Can You Make Money
From CFD Trading?

How to Make
Money From
CFD Trading

You can use contracts for difference (CFDs) to trade thousands of financial instruments including forex, global stocks, indices, commodities, cryptocurrencies and more. Over the years, CFD trading has gained popularity as a less capital-intensive way to trade and some of the benefits to trading CFDs include the ability to potentially make money in both rising and falling markets.

As CFD trading continues to grow, tales of making large sums have increasingly been bandied about. However, like forex trading, the reality is that success is not guaranteed. Becoming a successful trader takes a lot of hard work and a sound approach to the CFD market. To increase your chances of making money in this market, it’s important to understand the risk inherent in CFD trading and to capitalise on this knowledge.

What Makes CFD
Trading Risky?

One of the compelling benefits of CFD trading is the ability to trade underlying assets at their face value without having to invest in the full value of the asset. This means CFDs are heavily leveraged to give traders enhanced returns. By using leverage and margin, you can open a position for a fraction of the asset’s value yet still be able to benefit from all the subsequent moves in the market. The margin requirements are strictly regulated by the CFD brokers.

However, this same leverage and margin increase risk. Both can cause significant losses when the market moves against you and if you have inadequate risk management in place. A fractional downward movement can easily impinge on previous successful trades or even result in a negative balance.

Consequently, if you’re going to increase your chances of making money in the market and minimise the risk, it’s vital to know the fundamentals of good CFD trading. This includes understanding the qualities of a good CFD trader and the common pitfalls to avoid when trading whether you are a professional or day trading.

What Makes a Good CFD Trader?

As with all other investment types, there are some essentials that put you on the right track to finding success in the financial markets.

1. Knowledge

In addition to the high risk, CFD trading is different from trading in other markets. Using leverage with CFDs is a whole different playing field, price gaps exist and so do overnight charges, spreads are bigger, and margin calls can be frequent. To potentially make any money from trading CFDs, knowledge is key. You need to know how to manoeuvre the complex CFD environment.

It’s crucial to study the market before you start thinking about possibly making any money. You should also never stop learning. The CFD market is dynamic and if you want to build consistent success, you need to be aware of emerging strategies and techniques and be able to adapt to the changes.

2. Planning and Strategising

CFD trading requires a disciplined approach. You need to have a robust trading plan that is updated regularly as you refine your skill and gain more experience. You must also have a tried and tested strategy that fits your trading style and risk appetite. Without a plan and strategy, you’re simply gambling and likely throwing away the potential to make any money.

3. Practice

Part of being a disciplined trader with an edge is the ability to spend time practising instead of jumping straight into trading the many instrument choices available at your beck and call. Practising for months on a demo account can seem boring, but during this essential time, you can develop a routine that will help you with decision-making and keeping your emotions in check when you start live trading.

On its own, knowing what makes a good trader is insufficient to succeed with CFD trading. It’s equally important to know and understand the major pitfalls associated with the CFD market.

What Should You
Avoid When
Trading CFDs?

1. Using Margin and Leverage

As mentioned earlier, margin and leverage are double-edged. While they can amplify gains, you can easily lose your entire initial investment and more with these tools.

Consider this example. If Google shares are trading at $1,000 a share, you will need $100,000 to buy 100 shares. Let’s say you decide to buy the 100 CFD contracts with a 5% margin or 20:1 leverage, you only need $5,000 to open the position. If the price moves to $1,070 and you decide to close your position, you will gain $7,000 (100 shares x [$1,070 - $1,000]). For your $5,000 investment, you will have made a profit of $2,000 or 40% more money.

When buying a CFD contract, it means you believe that the price of the underlying asset will increase. But what if the price goes down? Continuing with the example, if the stock value went down by $70, your loss of $7,000 would exceed your investment by $2,000, before factoring in spreads and fees. In this case, you would receive a margin call.

With CFD trading, you are at greater risk of margin calls compared to other forms of trading. It’s important to use leverage and margin cautiously. Start small, learn from your initial mistakes, and refine how you use margin and leverage as you gain more experience.

2. Ignoring Risk and Money

Risk and money management rules are there to help you trade another day even after experiencing some losses. These rules will help you determine how to react to certain market movements and make the most of them.

Successful trading is not so much about how many gains or losses you have, but about how you manage to offset the losses with gains. Some top risk and money management rules to keep in mind include:

  • Setting stop-loss and take-profit orders. Stop-loss orders enforce exit levels that help you minimise losses. Take-profit orders (limit orders) help you lock in your profits in case the market takes a sudden downturn. You should always have a reason for setting the order at a particular level and you shouldn’t fall into the trap of moving it. Discipline is vital for success.

  • Deciding when to open and close a position. Before opening a position, you should decide the levels at which you will enter and exit the trade. There should be two exit levels, one for when the market moves in your favour (take-profit order) and when it moves against you (stop-loss order). These levels should also link to your risk/reward strategy.

  • Knowing when to close a losing trade. Losses are inevitable in trading. What’s important is knowing when to let profits run and when to cut losses before they compound. It’s important to take emotion out of trading and rely on reason when it comes to getting out of losing trades.

An important aspect of risk and money management that sets apart disciplined traders who succeed, from those traders who trade on impulse and often lose out, is the ability to stick to the rules.

3. Overtrading

Overtrading occurs when a trader recognises opportunities on the market not because they are actually there but because they want the opportunities to be there. There are two kinds of overtrading – trading too much and trading too often.

  • Trading too much

    This normally occurs when a trader over-leverages to maximise potential profits in the least amount of time. In most cases, the trader ends up maximising their losses instead.

  • Trading too often

    This occurs when a trader doesn’t want to miss out on anything and they open trades even when they shouldn’t. The trader fails to understand that trading successfully is not about making too many trades, but about making the right ones.

The key takeaway with overtrading is to always test any strategy in a risk-free trading environment. This way, you will practice knowing when to trade and how to use leverage correctly.

4. Being Disorganised

CFD trading is about being organised as much as it’s about knowing and understanding the intricate details of the market. Being organised mainly stems from having a strict trading plan that helps you minimise or eliminate randomness in your trading. Without a plan, it’s easy to wipe out your entire account before you even get to possibly making any money.

The plan you formulate must include the essentials such as:

  • A clear outline of your long-term expectations, goals and targets, which must all be realistic.

  • A risk and money management plan.

  • A sound trading strategy that has been backtested.

It’s also prudent to stay organised by keeping a trading journal. The journal should help you keep a record of things like:

  • The instruments you traded and why you chose to trade them, for example, did you use fundamental or technical analysis?

  • When you entered and exited the trade.

  • Whether the trade was a profitable one.

  • How you handled your emotions during a particularly difficult trade, for instance, in a volatile market.

  • The lessons you learnt from your overall trade management.

A key tip for giving yourself the best chance of succeeding in the markets is to stick to what you know and have the most experience with. Only move on to other areas when you have sufficient knowledge and practice in those new areas.

5. Not Monitoring Your Trades

The CFD market is intricate. Due to the low entry capital requirement, rapid price changes outside of normal trading hours and market volatility can change a winning position and your account balance very quickly. Price gapping can render your stop-loss order void and a margin call can be imminent. It’s important to continuously monitor your account. This way, you will be able to react and take action when necessary.

6. Ignoring Diversification

A leveraged investment, which is what you get with CFD trading, carries a high risk due to market swings. You should trade cautiously. One of the main ways to minimise risk is diversification. It’s important to diversify across various instruments and global markets.

This way, you will have a buffer in case of any major swings that may occur in the market unexpectedly. For instance, when the 2008 financial crisis hit, the traders with diverse portfolios were less hard-hit compared to those who had all their eggs in one basket.

How Do You Get
Started With CFD

Once you have your trading plan in place and you know the common mistakes to look out for, it’s time to start trading. To get started, you need to choose the right CFD provider or CFD broker. The quality of the broker you choose to trade CFDs with can help simplify the trading process and increase your chances of potentially profiting from trading and it is important to ensure that a broker meets your trading expectations and requirements when you open a CFD trading account. A CFD broker also has to match your trading style and provide you with the right tools and support.

Among other things, a broker should meet the following requirements:

  • Regulation. Confirm that a broker is regulated to ensure that your investment is protected.

  • Good fees and commissions. You want to go with a broker offering transparent pricing. You should opt for good spreads and commission fees without sacrificing the quality of trading.

  • The choice of trading platform and trading tools. A good platform and trading tools will go a long way in improving the quality of your trades.

  • A good selection of financial instruments and trading terms. Select a broker offering instruments and terms that suit you. For instance, if you want to trade stock CFDs without paying any additional fees you’ll want to avoid brokers who don’t offer stock CFDs and those who charge an extra fee to access them.

  • High-quality educational resources. Ongoing education is a prerequisite for succeeding in trading. Find a broker with excellent educational resources.

  • Exceptional customer support. A good broker is easily accessible when you need them not only when it suits them. One way to see how good a broker’s support is to read customer reviews.

Once you select a broker, you can open a demo account and start practising. It’s prudent to make your first deposit and start live trading only when you’re confident and you have a good plan in place.

Is it Possible to Make Money
with CFD Trading?

The simple answer to this question is that yes, it’s possible to make money with CFD trading. The long and more realistic answer is that you first need to hone your trading skills and have a lot of discipline, practice, and patience to do well in the market. Successful CFD trading is possible, you just have to do it right.

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