with certain restrictions and limitations though, and you won’t have access to the full range of CFDs the broker offers.
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Funding Your Account
Once you’ve created your account, selected the type that works best for you, and verified your identity, the next step is funding.
As with the account creation process, this is pretty simple and straightforward. Most brokers give you three options here. You can either fund via direct deposit, which involves linking an established bank account to your trading account, via credit card, or by way of BPAY.
Depending on the broker you’ve selected, some fees may apply. One of the more common promotions offered is that the broker will absorb those fees, even if they’re normally charged, so that’s something to keep an eye out for.
One question that often comes up, especially with new traders who are just starting out is “how safe is my money.”
We’ve mentioned that Australia has some pretty stringent rules on that front, so if you’re trading here, then you can do so with a high confidence level that your money is quite safe.
This is because most brokers keep the funds of their investors in Trust Account that’s separate from the rest of the broker’s business accounts. That firewall keeps the money safe, even in the event that the broker’s firm goes bankrupt.
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Self-Assessment – Which CFD Market Is The Best Fit For You?
This is a totally separate question from the DMA vs. Market Maker question, and has more to do with the types of opportunities you’ll be most interested in trading in, once your account is up and running, and there’s a lot more to this than first meets the eye.
One of the key things that will guide your thinking here are the markets and types of investments you already have experience in dealing with.
This is simply a case of using what you know. If you’ve got a good background in tech companies, for instance, and you have a firm understanding of one in particular, then use that. You’ll save time and be able to start making trades that much more quickly, without having to do a ton of research.
Another important consideration is what your personal trading window is. If you have an office job, working 9-5, and you live in Australia, then it’s going to be hard for you to make trades during the day on the AUX, so international markets will have more appeal, because you can conduct trades when you get home in the evenings.
Yet another important consideration is your tolerance for risk. If you are fairly risk averse, then you’ll want to trade in low-volatility markets, but of course, that comes with certain tradeoffs too, not the least of which is the fact that your potential for profits will be somewhat lower.
The simplest way to get a handle on market volatility is to look at the ATR, which stands for “Average True Range.” This is a simple indicator that gives you a good top-level view of how volatile any given market is over time.
Reaching a good understanding of your risk-tolerance is an essential component to successful investing, and will go a long way toward helping you achieve long term success. It will also allow you to make a fairly realistic prediction about what kind of return you can expect, although we’ll have more to say on that topic in a later section.
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Before You Make Your First Trade
We’re still not done yet, and you’re still not quite ready to jump in and start trading. We’ve gotten a lot of the groundwork covered, but the last thing you want to do is go off half-cocked, and that’s what this next section seeks to prevent.
We’ve mentioned a couple of times that our recommendation is that from day one, you should treat your investment portfolio like a business, and we’ve outlined the main reasons that’s so important. Now, we’re going to tell you how to go about doing that.
The very first thing you’ll want to do is to write up a formal business plan. This will help you answer some key questions like why are you investing in the first place?
To make a profit, sure, but beyond that, what’s the point? What goal are you trying to achieve? Are you building a retirement nest egg? Putting together money for your dream house? What?
Ultimately, this comes down to being a variant of the “what do you want to be or do when you grow up?” type question. It’s important, because understanding what your aims and goals are is an essential component to defining your overall investment strategy, and speaking of that, that’s where our guide is headed next!
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Defining a Basic Investment Strategy
Your investment strategy has several moving parts, but the “Big Three” are:
- Your Goals
- Your Expectations (ROI)
- And Your Tolerance for Risk
Only by having a thorough understanding of these three components can you begin to devise a workable investment strategy for yourself. That matters because investing without a plan is a recipe for disaster.
If you go in without a plan, then you’ll be inclined to shoot from the hip, make decisions sans research, and allow your emotions to take over. That never ends well, and given that, the next question then, becomes “how, precisely, do you construct a viable strategy?” To do that, you need to work out some trading particulars, which include:
Market Entry Criterion
Whole books can and have been written about timing your entry into any given market. You’ll find lots of different opinions on the subject, and lots of different strategies to inform you of when it’s the “right” time to enter into a position.
At the end of the day though, all those strategies have one thing in common. They all rely on one or more measures to inform the decision, which takes emotion and guesswork out of the equation.
The purpose of all this focus on finding the proper time to enter the market is to build expectancy into your system. That’s something we’ll explain in more detail later.
For now, the important thing to understand is that while perfecting your market entry strategies are important, don’t sweat it if you don’t do it perfectly. It’s not going to kill you, but refining your technique is something that will help ensure profitability as you gain more experience.
Ultimately, your goal should be to develop a viable market entry strategy for the following three market types:
- Range Bound
- Trending
- And Volatile Breakouts
These three cover all possible trading conditions.
You’re bound to get lots of advice on the subject of entering each of these types of markets, but for now, let’s just keep it simple. Use the following indicators to build your strategy around:
- For Trending Markets, use moving average indicators to inform your decision
- For Range-Bound Markets, use oscillators like Bollinger Bands, RSI, or Stochastics to inform your decision
- For Volatile Breakout Markets, use chart pattern analysis
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Your Money Management Plan
If you want to achieve any level of success in the market, then you’re going to need to learn to manage your risk. That means managing your money and making sure that you’re not putting all of your investment eggs into one basket so as to prevent a catastrophic loss.
The question is, how? How precisely do you do that?
Fortunately, there’s a really simple answer. It’s called “Fixed Percentage Risk Per Trade.”
This is a formulaic approach that tells you how large any given position should be (how many CFDs you should buy). In order to make the calculation, there are a few basic pieces of information you need. These are:
- Your entry price
- Your initial stop-loss
- How much capital you’ve got in your account
- The percentage of capital you opt to risk on any position (let’s just arbitrarily say you settle on 2%) – a good rule of thumb is to never risk more than 1-2% of your capital, so use whichever makes the most sense to you
Here’s how you use the formula:
Let’s say you’ve got $25,000 in your account. You’ve entered a position at $20.00, and your initial stop loss is $19.50 (fifty-cents away).
- 2% of your capital is $500 ($25,000 * 0.02)
- $500/ $0.50 = 1000 share CFDs
That’s useful as far as it goes, but this formula will also tell you when (or if) you should increase your position size, or reduce it.
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Understanding The Risk vs. Reward Tradeoff
The higher the risk, the greater the (potential) rewards. That’s it in a nutshell, and it’s a concept that most people understand intuitively.
It really matters in terms of devising a successful trading strategy though, and the first thing you need to do is to have an honest conversation with yourself about how much risk you can tolerate.
If your risk threshold is low, then you’ll take a pass on high risk opportunities that could have big payoffs, or could lead to catastrophic losses.
On the other hand, if you have a relatively high tolerance for risk, you’ll be much more inclined to take those trades, which will open the door to more trading opportunities, but require much better risk management skills to be successful.
Each person’s tolerance for risk is different, which is why it’s so crucial to understand where the line is for you.
Looking at the risk-reward ratio in conjunction with your winning trades percentage gives you a valuable measure that enables you to accurately assess your trading performance.
Your risk-reward ratio is calculated as follows:
(Average Win Amount/Average Loss Amount)
This gives you a snapshot of how much money you make when you exit a trade profitably, versus how much you lose when you misstep.
Obviously, the higher the risk-reward ratio, the better your profits, but that’s only true if your win percentage is high enough to make it pay off. If you’re mostly conducting losing trades, then the system can still lose money.
The best way to think about this is to consider the lottery.
If a ticket costs you $1, and you stand to win $10 million, then you’ve got a HUGE risk-reward ratio. On the flip side though, the win percentage in such a scenario is incredibly low, which explains why almost nobody makes money playing the lotto!
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Your Exit Criterion
– Know When To Hold ‘em, Know When To Fold ‘em
While the absence of a clearly defined entry strategy won’t necessarily make or break your portfolio, the absence of a clearly defined exit strategy will kill you faster than anything. Worse, defining a cogent exit strategy is one of the hardest elements of successful trading to master.
Think about it. You’ve entered a position and have seen it increase in value. When, exactly do you sell? If you sell too soon, sure, you’ll lock in profits, but if the value of the position keeps rising, you’ll essentially leave money on the table.
Or think about the flip side: You enter a position and it starts to lose money. How big a loss are you willing to withstand before you bow out?
Being able to answer those questions definitively is crucial to your long-term success, because if you fail to properly define your exit and start losing money, you’ll damage your confidence, which will hurt your chances of success in all future trades.
This then, describes the two parts you’ll need in order to properly define your exit strategy:
- How and when to exit when taking profits
- And how to exit at a loss
Without both of those things, you can’t expect success in the long run.
The key here is the concept of expectancy. Expectancy comes in two flavors: Positive and negative. This simply describes setting the conditions of all your trades so that the odds are ever in your favor.
Note that this isn’t the same thing as trying to devise a system that increases your percentage of profitable trades. Its main purpose is to ensure that you win consistently by ensuring that your successful trades are vastly more profitable than your losing trades lose.
Here’s how you calculate expectancy:
(Percentage of Winning Trades * Average Win Amount) – (Percentage of Losing Trades * Average Loss Amount)
This will tell you whether your trading strategy is a positive expectancy system, or a negative expectancy system. Obviously, if you’re trading in a negative expectancy system, then you need to change that immediately, or you’re doomed.
Don’t let this discourage you though! Knowing is half the battle, and once you know, you can start taking steps to get your trades back on track.
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Fine Tuning Your Strategy
Obviously, you’ll be in a better position to fine-tune your strategy after making your first few trades, so we’ll have much more to say about this in later sections, but there are some additional things you can feather into your thinking before you start that will serve to modify your basic strategy.
Controlling Leverage
Historically, the stock market earns investors an annual return of about 11%, totally unleveraged. If you’re trading CFDs at 2x leverage, and meeting the industry average, then you can realistically expect to earn about a 22% return. If you’re trading at 3x leverage, then on average, you can expect a 33% return.
Having said that, we’ve talked before about the potential dangers of leverage. If you’re not careful, and you find yourself on a losing streak, then your losses will be proportionally magnified based on the amount of leverage you’re using. This is why we recommend starting slow and cautiously.
From Day One, you’ve got to have a firm understanding of exactly how leveraged your positions are, so you can better control your risk. This is not something anyone is going to tell you, or do for you. Just because you can trade with only a 5% margin doesn’t mean that you should!
Ultimately, the decision about how much leverage you use is on you. Use it with care and caution.
So how do you know exactly how much leverage you’re using?
It’s easier than you might think. Here’s the formula:
(Total Exposure/The Size Of Your Account)
To put some real numbers to this, if you’ve got $5k in your account, and you’re controlling $20k worth of CFDs, then your leverage is (20,000/5000) = 4x.
The next logical question then, is that good? Is that bad? How do you know?
While the answer differs for everyone, here are some basic rules of thumb:
- New traders who are first starting out should aim to keep their leverage at or near 1.0
- After 3-4 months of trading, and once you’ve gained some familiarity with using stop losses, aim to keep your leverage between 2.0 and 3.0
- Once you’ve got some experience under your belt, and have been trading for about a year, are familiar with stop loss strategies, risk management techniques and understand your strengths and weaknesses as a trader, aim to keep your leverage around 5.0
- If you consider yourself to be a professional trader, aim to keep your leverage between 7.0 and 10.0
Any more than that, and you’re flirting with disaster.
Now, having said all that, what are your investment goals? Are you aiming to make a 20% annual return on your investment?
If so, and given that the stock market offers an annual rate of return of about 11% unleveraged, then you can meet your investment goals with just 2x leverage.
That’s the kind of thinking you need to be engaged in. Only by having a clear understanding of your aims and goals can you properly control leverage and use it for maximum benefit without getting carried away.
If you don’t take anything else away from this section, remember this: Regardless of what your investing aims and goals are, your first, overriding priority is to stay in the game. After all, you can’t achieve your goals if you’re not even playing, and if you don’t keep a good handle on your leverage, you can easily wipe out the entire value of the account.
To make sure that doesn’t happen, you’ve got to stay in the game, and that means being very careful with leverage, over and above anything else!
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Tools Of The Trade
In order to make successful investment decisions, you need two things: Software and data. The problem is that raw data in isolation isn’t very useful. There’s so much of it that it can be hard to pull anything meaningful out of it.
Software helps turn raw data into actionable investment intelligence.
Fortunately, most brokers do an excellent job at providing free charting software that can turn those oceans of raw data into intelligence you can use.
Most of the free charting software offered by brokers is quite good, and is more than enough to get you started. Sooner or later though, you’re going to want more than the simple charting software can provide, and when that day comes, here are some other programs to consider:
- AmiBroker – An excellent versatile tool that gives you the ability to build your own indicators using a simplified coding language, and provides full-featured back-testing capabilities as well as excellent EOD (End of Day) data.
- TradingLevels Charting Program is a free stock market charting program for tradinglounge.com members it has over 100 indicators including trading levels with free Google price data.
- Incredible Charts – a low-cost options that has lots of great charting features and data services. If you’re just starting out and looking for something a bit more robust than what your broker is providing, this one’s a great option
- MetaStock – With more than a decade of experience and hundreds of thousands of users, this is one of the most popular trading platforms available. Owned by the Reuters Corporation, it’s simply amazing, and you’ll be dazzled by its broad range of features
- Ninja Trader – One of the best options out there, once you’ve gained some experience at trading. One of the coolest aspects of it is that it gives you the ability to “replay” your trades and consider alternatives to the actions you took. This helps improve your skills in a big hurry, and as such, is an invaluable addition to the program.
- TradeStation – one of the oldest software packages out there, and often cited by professionals. It gives you the ability to create your own indicators and build out your trading strategy online. Great stuff!
- Wealth Lab Pro – This platform was acquired by Fidelity Investments, which is a powerhouse in the world of investing, and as such, the platform is highly regarded and well-trusted. A little more expensive, but well worth considering!
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THE IMPORTANCE OF DATA Data drives every aspect of your investing decisions. If it’s not, it should be. The last thing you want to do is to make decisions based on gut feelings or emotion. Keeping everything data driven is the best way to avoid letting your emotions cloud your thinking.
Where data is concerned, you’ve basically got three flavors to choose from, and we’ll describe each in brief, just below:
- End of Day (EOD) data – This is simply data downloaded at the end of each trading day that reports the open, high, low, close, and trading volume of all charts.
- End of Day (EOD) data company is JustData.com.au recommended
- Real-Time Data – This is hands-down the most expensive data you can incorporate into your (paid) trading platforms, but there’s a wrinkle. Your broker will almost always provide live-streaming data on commodity, index, and forex markets, but the drawback is that you can’t export that to any third-party software you might be using. To get it there, you’ll need to pay for a data subscription
- Snapshot Data – This is simply data you can download at various times during the trading day. For instance, you can set up your system to download data on an hourly basis, so you can scan it and identify additional trading opportunities
In terms of where to get your data, there are a number of brokers available, and they wouldn’t still be in business if they didn’t offer a quality product. To keep things simple, our recommendation is JustData Simple, accurate, and reliable. What could be better?
EVALUATING SOFTWARE Whatever software you work with, here are some key ingredients a good program will have. Note, don’t be alarmed if the software you’re using doesn’t offer all of these, but as you gain more experience trading, keep this list handy, because it may guide you to a program that meets your needs better. Here’s the list:
- Accurate and complete, fully adjusted market data
- Some kind of ability to scan for specific criteria. For instance, an ability to show any shares making a new 20-day or 30-day high
- An ability to build your own indicators, which allows you to really customize your strategy
- Some back-testing ability that allows you to fault-test your trading strategy
And now you’re ready to trade, which brings this section to a close. We’ll pick things up in the next section with making your first trade and beginning to put your strategy into action!
YOUR INTERNET CONNECTION For some people, especially day traders who only hold their positions for a matter of minutes (or sometimes, even less), the faster your internet connection, the better, because the added speed allows you to execute trades more quickly and efficiently, and maximizes the number of opportunities you can take advantage of.
CFDs aren’t really designed to be used for that kind of trading (because you have to pay the spread, which negates small-move profits in almost all cases), and for that reason, while a fast internet connection matters, what matters more is simple reliability.
All that to say that when you’re designing your trading system and setting up your computer, you should probably opt for an internet provider that offers rock-solid reliability and is very responsive should your connection fail for some reason. Of course, get the fastest connection you can afford, but focus on the reliability. The first time something goes wrong, you’ll be very glad you did!
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Chapter 3 - Key Points to Remember
- Direct Market Access (DMA) CFDs are great because of their transparency. Your orders are directed straight into the underlying market
- Market Maker CFDs are great because of their convenience. Its one-stop shopping in several markets all over the world. Pricing largely replicates the pricing of the underlying assets
- Asking the “right” questions can cut to the chase and help you zero in on the right broker for you
- Opening and funding your account is pretty simple, although there is some paperwork involved, and you’ll need to comply with some basic background checks and identity verification. Funding can be handled via direct transfer, credit card, or BPay
- Australia has stringent requirements of brokers where funds held on deposit are concerned, so your funds will be quite safe. If you’re trading in some other country, you’ll want to do your due diligence so you know your risks and potential exposure.
- Having both a business plan and a well-thought out trading plan is essential to your long-term success
- Only trade positive expectancy trading systems
- Know yourself. Know what your investing goals are, as these will help you develop, then refine your system
- Controlling leverage is an essential component of managing your risk – remember: Above all else, your goal is to stay in the game. That means keeping a tight rein on leverage and knowing how much you’re using at any point in time
- Work smarter, not harder. Use tools and technology to help you refine your strategy
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