Facts Every Trader Should Consider

The Short-term Goal of Leveraged Trading

CFDs and Spread Bets, both types of Leveraged Trading, are typically used to take short-term speculative views on Market movements. In contrast to buying and holding assets as investments for months or years, there is no significant interest income or dividend yield from a CFD or Spread-Betting Position. In other words, short-term Trading (using CFDs, Spread Bets, or other Leveraged products like futures, options or turbo warrants) is a zero-sum game. In the absence of transaction fees, the net Profit and loss (P&L) of all short-term speculative Traders is zero – with the Profits of successful Traders balanced by the losses of unsuccessful Traders.

Trading Profitably

Trading successfully requires considerable skill and perceptive Market Insight. However, there are specific steps that can be taken to maximise the chances of Trading Profitably. A Trader should consider overnight funding charges and commissions, as well as the Spread when selecting a provider. Some providers boast of the very tight bid/ask spreads but charge large overnight fees. Some, particularly in the FX world, Market ‘no dealing desk’ services with minimal bid-ask spreads – but charge significant commissions on transactions. A Trader should select one Commodity to start with. He should learn everything he can about that Commodity. In short, he should become an expert in that Commodity. It is easier to Trade profitably if the Trader has to think only about one product. Once he perfects that he can add another. Traders get easily side-tracked if they attempt to do too much, too soon.

Examine Fees In Detail

Select a provider that provides good-quality Trade execution. From a Trader’s point of view, poor performance is economically equivalent to additional hidden transaction fees. If the Trader’s provider offers low transaction fees but is unable to fill the Trader’s order reliably, the Trader should consider choosing a provider with better liquidity and a more robust execution algorithm. Learn how the execution policy of the service provider benefits its Traders, and the Price improvements you could receive before making your selection.

Minimise The Fees You Pay

It is rarely a good idea, for instance, to take small Profits or losses only slightly larger than your transaction fees. Frequent Trading in this manner will tend to push your overall result toward a loss unless somehow justified by the underlying dynamics of a specific market. At the other end of the spectrum, swing Trading attempts to capture gains in a Market between an overnight hold and several weeks, minimising the times you pay the spread.

Be Disciplined

The Trader should have a clear idea of the following before placing a Trade:

  • Why the Trader is entering a Position
  • When the Trader will take Profits
  • When the Trader will take a loss

The successful Trader should have the discipline to stick to his plan as events unfold. Disciplined Trading maximises the Trader’s exposure to a chosen strategy and Market while minimising the number of trades placed, and hence, the total of fees paid. The Trader should set his daily profit target and stick to it. If, for example, he sets as his daily target a profit of 10%, he should stop Trading once that target has been met.

To put some numbers to it, for every 1,000 currency units, his capital should increase, as set out in the table below. If a Trader had the discipline to do this daily, his initial £1,000 would grow to £1,611 by the end of his first week. Similarly, it would continue to grow so that it would be £6,730 after four weeks, £45,276 after eight weeks, £303,594 after twelve weeks and a staggering £92,743,331 after 26 weeks. This takes discipline and 100% concentration.

Capital Growth Table at 10% Daily Profit

Develop A Trading Plan

Differences in Client Profitability between providers of Leveraged Trading is essential. Different providers have different proportions of Profitable and unProfitable Traders. These differences can give the Trader valuable information about the average level of fees a provider charges, as well as the efficiency of their execution. The Trader should use this metric with some caution, however, as other factors may drive inter-firm differences.

Different Product Offerings

Firms specialising in CFDs on individual equities may show a different Profitable/unProfitable Client split to a firm specialising in CFDs on FX. However, this may largely result from a difference in characteristic Trade frequencies and fees per Trade between these different asset classes, rather than from any competitive difference in transaction fees or Trade execution efficiency.

Size Of Client Sampling

Very small firms, with a limited number of Clients, may generate a Client Profitability statistic that varies significantly from quarter to quarter is much more likely to reflect statistical noise resulting from the firm’s small sample size, rather than any quarter-to-quarter alteration in the commercial terms or execution quality offered by the firm.

Greater Number Of Trades

A firm offering a comprehensive spectrum of products, used by many Traders as their primary provider, may show a worse ratio of Profitable to unProfitable Traders than a specialist firm used by the same pool of Traders as an occasional back-up provider. The reason for this is that the Trader results of the former firm, where the bulk of Trading occurs, will be split over a more significant number of Trades than those of the latter firm. The greater the number of Trades placed, the sharper the shape of the bell curve will become and the more significant the proportion of Trader results that will fall to the left of the zero P&L axis – even if the same Traders, paying the same fees per Trade, are driving both sets of data.

How To Maintain A Positive Outlook

Trading is not a 9-5 job that finishes when you stop…it never sleeps. When the Trader is not trading, the Trader is reading and learning to get better. However, there are times when the Trader’s motivation is low… Here are a couple of ways to boost it quickly and get back on the horse!

Be Inspired

Surrounding yourself with an aspirational crowd can help remind the Trader where he can get to if he puts his mind to it and goes for it. It can be a nice bolster when he sees people that he aspires to mimic. Start attending seminars, networking events to get yourself back into the mindset of a Trading Professional.

Talk With A Mentor

A Mentor can dramatically increase your motivation and stimulate you to move forward. Seeing someone who has been where you are now and listening to their advice is a good boost of inspiration.

Be Creative

It can be something new within the Trading sphere, or it can be as far away from it as possible. The trick here is that when the Trader tries new things – it helps the Trader be more flexible and adaptable instead of becoming rigid. Being able to ‘move’ with the Market is a crucial skill in trading.

Complete A Task That You Dislike

Even in the most fulfilling jobs and careers, there are things so annoying to do that procrastination takes over and we put them off for days. Slowly this then develops into a hindrance to enjoying the thing that we were doing in the first place. The solution is to bear down and do it - rip off the plaster. These are only a few things that can get us back on our motivational track, but there are many more. Anything that will shake up our world and give us a boost is good.

Form A Trading Strategy

Before the Trader goes into forming his Trading Strategy, he will have a variety of Trading ideas – some setups and patterns that he will think about and try out. As he begins to recognize which ones lead to most Profit, these ideas will evolve into Strategies.

Be aware that staying up to date with the news globally and understanding the historical behaviour of commodities, stocks and currency pairs is crucial to predict their actions on the Market in the future accurately. Whatever Strategy is preferred, it can be changed along the way if necessary. However, the critical point is that the successful Trader must develop the plan and then work the plan, remaining flexible where and when required. Only then will the Trader be able to take full advantage of what lies in front.

Neil G Van Luven

Neil G Van Luven signature

President of the Crude Oil Investment Club