Trading Experience

Darryl Nagel

In order to become a skilled trader, it is essential to gain trading experience. While paper trading has its place for gaining confidence with your trading plan, there is no substitute for actual trading with your money on the line.

How did you learn to drive a car? The only way is to actually experience driving a car. Sure we all made mistakes when first starting out. That is to be expected. That is how we learn. For me it is the same with becoming a skilled trader. The way to become skilled is to take many, many trades. The more trades you take, the more skilful you become.

CFDs can provide excellent trading experience, provided you are very disciplined. CFDs are a leveraged product as they are traded on margin, thus losses as well as profits are magnified. In the hands of the uneducated and undisciplined, CFDs can be a wealth hazard.

For traders who fully understand how CFDs work and are disciplined, I want to suggest that you use CFDs to simply gain more experience trading with your own money. Just as you paid a driving instructor to take you on a driving lesson, consider trading share CFDs for the trading experience. Why use share CFDs this way? The answer is that with share CFDs you can trade just 1 share CFD.

The starting point is to decide how much you wish to invest in your trading experience. Having established that I am willing to risk just $50 on a share CFD trade, I will calculate the number of share CFDs by using the following formula:

No. of share CFDs = $50 / risk per share CFD

To calculate the risk per share CFD, when I have a long trade, I deduct my stop loss from my entry point. As an example, if my entry point is $23.66 with my stop loss at $23.38, then my risk per share is $23.66 - $23.38 = $0.28.

The number of share CFDs I can purchase is $50 / $0.28 = 178.

The commission on the trade (both in and out) is approx. $20.00, with a finance cost of approx. $5.00 if I hold the position for 5 days.

Ensure that you provide your CFD provider with a stop loss when you give them your entry point. This is essential.

The total cost of the above trade is $75, ($50 + $20 + $5) assuming that it is not a profitable trade and I am able to close out my long position at my stop loss. You can obtain a guaranteed stop loss at additional cost from some CFD providers. I will expand on this concept in a future article.

You cannot get an injection of experience or take an experience pill. The only way to get trading experience is to take action and trade!

Good trading!

Darryl Nagel