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 MARKET REPORTS |
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Resident Trader
Book Review: Supercharge your Trading with CFDs
Will Kraa, January 14, 2008
Here is a game to play. You must choose one or the other but can’t switch once started and you can play as many times as you like so long as you stick to your choice. Here are the choices:
(a) You have a 50 percent chance of winning $150 and a 50 percent chance of losing $10 or
(b) You have 100 percent chance of winning $50 and 0 percent chance of losing.
Which game did you choose?
To find out the exact answer you will need to read the book I am writing about. But according to the author, and I wholeheartedly agree with him, if you chose option (b) you should stop trading and put your money in the bank. And if you want to make more money than putting it in the bank, option (a) will most definitely give you a far better return than option (b) (after playing the game a reasonable number of times.)
Just recently I was nosing around in one of my favourite bookshops when I came across a small book written by Jeff Cartridge, “Supercharge Your Trading with CFDs”. The fact that it was written by a contributor to this site sparked my interest and I had a look through it. I was interested enough to buy it and this afternoon I read it.
For those who are relatively new to trading CFDs this is an excellent book to get you started. And if you are not interested in CFDs it will not hurt you to find out more about them and no matter what you are trading, you will find useful ideas in this book. It is a small book of just 181 pages and covers a lot of ground so don’t expect detailed descriptions of everything. At the same time the author does not waste space with superfluous prose to fill out the pages. He has the ability to give the essential information and to make it readily understandable.
The early chapters of the book explain CFDs and other derivatives and their uses. Here you will find the things you need to know before venturing into CFD trading. It also gives a detailed comparison of DMA and Market Maker providers and their respective advantages and how they work so that you can more readily decide for yourself which way you might want to go.
I would have liked to have seen a little more about the “all or nothing” aspect of the market maker model. What this means is that it is possible for an order placed with a price limit not to be filled, even though far more than the volume you require is traded at the price at which you are prepared to buy. In these cases there may not be enough volume at ony one time to fill your order in one hit and so it may not be filled. On the other hand, in the DMA model the order will be in the market and may be filled in several trades. Also in the DMA model you may be able to get a better price as your order is in the queue and may gradually make its way to the top where it can be filled.
After these basic issues there is a twenty-page section devoted to CFD strategies. Some of these are quite interesting but remember there is a lot to cover in a limited space so you will not find here a detailed explanation of a trading system that you can start to trade after reading this book. But there are some interesting ideas here for further investigation.
This is followed by a solid section on Risk Management and Position Sizing so if you have not read and studied Dr Van Tharp’s book you will find this very useful. I am glad to see that there is a very good emphasis on this vital subject. Of course Dr Tharp’s book does not cover CFDs since they are not available in the USA while this book does apply this subject very specifically to CFD trading. This is very important in view of the leverage available with CFDs. The risk management outlined here is quite conservative and if followed should ensure you should not find yourself in financial strife.
Pyramiding is one strategy advocated in this book and while this can lead to more profitable trades I would like to add a note of caution. Usually pyramiding implies that trades are increased in size as they move in your favour by adding progressively smaller trades to the initial trade. While this is one option given here the term is also applied to adding to the trade in lots of equal size to the original trade. This is done in a way which means that, as the trade increases in size, the risk taken is never more than the original risk of the trade. This will work so long as there is no adverse gap in the price.
Because the trade size has grown considerably it can happen that some bad news will cause a large move contrary to the trade and the trade will have to be closed at a price well below the anticipated stop. This may cause a loss much greater than the account can bear and so my advice would be that if this strategy is followed guaranteed stop loss orders should be used especially when trading share CFDs.
The next section of the book deals with trade analysis, a subject often overlooked but very important to discover ways where trading can be improved. Doing this regularly can make the difference between getting nowhere and being profitable. This is only a small part of the book but in a few pages gives the essential outline of how to go about this.
There is a description of a very simple but effective trading strategy applied to different time frames and this is one that can be used to trade CFDs over a range of instruments to be profitable under the right market conditions. I have seen complicated trading methods but the best ones are often the most simple.
Psychology of trading is also discussed in a very effective way considering the limitations of space in this book. This is a subject that will make the difference between being successful or being one of the majority of traders who do not make consistent profits. There are some good ideas here, which can be very beneficial to any trader.
Finally the author discusses a couple of his own trades and finishes by talking about trading plans.
This is a book written by a successful trader who has the ability to get to the heart of the matter and to explain things in an easy to understand way. He is not afraid to mention mistakes he has made and how to learn from this. There is a lot of very practical advice here and you will certainly get your money’s worth out of this book.
You can purchase a copy of Supercharge your Trading with CFDs via this link.
More articles from this edition of CompareShares:
Trading: Can a charting or trading package make you rich?
Stocks: Fund manager stock tip: ABB Grain
Resident Trader: Book Review: Supercharge your Trading with CFDs
Stocks: Stock of the week – Mermaid Marine
Analysis: Should we fear a US recession?
Commodities: As the bear resurfaces in the US, gold thrives
Economics: Slip sliding summer
CFDs: Top 10 CFD Stocks
Markets: Wall St falls sharply
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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