This is not to say that all CFD trading systems are mechanical, and that discretionary systems don't work as well. There are in fact many types of systems around. Some are purely mechanical and some rely on a certian amount of judgment from the trader, which is gained through experience of paper and live trading.

And yes, CFD trading online is becoming more popular.

By the time you finish this article, you'll know what a CFD trading system really is, and the effect a trading system has on your actual trading performance.

Firstly let's look at what a CFD trading system is.

A trading system is basically a set of rules.

With purely mechanical systems, you can literally write the entire plan down (since it is mechanical, and a CFD either passes your rules, or it doesn't), and can even have someone else follow the system precisely.

In fact, you can program the system into trading software such as Metastock and TradeSim, TradeStation or WealthLab and backtest them to see their performance over the past 10 years for example. And when you've backtested say 10 to 20 systems, you choose the best one - one with a good profit and not too large a drawdown as well.

This is excellent because it means that anybody with the desire to trade profitably can do so by designing their own system and backtest it (with some education this becomes a lot faster), instead of trading with a system that's totally unknown in how it will perform.

Some other systems on the other hand, are part discretionary, though this doesn't mean that there is no systematic approach. Though these systems may not be 100% mechanical, there is still a step by step systematic approach that has been shown to be profitable. The reason why they may be not 100% mechanical is either because the indicators may be interpreted with discretion such as drawing support or resistance lines (unless this itself is made 100% mechanical), or uses chart patterns that are not easily mechanically defined. These kinds of systems can still be learnt, and are learnt from someone who has already traded the system successfully.

With whichever type of online CFD trading system, it is through trading with a system, that trading becomes an instrument that can be used to create profits on a consistent basis. Almost in a business like manner, where you apply a system, earn money, and monitor your performance to see that you're on track. And ideally, emotion is kept out of the marketplace.

So, what a CFD systems essentially does, includes these three important things:

1. Cuts your losses short

That is, if a trade goes against you, you exit at a small loss, not a large loss. This is done with a stop loss, which is in contrast to some people who put money into stocks or CFDs and have no plan for exiting, and see their losses keep increasing until they lose a significant portion of their float. In fact, the stop losses in a CFD trading system should be not too small to exit you out of trades with minor movements of the CFD price, and not too large in that your losing trades become too large in comparison to your winning trades. An optimal stop loss is in its happy medium.

2. Lets your profits run

That is, if a trade goes in your direction, your trailing stops allow enough room for the CFD to run and your profits to become large, but close enough to allow you to exit later on when the trade eventually does go against you. With a trading system where this happens, your profits are bigger (usually much bigger) than your losses, although they are typically not as frequent. Both of these points 1 and 2 above leads to…

3. A healthy profit-loss ratio

In case you're unfamiliar with this term, the profit-loss ratio is the size of the average profit compared to the size of the average loss. For example, if your average profit is $820 and you average loss is $205 your profit loss ratio is 4 (820/205).

Note that there's a similar term called the win-loss ratio, which is how many wins there are compared to losses. But these two terms must be looked at together. If you only have 35% winning trades and 65% losing trades, resulting in a modest win-loss ratio of 0.54 (35/65), a system is profitable, if the profit-loss ratio is nice and high.

That is, you multiply the profit-loss ratio, with the win-loss ratio, to get the “profitability ratio”. As long as this number is greater than 1, the system is profitable. In the example just mentioned, the profitability ratio is 2.15 (0.54 x 4). This is really what makes a system profitable.

You will always have losing as well as winning trades in a trading system. If the wins are much bigger than the losses, though less frequent, and this includes taking into account costs of trading such as commissions and interest costs, then your trading plan is good, and your trading will be profitable.

So in conclusion, you now understand what a CFD trading system is, and why it's important to have one.

What we've just gone though is an important concept. It's in fact the basic principle as to why a trading system is profitable or not.

Kurt Magnussen makes it easy to go from CFD trading novice to learning the keys to successful CFD trading, quickly & easily. To learn more valuable tips and hints on CFD trading, including how to choose a CFD trading system, go to this website on CFD trading systems and tips on online CFD trading.