CFD Trading Systems

CFD systems

CFD traders often trade with a trading system.

This is not to say that all CFD trading strategies are mechanical and that discretionary systems don’t perform as well. In fact there are many types of systems around. Some are purely mechanical and can be designed and backtested over historical data.

Some other systems are part discretionary, though this doesn’t mean that there is no systematic approach. Though these systems may not be 100% mechanical, there is still a step by step systematic approach that is used.

So what really defines a CFD system?

A trading system is basically a set of rules.

With purely mechanical systems, you can literally write the entire plan down (since it is mechanical, and a CFD either passes your rules, or it doesn’t).

Of course, past results as shown by backtesting programs do not guarantee future performance.

What a CFD system actually does

A trading system can measure (historically and live) these three things:

A profit-loss ratio

The profit-loss ratio is the size of the average profit compared to the size of the average loss. For example, if your average profit is $500 and you average loss is $250 your profit loss ratio is 2.

Note that there’s a similar term called the win-loss ratio, which is how many wins there are compared to losses. If you only have 35% winning trades and 65% losing trades, resulting in a win-loss ratio of 0.54 (35/65).

You multiply the profit-loss ratio, with the win-loss ratio, to get the so called profitability ratio. Again, with backtested results, remember that past results does not guarantee future results.

Drawdown

If the historical drawdown is a certain amount, there is no guarantee that future drawdown will be the same or less, as it can be more.

Smoothness of equity curve

When results are consistent, the equity curve is smoother and in many cases, the drawdown is smaller as well. But each system is different, so look at the consistency as well as all other parameters including drawdown.

What a CFD system specifies

So let’s have a look what a trading system specifies:

1. What instruments you’re trading

For example, are you trading CFDs on a particular market?

2. What the entry conditions are

That is, what has to happen for you to enter a CFD. For example, systems may use price action or indicators. Other systems use chart patterns that are either mechanical (black and white) or discretionary.

3. What your exit conditions are

That is, what has to happen for you to exit a trade. For example, you may use an initial stop and a trailing stop. When you enter a long trade at say $5.50, you may set an initial stop, so that if the trade goes against the direction of the trade and trades at or below that stop, then you would be exited from the trade.

The trailing stop is a stop which moves as the trade goes in the direction of your trade (up for long trades), to protect your profits, and also eventually exit you when the trade eventually turns back against the direction of the trade.

You should seek your own financial advice before trading.

4. When to review the system

Part of trading is deciding when to review your system to check that it's performing as expected. After a period of time, or after a certain drawdown or other criteria, it's time to evaluate the performance. If necessary, you may need to figure out why the system has not performed as expected and if there's a reason for it.

Learn about how CFD brokers and providers have an impact on whether you'll be able to properly trade your system.

Note:

All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. Seek your own financial advice before taking any action.

All forms of trading involves risk of financial loss.

Also note that CFD trading is not legally permitted in some countries.

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