CFD is a Contract for Difference. You don’t actually own the asset, equity or index; instead, you buy or sell a contract on some level of an underlying asset. When you exit the position, your profit/loss will be reflected in your account based on the difference between where you bought it and where it closed.
For any beginner in FX Trading, it’s essential to understand the dynamics of this type of trading before jumping into it. For one thing, trading can get complex very quickly with CFDs. With more complicated securities, multiple factors are considered when determining how much you can make off a trade, including the cost-to-carry on the asset and its dividend yield.
So what does it take to make a success out of CFD Trading?
Know What You’re Getting Into
CFDs are complex instruments and can be challenging to understand for newcomers to trading. Make sure you know how they work before investing any money in them. It may help to read an introduction to CFDs.
Make Sure You Trade with a Reliable Brokerage
One of the most important tips is to ensure you use a reliable brokerage because there may be a difference between a smooth and unprofitable trading experience. When selecting a brokerage, the first thing to do is take a close look at their regulation-if they’re not registered with an organization like ASIC, the chances are high that you’re going to have problems. You can check this here.
Limit Your Leverage
Leveraged trades are a double-edged sword, but if you want to make the most out of every trade, limit yourself to 50% or less on each position since that will keep your losses minimal while potentially increasing your gains.
Practice Before Risking Real Capital
This one is significant if you’re new to online trading in general practice using virtual cash first, so it’s not quite as nerve-wracking when you start risking actual capital.
Do Your Research
It’s one of the most critical tips-while you can research other people’s recommendations, you need to keep in mind that it’s your money and don’t blindly follow the advice of others. After all, nobody knows how much risk you can handle as well as you do.
Keep Calm and Be Patient
It takes time to learn your way around all the intricacies of CFD trading, so remain patient and always look at the bigger picture before making a move. If you’re losing, take a step back and consider why before just jumping right back into action. The market has no obligation to cater to your every whim and needs time to develop.
Set a Stop-Loss and Stick to It
When you’re new to CFD trading, it’s easy to get carried away with your emotions. To not let that happen, it’s essential to set a stop-loss before you even open a position and never deviate from it because the chances are high that if you do, your decision could be based on fear or greed rather than reason.
Use Limit Orders and Stick to Your BPS
If you want to trade CFDs, it’s essential that you only use the financial instruments that are right for you. For example, if you’re interested in trading indices, then put yourself into a position where your potential loss is capped at 100 points of the index instead of having no predetermined limit. Also, always set stop-loss orders and stick with them-this will help reduce the number of unprofitable trades.
Take Your Profits While You Can
Most people have a hard time taking their profits because they’re worried about leaving money on the table. If this describes you, then try setting targets for what price changes would need to occur so that you can sell your CFD early instead of letting it sit in hopes of making even more profit.
Don’t Buy in More than You Can Afford to Lose.
Although investing is always a gamble, it would be wise not to risk any money you can’t afford to lose. It will lower your stress level and allow you to focus on the things that matter.