Developing a Winning CFD Trading Plan

  • By Harrison Cole

  • June 12, 2014
  • 1:27 pm BST

Do you plan on winning? Then you need a CFD Trading Plan

Time Frame

The first step in developing your CFD Trading Plan is to decide on the time frame that you want to trade. This includes the market that you are considering, be it shares, Contracts for Difference (CFDs), Options, or futures, how long you intend to stay in a trade and how often you are going to monitor the trades.

Few people can monitor a trade all day every day, so trading intra day time frames on shares or CFDs can be left to those traders that have the flexibility to do this. End of day would be the most common timeframe chosen by traders, holding trades from a few days to a few months.

Those investing for income or long term growth would consider a timeframe of months to perhaps years and could monitor the share on a weekly or monthly basis. The shorter the time frame the more risk in the trade, the more decisions that a trader has to make and for a successful trader there will be greater returns.

Decide what works for your lifestyle and commitments before moving on to the next step.

Trade Selection

The next issue to address is which trade to enter. There are an infinite number of trade opportunities and you have a finite amount of money. You can afford to be very selective. In fact, you cannot afford to not be selective. The less experience you have the more selective you should be. The feeling of missing something is one of the most common feelings new traders experience. It is very difficult to learn to just sit there and wait for YOUR set-up to develop while the market is making all these nice swings and all those other people are making money.

The task now is to identify two or three types of set-ups to add to your “watch list”. As a new trader, always trade with the trend. Buy CFDs that are trending up as it is likely that they will continue. A car traveling in one direction takes time to turn around to travel in the other direction.

A very useful exercise is to study stocks that have performed well in the past and identify patterns or set-ups that occurred prior to the strong move. If you are a new trader, find just one or two set-up conditions and learn those inside and out so that when you see them the response to place the trade is a reflex. If you see a potential trade set-up and doubt/indecision begins to creep in, it means you have not done your homework and were not prepared.

Another benefit of studying set-ups is to learn that the same set-ups occur over and over and build the belief system necessary to have the unflinching confidence required to consistently take the trade set-up when it appears. If you are having difficulty identifying these profitable set ups then follow an experienced analyst until you can identify them.

Entry Techniques

When the conditions for a trade are met according to your plan, it is time to enter the market. Always trade in the direction of the trend, even on entry, using a conditional order. Entering the market this way is the most fundamentally sound approach to entering a trade. This is an entry done with the potential new trend, not against the current market trend. Place an order above a resistance level to buy the share if it pushes higher. You will not own the share if it does not break upwards and you will be on the stock when it does finally break higher.

This approach to buying CFDs allows you to place a stop immediately below the resistance level or the most recent low prior to the trade entry. In this manner, the initial risk of the trade can be determined without guessing where to place a stop.

At this stage consider how much capital you are prepared to place onto the share. The amount of money that you commit to the trade and the level of your initial stop will determine the money that you have at risk on the trade.

Exiting the Trade

Now where, when, and how do we get out? In other words, what is the exit strategy? The first order of business after a trade is entered is to immediately place a protective stop. Stops have the power to set you free.

Decide where you must place your initial stop, this determines the initial risk when entering the trade. You now know what your initial capital exposure is and because of this any trading surprises should be positive. Use stops. You can always re-enter a trade. There is always another opportunity.

Yes, you will get stopped out dozens of times one tick from the reversal that lasts for days. Big deal, learn to re-enter on another reversal or trend continuation set-up. It is a lot easier to get stopped and have to re-enter than to blow out your account and wait another year to accumulate enough capital to start all over. Ideal set-ups are a dime a dozen so always use stops.

Now we are in the trade and the initial protective stop is in place. What next? What to do next depends on the expected outcome of the trade. When a trade goes right straight away, you can raise your stop to break even. It is perfectly acceptable to leave the stop at the initial level, however it is better psychologically to prevent a trade that is profitable from turning into a loss.

Adjust the stop at the first opportunity to break even to recoup the cost of brokerage. If you are stopped out and have a problem getting back in the trade if the conditions remain valid, you need to work out that problem if you are going to be successful.

When the trade is at or very near the target, it is definitely the time to bring stops close to the share. If the target is reached follow the trade closely using a tighter stop to exit from the trade when the share rolls over.

Conclusion and Review

Timeframes, Trade Selection, Entry Techniques and Exit Techniques are the basic elements that each trader must address in developing a trade plan. If you do not have a trade plan, you now have a solid guideline from which to start developing one. Below is a guide.

I am going to trade end of day charts monitoring the share on a daily basis and staying in trades for a period of days to weeks.

Trade Selection:
I am going to buy CFDs that have been trending up for two months or more. I will trade liquid CFDs that I can easily buy and sell. I am looking for a minimum profit of 10% when the trade goes as planned. I will trade ascending triangle breakouts confirmed by small green candles and increasing volume.

Entry signals:
I will only enter a trade if the CFD breaks through the resistance at the top of the ascending triangle. My order will be a conditional buy order one cent above the resistance level. No volume trigger will be used.

Exit signals:
I will ALWAYS place an initial protective stop order as soon as my trade is triggered and I will NEVER move it away after it is entered. My initial stop level will be below the resistance level above which I have placed the buy order.

If the trade begins to do the unexpected such as not unfolding in the type of pattern anticipated for the trend, I will tighten my stop to at least breakeven. Capital preservation and building trust in myself are the most important objectives I can achieve at this stage in my development.

If you fail to plan, you can plan on failing.

Jeff Cartridge