In recent years, Contracts for Difference have gained enormous popularity among traders all over the world, and the interest is still growing. However, in choosing CFDs, many newbies still don’t realise exactly what they are doing and continue making some crucial mistakes.
Let’s see, how we can close the knowledge gap and learn some major CFD trading rules on how to do it successfully, or at least, what to start with.
Rule #1. Understand what a CFD is
I’m afraid to sound like a Captain Obvious, but in order to start trading, like in any other business, you should exactly understand WHAT you’re trading and HOW to do it right.
A , or a CFD, denotes an agreement between a trader and a broker to trade on the difference, speculating on the instrument’s price fluctuations. The main difference of CFD trading is that you don’t actually buy or sell the underlying asset (a share, commodity, index, or cryptocurrency).
To cut a long story short, watch our “What is a CFD” video and use it as a short guide to start:
Rule #2. Control your CFD leverage
One of the major advantages of trading CFDs is that you don’t need to pay the full cost of a chosen asset. You can trade on margin, which means your broker leverages your capital for you to trade a particular instrument. In this case you have to pay just a certain percentage (or margin) of its full value.
Traders may prefer to enter trades that may at least double their money. Trading CFDs makes the situation even more attractive, providing much better opportunities and offering leverage.
Sounds too good to be true? While the situation turns in your favour, it can work out well for profits. However, greater leverage presupposes greater risks. So, you’d better start small with your CFD leverage and keep your total exposure relatively low according to your capital base.
Rule #3. Religiously use CFD stops
Stop losses. An absolute must-have, in our case, a must-put.
I’m sure you’ve heard that are an effective way to cut your losses and reduce trading risks in case the market price goes against you.
There are two major reasons, why stop-losses are so popular: to save you from significant losses or to lock in gains. When used effectively, stop-losses may help you to take profits when your positions are favourable. Also, they can perfectly cut your losses short, when the market’s trend changes its direction against you.
Properly set, stop-losses become a trader’s ‘best friends’. Take a few minutes to watch a short guide on how to set a stop-loss using the ATR method:
Rule #4. Make a realistic plan and stick to it
It’s always easier to go somewhere, if you can clearly imagine what to expect when you reach the destination. Starting your CFD trading journey, try to identify your primary goals and gradually fulfil your trading plan.
A comprehensive investment plan will help you keep your head clear and eventually achieve what you want. I’m sure you’ll find people in the investment world, who made huge money just thanks to their gut feeling. However, these people are an absolute minority.
The vast majority of people, who enter trading without a proper plan end up losing money. Don’t join them. Elaborate your entry strategy, define your money management strategy, keep your trading journal, learn from your mistakes and track every step you make.
Rule #5. Stay calm and keep going (aka never give up!)
Trading is always risky. Risk makes our heart beat stronger, drives the feeling of excitement and adventure, fear and frustration.
Your task is to keep your head cool and stick to your plan. Never let your emotions rule your trades. Biased trading behaviour may bring significant losses, so your challenge is to be disciplined.
There are no wins without a loss. Be ready and keep a positive mind-set. Use our CFD trading tips and become a successful trader.