Managing your CFD trading portfolio

The 1st question that novice traders usually ask is “Why bother?” Portfolio management can be a complex subject and can take a lot of time and energy. Surely it is much better to simply concentrate on trading and let the cash look after itself?

In an ideal world obviously that would be the case. But this isn't a perfect world.

Portfolio management allows you to diversify your risk. Poor portfolio management would be to have your account leveraged in three Contract for difference trades, all long and all in one sector. Should all CFDs drop by only a few per cent, your trading account may very well be wiped out. A much better approach to capital allocation would be to arrange your portfolio in similar way to banks. Which is to “spread your risk”.

Some CFD traders would argue that portfolio management is not essential. Numerous CFD traders do not even use portfolio management, and they can go on to have long and successful trading careers. However, it's always sensible for most novice traders to practice prudent money management. The discipline of portfolio management will help protect you and your CFD trading account from catastrophe.

One disadvantage of portfolio management is that it is likely to need more money. A $5,000 account will always find it hard to diversify and allocate capital in a diverse manner. The simple reason for this is because $5,000 is not enough to diversify.

Before you start you must always consider putting slightly more money into your CFD trading account, this will likely enable you to diversify your portfolio. This may sound unpalatable, but when you consider who else is looking after your capital for you (fund managers), you would be far better off managing it yourself.

Timeframes
It is difficult to depend on one timeframe. Many people describe themselves as “15 minute chart” traders, others as “end of day”. In truth a mix of techniques is what will normally work best.

Many people are much longer term CFD traders, in reality they are not really traders at all but simply investors. “Buy and hold” is the maxim employed by many of these folks (also known as “buy and hope” by shorter term CFD traders).

Two of the great long term investors in history have been WD Gann - who spoke of there being “more money in the long pull” and of course Warren Buffett - who advises anyone not to invest in a share if they're bothered about its price declining 50%.

This timeframe argument actually becomes an issue of trading style more than anything. There are trading styles as diverse as scalping and weekly swing trading that on the same CFD will yield the difference between making 200 trades per day versus 12 trades a year.

The key thing about timeframes is that your optimal timeframe is a personal thing. What works for one individual could be totally wrong for the next. No single timeframe is right or wrong. Just go along with what works for you.

Risk diversification
When diversifying your risk think macro. Don’t confine your trades purely to one market. A lot of the biggest share CFDs trade large daily volumes overseas (e.g. BHP is traded in the UK as BLT - Billiton).

This is an important thing to be aware of. The financial markets trade almost 24 hours a day. It is advisable to use this to your benefit.

Trade whilst you sleep, with orders protecting your capital and taking profits. If your analysis is correct you won’t need to worry about being awake, trades will run themselves.

Make end of day judgments on these trades, you will have lots of time to analyse the picture, so use it. Don't be lazy. Do your groundwork.

Leverage
Leverage truly is a ‘double-edged sword’. Used wisely it can be the edge that provides you a massive return on limited funds. Used incorrectly and it can destroy your trading account in minutes. Put it to use wisely. No good CFD provider wants you to lose. CFD providers offer leverage because they know skillful clients can benefit from it.

Always think of Rule number 1- It's essential to stay in the game. It is unrealistic to expect to be making millions after your first few weeks CFD trading it's more likely to take 6 months to 2 years before you become a profitable CFD trader.

Remember it takes a good doctor a minimum of 5 years to qualify and they still have patients die on them. There isn't any reason why learning how to trade should be a 5 minute thing. It just won't happen.

Don’t over leverage - make this your mantra. Don’t use leverage simply because it's there (Your car has an air bag and you don’t want to use it on every journey, right?)

Used wisely you have got a huge advantage with the leverage available to you, but be aware it is like a sharp knife, best used carefully. The more skillful you become, the more you will learn how to use it and that’s what your evolution as a CFD trader will be all about.

Article Source: http://gamblingarticlessite.com

John Masterton is a professional CFD trader trading with Australia's largest and most popular CFD provider, IC Markets. John has published a number of articles on CFD education including guides and ebooks which you can download for free.

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