Traders in shares, indices, forex or commodities should always have a backdrop of basic rules, which revolve around going with the trend, limiting losses and good money management. In other papers, we have covered these items extensively, together with how to avoid mistakes and other important factors to watch when trading CFDs. There are, however, some commonsense rules that do not have to be applied to rigorously, but add another level of comfort within what can be a very stressful process.
A simple first rule – watch the cost
Market makers and other brokers are not stupid, and the setting of prices and spreads (or slippage) depends on several factors including time of the day, volatility and before and after news items. If you have a system that is not tailored to quick, borsa trading sites intra-day moves, and your chosen timeframe is to look for results within anything up to a month, then minute by minute timing is less important than getting the overall picture correct.
On that basis you need to reduce your slippage costs as much as possible, so the time to place trades should be when the spreads are narrowest. After a while you should be used to the normal minimum spreads on most shares, and unless there is a pressing need to immediately deal (maybe on a profits warning or takeover news), then it pays to always ensure the spread is at the minimum before dealing.
This means not trading in the first few minutes of the trading day as buyers and sellers position themselves for the session. Sometimes the whole market may not only be marked down, for instance on a heavy fall in Far Eastern stocks overnight, but spreads might be wider because of the frenetic nature of early dealing. After a while though the spreads should usually return to normal, and you can deal more comfortably.
Example: You have a system that uses 3% targets and 2% stops, and say you normally buy and sell Royal Bank of Scotland shares with a minimum 1p spread, which represents a 0.05% or 5 basis point spread. From time to time the spread widens and can be as much as 5p after an outside event or early in the morning. This means that if applied to both sides of the trade, dealing on this wider spread would cost an additional 0.4% or 40 more basis points and effectively negates almost half of the edge of your system, which is fairly serious.