CFDs gained a lot of popularity in the past few years because of the different benefits that are offered. However, every single person that wants to trade CFDs has to understand that there are risks that have to be taken into account. With this in mind, if you want to be successful with CFD trading, here are some great tips that you can use right now.
Learn All You Can About Contracts For Difference
Contracts for difference are derivative products that allow you to take advantage of price variations on numerous global markets, like commodities, cryptocurrencies, shares, indices, and Forex. The big advantage is that you do not have to own the asset you trade. Positions can be taken when markets fall and rise.
A CFD is always a leveraged product. This means that you put down a deposit, which is known as margin. The loss and profit are calculated based on full position size. Leverage will magnify profits but will also magnify losses. You can actually lose more than the deposits you put in for the individual position.
Always Use A Trading Plan
As you keep learning more about CFDs, you need to create your trading plan. This includes information about what, how, why and when trading happens. In addition, the plan shapes your behavior and protects you against making a decision based on your emotions.
Every single trading plan needs to include risk assessment, motivation, goals, time committed, risk management, trading strategy, available capital and more. Your trading plan will always be different than that of anyone else. This is why you should never copy what someone else does. This only leads to failure.
Stick To The CFD Trading Strategy You Chose
There are different trading strategies that can be used and you need to choose one. After you do, you need to stick to it. The strategy depends on the time that you have available as markets are monitored. Countless trading styles exist and you choose one based on the strategy that is appealing, like scalping, swing trading and day trading.
When you trade, you use some specific parameters that you respect. This minimizes the natural impulse to trade due to greed or fear. You have to be aware of when the strategy works and what it does not work. This is done by keeping records of losing and winning trades. Then, you back-test the trading strategy to see if changes are necessary.
Analyze Markets To Properly Time Trades
As the CFD trading strategy is built, you have to decide what you do in order to identify the entry and exit points. 2 types are nowadays used: fundamental and technical. In fundamental analysis, the focus is put on external influences and events like breaking news, company announcements, and macroeconomic data. In technical analysis, the goal is to predict the future. This is usually done by analyzing the historical price charts.
Every single analysis form can be individually used but it is best to use them both, as much as possible.
Understand Total Position Size
Position size means the trade’s total market exposure. As a new position is opened, you consider the available capital and the risk you want to take.
Every single CFD trader has to outline the capital that will be risked on one trade. This is added to the trading plan. Always, the amount considered is how much the trader is willing to lose in a failed trade.
CFD trading can be leveraged. When this happens, the position size is much higher than the initial deposit. This means that you can end up losing more than what you initially add to the trade. The best approach for beginners is to risk just a very small percentage of the entire capital on one trade. Then, risks have to be managed with the use of limits and stops.