CFD Trading 101 – Top Tips
CFDs or “Contract for Difference” are a great way to make money online. However, success in CFD trades is more about disciplined and methodical approach, rather than mere speculation. Here are some top tips to follow, to make your CFD trades a success.
- Understand the nature of the trade.
Many traders fail to grasp the nature of the CFD trade, and wait for a bull market. A CFD is essentially an agreement to exchange the difference between the opening price and closing price of a contract. Smart investors leverage CFDs to speculate on the future movement of market prices, either upward or downward, and aim to make money regardless of the direction in which the underlying markets perform.
- Preserve Capital
The basic aim of any trader is to preserve capital. Many traders, tempted by the lure of easy money, make the mistake of over-trading, and in the process fritter away their capital. Smart traders do not trade to make money. They rather focus on not losing any money. Profits follow naturally when this basic precept is adhered to rigorously.
Preserving capital and not losing money requires a disciplined approach of setting stop losses and adhering to it, being wary of doubling up, or chasing a lost or missed opportunity, and knowing when to cut losses and get out of a losing trade.
Avoid impulsive trades. There is no shortcut to hard work and due diligence. Even as there is no sure-fire way to predict the market, an intelligent investor can still aspire to succeed through a diligent study of the underlying trends and broad macroeconomic factors that would have a bearing on the movement of the markets. With CFD trading, the task is all the easier, considering the investor only needs to get the broad direction of the market right. It is the movement of individual stocks, which may be influenced by several micro-level factors, that are almost impossible to predict on any given day.
The ability to trade the news and react quickly to extraneous events can be crucial for success, but always bear in mind the markets may have already factored in the implications of the news.
- Adopt a Sound Trading Strategy
Trying to time the market is foolhardy, but a smart trader still knows when to enter and exit a trade. The ability to time the entry technique to perfection, by comparing the state of the market with the trends and overall market sentiments, and the ability to remain patient and wait for the right opportunity rather than blindly get into a trade, all have a big bearing on success.
An effective money management plan also has a big impact on successful CFD trading. This basically translates to how much capital to deploy on each trade, the leverage, and the extent of risk.
- Establish Realistic Goals
Establish realistic goals, and stick to the targets. Many traders make a basic mistake of sticking on with a losing trade, hoping markets will rebound. Likewise, many traders get carried away by initial success and give it all away. Tales of traders who manage to strike it big and then give all the winnings back are all too common. Stop loss are not just for losses, but also for profits.
Also, CFD leveraging is tempting, and allows the possibility of making huge gains from a small capital. However, it is important not to get carried away. Start small, keeping the total exposure low relative to the capital base. As a rule of thumb, a maximum leverage of three times the account size is optimal for newbies.
Make every trade a learning opportunity. Try to understand what clicked, or what went wrong with every trade. Evaluate the instrument, the timing, the trading ruled applied or omitted, and other factors. Learn from the experience, to better the trading strategy. Hindsight is the most powerful educator in the market.
It pays to be aware of one’s own strengths and weakness, and work hard to improve the strengths, while minimising weaknesses.
- Adopt a Disciplined Approach
Last but not the least, there is no short cut to quick riches. Making money from CFD trades requires patience and discipline. It is important not to get carried away by initial success or be disheartened by an initial setback. Losses are part and parcel of the trade, and a persistent investor tries to ensure his profits exceed his losses.
Opening an account with a stable and reputed platform such as CMC markets offers manifold benefits, including the convenience of an online trading platform to trade from the comforts of one’s home or office, a reliable trading platform that ensures all trades are executed to perfection, prompt settlement of accounts, and much more.
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