Trading CFDs full-time

Full-time traders used to be slick young traders on too much coffee who traded big sums for the big banks. Today, full-time traders come from all walks of life such as Newcastle-based mother of two, Justine Pollard, who trades Contracts for Difference (CFDs) from home.

CFDs are criticised by many commentators as being too risky for the everyday trader, but Pollard disagrees. She claims that CFDs are only risky when people trade beyond their means. “If CFDs are in the right hands they’re a powerful way to get leverage,” says Pollard, who started investing in the stock market as a teenager and became a full-time trader in 2000.

The big plus with CFDs, according to Pollard, is that they have a safety catch that protects losses on an account called an automatic stop loss. A stop loss is a pre-determined order to sell out at a specific price, which means that a trader knows from the outset of a trade the maximum amount she can lose. For extra protection, traders can take out a guaranteed stop loss, which guarantees that a trade is exited at the exact price no matter what the share price does.

Over the years Pollard has traded equities and indices as well as derivatives. She shifted from buying stocks based on fundamentals to trading using technical analysis.

Wanting to trade over the short term, Pollard initially tried options. She thought that the faster and more regularly she traded, the more money she’d make.

And indeed, she doubled her money in the first three months.

But her ego got the better of her and good trading took a back seat to making money. She found herself overtrading her account, which is a common trap for beginner traders.

To conquer her self-sabotaging habit of allowing dollar signs to cloud common sense she kept a trading diary, embarked on personal stgelopment courses, learned creative visualisation and practised Neuro-Linguistic Programming.

After losing 10 percent of her capital during September 11 she decided to abandon options trading. One of the reasons for the loss, according to Pollard, was that option market makers wouldn’t make a market until the end of the day preventing her from exiting her positions.

Pollard describes herself as a trend follower. Essentially, trend following attempts to buy shares in an uptrend and sell when the trend finishes. Trend followers also aim to profit from falling shares by short selling into the trend and buying again once the trend has come to an end.

Pollard’s tips for successful trading include:

– Design a trading plan from the outset

– Manage risk by utilising stop losses

– Determine upfront how much risk you are willing to take on each trade

– Ensure that no single position exceeds a set percentage of your total capital

– Decide how many positions you can have open at any one time

“I know I’ll be right only 50 percent of the time and that there’ll be very few shares that make me big money,” says Pollard. “The goal is to keep the losses small and the wins large.”

Pollard pre-codes her trading system into a charting package. She has a mechanical filter that scans for entries based on specific moving averages and she exercises a trailing stop-loss to exit (a trailing stop loss enables a trader to move their exit position up and down to capture profits).

Pollard looks for stocks that after a period of trending sideways, break out of a resistance and trend upwards.

In short selling she looks for down-trending shares. “I love it when they churn sideways, build up a strong support then break through the support level. I want to get in on that break,” she says.

No trade ever exceeds 20 percent of her capital.

CFDs are high risk so Pollard only allocates 10 percent of her capital to the CFD provider and leaves the remaining 90 percent in a high yield term deposit to offset the interest costs.

“For example, if I had a $100,000 trading account, I would put $10,000 over to the CFD provider and leave the other $90,000 with a high yield bank account,” she says. Once she goes beyond $100,000 she always uses guaranteed stop loss orders.

Where people come unstuck, is when they have a $20,000 trading account and put the entire $20,000 over to the CFD provider and trade it up to $200,000, notes Pollard. They have no money management or stop loss strategies, lose more than their $20,000 and are required to pay up their losses, she adds.

She advises, if you have a $20,000 trading account only put $2,000 over to the CFD provider and trade it up to $20,000.

“If you want to trade more than that be smart and use guaranteed stop losses and adhere to a trading plan with strict money management strategies.”

Pollard has written a book about trading called Smart Trading Plans.