Every trader who has ever set sights on a bar chart has had the dream of earning a full time income from the markets. Many of those same traders fall well short of the mark when it comes to understanding and profiting from the very market that was supposed to fulfill their dreams and provide an endless supply of cash flow. So how easy is it to profit from using an index CFD trading strategy?

Index CFDs like the Dow Jones or the Aussie 200 are perfect opportunities for traders to develop and back test a CFD trading strategy to take advantage of the volatility and access to leverage that these products have to offer.

Here is what you need to do to back test and discover a profitable CFD trading Strategy

First things first, you need to establish a clear objective or set of goals that your particular system is looking to achieve. At the very outset you will need to clearly identify the ideal time frame that suits your personal trading style and be very aware of the amount of risk that you are looking to take on board in this CFD trading System.

Once you have identified those 2 broader picture criteria it’s time to build your CFD trading strategy. Firstly you need to develop a clear cut entry technique that removes any emotion and allows you to feel confident each time an alert is triggered. You can back test this part using a time stop method which means you enter and exit after 1, 3, 5 or say 10 trading periods (could be an intraday system) and check what percentage of your entries are in profit after that time stop.

What about my exit strategy?

Next comes the exit strategy and here you need to take into account your profit exit and your exit at a loss. Both these components are extremely important and in fact the only way your system is going to be profitable is knowing when to exit smartly. There are many types of exits you can employ and one of the greatest proponents of successful exit strategies is Chuck LeBeau who came up with ideas like the chandelier exit plus others. Chuck LeBeau has always been way ahead of his time.

Money management is for the Professionals

Money Management will play a very critical role in your system development testing and potential success. Allocating the right amount of funds at the start of the trade and throughout a winning or losing trade can make or break most traders. Be sure to risk no more than 1-2% of your trading capital in any one trade. This will allow you to stay alive during a losing streak and still have confidence to take the next trade.

Back test to trading with absolute confidence

Finally comes the back testing component. Back testing software will vastly increase your chances and provide quick answers to whether or not your system is profitable on historical data. Back testing software can range in price from several hundreds dollars up to several thousand for products like

Source by Ashley Jessen