Making Money from CFD Trading - by Catherine Davey

This is an interesting book for many reasons. On the one hand it is an interesting look at how CFD trading can be used to develop trading profits. It is a welcome to the real world of trading. The reality is a long way from the glossy brochures produced by the CFD providers. It is also significantly different from the more generalized introduction Davey wrote several years ago on CFD trading.

Making Money from CFD Trading - by Catherine Davey

Those interested in the reality of trading CFDs will find this a useful book. Those who are looking for techniques, methods, analysis steps, systematic approaches will be disappointed. This book is a personal journey rather than a workbook which can be used as a starting point for developing your own techniques or fine tuning trading approaches.

On the other hand, this book illustrates very well the dangers of not planning when entering a new market and a new market area. Davey notes she started her approach based on nothing more than trial and error. She did not paper trade her ideas first. It was not until she consistently lost money that she decided to back test some ideas to see if they worked. It took her a long time to understand the nature of the market she was dealing with. CFDs are not the stock market. Market depth, liquidity and price behaviour are the most important features of this market. In her summary, Davey acknowledges this, but it takes many trades before she discovers the importance of this feature.

This is a personal journal and Davey describes her experiences in moving from the theoretical understanding of what is involved to the real understanding of what is involved in trading. She notes the irony herself. Having reported on financial markets, interviewed many traders (including myself) and read numerous books, she found that what we all said about the emotional and psychological side of trading was far more important to success than non-traders realize. Davey does bare her soul in this book and this takes some courage. Readers should learn from this. This is an unintended collection of errors typically made by those who first enter the markets with real money. Davey includes her solutions, working with personal trainers, industry professionals and others. The solutions may not work for you, but the extreme emotional situation in which she finds herself, - self doubt, fear, confusion, greed - are the ones faced by every trader.

I find the book is most useful as a study of how new traders struggle against the usual range of problems despite the availability of many books that clearly identify these problems, and provide a range of solutions. A more appropriate title may be "Learning how to Trade," because this is the most useful aspect of this book. I did not find it provided any particular insights about trading CFDs.

Her conclusion that "the largest total returns I made were on the stocks I traded with the smallest losses" is a conclusion consistent with that frequently written about by experienced traders. It's no secret, but from the first day of her trading, she chooses to treat it as if it were. She chooses to learn this the hard way. Her win loss ratio was less than 50% - more losers than winners. The bull market pays for your mistakes and of all the lessons included in this book, this is the one that is not mentioned.

Book Synopsis

Norman, David - CFDs: The Definitive Guide to Trading Contracts for Difference (Harriman House Publishing, 2009)

Billed as an essential guide to CFDs, this book is an excellent resource to which you will refer again and again. The author has 20 years of experience in the financial markets and has written several books previously about trading.

Norman carefully leads you through the basic principles of trading CFDs, and how to open and run a CFD trading account. He goes on to explain the ways in which CFDs can be used and includes several trading strategies.

Acknowledging that there are risks in CFD trading, the book details ways to mitigate those risks including stop losses, trading stops and guaranteed stops. On the other side, the advantages of the leverage enjoyed with CFD trading are demonstrated.

While comparing the role of CFDs with the alternatives, such as spread betting, options and futures, Norman also goes into detail about combining CFDs with other forms of trading, for example when used for hedging purposes.

The role of regulation is discussed, and the book is remarkably up-to-date, looking to possible future controls that may affect the CFD trader. Taxation issues are dealt with, and recommendations made for trading tax efficiently.

With the wealth of information that Norman had packed into these less than 200 pages, you will have a desktop reference book for all your CFD needs.

Davey, Catherine - The Diary of a CFD Trader: How to Make Serious Money from Contracts for Difference (Harriman House Publishing, 2009).

For a newcomer to CFD trading, this book provides a valuable seat-of-the-pants review of what you are letting yourself in for. It is an essential purchase and particularly good value for a financial book, which is being even further discounted from some booksellers.

The book takes you through a wild four-month journey, following the ups and downs of the author’s trading life. It is all here, the pleasure and the pain, as Davey keeps a detailed trading journal of her initial experiences trading CFDs. Along the way, Davey keeps meticulous notes of her feelings and frustrations.

This is not just a diary of trading actions, however. The book supplies plenty of information about the mechanics of CFD trading, and explains much of the jargon. Davey is an active part time CFD trader, which she combines with an editorial position, and has written extensively for newspapers and magazines.

In the course of the four months of trading, the initial $13,000 account plummeted to $8000, but then recovered to nearly $30,000. The book graphically illustrates how this was done, and shows the amount of hard work that is needed in order to trade as a business. The overall message is, however, clear in that the conclusion is that trading CFDs is worthwhile and you can make serious money from this occupation.

Temple, Peter - CFDs Made Simple: A Straightforward Guide to Contracts for Difference (Harriman House Publishing, 2009).

Peter Temple has written many financial books, and has an accessible writing style which will have you devouring this somewhat slim volume. Although concise, the book covers all the major aspects of trading CFDs, and gives a very readable introduction to this exciting product.

Temple is at pains to explain the mechanics of trading the markets, and commences with the fundamentals of hedging, trading on margin, short selling, and the types of financial instruments available to the trader.

He then details where CFDs fit into this picture, and explains how they work. He does not hesitate to point out that gearing is a double-edged sword, and makes sure that the risks of a leveraged product are fully understood.

The next sections of the book deal with how to setup your own CFD trading account, and the ways in which you should be considering your trades to make a profit. The trading strategies include pairs trading, relative value trades and hedging, and the book provides useful information on fundamental strategies.

Somewhat late in the game, in my view, Temple then elaborates on the role of discipline in the trading environment and touches on money management. As this concise book would be only a part of your trading library, however, this is a minor criticism, and it achieves the objective of being a succinct guide to CFDs.

Temple, Peter - The Investor’s Toolbox: How to Use Spread Betting, CFDs, Options, Warrants and Trackers to Boost Returns and Reduce Risk (Harriman House Publishing, 2nd Revised Edition 2007).

If you're looking for an introduction to using leveraged products, then this book may fit the bill. Temple has an extensive background, with many published works, and knows how to put the basics in simple terms for the beginner.

The book deals with much more than just CFDs, and thus provides a comparison with other geared financial instruments. It is written for the beginner, and assumes no previous knowledge of the markets.

The range of investment products includes CFDs, futures, options, binary betting and spread betting. Temple covers the history behind the formation of these derivatives, and explains in easy terms of how each of them works.

He gives critical assessments of the pros and cons of each financial product and their uses. The book shows evidence of the extent of his knowledge, coming from many years experience as a City analyst, and shows just how the markets work.

The book is printed on glossy paper with color illustrations, and provides a good introduction to this sort of trading. It is not detailed enough to be your only reference guide, but is reasonably priced and gives a good overview. Recommended.

Northcott, Alan - The Complete Guide to Investing in Short Term Trading: How to Earn High Rates of Returns Safely (Atlantic Publishing, 2008).

The title of this book suggests noble aspirations, and it is arguably complete to the extent that is practically possible in one volume. Northcott’s coverage of trading is comprehensive and reader oriented, and ranges from the history of the markets through many different financial instruments. However, perhaps because of its US origins, it does not include specific mention of contracts for difference (which are not permitted by the financial regulating authorities in the US).

Other than that criticism, for an introduction to the entire spectrum of trading, including all the terms and methods with which you need to become familiar, this book holds its own. If you need an easy to understand and wide ranging guide to the financial world, then this will be sure to please.

An interesting feature is the inclusion of interviews with successful traders, who provide answers to the questions of how they got into trading, and what methods are their favorites. In some ways, gaining these insights into the lives of successful traders alone makes buying the book worthwhile.

Northcott also takes time to address the psychological issues of trading, including the ubiquitous fear and greed, and introduces the importance of these to the novice trader. Money management is also dealt with thoroughly, making this volume a must have for beginning traders and a good stepping stone to more focused study.

DraKoln, Noble - Trade like a Pro: 15 High Profit Trading Strategies (John Wiley & Sons, 2009).

“Are you interested in being right, or being profitable?” asks DraKoln, and he goes on to explain the difference between retail traders and professional traders, in his view. This is a serious book with a serious price tag, and as such is not for the novice. However, if you’re looking to develop more sophisticated strategies of trading, or even just to inform yourself better, then this book is worth a look.

The 15 strategies are mainly based about using futures, options and spot trading together to maximize profit potential and reduce risk. There is very detailed analysis regarding when each strategy should be applied, and in which market environment. Methods such as collars, straddles, and strangles are bandied about, and the thorough way with which the application of these is taught shows that DraKoln knows his stuff and can explain it.

The book’s chief focus is on managing risk in a volatile market, and each strategy is analyzed in depth with the author going through the pros and cons in an unbiased and informative way. The goal of the book is to enable the transition of the reader from an unsuccessful retail trader to a professional trader, which DraKoln asserts is more to do with making a profit than with trying to be right.

If you have some experience of trading, but believe by being right in your trades you are making the best profits, then be prepared to be disillusioned by this book. An excellent volume for the trader who wants to improve and have a serious long-term career.

Davey, Catherine - Contracts for Difference: Master the Trading Revolution (John Wiley & Sons, 2003).

Heralded at the time of publication as the first Australian book on contracts for difference, in this short volume Davey sets the scene for what is now a rapidly growing trading method.

Davey recounts her early career in the financial business, and explains how she came to be interested in CFDs, which she, with great foresight, called the retail trading product of the future. In the process, she emphasizes the psychology of trading, and points out that an unsuccessful trader in whatever marketplace is likely to remain an unsuccessful trader until they get to grips with their emotions. Changing to trade CFDs from another product will not improve your performance.

The book points out that CFDs were previously only available to institutional traders, but had recently become open for individual investors. It runs through the advantages of CFDs, including profiting from either a bull or bear market, and fractional costs compared with owning shares.

While some may say that the book is old and outdated, and to a certain extent this is true, there are still many timeless lessons that may be learned from it. As Davey has continued to write, you may decide to opt instead for one of her later offerings about CFDs, but if you are intent on trading you should be thinking of establishing a library of books, and this deserves to be one of them.

Davey, Catherine - Making Money from CFD Trading (John Wiley & Sons, 2006).

This book traces Davey’s four month journey of self-discovery, as she recounts the tale of her entry into the CFD trading market. It is based on her trading diary, and is the second book she wrote.

If that initial description sounds familiar, it may be because Davey has also used her four-month trading diary as the basis of her latest book, “The Diary of a CFD Trader: How to Make Serious Money from Contracts for Difference”.

Inevitably, there is some overlapping of content between the two books, and I would advise skimming through both, if you can, to see which one you prefer. Davey learned a lot during her diaried experiences, losing more than a third of her trading account in the first month, and it is a story well worth reading about. I like the way that she engages the reader in her emotions and the psychology of trading, as so many people think that trading can be reduced to a mechanical or mathematical function.

If you want a taste of what the real trading life is like, rather than some dry and technical account, then I can recommend buying one of these books. Perhaps because it was written closer to the time, I prefer this one of the two accounts, but either would be a good addition to your trading library.

Heitkoetter, Markus - The Complete Guide to Day Trading: A Practical Manual from a Professional Day Trading Coach (BookSurge Publishing, 2008).

Although this book could have been just an advertisement for Rockwell Trading, of which Heitkoetter is the CEO, he confines his self interest to an appendix. This book is 300 pages of good information, explaining exactly what it means for you to commit to day trading as a means to becoming wealthy.

It is arranged in three major sections. The first is intended to familiarize you with the basics of day trading, and includes discussion of your equipment and connections, as well as the software recommended.

The second section is where the rubber meets the road, and Heitkoetter goes into considerable detail discussing trading strategies and the essentials of defining entries, exits, and stops. While it is no substitute for a technical analysis book, he manages to convey a lot of information and covers several indicators that are of importance in day trading. You will finish this section of the book with a clear understanding of how to form and implement your trading plan.

In the third section, the book covers other issues that may prevent you from succeeding, such as the psychology of trading and not taking profits at the right time. The appendices include much useful reference material.

With all that being said, this is a reference work for day trading covering the particular skills and problems involved in this type of application. Perhaps again because it is US-based, it has no specific mention of CFDs, but it does give you an insight into the world of a professional day trader, and is absorbing reading.

Lefèvre, Edwin – Reminiscences of a Stock Operator (Wiley, 2006).

In contrast to the other books, this is a classic work originally dating back to 1923, and republished several times, most recently in paperback in 2006. It is a most useful book covering investment and speculation, and its fictional character is based on a real-life trader, Jesse Livermore.

While you should not expect to learn about trading plans and strategies from this book, it provides an excellent education on the way the markets work, and shows that the markets will always act the same, depending as they do on human psychology.

Much of the trading strategy is concerned with identifying and following trends, rather than trying to locate reversals, and Livermore made much of his positions by using leverage. His was not a smooth path to riches, and even though he made huge profits he also went bust several times.

This book is an entertaining read which contains much that has been adopted into trading folklore. It speaks of the conflict with fear and greed. The axioms to “Let the trend be your friend” and “Let your winners run and cut your losses quickly” are also to be found in its pages. Reminiscences is a must read for all aspiring traders.