10 CFD Trading Tips To Remember

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10 CFD Trading Tips To Remember

Trading Contracts for Difference, more commonly known as CFDs, is an exciting financial product which is popular amongst experienced traders. With CFDs, you can benefit from the price movement of the underlying asset, without having to own and store it. If you are planning to start trading CFDs it is important that you first understand the basics. Once you have those covered, be sure to follow these tips that can help improve your success rate.

1. Start with a Demo Account

Amongst the best online CFD brokers, you will find that the majority offer free demo accounts. These accounts allow you to experience the platform’s full functions without risking any of your money. Similarly, you can never expect to make money using demo accounts, but they can help you develop a strategy and get used to the platform.

Plus500 allows you the option to open a demo account with a very short registration. Due to the high risk involved with trading CFD, it is important that you are able to afford the potential loss of your investment. 76.4% of retail investor accounts on Plus500 have lost money.

2. Use Stop Orders

Before you open a position, set both upward and downward limits. By doing this, once the set value is reached, your position is automatically closed. While this might seem counter-intuitive, especially if the asset continues to move in the direction you predicted, setting automatic limits lowers the risk of emotional trading. Stop-loss orders, in particular, are extremely useful, as they prevent you from losing all your investment capital.

3. Keep Learning

Even though you might have built up an enviable investment portfolio and can boast years of successful experience, you have never learnt enough. The CFD market is constantly changing, with new platforms and underlying assets. Bitcoin CFDs recently became popular, as did social trading, a concept pioneered by eToro.

By understanding market graphs and developing your trading skills you can decrease potential losses. Nevertheless, CFDs remain a high-risk trading product. 76% of retail investor accounts registered with eToro have registered losses over a period of time.

4. Setting Leverage and Trade Positions

While leverage may seem like free money, you need to understand that it is, in fact, a loan that you will have to pay back, even if the asset doesn’t perform as you planned. It is better to seek smaller leveraging as this limits your risk exposure.

If you cannot lower your leverage, another alternative is to lower your trade position. For example, imagine that you planned to invest €5,000 in Share A with leverage 1:10. Your broker doesn’t allow you to change the leverage, but you didn’t wish to expose yourself to more than €5,000. As a solution, you should only purchase €500 worth of shares.

5. Look for Consistency

Most investors who try and make it big with one single investment normally end up losing their money. You should focus on making multiple, smaller investments, and seek to turn a small but decent profit.

Plan your investment strategy beforehand, once you have calculated all your trading costs. This should give you a minimum percentage value increase required for you to break even. You should only seek to add between 5% to 10% to this value, before closing your position. This should give you a minimum percentage value increase required for you to break even. You should only seek to add between 5% to 10% to this value, before closing your position.

6. Don’t Chase a Loss

If a trade has not gone to plan, don’t overtrade to try and recoup your losses. As long as you haven’t exposed yourself to unaffordable risk, you should be able to manage the loss. Remember to use limits and to keep emotions out of trading. Your decisions should be based on logic, reason, and strategy. Tomorrow really is another day.

7. Diversify your Investment

Based on your research and experience you will develop gut feelings and hunches. While it can be beneficial to follow these, you should never invest all your funds on the same underlying asset. Look for trading brokers such as IQOption which offer a variety of assets, ranging from forex and stocks to cryptocurrency and options.

Even diversification strategies need to be well-planned. Due to the high-risk nature of the trading product, 77% of retail investors with IQOption have lost money when trading CFDs on the platform.

8. Sometimes Waiting is Better

Typically, for you to start seeing a return on your CFD investment you need to have a minimum overall performance of 60% successful trades and 40% unsuccessful trades. Sometimes, the best way to achieve this result is by waiting for the right time. Markets can be slow to react, and sometimes you could be slow to react to them. Be patient when trading, especially if you feel that you’ve missed a significant movement. You will certainly have other opportunities in the near future.

9. Monitor your Investment

CFDs tend to be highly volatile, so it is recommended that you follow their progress closely. Limits can step in and execute instructions when you’re not around, but you should not simply rely on them, because errors do occur. Price-gapping might also deactivate any limits altogether.

You might also need to close your positions daily, so as not to incur overnight charges. Furthermore, you need to be aware of margin calls, which are more common in CFDs, in order to fund your account or risk losing your invested funds.

10. Choosing the Right CFD Broker

While the competition between CFD brokers is fierce, there is a handful which has shown to be reliable, reputable, and generally superior. However, not all of these brokers might match your needs and trading strategy in the same way.

One of the most important factors when deciding on an online CFD broker is fees. Choose a broker with high fees and you could easily lose the majority of your trading profits. Trading 212 is an example of a broker which offers low trading fees and is ideal for those just starting out trading CFDs. 80% of retail accounts on this platform have registered losses when trading CFDs.

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