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.
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.