Do you wish to have a solid side-income on top of your monthly income?

You are not alone there, many working Singaporeans dream of that too, and one way many have done so is by trading AdvertisementContract for Difference (CFD).

To find out more about CFDs, you can read our beginner’s guide to CFD trading

Here is a tip for new traders, you can start by trading via a trial account that allocates virtual funds for you to test the market before making your first real trade.

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IG trial account

But when the real deal happens, the big question appears - is it difficult to handle the unpredictable gains and losses from trading?

If you have a clear, drawn-out system, it makes the whole process much easier. Money management methods are simple enough to learn; it’s just a matter of applying them in a consistent and disciplined manner.

So is there a secret behind trading successfully? We sat down with a data analyst with 15 years of trading experience and got him to share some key points on how he generates and manages a trading income.

Have a strategy on how to divvy up your monthly income for different investment time horizon

A simple general plan could be to divide your monthly income to these few categories:

  • 50 per cent in savings
  • 10 per cent in insurance (preferably simple term policies)
  • 20 per cent in investments
  • 20 per cent for overall expenses

Funds allocation

Adding on, you should be looking at a mix of short-term debt and long-term cash instruments as part of your investments.

In the case of short-term debt instruments, you can consider Treasury Bills (commonly known as T-Bill), money market funds, corporate and government bonds with a maturity period of five years or less, which allows you to be flexible and get quick returns on short periods.

Long-term cash instruments such as long-dated bonds, on the other hand, focuses on growing out a stable asset and give a steady return of investment over time.

But towards the later stages of your investment lifespan, you need to look at a more stable portfolio and cut down exposure to more volatile assets. One method is to increase your cash allocation and investments to allow compounding interest to build a solid retirement fund.

In short, you are effectively growing your wealth through a stable asset and protecting what you’ve accumulated through the earlier short returns.

Devise a system to prevent losses before chasing gains

You are a good trader not because you make more money, but because you mitigate your losses.

The key to doing this is to have a system, and to follow it unfailingly. Using Advertisementstop-losses during trades keeps your losses manageable and protect your assets if the markets move against you.

On top of that, have a clear plan and never rely on hunches. Fix how much you’ll sell, based on the price movement. For example, create specific tiers at which you sell. You could, for instance, look at profit levels and systematically define selling points with an upper limit.

For example, you could sell half of your stocks when the price hits $3.50, another half of the remainder at $3.75 and sell everything to reap the final profit when it hits $4. On the other hand, you could also look at a trailing stop loss and sell half of your stock when the price hits $3.50, another half when the price hits $3.25, and the rest of it when the price reaches $3 to protect yourself from potential losses.

Basic systems like these are the bread-and-butter of a trader’s risk management skills. You can change the system later if it’s not working for you, but always have a system.

An easy way to implement this system is to use trading platforms like Traders using IG can place guarantee stop losses with no upfront charges, which means they will only be charged if the stop is triggered. Use of trailing stop losses can also optimise gains and set price alerts to aid in executing strategies.

Above all, the first step to winning is simply not losing, focus on learning and developing systems to control your losses; making money is something that will follow.

Track and quantify what you do

Nothing is left unmeasured or to chance when it comes to trading. For every trade executed, metrics must be confirmed. These include the percentage of success, probability ranges, margin of error, volatility, and so forth.

It’s good discipline to take the same approach to all aspects of money management. When you split your money between savings and investments, and divvy them up between various assets, you need to monitor their performance. You should also be able to give quantifiable reasons as to why the money is divvied up that way.

For example, if you’re allocating 90 per cent of your assets to equities, you should be able to state (in hard numbers) the potential returns, the risks compared to a more balanced portfolio, and the point at which you’ll stop and change the allocation if it doesn’t work. Vague standards such as “when it makes more money” aren’t enough.

This way, reliable knowledge is gained on what works and what doesn’t. This helps to shape future decisions, such as asset allocation in your portfolio, and methods of diversification.

To put it simply…

At the end of the day, trading is all about self-discipline and being able to track, manage and devise a system that is within your control. When you have that pegged, it’s a matter of implementing it to test and quantify the results.

And why not test it out with AdvertisementIG’s trial account, which offers you $200,000 in virtual funds to practice and test your system? With that amount, you can refine the process and unlock the secret to win in the trading game.

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This article was sponsored by AdvertisementIG, the world’s No.1 CFD provider (by revenue excluding FX, 2018). All views, opinions and recommendations expressed in the article are the independent opinion of GoBear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.

GoBear team

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