CFD trading or Contracts for Difference has attracted so much interest lately that it is important to understand the basics of this exciting product before getting too involved.
Here I will show you 3 important tips to protect you and give you some key areas to focus on when making your next CFD trade.
1. Leverage in CFD trading. CFD trading is just a leveraged stock market opportunity that gives you access to greater funds than you could normally get from trading the stock market.
This can be both good and bad, and unfortunately many newcomers to CFD trading think that when trading CFDs everything will turn around because their exchange trading was bad. Unfortunately, nothing could be further from the truth. CFD trading and the use of leverage will only accentuate your stock market losses, so the most important thing is to start small and minimize the leverage used.
A good rule of thumb is when you start out don’t use more than 2-3x the leverage on your account. For example, if you open your account with $10,000, do not trade total positions that exceed $20,000 – $30,000 in total. Perhaps you distribute your packs of 4-6 items at $5,000 each.
Remember that CFD leverage emphasizes your returns and your losses, so it’s wisest to start small at first.
2. Develop a CFD trading plan that suits your personal profile. Developing a solid CFD trading plan is critical to your long-term success. While CFD trading is very similar to trading stocks, you need to tailor your plan to your personal goals.
First, you want to identify the areas where you excel and stick to them. You may be brilliant at picking what the CFD index will do each day, like the Aussie200, or short term swing trading CFDs could be your forte. Whatever you’re good at, stick with it and maximize your opportunities in those areas. More money is wasted when traders try to break into a new market than any other way.
3. Use stops religiously. Stops allow you to protect your worst case scenario by limiting your downside potential (unless the stock gaps are significant). This cannot be overstated when it comes to leveraged products like Contracts for Difference (CFD).
Specifically, I’m talking about a stop loss that limits downside as opposed to a stop used when taking profits. The trick to getting your initial stop right is to place it far enough away that you don’t kick you out too soon, but also not too far away that you don’t lose much if your initial stop is hit.
leverage trading
