Maximising trading success

Trading isn’t for everyone. Learn why the majority of traders lose, and how you can improve your chances of trading profitably.

The short-term goal of leveraged trading

CFDs, a type of leveraged trading, is typically used to take short-term speculative views on market movements. In contrast to buying and holding assets as investments for months or years, there is no meaningful interest income or dividend yield from a CFD position.

In other words, short-term trading (using CFDs, or other leveraged products like futures, options) is a zero sum game. In the absence of transaction fees, the net profit and loss (P&L) of all short-term speculative traders is zero – with the profits of successful traders balanced by the losses of unsuccessful traders.

What does this mean for trading profit?

The distribution of trader outcomes, again in the absence of transaction fees, can be visualised as a bell curve centred on zero. Relatively large numbers of traders will register a small profit or loss, and relatively small numbers of traders will register a large profit or loss. Overall, in this hypothetical fee-free case, there would be equal numbers of profitable and unprofitable traders either side of the zero P&L axis:

What impact do transaction fees have?

Transaction fees form an inevitable part of trading for all market participants, from private individuals to the largest banks and hedge funds. The fact that trading is not free of costs shifts the bell curve to the left. This leads to the typical results seen for all short-term speculative products – including CFDs – where the average trader P&L is a loss equal to the sum of transaction fees paid, and where the majority of traders lose.

For CFD traders, results vary across firms and preferred underlying asset classes. But typically 75-80% of traders tend to lose, and 20-25% of traders tend to win over the course of a year:

Maximising your chances of trading profitably

Trading successfully requires considerable skill and shrewd market insight. However, there are certain steps that you can take to maximise your chances of trading profitably. These all centre on minimising your transaction fees:

  • Select a provider that charges low explicit transaction fees

    You should consider overnight funding charges and commissions, as well as the spread, when selecting a provider. Some providers boast of very tight bid/ask spreads but charge large overnight fees. Some, particularly in the FX world, market ‘no trading desk’ services with minimal bid-ask spreads – but charge significant commissions on transactions. IG strives to offer some of the most competitive and transparent transaction fees in the market.

    Examine our fees in detail

  • Select a provider that provides good-quality trade execution

    From a trader’s point of view, poor execution is economically equivalent to additional hidden transaction fees. If your provider offers low transaction fees but is unable to reliably fill your order, you should consider choosing a provider with better liquidity and a more robust execution algorithm. At IG we offer some of the deepest liquidity in our industry, with a policy of delivering price improvements to our clients whenever we are able.

    Learn how our execution policy benefits our traders, and the price improvements you could receive

  • Adopt a trading style that minimises the fees you pay

    It is rarely a good idea, for instance, to take small profits or losses only slightly larger than your transaction fees. Frequent trading in this manner, often called scalping, will tend to push your overall result toward a loss unless somehow justified by the underlying dynamics of a specific market. At the other end of the spectrum, swing trading attempts to capture gains in a market between an overnight hold and several weeks, minimising the times you pay the spread.

  • Be disciplined

    You should have a clear idea of the following ahead of placing a trade:

    • Why you are entering a position
    • When you will take profits if proven right
    • When you will take a loss if proven wrong

    You should have the discipline to stick to your plan as events unfold. Disciplined trading maximises your exposure to a chosen strategy and market while minimising the number of trades placed, and hence the sum total of transaction fees paid.

    Learn more about developing a trading plan

Differences in client profitability between providers of leveraged trading

Different providers have different proportions of profitable and unprofitable traders. These differences can give you valuable information about the average level of fees a provider charges, as well as the efficiency of their execution.

You should use this metric with some caution, however, as other factors may drive inter-firm differences. For example:

1. Different product offerings

Firms specialising in CFDs on individual equities may show a different profitable/unprofitable client split to a firm specialising in CFDs on FX. However, this may largely result from a difference in characteristic trade frequencies and fees per trade between these different asset classes, rather than from any particular competitive difference in transaction fees or trade execution efficiency.

2. Size of client sampling

Very small firms, with a limited number of clients, may generate a client profitability statistic that varies significantly from quarter to quarter. This is much more likely to reflect statistical noise resulting from the firm’s small sample size, rather than any quarter-to-quarter alteration in the commercial terms or execution quality offered by the firm.

3. Greater number of trades

A firm offering a very broad spectrum of products, used by many traders as their primary provider, may show an apparently worse ratio of profitable to unprofitable traders than a specialist firm used by the same pool of traders as an occasional back-up provider. The reason for this is that the trader results of the former firm, where the bulk of trading occurs, will be split over a greater number of trades than those of the latter firm. The greater the number of trades placed, the sharper the shape of the bell curve will become and the larger the proportion of trader results that will fall to the left of the zero P&L axis – even if the same traders, paying the same fees per trade, are driving both sets of data.

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