CFDs are highly popular financial instruments nowadays, especially for experienced traders who have developed their own trading strategies and are confident in achieving their trading objectives. Every form of investment comes along with their own fair share of risks, and hence beginners may find themselves in a rut in their early years of CFD trading. Hence, we have listed below several tips for CFD trading especially if you are new, to prevent any detrimental losses and to keep your head afloat in this highly fluctuating market.
Stop-loss orders allow you to cap the maximum amount that you are comfortable with losing, so as to limit your maximum losses. This is an extremely useful method to prevent yourselves from burning your fingers while trading, allowing you to set aside a comfortable amount that you are prepared to lose in the worst-case scenario. Therefore, make sure that you limit your downside with stop-loss orders. You may also choose to use guaranteed stop-loss orders, especially if you are a beginner. You won’t want to find yourself losing more money than you can manage.
Though you may think that you are fully equipped with the knowledge of how CFD trading should be executed and are ready to try your hand at it, signing up for a demo account before getting yourself into the real deal is highly recommended. Get a demo account before you leap into the CFD trading world, you will be able to test your strategies and abilities out first before risking any real money. This is an effective way for you to determine if CFD trading is really for you before you even risk losing any of your actual assets.
Before you jump into the CFD trading market, it is crucial that you read up as much as possible on how it works to equip you with sufficient knowledge of the investment type. Do your due research and familiarize yourself with the CFD trading basics and the specific investment type. One pro tip is to select a small number of specializations and stick with them as you do your research. You can always expand your specialization once you are comfortable with your current knowledge in the future. Be sure that you are confident before you start dealing with actual money, to prevent yourself from losing unnecessary assets in the market because of your lack of skills and knowledge.
Photo from http://unsplash.com/ by Adam Nowakowski
Always use leverage when you can, and if there is an option to adjust your leverage, do it. You should always consider lowering leverage to a level that you are comfortable with losing. Similar to the stop-loss orders, physically limiting an amount to lose for yourself will help you control your temptations and continue making losses after your monetary threshold.
As some brokers will not permit the lowering of leverage, you can always choose to adjust your trade position instead. A key point to take note is to know your outstanding risk level at any point in time. For example, if you wish to hold a $1000 share position, and the default leverage at your broker in which you cannot amend is 5, you should consider lowering your CFD trade position to $1000 = 5 * $200.
Similar to doing your research, conducting your own analyses on the market that you are considering investing is is highly important. Even though you hear of people who have managed to make significant profits in their investments, the tactics they use may not always guarantee profit and even if you do make use of their strategies, it is not always the case that you will mirror their winnings too. Jumping into something just because you hear others brag about their profits is not recommended, and should not be done without prior analyses. Do your own research and analyze your trades on your own terms to find out if such an investment is suitable for you, and whether or not you are confident in the investment type. Not every form of investment is suitable for every individual.
Having a trading strategy is important before you open each trade and position. Though developing a successful trading strategy will require years of experience and trial-and-error, setting the basics will help you put your investments into perspective. What should your threshold be in the best and worst-case scenario when you close your trade? What will you do if the underlying price increases by 10%? And what if it drops? Coming up with a table like a leverage table may also be useful for you to help you decide quickly and react immediately to the fluctuations of the market.
Photo from http://unsplash.com/ by Campaign Creators
Most of the time when investors start making losses, they end up deviating from their original plan in hopes of recouping their losses. If this situation persists and their goal is not reached, they end up losing even more money than intended and end up in a worse situation than they were in. This not only renders their initial plan ineffective, but it also causes them to lose more money than the amount that they are comfortable with. Hence, committing to your initial strategy is important, instead of getting emotional over your losses and alter your plans just to earn them back.
When you use higher leverage, you will be able to invest more assets than you actually have. Though this can be beneficial for some, others may have it work counter-productively. Traders should always trade responsibly and to avoid situations where the losses that you incur are far more than you can actually afford. CFD trading works on the same principle underlying mortgages—if you take a mortgage that you cannot repay in due time, you end up losing your property altogether. Choose a level of leverage that works for your financial situation and avoid being greedy. You may end up losing all that you have without even realizing it.
You are guaranteed to experience days where your investments will start to crumble down and hence always expect and prepare for the possibility. Ensuring that there is sufficient equity in your accounts is one way to anticipate this, in order to make a smart potential margin call. There will be good and bad days, so always be optimistic but do not allow yourself to be too optimistic such that you end up making too many losses until your wallet goes dry.
Ultimately, go with your gut feel and manage your finances properly. The aim of CFD trading is to make as many profits as you can while keeping your losses at a minimum. Always set aside a monetary threshold for yourself to close your trade before incurring too big a loss. Stick to your initial strategy and avoid being too greedy in hopes of earning back your losses. The aim is to trade smart and know when you should close your account before your bank account balance hits rock bottom. If you are curious to know more about CFD trading, you can find more information on business24-7.