If you want to trade contracts for difference to make a profit over time, you will probably want to use a trading system. Without a system, it is unlikely that you will be able to hang onto your money long enough to learn how to trade for a profit.

In its simplest form, a trading system will just set out the parameters under which you intend trading. Trading systems may be completely specified, sometimes called mechanical trading, where all your actions for any possible market move are predefined. On the other hand, for those who think they have an edge based on their intuition, the system may specify initial scans of the charts to look for a promising trade, but then the actual decision will be made based on experience.

Although there are traders who profit using either type of system, it is usually recommended that you use mechanical trading, at least at the outset, so that you do not succumb to your emotions and lose your trading capital too quickly. Mechanical trading does not imply that you must use a computer to tell you what to do, but as the system is fully defined you would be able to do this if you wanted to.

One advantage of mechanical trading is that you can back test the system thoroughly to see how profitable it is. As the decisions are predefined you can apply them to historical data and watch what performance would be achieved. Though past performance is no guarantee of future results, this is usually effective in determining whether the system is worth trying out.

The great advantage of this test of the system is that it is objective, and does not involve any decision-making or emotions. An important aspect of the system, in addition to how much profit it would make, is how large a draw down on your trading capital you can expect. Back testing over a period of, say, 10 years should give you a good idea of this. It is much harder to determine whether a discretionary system will work out for you, as the answer to this can really only be found out in practice.

The actual process of choosing the trades to make is covered in the section on CFD trading strategies. The trading system is concerned with the implementation of those strategies. A good trading system will directly address the essential elements for having a profitable trading career.

The first, and for some people, the hardest essential of trading is to have a point where you identify the trade is not going to work, and you cut your losses by selling your position in the trade. When considering any trade, your system should be able to tell you at what price point you know that the trade has failed. Whatever type of system you use, it is unwise to allow emotion to affect this decision, even with a discretionary system.

To realize this is true, all you have to do is imagine that you have lost, say, 10% on the trade and reached your stop loss. If you think it is difficult to sell and realize that loss, just consider the alternative -- if you stay in the trade and the loss becomes 20%, do you really think it will be any easier to sell at that time? The discipline to get out of the losing position is paramount for trading success.

The second essential for your system to address is allowing a winning trade to make as much profit as it can. Particularly after a losing trade, the tendency can be to exit the position when it has produced a reasonable profit, and achieve a good feeling. There is nothing wrong with taking a profit, you might think, but there is certainly something wrong with leaving money on the table and selling before you realize all the gains that are possible.

Most systems will deal with this by having a trailing stop, and you should have one at least in principle, even if not as an actual broker order. The trailing stop is a stoploss order that follows the price of the security at a certain distance away. The value of the trailing stop ratchets so that it will never go back down. The effect of this is that if the price drops after its initial gain it will hit the trailing stop and the trade will be exited. Provided the initial gain was sufficient, and the distance of the trailing stop from the price was not large, then this should ensure that you sell automatically at a price higher than you bought.

Trailing stops can be entered on the market with your broker, or you can manually adjust a stoploss order as the price rises, and opinion varies on which is the best strategy. As a means of taking a profit, they are reliable even though you will not have sold at the peak price, and many people depend on them for the majority of exits from their trades.

The third essential that your trading system should take into account is your profitability, which depends on the percentage of winning trades compared with losses, and the average profit compared to the typical loss. No strategy is going to guarantee a win every time, and you may even have a strategy which loses more often than it wins but is still profitable, as the size of the gains may be so much more than the typical loss size.

Finally, your system will need to account for how large your trade can be, compared to your trading capital. Unless you have good money management built into your trading system, the inevitable bad run of losses may be sufficient to reduce your account so that you are not longer able to recover and make a profit.