Over the past decade, CFD (contracts for difference) trading has grown in popularity across the globe, and this trend is expected to proceed over the next couple of years. CFD trading is a great way to make short-term ventures with low starting capital.
Starting slowly with a relatively easy trading approach that concentrates on your market understanding is advisable if you’re new to CFD trading. By analyzing your previous trading decisions, you get to know what works and what doesn’t.
From there, you can improve and perfect your trading approach as your market understanding and confidence grow. The exciting benefit of CFD trading is that you don’t have to purchase the fundamental assets at its entire face value. Instead, you can use margin or leverage provided by a broker to purchase a position in the market at a significantly lower value.
In this review, we will look at a couple of tips that you can use in order to start trading with confidence and prevent loss of capital. This guide only covers the basics from which you can then design a better trading approach.
1. Learn How to Use Stops
CFDs can be very unstable, and the slightest shift in market prices can send substantial shockwaves through CFD markets. And although CFD trading is naturally risky, it’s possible to minimize the extent of risk through how you trade as well as learning how to use stops.
Stop-loss orders are vital to a calculated and realistic trading strategy, and they can help alleviate severe capital losses while allowing winning positions to flourish fully.
And although stop-loss orders attract extra costs, using them prevents your capital from being exposed to leveraged trades. This is the first step towards building a robust CFD portfolio.
2. Allow Your Profits to Run
If there were ever a fundamental code to live by in CFD trading, this would be it. Allow your profits to run at every given opportunity.
CFD trading profits aren’t always easy to come by, and statistically, those that turn out well will be overshadowed by those that don’t turn out quite how you expected. This makes it vital that you allow profitable portions to continue running as far as possible.
Every ounce of your gut will tell you to close shop and draw profits. However, the more profits you draw from each winning trade, the better your chances are of succeeding.
3. Diversify Your Risk
Ensure that all your capital isn’t tied up in CFDs or specific countries or sectors. Instead, take a diverse approach and split the risk over various markets and financial instruments.
CFDs are grand, but if they account for your entire investment portfolio, you’ll have issues. In the same way that businesses can’t be overly reliant on one client or supplier, you too shouldn’t bet all your capital in one instrument but rather diversify across several other investments.
This ensures that even in the worst-case scenario, you still have some capital left. It’s all about protecting your money because it’s only money that can generate more money.
4. Use Leverage Wisely
Leverage is one of the main reasons why people trade CFDs. It’s an inescapable feature of this instrument that is, in practicality, its reason for existence. Leverage can be very risky if things don’t go according to plan. However, using it effectively will benefit your trading portfolio.
A carefully leveraged portfolio can offer the likelihood of high potential gains due to leverage with a cautious enough plan to preserve capital assets.
5. Know Your Trading Costs
CFD trading is quite different to spread betting, whereby all costs are crystal clear in the transaction. In CFD trading, there are a couple of different layers of trading costs that can affect you depending on the composition of your transaction as well as your broker.
As a result, it’s important to make sure you understand all these costs and how they will impact your ability to generate profits from a particular transaction. This will enable you to make informed investment decisions.
To sum it all up, the CFD trading tips illustrated above are not easy to follow; it takes determination, discipline, and time. However, you will realize they are worth it in the end because you’ll be able to carry out all your CFD trades successfully.