CFD Trading System Types: Why Do Some Traders Trade More Than One System?

Why do some CFD traders consider trading different types of CFD trading systems rather than just one strategy?

Many traders will trade a single system, especially when they’re starting out. And when trading successfully, some traders even stick with a single system, though it may not necessarily be the same system that they started with.

But why do many traders progress to trading more than one CFD trading system or strategy?

And here we’re not talking about different variations of the same strategy, but different strategies that fundamentally takes different trades because it looks for different types of movements in the stock market.

We’ll get onto this in a moment, but first let’s have a look at why traders would trade different strategies.

The reasons why traders will consider trading different system types are:

1. To smooth out their equity curve. That is, to try to get more consistent trading returns and to reduce drawdown.

Why should this be so?

Say you’re trading only one system for a particular stock market. A system used for that market usually has profitable periods as well as periods of drawdown. So you’ll have to be able to cope with those periods of drawdown, and having to give your profits back to the market.

If you trade say 2 different CFD systems on that same market, or 2 systems on 2 different markets, whether it’s the Australian, UK or US stock exchange CFDs, then you’re diversifying your CFD trading strategy.

If those 2 systems are non correlated, that is, they don’t take the same trades, especially if they’re different system types, having different approaches to the market and not just 2 variations on the same system, then you have 2 systems that’s exploiting different types of movements in the market.

When this happens, then when one system is not triggering trades, or even in drawdown, the other system can be triggering trades and making profits. You are aiming to make it a smoother equity curve rather than an inconsistent one.

This is assuming that you can trade these different markets profitably, as different markets can behave in different ways.

2. To diversify risk.

When a trader’s money is in the market, there is always a remote risk of a stock or share going into liquidation, takeover, or some other cause of a trading halt. On a less extreme note, there may be gapping of the underlying stock or index price which can cause slippage if it gaps through your stop loss.

These are examples of market risk, which all traders have to face.

When a takeover bid or liquidation happens, the stock and hence CFD price can fall or rise significantly. It doesn’t happen all the time, but it occasionally happens. Depending on your CFD provider or broker, you may be given the option to exit at the last traded price, or may have to be in the trade until it’s all over, which may take months. The usual situation is that you may be shorting a CFD that’s going down in price, and the underlying stock or share goes into liquidation. When the stock is revalued weeks to months later, it could be zero or a very low price, and you’ve made a very large profit. In this case there’s no problem.

If however the CFD provider wants a larger margin or even 100% margin when a stock goes into liquidation, then you’ll need enough funds to stay in the trade, otherwise you may have to exit the position at the last traded price, or whatever the rule is with your provider. So check what various CFD brokers do in these situations of a trading halt or liquidation.

This relates to CFD systems because if you have system “A” for example, that generates a % return by being in the market for a shorter period of time over a 1 year period, eg 100 trades a year with an average trade duration of 3 days = 300 days, compared to system “B” that has the same return by takes 200 trades with an average trade length of 15 days = 3000 days, then you’re improving your returns and reducing market risk by having 1 of each system A and B, rather than 2 systems that resemble system B.

3. To get more robust (ie consistent) system than having weeks of nothing or even drawdown.

Market conditions are always changing. Some markets are trending up, some trending down, and some quite choppy. But even in these types of markets, sometimes they trend up or down but not in the same way, either trending strongly or weakly or with a variety of different patterns.

So when backtesting, you would probably have chosen systems that seem to perform in different markets by looking to see which systems perform well over many years of data not just over 1 or 2 years of data. This is because there would have been different market conditions over the years, all the way from bull, bear to sideways.

So if you choose CFD trading systems that work in different markets as well as looking for different types of stock price movements, eg one looks for trends and the other looks for retraccements, then your overall approach to trading is more robust. You're aiming to have a trading strategy that works for a while and withstand changes in the market.