Successful CFD Trading Tips

How to Trade
CFDs:
Successful CFD
Trading Tips

Contracts for Difference (CFDs) provide an opportunity to potentially profit from the price movement of an underlying asset, in both rising and falling markets, without owning the asset. CFD trading has gained popularity in recent years due to the numerous advantages it offers, however, it also carries a lot of risk which can be detrimental to success. This article provides some insight into how you can increase your chances of trading CFDs successfully.

Know What You’re Getting Into

Before you can trade CFDs successfully, you need to build your knowledge. It’s important to understand CFDs, both in terms of trading basics and factors affecting particular trades. For instance, one of the most important basics is that CFDs are leveraged financial products. This means that while returns are magnified, it’s also easier to wipe your entire account – the leverage can magnify your losses to a point where the losses exceed your deposits for individual trades. That’s unless you are using risk management tools which we’ll come to later on.

When it comes to trading specifics, you have to learn that margin, leverage, and stop losses can behave unexpectedly due to gapping in the market. You need to ask yourself if you understand things such as price gaps, overnight fees, margin calls, and higher spreads and how they will affect your CFD trading.

Keep Learning

All financial markets are dynamic, CFDs included, and so continuous learning is a must. You have to keep up with any market developments and refine your strategy accordingly. Updating your knowledge is an ongoing process because what works today may not necessarily work tomorrow and learning from mistakes is all part of it. Fortunately, there is now a wide range of educational resources available to CFD traders to help you develop and update your knowledge regularly.

Have a Robust Plan

A trading plan gives you a clear path to follow in your trading journey by outlining the why, what, when, and how. Knowing all these factors before jumping into trading helps you avoid trading on emotions, which can lead to making uninformed decisions that will likely translate into losses. A trading plan needs to cover some important aspects:

  • Your motivation for trading supported by realistic and clearly-defined trading goals

  • Trading style and risk appetite

  • The assets you want to trade. Don’t expect to specialise in trading all the available asset classes.

  • How you will finance your trades and how much capital you will use

  • Trading strategy with clear rules for trade entry and exit, and risk and money management.

  • Record keeping

A good plan will give you an excellent structure for your day-to-day trading decisions.

Stick to the Plan,
especially the
Strategy

A trading plan is important but your trading strategy is a crucial part of that plan. To a large extent, your strategy will determine how well you do in the CFD market. As such, it’s vital to stick to the strategy. Not only will this help you minimise risk (a strategy highlights acceptable risk levels), but it will help you to avoid trading on a whim.

In addition to sticking to your strategy, it’s also equally important to know when that strategy is not working and needs some updating. A trading journal is one of the best ways to keep up with how well your strategy is working.

Keep a Trading Journal

A journal will give you something to look back on and identify what’s working and what’s not. For instance, you can identify patterns, reflect on your emotions, and see how they affected the outcome of your trades. Having a journal will save you time when it comes to streamlining your strategy.

  • Your trading journal should include:

  • The financial instrument you traded

  • The reasons for making that particular trade. For example, did you decide to trade based on risk sentiment, technical analysis, or trending global news?

  • When you opened and closes the position

  • The outcome of the trade; was it a winning trade or a losing one?

  • An assessment of your trade performance. Some things to ask yourself include whether you followed your strategy and how well you managed your emotions.

  • Lessons learnt from undertaking the trade

Choose a Quality
CFD Broker

Finding a reliable CFD broker is one of the most important trading decisions you have to make. Just like with other financial markets, your choice of broker will affect your CFD trading results significantly. You need to determine if what the CFD provider offers sets you up for success – from the spread, extra fees and trading platform, to the quality of trading tools, educational resources, security, and support. The broker needs to provide solutions that suit your trading goals.

Practice, Practice,
Practice

CFDs are complex. You will likely fail if you jump into live trading with insufficient experience. It’s important to test your trading strategy and practice trade execution on a demo account before risking real capital. Trading in a risk-free environment is also a great way to back-test your strategy and assess how well you handle your emotions when trading. With practice, you can build a sound strategy, develop your trading skills, and improve your decision-making – all essentials for building a successful CFD trading career in the long run.

Base Your Trade on Reason, Not Impulse

Your trading decisions should be based on good analysis and reasoning if you are going to trade at the most opportune times. Before you start trading, you need to choose the technique you will use to analyse the market. The two types of analysis commonly used by traders in CFD trading are fundamental analysis and technical analysis. It’s not uncommon for traders to use both analysis techniques and some even include sentiment analysis as well.

It’s vital never to take anything personally or let your emotions affect your decision-making. Even after experiencing consecutive losses, you need to stay disciplined and work on reviewing your strategy to cut the losses and keep moving forward.

Understand Your
Trade Position

Because CFD trading is leveraged, it carries high risk. As such, it’s crucial to know your total position size before you trade. One of the things you need to understand is the difference between margin and leverage. Simply put, you use margin to create leverage and hold a bigger position for only a fraction of the required capital outlay.

For instance, if you have a 5% margin, it translates into 20:1 leverage. Let’s say Google shares are trading at $1,500 a share, you would need to provide a capital outlay of $150,000 to buy 100 shares without margin. With a 5% margin requirement, you would only need $7,500 to open the position. Nonetheless, while margin is advantageous, you also need to know how to control your risk exposure and trade positions.

Controlling leverage

Leverage is a tool and it should be used appropriately. This means you don’t necessarily have to use all the available leverage. It’s best to scale down leverage to an acceptable level that aligns with your risk appetite.

In cases where you can’t lower your leverage, you can opt for a lower CFD trade position instead to reduce your risk exposure. For example, let’s say you want to invest $10,000 in Google stock CFDs with 10:1 leverage. If your CFD broker won’t allow you to lower the leverage you can reduce risk by purchasing only $1,000 worth of shares to give you a leveraged position of $10,000 ($1,000 x 10). Without lowering your trade position, your leveraged position would be $100,000 (10,000 x 10).

Have Risk and
Money Management
Rules in Place

Risk and money management rules can be the difference between recovering after losing trades and depleting all your trading capital. It’s essential to outline how you will use your funds and the steps you intend to take to limit your risk exposure. Some of the important risk and money management rules include:

Having and sticking to an acceptable level of risk. You have to consider how much capital you have and how much of that capital you’re willing to risk on a single trade. A general rule is not to risk more than 1% of your capital on one trade.


Determine when to enter and exit trades. Before you enter a trade, you need to determine the level at which you will enter the market and be disciplined to wait for the price to reach the level. You should also have two exit levels where you will set your stop-loss and limit orders. These price levels should be linked to your risk/reward ratio to ensure that your expected returns are worthwhile. Traders generally stick to a minimum ratio of 1:3.


Using stop-loss and limit orders. Most CFD strategies for beginners and experienced traders will employ the use of stop losses and/or limit orders These pre-defined exit orders will help you mitigate your risk exposure. A stop-loss order will minimise your losses when the market moves against you and a limit order will lock-in your profits in case the market takes a sudden downturn. When setting a stop-loss order, you should ask yourself how much you are willing to lose before closing a position. With limit orders, you shouldn’t abandon your limits because of greed. Discipline is key.


Knowing when to cut your losses. Always set the maximum loss you are willing to incur per trade and close your position when you reach it. Part of successful CFD trading comes from responding correctly to losses and one big rule is that you should never add to a losing position in the hope that the market will stop moving against you at some point. The general rule is to cut your losses and let your profits run.


Monitor Your
Trades Closely

CFD trading is intricate. Even with stop-loss and take-profit orders in place, market volatility and gapping can turn the market against you. It’s important to keep a close eye on your trades to better react to any problems or trading opportunities as they arise.

Monitoring your trades also helps to ensure that you have sufficient margin in your account to keep your position open. Trading CFDs requires that you have a maintenance margin. You get a margin call when your account falls below this margin and you are also at risk of having your position closed out.

Expect Losses

Trading the global markets, and CFDs in particular, means you have to acknowledge that at certain points, the market will move against you and losses are inevitable. It’s best to have a good strategy that will help you cut the losses and prepare for new opportunities. It’s also important to ensure that your account always remains sufficiently funded after a losing trade to avoid getting a margin call.

Diversify

CFD trading carries high risk and one way to lower that risk is diversification. This means you don’t rely on making your income from one source. For example, if all your positions are in stock CFDs and there is a sharp decrease in the price of shares due to some geopolitical issues, you will suffer considerable losses. However, if you have some investments in forex or index CFDs as well, your exposure to losses will be reduced.

You can diversify by opening positions across the CFD market and other financial markets. For instance, you can trade cryptocurrency CFDs and commodity CFDs but since returns in the CFD can be volatile, you can choose to branch out of CFDs into the forex market.

There are thousands of financial instruments available on the CFD market but when diversifying, it’s important to start small. You need to stick to markets and instruments you are familiar with and understand. You can diversify to other asset classes as you gain more experience and you become more confident in your trading capabilities.

How to Get Started
With Trading CFDs
Successfully

There’s no secret formula to CFD trading and so these trading tips won’t make you successful overnight. Trading CFDs successfully requires having a realistic long-term plan, discipline, and patience. Losses are part of trading but the plan is to minimise risk and build consistently profitable trades to offset the losses. You can start building a successful CFD trading mindset by following these tips and committing to refining your trading skills.

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