The ascending triangle chart pattern is a very well known pattern that has been used by many successful traders over the years on the long side, but is not always traded short. An ascending triangle is formed when the price action is contained within two lines. The top line is close to horizontal while the bottom line slopes up towards the top line.

Ascending Triangles Can Be Profitable Short

Ascending triangles are definitely not one of the most predictable patterns that are available to trade short. With just 36% of the patterns breaking down ascending triangles also don’t deliver good returns when they do. The average drop is 0.31% in 9 days with about half of the breakouts (44%) being profitable. These results aren’t great, but selecting the right conditions can make trading ascending triangles better.

Improve Your Trades

Short breakouts from ascending triangles work better in falling markets which is clear from the results that were achieved in 2000, 2002 and 2008. The best short trades occur at market turning points. The market and the stock should be in an up trend or consolidating, with the sector consolidating or falling for the best results when trading ascending triangles short.

Avoid ascending triangle trades that break down at the start of the pattern, but it is ok to let the trade go all the way to the point of the ascending triangle before breaking out. Another key to picking successful short breakouts from ascending triangles is to look for a turning point up from the lower boundary that fails to reach the upper boundary and then falls away.

Ensure that the volume is supportive of the breakout, i.e. volume as the stock falls is greater than volume as the stock rises.

Ascending Triangles Can Be Profitable

Incorporating these simple changes when selecting ascending triangles to trade short, dramatically improves the results. With an average return per trade of 1.07% in 10 days and a hit rate of 52% it is possible for ascending triangles to be traded short successfully.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.

The descending triangle is the most profitable chart pattern when trading short. The descending triangle is formed with the lower boundary of the price movement contained by a line close to horizontal and the top line slopes down toward the bottom line.

Descending Triangles Best Traded Short

Descending triangles are one of the most predictable patterns that are available to trade short. With 57% of the patterns breaking down descending triangles can deliver good returns when they do. The average gain is 0.92% in 9 days with about half of the breakouts (45%) being profitable. These results are good but selecting the right conditions can make trading descending triangles very attractive.

Specific Setups to Improve Profitability

When you look at the performance of a descending triangle in bearish market conditions you will see the results were stronger than they were in more bullish years. Trading descending triangles when the market is in a down trend or consolidating improves your trading results. The sector should be falling to make the best profits. Unusually the trend of the sector at the end of the pattern, prior to the breakout is less important than the sector trend at the start of the pattern.

Breakouts can occur anywhere along the length of the descending triangle pattern. Another key to picking successful short breakouts from descending triangles is to look for a turning point up from the lower boundary that fails to reach the upper boundary and then falls away.

If volume supports a descending triangle breakout then the profitability of the trades improves. For volume to support the breakout, volume when the stock is going down should be greater than volume when the stock is going up.

Descending Triangles Extremely Profitable

Incorporating these simple changes when selecting descending triangles to trade short, dramatically improves the results. With an average return per trade of 2.55% in 10 days and a hit rate of 48% descending triangles are one of the most profitable patterns to trade on the short side.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.

The descending triangle is the most profitable chart pattern when trading short. The descending triangle is formed with the lower boundary of the price movement contained by a line close to horizontal and the top line slopes down toward the bottom line.

Descending Triangles Best Traded Short

Most descending triangles would be expected to break down and in fact 57%, break out to the downside making this pattern best when traded on the short side. 45% of these breakouts are profitable and on average the profit per trade is 0.92% over a period of 9 days. A good proportion, 12.1% of these breakouts make a profit of 10% or more. The descending triangle is one of the best chart patterns when it breaks to the downside and applying some filters makes this pattern even more attractive to trade.

Refine Your Entries

When you look at the performance of a descending triangle in bearish market conditions you will see the results were stronger than they were in more bullish years. Trading descending triangles when the market is in a down trend or consolidating improves your trading results. The sector should be falling to make the most profits. Unusually the trend of the sector at the end of the pattern, prior to the breakout is less important than the sector trend at the start of the pattern.

Descending triangles that breakout early in the pattern, produce similar results to those that breakout later, so this is not an important filter to use. The best results are achieved when the stock climbs up from the lower boundary and collapses back before reaching the upper boundary of the pattern.

Ensure that the volume is supportive of the breakout, i.e. volume as the share falls is greater than volume as the share rises.

Descending Triangles, Profitable When the Markets Is Not

Following a series of simple rules to determine which descending triangle to trade can improve results dramatically. By applying these filters descending triangles are profitable on 48% of the trades and return an average of 2.55% per trade in 10 days. This is a very profitable pattern to trade.

Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.

Which is better to trade CFDs or stocks? The answer to this question is not obvious and it will depend on what you want to get from trading. Looking at CFDs vs Stock we will highlight the key differences.

Cash, All or Nothing

It is normally necessary to have 100% of the cash available to purchase a stock. Even if you were to use a margin loan and borrow to invest you will still be required to front up with about 40% of the investment in cash.

With CFDs the amount of cash required is as low as 3% for stocks and even less if you are trading indices or currencies. The profit potential when trading CFDs is very large due to the leverage employed and can be 10 - 15 times that available when trading stocks.

When it comes to making the most of your capital CFDs win easily against stocks.

What Happens When It Doesn’t Work?

When using a large amount of leverage it is not only gains that can increase it is losses as well. When you are trading stocks the worst case scenario is 100% loss if you paid for the shares in cash.

It is possible to lose more than 100% of the money you invested in the first place with CFDs, so risk management is very important.

Trading stock gives a much greater control over risk than trading CFDs. The leverage involved with CFDs make risk much harder to manage as losses can become large very quickly.

What Does It Cost?

Brokerage and interest charges are the two main costs of trading when looking at CFDs vs stock.

When trading stock there will be no interest costs at all. CFDs attract interest charges on the whole position.

With lower brokerage rates on CFDs and higher interest bills it will ultimately come down to how long a position is held to determine the winner between CFDs vs stock.

Tax Free Profits?

One of the reasons that CFDs were originally developed was to get around stamp duty that was payable in the UK on stock purchases. CFDs were exempt from stamp duty.

Australian traders will notice a difference between CFDs vs Stock when it comes to tax. There are no franking credits attached to CFDs and the 12 month capital gain discount also does not apply. There are tax advantages to stocks in Australia.

Tax rules are considerably different between different countries so it is not possible to determine the winner here as it will depend on your country of residence.

CFDs vs Stock, The Winner Is

CFDs provide greater leverage which gives you an advantage if you can manage your risk well. If not Stocks are definitely easier to handle. Which of the two, CFDs vs stock is better is ultimately up to you.

Lower brokerage costs make CFDs a better proposition for the short term trader, but interest can have an impact if you hold positions for the longer term. I like trading CFDs because of the greater upside that is available and work to actively reduce the risk that is associated with the leverage.

Understanding the dividend process will help you to understand what happens if a stock goes ex dividend while you are holding it with a CFD.

When trading stock, there are three important dates in relation to dividends; the ex dividend date, the record date and the payment date. When you are trading CFDs, the only date that is important is the ex dividend date.

Trading Stocks For Dividends

Buying the stock before the ex dividend date will entitle you to receive the dividend. Buying the stock on the ex dividend date you will not receive the dividend.

The next date is the record date which is 3 trading days (on the ASX) after the ex dividend date. This is the date the investor must own the stock on to receive the dividend. Because it takes 3 days to settle a share that is purchased the ex dividend date and the record date are three days apart.

The final date is the payment date on which the dividend cheque is actually posted to the investor. There can be a significant delay from the record date to the payment date.

CFDs - Its All About The Ex Dividend Date

When you are trading Contracts for Difference (CFDs) the only date of any importance is the ex dividend date as all three dates that apply to stock investors blend into one.

If you have bought the Contract for Difference (CFD) then on the ex dividend date you receive a cash payment equivalent to the amount of the dividend.

When you are short selling CFDs you will have a payment taken out of your account on the ex dividend date that is equal to the amount of the dividend. These payments or deposits will be processed from your cash account by the CFD broker.

Zero Risk, Is That Possible

It may then seem that by buying a Contract for Difference (CFD) one day before the ex dividend date and selling it after the ex dividend date you have found a no risk trading opportunity as you are guaranteed to receive the dividend.

There is a problem with this strategy and that is the stock normally drops the amount of the dividend on the day it goes ex dividend, which would wipe out any gain made from the dividend payment.

Likewise it does not work to sell a Contract for Difference (CFD) before the ex dividend date, the drop in value on the ex dividend day will be offset by having cash removed from your account for the amount of the dividend.

Franking credits cannot be used if you are trading Contracts for Difference (CFDs) for dividends. Using CFDs eliminates some of the tax advantage of investing for dividends.

The Ex Dividend Date and CFDs

On the ex dividend date you would expect the stock to drop equal to the dividend payment. If you own a CFD you will get the dividend payment in cash. If you have sold a CFD and are short you will pay out the dividend amount in cash.

Interestingly, most CFDs do not trade on a Contracts for Difference market. The Australian Stock Exchange has created a market for CFDs but as at the end of 2008 the volume traded on the ASX CFD market represented only 1% of the total CFDs traded.

CFDs Traded Over The Counter

CFDs trade Over The Counter (OTC) which means that they are an agreement between you and the CFD provider. There is no formal CFD exchange, so to exit the position you must close the position with the same broker you entered the contract with. It is not possible to close the CFD with a different broker.

The prices that you can trade a CFD at are usually the same as the underlying market as the CFD brokers mirror the underlying market with their quotes.

Protecting The Position With A Hedge

While no formal Contracts for Difference market exists, other than the ASX CFD market, the CFD broker may, or may not trade the underlying instrument on the underlying market to protect the position they have taken with the individual trader. This is known as hedging a position.

If a trader was to buy 300 shares of BHP, the CFD broker could simultaneously buy 300 shares of BHP on the ASX market. By doing this any gain or loss made by the trader on the CFD position equals the gain or loss made by the CFD broker. The broker is said to be fully hedged.

If you choose to use Direct Market Access then the CFD provider fully hedges every position. If you are using the Market maker execution model then the CFD provider does not necessarily enter every trade and may instead hedge the total position.

No Guarantees With CFDs

The strength of your CFD broker is an important consideration as you must enter and exit your CFD trades with the same broker. When it comes time to take a nice profit you want to be sure your CFD broker is there to deliver it.

Most CFD brokers are large companies that are publicly traded so information on their financial strength is readily available. However not all companies are public and finding out the financial strength of those that are not may be more difficult.

CFD Market

The absence of a CFD market does not really affect traders at all. By placing orders with your CFD broker you are likely to trade at market prices and the order could even be executed in the physical market.

Trading a high probability trading strategy with CFDs is certainly attractive. This style of strategy is right very often, which makes it much easier to trade.

It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.

High probability trading strategies are not necessarily the right direction to focus on with your research.

Its Not About Being Right

It takes two numbers to gauge the performance of a trading strategy. The hit rate (how often the strategy is profitable) and the risk reward (wins relative to losses). It is the combination of these two factors that determine the effectiveness of the strategy.

Consider the following trading strategy that is profitable 95% of the time. The strategy wins $100 on each profitable trade, so from 100 trades the strategy makes $9,500 trades on average. But what happens on the other 5% of the trades.

If the average loss is $2,500 then the strategy loses $12,500 based on 5% of the 100 trades. Even though this strategy is right very often it still loses money. It is not one or the other measure in isolation, it is the combination of win% and the risk reward.

You Will Still Have Losses

Most high probability trading strategies rely on small profit targets and wide stop losses. FAP Turbo is one example of this a Forex trading robot that is right 95% of the time.

These strategies work very well up to the point where they experience very large losses. A tighter stop can be used to reduce the size of the loss. This however will usually reduce the win% and how often the strategy wins.

It Is All About Balance

Back testing can be used to determine the optimal balance between risk and reward and the win%. Try testing a variety of different stop loss levels to determine the best outcome for risk reward and win%.

In my personal testing around trading chart patterns I have found that the best trades go well from the start and do not look back. Tight stops can be used with a positive impact on the results of the strategy. I have also found that using profit targets limits gains and while it improves the overall win percentage it does not improve the overall profitability of the strategy.

Make Money First, Be Right Later

Strategies that follow the trend are not right very often and win about 30% of the trades. The wins are much bigger than the losses with a risk reward greater than 3. This combination produces a profitable strategy.

Scalping relies on a high win% usually 70% or more, but usually have a low risk reward where profits are equal to losses. This is another profitable strategy.

Successful trading is about making money, not about being right. Ensure the strategy you use is profitable overall. It is not just about getting a high probability trading strategy.

New traders may say that CFDs suck, but blaming CFDs for the fact you lost money is a very natural thing to do.

Losing money is not due to the use of CFDs (Contracts for Difference) it is the decisions that the trader made. It is very important as a trader that you take responsibility for your actions, both win and lose.

Leverage Is A Double Edged Sword

CFDs trade on leverage where a small amount of money down gives you access to a large position. This can result in very quick gains or losses as the market moves. If you lose money trading CFDs do not blame CFDs and say that CFDs suck.

Using stops on every trade is an important part of your risk management. If you do not use stops then you may not be ready to become a CFD trader.

The Broker Knows Where Your Stop Is

When trading CFDs the broker knows where your stop order is placed and some people believe CFDs suck because the broker can then target your stop. Once you are exited from the trade you then watch the market move the way you expected it to go in the first place. You lost money despite the fact that you were correct.

The brokers trade millions of dollars each day and it is not in their best interests to chase after traders stops. The more money you make the more you are likely to trade. I have had stops hit and then watched the market reverse and I have also seen the market very close to my stop loss before reversing. Good stop placement will minimise the number of false stop loss triggers.

All the traders in the market create the price movement and you are giving a CFD broker too much credit if you think they can move the market. Accept that you will be stopped out at times even if you have placed your stop correctly.

Ripped Off By Re-quotes

Many new traders trading shares also reckon that CFDs suck because their market maker broker re-quotes them a higher entry price when buying the CFDs. These re-quotes are delivered because there is insufficient volume at the level that the trader wishes to trade, or the market has moved rapidly from the current price.

The difference between the re-quote and the price you placed your order at is called slippage. This is accepted when buying stock as you may execute some of your order at one price and some at a higher price where there is sufficient volume. Your average price is then higher than your original order.

A market maker executes the whole order or nothing at all. They do not provide partial fills instead the broker provides a re-quote at a level that they can execute the complete order. Re-quotes are necessary for the orders to be executed in line with the underlying market and are not designed to rip traders off.

It Is Up To You

It is never the trading instrument that is the cause of bad performance it ultimately is the trader. There is no point in blaming the market, the broker, your partner or CFDs it comes down to your decisions.

If you never take responsibility for your results, you cannot change things. If you think the rest of the world is driving you crazy, you will have to send the rest of the world to a psychiatrist for you to get better. As a trader take full responsibility for the outcome of your trades, you can then change the outcome.

CFD finance is easy to understand if you can grasp the mechanics of trading Contracts for Difference. To enter a CFD position you must pay a small margin. The margin that you pay is insurance for the CFD provider against any loss you may make. The value of the margin varies each day as the value of the position changes. The margin money does not buy the underlying stock.

The CFD Broker then protects the position they hold by purchasing the underlying instrument and the cost of this is the full value of the position. The CFD broker is effectively lending you the money to buy the underlying instrument.

CFD Finance when Buying CFDs

The CFD provider will charge interest on the whole position that you enter. Interest is charged on the face value of the contract if you buy a CFD. The face value is the number of contracts multiplied by the current price.

So if you buy 1000 CFD contracts of BHP at $33.00, then you will be required to pay interest on $33,000. This is how CFD finance works when trading long.

CFD Finance When Selling CFDs

When you short sell a CFD you get paid straight away for the position you sold. You do not see the money directly in your bank account, but the CFD broker does receive the cash if they sell the underlying instrument.

Selling 1000 CAT at $41 using Contracts for Difference would return you $41,000 on which you will get interest while the position continues to be held.

How Much Will CFD Finance Cost?

Interest rates vary from provider to provider but are usually based on the following formula. A reference rate of interest plus a margin of 2 - 3% for long positions and a reference rate of interest less a margin of 2 - 3% when trading short. The reference rates used are typically the Reserve Bank of Australia (RBA) rate or the London Interbank Offered Rate (LIBOR).

The CFD broker then makes money via the interest rate margin that they charge on every position. In effect CFDs are just a fancy way for CFD brokers to lend money to their clients.

When Is CFD Finance Charged

CFD finance is not calculated on positions that are entered and exited on the same day. Interest is only charged if a position is held overnight. So intraday positions are excluded from CFD finance.

The rate of interest is very low relative to the impact of movement in a CFD position. With current interest rates at about 6% per annum fluctuations in the CFD position can easily be more than this in a day.

There are a number of books available dedicated specifically to CFDs. The majority of the CFD books have been written by Australian authors and traders and the books cover all aspects of trading Contracts for Difference (CFDs).

Eva Diaz - Real Traders 2

There is a wide variety of CFD traders featured in Eva Diaz’s book. This is a look at real traders and how they use CFDs in the markets. Dave Limburg was one of the competition winners in a CMC Markets trading competition running up a profit of 441% in 9 weeks. Dave Limburg is just one of the featured trades in this CFD book.

Jeff Cartridge - Supercharge Your Returns with CFDs

I cannot write an independent review of this book as I wrote the book myself. I attempted to put together a book that covered everything from the basics of how a CFD works through to the psychological game that is a part of trading success. It includes a variety of strategies as well as a comprehensive section on risk management. The book was translated in to German as well.

Contracts for Difference by Catherine Davey

The first CFD book launched in Australia was Catherine Davey’s book simply titled Contracts for Difference. This provides good coverage of the basic mechanics behind CFDs and how to trade them. A large section of the book is devoted to technical analysis that can be found in many other books as well. The book was sponsored by a CFD provider and the provider is featured throughout the book.

Making Money from CFD Trading by Catherine Davey

Catherine’s second book profiles her journey in taking a $13,000 CFD account and turning it into $30,000. This is a great insight into what it takes psychologically and emotionally to trade CFDs as Cat embarks on the journey to make money with Contracts for Difference (CFDs).

“Trading ASX CFDs, Options and Warrants the ASX Way” written by the ASX

This book was published by the ASX and takes a look at the benefits of using ASX CFDs and other derivative products to trade. A sound factual overview of the trading products is available from an experienced education team.

CFDs a Traders Guide to Contracts for Difference and Technical Analysis by John Jeffery

John Jeffery has many years experience in the markets as both a trader and an educator. This book covers a lot of ground covering tools and strategies for success when trading CFDs. It also covers the background behind CFDs and how trading CFDs compare to trading other derivatives. It is a well rounded book.

The Best CFD Book Available

Which books is best will depend on what it is that you are looking for as all the books look at trading in different ways. For an insight into what it takes to trade on a daily basis check out Eva Diaz’s book or Catherine Davey’s second book.

If you want the mechanics of ASX CFDs and derivatives then the ASX book is the obvious choice. And if it is an overall view of CFDs and their application to trading then consider the books by Jeff Cartridge or John Jeffery.