If you’re new to CFDs then make sure you only make small trades to begin with.
Top CFD Trading Tips
1. All CFDs are traded on margin which means that you only need to put up a small percentage of the value of the underlying position to take on significant risk. So start off with small trades, and make sure you understand what is meant by a single CFD and what the minimum price fluctuation is. This can be quite different for CFDs on individual equities or currencies, for example.
2. Work out what kind of trading suits you best. There are traders who only ever take short-term positions, maybe for only a few hours, and who would never hold a position overnight. This type of trading may appeal to you, but do you have the time to follow the markets closely every day? If not, then taking a medium to long-term approach could suit you better. Short-term traders tend to prefer range-bound markets while longer-term traders look out for trending markets.
3. Only trade with money you can afford to lose. It is every trader’s aim to be profitable. But the very nature of trading is that the market doesn’t always behave as one would like. So it is important to understand that everyone gets it wrong from time to time, especially when they are starting out. That is why it is so important to carry out strict money management. This involves dividing up your risk capital into small tranches and then use stop losses to reduce your market risk.
4. Develop your own trade ideas and don’t be tempted to take a position on the basis of a tip from someone else. By all means, use tips as the starting point for further investigation, but make sure you do your own homework and that it’s thorough. There are rarely any reliable short-cuts when it comes to successful trading, so try and come up with your own ideas. These can come from carrying out research or looking at developments in your immediate environment.
5. Study charts. Look at how prices move and try to identify patterns. See how charts of liquid markets such as the major stock indices and currency pairs differ from illiquid ones - such as the stock price of small companies. Practice using drawing tools to help identify areas of support and resistance. Popular ones include Andrews’ Pitchfork and Fibonacci Retracements. Use obvious support and resistance levels as bases for entering positions, taking profits and running stop losses.
6. Back up with technical indicators. Drawing tools are vital when it comes to identifying significant trading levels. However, it’s important to back these up with technical indicators which can help you identify such important factors such as changes in momentum, or whether a market is oversold or overbought.
7. Plan your trades. The more you can do to take the emotion out of trading, the better. For this reason most successful traders use rules-based strategies to enter and exit positions. This is particularly important when it comes to choosing stop-losses. You should never open a trade without knowing exactly where to place an appropriate stop loss. And once this stop is in place, you should never move it further away. Discipline in risk management is vital for a successful trader.
8. Don’t chase a market. If you miss your entry level and the market gallops off, don’t go after it. It’s frustrating, but jumping in late can lead to losses. Either wait for a significant correction or let it pass completely. There will always be another trading opportunity so have patience. Don’t be tempted to override your rules for the sake of being in the markets.
9. Don’t add to a losing trade. When a market moves against you it can be very tempting to “double-up” - that is, add to the losing position. The thinking is that with twice the amount riding on the market you can make back unrealised losses twice as quickly. But the reality is that in most cases you will end up losing more than you planned. So don’t double-up, or move your stop further away or do anything to change the trading plan that you put in place BEFORE you started losing money and your emotions kicked in.
10. Never forget: there are two types of capital – monetary and mental. Always plan your trades and use risk management tools to protect both. The last thing you want is sleepless nights because a market is moving against you and you haven’t taken action to limit your potential loss.
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