12 CFD Trading Tips

CFD Trading Tips & Tricks

It’s been said before that if you want to make $1 million trading then start with 2 million! There really is no magic wand that you can wave to make yourself rich from CFD trading, but you can build a great second income that may even become a primary income if you treat it as a learning journey. Here are 12 tips to get you started:

1. Stop-loss orders

Stop-loss orders are as sensible for CFD traders as seat belts are for drivers. They limit your losses and stop them from falling over a cliff. If we could shout one thing from the rooftops all day then it would be this: always use stop-loss orders.

2. Start off with a demo account

Most account providers are happy to provide you with a demo account. Airline pilots get better using flight simulators before they risk people’s lives in the air, and smart traders use demo accounts to hone their skills in this sometimes-tricky environment. The money is fake but the benefits are real. Practice makes perfect!

3. Research, research, research

Most successful CFD traders usually focus on a fairly narrow area. This is because it’s difficult, if not impossible to be an expert at everything. So the idea is that you find an area of investment where you feel most comfortable and then focus on that. But perhaps even more important than finding your niche is learning the basics. There’s a whole lexicon of terminology involved with CFD trading, and if you don’t understand it before you start then at best it will slow you down and at worst you will make catastrophic mistakes.

4. Limit your leverage

Leverage is one of the things that makes CFD trading so appealing. It puts you in the game for mere fractions of what you pay if you are simply buying assets directly. But it also exposes you to potential losses that can be many times greater than you see with traditional trades. So, as part of your risk management plan, keep leverage within sensible limits, based on your current financial position.

5. Use the correct trade position

Always be clear on your outstanding risk level. If a broker won’t let you reduce the leverage then consider reducing your trade position. For instance, Let’s say you want to hold a $1,000 Microsoft share position, but your broker’s default leverage is 5 and it can’t be reduced to 1. In this situation, simply lower your CFD trade position, so your leveraged position would be $1,000 = 5 * $200.

6. Analyse

Gamblers who feel lucky are fooling themselves, because their emotions cannot help them when they play. In fact, emotions can be a hindrance. The only things that can help you are fundamental analysis and technical analysis, so read widely and read deeply!

7. Formulate a trading strategy

Every trade that you open needs its own trading strategy. You should already know ahead of time where to close both to maximise profit and minimise loss. You can almost role-play in your head what you will do in different situations. Like, what do you do when the underlying price decreases by 4%? You could prepare a table for all kinds of eventualities and use it as a map to guide your actions if and when each of them transpire.

8. Don’t go chasing your losses

Your CFD trading strategy is there for a reason. If your stop loss is set at 9% below the purchase price, then don’t stick with Tesla (for example) because you’ve a good feeling about it. Stop-loss always knows best!

9. Use leverage to Your Advantage

Leverage is borrowing to invest, but obviously if you borrow well beyond your means and your trades don’t turn out as well as expected then you could be on the receiving end of ruinous losses. Leverage can make you feel richer than you really are, and it can also make you poorer than you can afford, so always use it responsibly.

10. The sun can’t shine every day

Even the best investors are not immune from margin calls, so it’s best to make sure that your account is always topped up with enough funds for those rainy days when there’s an unfortunate hole to fill.

11. Diversify

CFD trading can Put you in touch with lots of different markets and assets. Now, I know we said that you should specialise to be successful, but there’s a balance to be struck between specialisation and diversification. That’s because if you put all of your eggs in one basket and things go south then your losses could be pretty monumental. Don’t go long on cryptocurrencies alone (for example) because your exposure would be enormous. Modest trades in a few different markets will see you through.

12. Get a Good CFD Trading Broker

CFD Trading can feel a bit like the Wild West at times, so, make sure that you select a good broker, based on a balance of reputation and price. Don’t be attracted by bargain-basement operators who promise the earth. There’s usually a reason they’re cheap. So many people are willing to share their experiences online these days that there’s really no excuse for not finding a good broker.

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