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6 golden rules every CFDtrader should follow

Over the last few years, Contract for Differences or CFDs have grown to become some of the most popular trading options in the financial market. This popularity can be attributed to the benefits traders get from trading these contracts. While beneficial, CFDs also come with certain risks when not done right.

The best way to avoid falling victim to the risk associated with CFD trading is by following some guided steps when starting out in this market. Here are 6golden rules every CFD trader should live by to succeed in trading contract for differences.

What are CFDs?

It is highly important to take time to understand what CFDs are and how they work, especially for newbies.

CFDs or Contract for Differences are trading contracts that work by speculating different markets changes. They are used in forex, shares, indices, and commodities. When trading CFDs, you do not own the actual products in the contract. Instead, traders make money from predicting price market shifts. This makes them the most ideal trading options for people who do not want to own the trading products or people with limited capital options.

Because CFDs are leveraged products, you pay a small deposit referred to as the margin to access the market. How much profit or loss you make depends on the size of your investment.

Adopt a trading strategy

Having a winning trading strategy acts as a guide for when and what to trade. A strategy tames your trading habits and protects you from emotional trading.

The best trading strategy should be based on your time commitment, attitude to risk, motivation, trading goals, record keeping, available capital, and risk management.

Never deviate from your strategy

Your trading strategy is your trading plan, tailored to suit your trading needs and goals. It covers how you enter and exit trades by using indicators and tools to guide these options. A trading strategy works to ensure you enter trades at the best time and exit at the best time.

One of the most important rules of trading CFDs is to always stick to your strategy. A strategy ensures you only trade in pre-set parameters, reducing the possibility of impulse trading or emotional trading.

When it comes to using trading strategies, it is also important to know when your strategy is no longer working. If this happens, ensure you take time off trading to tweak your strategy and get back to winning ways.

Learn to time trades

Part of using a trading strategy is having a reliable analysis. Accurate analysis makes it easier for you to know when to enter and exit trades.

Generally, you can two options; technical or fundamental analysis.

Fundamental analysis focuses on external factors affecting different markets. These include macroeconomic data, company announcements, and breaking news. On the other hand, technical analysis focuses on predicting future paths for a market based on historical charts.

For the best outcome, it is advisable to use these two analysis types together.

Always protect your capital

The position size is the total market exposure of your trade. Before entering a new position, always check available capital to determine the risk to take. Remember, the amount you use as capital is what you can win or lose.

Since CFD is a leveraged trade, the total position size is always more than the deposit. The best way to0 protect your capital is to risk a small percentage on each trade. Remember to manage your risk using stop limits.

Learn how to manage risk

Attaching limits and stops is the best way of managing risk. Consider opening stop-loss orders with your broker that instructs them to close your positions when the price is unfavourable to your trade.

On the other hand, a limit close order ensures your position closes at a favourable price level higher than the market price. Your trade can be closed once you reach a pre-set profit margin. This is an ideal way of protecting your capital from volatility.

Always Start small

As you start trading CFDs, start small. With so many markets to choose from, only begin with markets you are familiar with. This will help to build your trading confidence while working on a strategy. Once you have enough exposure and experience, you can start trying new markets.

Conclusion

In CFD trading, strategy development is a never-ending process that has something new to offer, even to the most experienced traders. Following the rules in this article will ensure you get started in CFD trading on the right foot.

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Beginner Tips for Trading Contracts for Differences

Both beginners and established traders can earn profits by being conversant with essential trading skills, understanding CFDs, and getting proper advice. Here are some tips beginners can leverage to succeed in CFD trading.

Acknowledge Asset Correlations

CFDs can help reduce risk exposure. However, traders will have to acknowledge the asset correlation element. Correlation refers to the assessment of two asset movements against one another or as a team. Many traders choose short and long contracts for differences in a single industry. In contrast, others may opt for two markets that demonstrate a negative correlation, like crude oil and the US Dollar.

Pair trading allows traders to exploit the divergence between both underlying assets. Based on the market trend, traders will have to choose a strong and a weak asset. Traders can match a long position with a weaker asset and a shorter position with a strong asset. The general market direction often does not influence the long-term results.

Analyze Positions

Traders should understand that analyzing positions is critical for reducing risks and increasing chances of success. Novice traders are highly likely to be tempted by an instinct or possible noticeable trend without proper research. Doing so amounts to gambling which can be extremely risky in the CFD industry.

CFDs are margined products, and the total leverage on a trader’s account can have a significant impact on the slightest movements in any direction. As a CFD trader, you must be patient. Remember, the markets remain virtually open during the day and sometimes across the night. Take time to conduct substantial research to reduce risks.

Analyze CFD Brokers

Choosing the ideal CFD broker is critical for success. A reputable broker can help you do the right research and acquire proper trading education. Some brokers offer user-friendly systems to ease trading activities. While every broker may claim to be the best, consider doing your due diligence to identify one that meets your needs. Remember even when a broker appeals to many traders, he may not be the best for you.

Target Capital Preservation

The CFD strategies you choose as a beginner should target capital preservation. Any expenditure you make is valuable, and you want to minimize losses as much as possible by evading risky strategies. Beginners should strive to learn and analyze different strategies through a demo account. Gain experience first before investing in live trading.

Limit Leverage

Focus on your positions. A competitive trader places guaranteed stops under each transaction. However, they also adjust them accordingly to restrict profits as they increase and shifting the stop-loss orders whenever the markets flow in their favor. Traders should also monitor their positions consistently. A trader can incur severe losses in CFD trading if the markets fluctuate against their leveraged transaction.

Expand Your Exposure

Your CFD trading activities are not restricted to a particular country or industry. Adopt an expansive approach to spread the risk over a wide range of instruments and markets. CFDs are excellent, but they should not depict your entire worldly fortunes. Just like businesses should not rely entirely on a single supplier or client, CFD traders should expand their trading across different investments to secure their capital against eventualities.

Understand Your Trading Expenses

All costs in spread betting transactions are transparent. However, various trading cost layers come into effect based on the composition of a transaction and preferred broker. Traders should strive to understand these expenses and their impact on making a profit on a specific transaction.

Having this knowledge is crucial to making informed decisions. Traders considering holding contracts for differences positions for more than a day should know the daily financial costs accumulate and can quickly become an obstacle to their trade. As a result, traders should determine trading and financial expenses in relation to their trading strategy. Doing so helps them establish the trade viability.

Limit Your Losses

Traders always expect some percentage of profit from each trade. Remember, your earnings could be minimal or substantial based on your preferred market, leverage, and capital amount. Assuming the market will move towards your direction can be risky. Leverage stop-loss orders to limit risk and losses and increase your chances of making a profit.

Finally

Achieving success in CFD trading can be a long and challenging journey, but the lessons you learn along the way are worth it.

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Lessons from 5 Successful Forex Traders

One of the most famous forex investment quotes by Jesse Livermore is,” Money is made by sitting, not trading.”

Understanding the seven-lettered quote has promoted many novice forex traders to millionaires or positioned them to regularly make decent earning from the venture.

So, how does that quote relate to your trading? It is simple.

You should understand the market enough to pinpoint entry or exit positions. You can rely on technical analysis. Alternatively, you can forego analysis conduct coping trading.

What if you rely on the above decision-making channels but still garner losses? That is where learning from successful forex traders plays a massive role in inspiration, risk, and portfolio size management.

What is more? Find out below.

2 Things to Pay Attention to When Tracking Biographies of Successful Forex Traders

Before analyzing the specific virtues of specific forex traders, it helps to have a checklist of how the forex traders managed funds and the actions the traders took after failure or success.

Here are some of the most successful forex traders and how they joined the global billionaires’ list.

1.   George Soros

George Soros is an American citizen, born on 12th August 1930 in Budapest, Hungary. He appeared at number 288, with 8.6 billion USD in Forbes list of the World’s Richest forex traders in 2021.

George Soros is known as the forex trader who made the highest earning in a day. It was 16th September 1992 when he won about 1 billion USD by going short on the Sterling Pound.

He closely watched the events of ERM and the British pound in 1992. He risked a massive portion of his wealth against the Bank of England. The market favored him when the pound lost from the speculative market drastically.

His success comes from understanding the forex market and using complex trading strategies that see him build his forex wealth.

As a hedge fund manager, he has crazy investment strategies, understands competitive advantage, risk management, and an avid sales plan.

2.   Bruce Kovner

Bruce Kovner is an American investor. His speculative interests began when he was 32 years old.

Bruce Kovner gathered 3000 USD from credit and invested it in forex. He earned 23000 USD. If not for his poor timing, he would have reaped 40000 USD from the trade.

He proceeded to start Caxton Corporations that transitioned into Caxton Associates through diversification and his keenness to change strategies with dynamic forex market times.

From Bruce, you can learn courage and the ability to spread risks and funds.

3.   Stanley Freeman Druckenmiller

Stanley Druckenmiller is an American investor, hedge fund manager, and former chairman of Duquesne. He is recognized for making gains with George Soros during the crash of the Bank of England.

George Soros had earlier hired him to manage Quantum group of funds in 1988. He also made fortunes from German mark devaluation in 1980.

His market analysis helped him make over 60% ROI when political issues surrounded the Berlin Wall. His understanding of currency values made him patient enough to draw heavily from the undervalued currency.

4.   Joe Lewis

Born on 5th February 1937, Joe Lewis is a UK citizen with a Jewish origin. He dropped formal schooling at 15 to manage a family business.

Joe’s management skills saw him make West End Catering Business successful before moving to the Bahamas in the 1970s. He developed an interest in forex trading in the 1980s and has been an active trader to date.

His persistence and knowledge of the forex market have seen him rise to a successful forex trader. He owns Tottenham Hotspur and UK’s Butler pub operator.

5.   Bill Lipschutz

Bill Lipschutz is an American forex trader who developed his investment interests at Cornell University. He studied Architecture and Arts.

Through stocks and forex trading, he managed to convert 12000 inheritance to 250000 USD while at university.

Bill once made mistakes that almost squandered all his earnings. But through failing to give up, he managed to resurrect his dying portfolio and earn more later.

Conclusion

Despite college or wealth background, you can make it in forex trading. All you need is solid market analysis, risk management, and strong determination to succeed in the venture.

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Strategies For Trading CFDs

A contract for difference or CFD is a contract between two parties, a buyer and a seller. The contract allows the seller to earn the difference in the value of an asset between the time the contract is entered into and the time it’s executed.

A CFD is based on an asset. Using a CFD, a trader can make a profit on an asset without owning it.

Trading CFDs has many advantages to the trader. Therefore, CFD traders need to implement proper trading strategies to make a profit.

Here are some of the strategies a trader can implement to profit from trading CFDs.

Increase Your Knowledge

If you intend to trade CDFs, you need to gain knowledge. You may already know the different aspects of trading that you are exposed to through CFDs. When trading CFDs, it is better to stick to what you know.

If you trade stocks, currencies, commodities, or other assets, when you get to CFDs, you should trade them under the assets you already know.

Invest low amounts as you learn the ropes in CFD trading. This ensures that you don’t lose a lot of your capital.

Trading The News

Trading the news is an effective strategy when trading in financial markets. When there is positive news about a country or company, the currency or respective stock is likely to rise. When there is negative news, the price of these assets falls.

As a CDF investor, you can profit in either direction. Just make sure to take a position before a significant price change happens.

Take a long position for positive news and a short position for negative news. When the price goes as far as it can, exit your position with a handsome profit less your brokers’ commissions.

Use Of Leverage

CFD trading allows you to use leverage to trade. Leverage allows you to hold a larger position of an asset than you can with your present financial capacity.

When trading CFDs make sure that the leverage you use does not cause you loss. Make sure to grow your leverage levels as you gain more experience.

Scalping

Scalping refers to seeking numerous trading and profitable opportunities during the day. This means that you can enter into several contracts within the day and exit after you have made your expected profit.

Pair Trading

Pair trading is a highly effective CFD trading strategy. It requires you to first pick an industry. Once you have an industry of choice, pick two stocks or currencies that are less and less correlated.

This means that as the price of one asset rises the other falls. Go long on the asset whose price is rising and short on the one whose price is falling.

You can make your profit on the movement of the two assets and not on the movement of the market.

To succeed in this strategy, you need two strong assets whose price is moving in the opposite direction. You will make your profit in the price difference between the two assets.

Set And Stick To Your Goals

When trading CFDs, you need to have goals. You also need to stick to the goals you set. This helps you to limit your emotional involvement in your trades.

When you achieve your target, stop trading. Trading beyond your target may cause you to feel that you can beat the market.

When you trade beyond your target, you can easily make a loss. This will be the result of overconfidence in your trading.

Sticking to your goals also ensures that you don’t take on more risks than you can handle. This ensures that you can preserve your capital and keep trading.

Monitor Your Results

As long as you are trading, you must always monitor your results. Keep track of your trade movements.

Are the prices rising or falling? This determines whether you will make a profit or a loss.

Record your complete trades and check whether you are making a profit or a loss.

Conclusion

When you trade CFDs, make sure that you have good trading strategies. Set clear goals and stick to them. Trading the news is an important strategy that you can use. Also, remember to always monitor your results as you trade CFDs.

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Benefits and Limitations of CFD Trading

Contract for difference (CFD) trading is a short-term financial agreement between a trader and a broker. After the contract, the broker pays the trader the difference between the opening and closing positions of a specified currency pair. Depending on the direction taken by price movement, CFD trading can result into a profit or loss. If you are the trader and the price moves in your favor, you stand to gain.

However, if the currency price moves against you, you stand to lose. CFD trading is popular in the forex market with many reputable brokerage firms using it as a trending strategy. The firms use the trading strategy to protect your trading account by limiting any heavy loses that would put your account into debt. They do this by offering negative balance. CFD trading has many benefits but it also comes with some limitations.

Benefits of CFD Trading

1.    Allows Leverage/Margin trading

One of the key benefits of trading CFDs is that it allows you to trade leverage. What this means is that you can use a smaller amount of capital to control a much larger trading position. The lower the margin needed for investment the higher the chances of potential profits.

2.    Gives you room to go short

Short selling is a trading strategy many traders take advantage of especially when the prices in the market are falling. A CFD platform provides an investor with both the buy and sells prices. When the prevailing currency price conditions indicate an upward trade, you can trade with the buy price. If there is an indication of a potential downtrend from the prevailing market conditions, you can trade with the sell price.

Short selling involves borrowing an asset hoping the price will go down so you can make a profit later by buying it back. The strategy takes advantage of an unexpected currency price. Whether the currency price declines or goes up, you will most likely gain profit from the trade. The short selling strategy is challenging to execute with other products that are not derivatives.

3.    Allows trading a wide range of markets

Trading CFDs provides you with an opportunity to trade different markets that include digital currencies, forex, currencies, indices, commodities, shares, stocks and energy. You can also trade CFDs from a wide range of devices, which included mobile phones. CFD is accessible in only a single login, which saves you the trouble of login into multiple platforms when you need to access each portfolio.

Some brokers also offer their traders an around the clock trading platform allowing them to access their portfolios anywhere and at any time. Even when the currency prices are changing fast, you never miss valuable trading opportunities.

4.    Offers instant order execution

Unlike traditional brokers that take days to settle trades, a CFD platform offers you instant order execution. With this, you can instantly open and close positions, which provide you with the ability to react to market conditions in a better way and get more trading opportunities.

5.     Low fees and commissions

Most CFD brokers do not charge anything to open and close trading positions. All you pay for is the spread and you are good to go.

Limitations of CFD trading

1.    Overtrading

CFD trading speed is very attractive which can lead to over trading, which is a serious mistake to make. Trading without having your emotions in check just because the speed looks too good easily leads to tiny profits from bad opening and closing positions.

2.    Leverage

While leverage is the key advantage of CFD, trading it can also be a disadvantage. The same leverage that can give you substantial profits when the trade positions are in your favor can also start to eat rapidly at your capital if you do not get the leverage balance right.

The key to minimizing the risk is to reduce the leverage impact when positions do not go your way by using a slow and steady CFD trading approach. Some uncouth brokers might also take advantage of new CFD traders by offering trades with high leverage in the hope of gaining from the trader’s loss.

3.    Financing fees

Even if opening CFD position is free, some brokers might charge you financing fees if you keep an open position overnight.

Conclusion

Trading CFDs might be challenging for a newbie but with a committed and trusted broker, it is one of the simplest trading strategies. If you want to be on the safe side, you should choose a trading platform that provides you with the preference of using a demo account to help get a better footing at CFD trading. It is great strategy with many benefits but it has its risks that you can avoid if you trade with caution.

 

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Reasons Why Every Forex Trader Should Learn About Fibonacci Retracements

Fibonacci retracement is a technical analysis tool in forex trading. The tool uses a template based on an ancient mathematical script to evaluate price movements and identify potential support and resistance levels.

The mathematical ratios and proportions are present throughout history and in nature, also called the Golden Ratio. It affects everything from snail shell shapes, ancient buildings, and the anatomy of the human body. Therefore, for a trader to use the Fibonacci mathematical principles, they need to understand these concepts.

What are Fibonacci Retracements?

In forex, the Fibonacci retracements are established areas of support (where prices stop going down) and resistance (where price stops going up). These retracement levels are drawn against the forex asset price. Every retracement level on the trading chart is a horizontal line that identifies the levels for analysis.

The determinant for the Fibonacci levels is via the connection of a trendline between the high and the low. The vertical distance sorted by these ratios is 61.8%, 38.2%, and 23.6%. While 50% is not officially a Fibonacci number, it is also used as a retracement level via this analysis method.

Uses of Fibonacci Retracements

Traders using the Fibonacci retracements can set stop losses, target prices, buy orders, etc. The Fibonacci retracements are used in various indicators such as Tirone levels, Elliot Wave Theory, Gartley patterns, etc. After significant price movements, traders can find resistance and support levels at the Fibonacci lines.

Traders must realize that Fibonacci retracement levels are nothing like MAs or moving averages which change with time. Instead, these Fib retracements are static and do not change. This means that identifying them is simple and allows traders to react as soon as prices change. The Fib levels are inflection points. This means traders expect a price action at these points, which may be a price break or rejection.

The Role of Fibonacci Retracement When Creating a Trading Strategy

Traders can use the Fibonacci retracements in different strategies. Most people are more used to 38.2% and 61.8% retracement levels, which determine pullback degrees, continuation pattern, and correlation after a bullish or bearish action.

As a continuation pattern, if the retracement has shown itself to be active in indicating resistance or support levels, traders can deploy a breakout strategy. You can enter a long position at the halfway mark or the 50% level and place a stop-loss order under the 61.8% retracement level. You can also use Fib levels at short order and near the peak of a significant move, with the Fib levels used as a take-profit mark.

Fib levels may be the most favorite technical indicators but are limited in their trading pair revelations. This is because they do not consider various variables like trading volume, volatility, and other factors affecting prices. The retracement levels reflect price relative to its previous price, so Fib numbers need to be factored in with other technical data.

Why Fibonacci Retracements Are Important to Every Trader

The Fib retracement concept indicates that markets retrace previous behavior with time. This means they follow a continual pattern, and you can say history repeats itself. You can estimate retracement levels depending on vertical lengths of support and based on the resistance levels.

Traders who use the Fibonacci levels based on these critical ratios mentioned before can stop losses or target prices. The ratios while trading is mainly pegged on empirical evidence and blindly having faith in the percentages. The Fibonacci numbers can measure and evaluate continuation patterns, and counter traders can set target prices.

A popular theory on the use of Fibonacci retracement is that markets are subjected to laws of nature, just like humans using them are. If this theory is true, then Fib numbers should apply to the forex markets.

Conclusion

We can see the Fibonacci retracements at work in commodities, stocks, and other financial markets. This means that every trader, not just in forex, should be familiar with the Fibonacci levels. Your expert skill in Fibonacci retracement evaluation will guide you when assessing trading opportunities in whichever investment market you are in. As random as they may appear, most price movements occur as a reaction to a more significant price movement when you are either hesitating or looking to make a profit.

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Fibonacci Retracement in Stock Prediction

Fibonacci retracement levels are based on the primary numbers identified by Leonardo Fibonacci. While the Fibonacci sequence of numbers is not as necessary, the relationship between the numbers, expressed as ratios, is what forex traders use for technical analysis while trading.

 

Fibonacci retracements are formed by taking extreme points, i.e., a peak and a trough, on a stock chart and dividing the key Fibonacci ratios that Leonardo Fibonacci identified as the key financial ratios. The determined levels 23.6%, 38.2%, 50 %, 61.8%, and 100% are drawn to enable traders to find out the support and resistant levels.

 

Although the 50% level is not a Fibonacci ratio, traders often use it due to asset prices’ tendency to continue in a particular direction after the 50% retracement.

 

Predicting Stock Prices with Fibonacci Retracement

Like in nature, Fibonacci retracement plays an integral role in forex trade. Technical analysts use Fibonacci retracements to identify resistance and support levels, draw support lines, set target prices, and place stop-loss orders. Traders use Fibonacci retracement levels to determine how much of a previous move the price has retraced, in which case the direction of the last trend is likely to continue.

 

How to Apply Fibonacci Retracement in a Chart?

A trader can use the Fibonacci retracement level to indicate an entry point to trade. For example, if the trader notices that a stock has declined at 38.2%after a significant momentum, the trader could decide to enter the trade as the asset begins to register an upward trend.

 

When a stock reaches a Fibonacci level, it is often deemed a good time to buy because it is speculated that the stock price will retrace, enabling the trader to recover losses.

 

The Disadvantages of Using Fibonacci Retracement

There are a few conceptual and technical cons of using Fibonacci retracements,

Firstly, traders need to know that Fibonacci retracements are highly subjective. Not all traders understand how to use Fibonacci explicitly fully. Hence those who do and make a profit verify the effectiveness of the tool.

 

Traders also argue that the use of Fibonacci retracement to make technical analysis is a self-fulfilling prophecy. For instance, if traders are all using Fibonacci ratios, then the assets’ price will be affected by this fact. For example, traders using Fibonacci place a stop-loss order below the 200-day-day moving average of a company.

 

If a large number of traders have placed similar trades using the same tool and within the specified period, the stock is pushed down and confirms the movement that traders expected. Similarly, other traders will be tempted to sell their positions after the asset price decreases, thereby reinforcing the trend’s strength.

 

Although the short-term selling pressure in such cases is fulfilling, it has minimal bearing on whether the technical tool is not the price driving factor in weeks or months.

 

Fibonacci is also a numeric anomaly that is not grounded on any logical proof. Thus, the sequences, ratios, integers, and formulas of Fibonacci retracement are a product of a mathematical process and hence make the tool unreliable. It is important to note, however, that Fibonacci retracement levels are not inherently unpredictable.

 

The underlying principle of any Fibonacci tool is a numerical anomaly that is not grounded in any logical proof. The ratios, integers, sequences, and formulas derived from the Fibonacci sequence are only the product of a mathematical process.

Due to its highly subjective nature, the Fibonacci retracement strategy can only point to possible reversals, corrections, and countertrend bounces. This system struggles to confirm any other indicators and doesn’t provide easily identifiable solid or weak signals.

Conclusion

Fibonacci retracement levels is a great trading tool for you as a forex trader. It improves your trading by enabling you to identify opportunities for you to make entries into a trade or sell your shares. A Fibonacci retracement does this by allowing you to identify patterns that repeat themselves, thereby making your odd significantly high.

 

Due to the few conceptual and technical disadvantages of using Fibonacci retracements, such as its high subjectivity level, and the fact that it has no logical proof, it is advisable to trade with Fibonacci alongside another technical analysis tool to enable you to confirm anticipated outcomes.

Technical Indicators in Forex Trading
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Technical Indicators in Forex Trading

Technical indicators are tools used in forex chart analysis that give you, the trader, a better understanding of price movements and when it is best to make moves. Different technical indicator tools can be used to analyze price trends, measure volatility, price averages, and so much more.

Technical indicators for trading forex come in four main types. These are oscillators, trend following, support/resistance, and volatility. Each type is grouped based on its function, which can be anything from the ability to reveal currency pairs price averages over time to giving the trader an idea of the current support/resistance levels.

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What You Should Know About Scalping
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What You Should Know About Scalping

The Scalping trading strategy profits from small price changes. The profits on these trades are taken quickly once the trade becomes profitable. All trading forms require a trader to exercise discipline. Since the number of trades is substantial, the gains from each small trade are small. The scalper needs to adhere to a strict trading system and avoid huge losses that can destroy the other successful trades.

Read more “What You Should Know About Scalping”