The first question that novice traders generally ask is “Why bother?” Portfolio management is usually a complex subject and can take plenty of time and energy. Surely it is better to simply concentrate on trading and let the cash look after itself?
In an ideal world it goes without saying that would be the case. But this isn't an ideal world.
Portfolio management allows you to diversify your risk. Poor portfolio management would be to have all your account leveraged in three CFD trades, all long and all in one sector. Should all CFDs drop by just a few per cent, your trading account may be wiped out. A much better method of capital allocation would be to arrange your portfolio in similar technique to banks. That is to “spread your risk”.
Some CFD traders would contend that portfolio management isn't essential. Numerous CFD traders don’t even use portfolio management, and they can go on to have lengthy and successful trading careers. However, it's always prudent for most newbie traders to practice prudent money management. The discipline of portfolio management will help protect you and your CFD trading account from catastrophe.
One drawback of portfolio management is that it is probably going to require more money. A $5,000 account will always find it difficult 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 should 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 think about who else is taking care of your capital for you (fund managers), you'd be far better off managing it yourself.
Timeframes
It is difficult to rely on one timeframe. Many people describe themselves as “15 minute chart” traders, others as “end of day”. In truth a mixture of strategies is what will normally work best.
Some people are much longer term CFD traders, in actual fact they are not really traders at all but simply investors. “Buy and hold” is the maxim used 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 stock if they are concerned about its price declining 50%.
This timeframe argument actually becomes an issue of trading style more than anything. There can be trading styles as varied as scalping and weekly swing trading that on the same CFD will produce the difference between making 200 trades each day versus 12 trades a year.
The key thing about timeframes is that your optimal timeframe is a personal thing. What works for one person may just be totally wrong for the next. No single timeframe is right or wrong. Just go with what works for you.
Risk diversification
When diversifying your risk think global. Do not confine your trades purely to one market. Most of the biggest share CFDs trade large daily volumes overseas (e.g. BHP is traded in the UK as BLT - Billiton).
This is a vital thing to be aware of. The financial markets trade almost 24 hours a day. You ought to use this to your advantage.
Trade while 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 have plenty of time to analyse the picture, so use it. You should not 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 restricted funds. Used incorrectly and it can wipe out 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- You must stay in the game. It's unrealistic to expect to be making millions following your first few weeks CFD trading it is more likely to take 6 months to 2 years before you become a profitable CFD trader.
Remember it takes a good doctor not less than 5 years to qualify and they still have patients die on them. There is no reason why learning how to trade should be a 5 minute thing. It just will not happen.
Don’t over leverage - make this your mantra. Don’t use leverage simply because it's there (Your car has an air bag but 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 with care. The more skillful you become, the more you will learn how to use it and that’s what your evolution as a CFD trader is going to be all about.
Author Resource:
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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