10 CFD trading tips for rookies
CFD stands for Contract for Difference, and it is a type of financial derivative that allows you to speculate on market price movements without having to purchase or own any asset. When trading CFDs, you either go long or short, which means to buy or sell, respectively.
For example, if you think a stock is going to appreciate, you will purchase a CFD going long. If you believe a stock will depreciate, you will do the opposite and purchase a CFD going short. If your predictions are correct, you will make a profit once the position is closed.
CFDs have no expiry dates, so if you want to close a position, you will have to purchase another trade that goes against the first one. If you bought a contract to go long on a stock, you will have to buy another one to go short on the same stock in the same amount. The difference in the contract prices is the difference that you earn or lose.
Saxo is one of the many international banks with branches in the MENA region that offers CFD trading. If you are interested in getting started, you can click on the link to learn more.
10 CFD trading tips for rookies
If you are just starting out trading financial derivatives, CFDs are a good place to start due to their relative simplicity amongst other products, such as options and futures. Below are 10 tips on how you can make the most of your CFD trades.
1. Educate yourself on CFD trading
The most important thing to do, of course, is to educate yourself on how CFD trading works. You should pay attention to how CFD providers price their contracts, and you should make sure you understand what a contract consists of. This allows you to open and close positions much more smoothly.
2. Use risk management techniques
Next, you should learn (and apply) risk management techniques when trading. Know what stop-loss orders are, as it is one of the most useful CFD trading tips out there. A stop-loss order can help you cut your losses automatically if the market goes against your predictions. This can help limit your downside hugely, especially if you are not someone who is monitoring the markets all the time. (Ideally, you should be, but you may have other commitments.)
3. Choose a suitable broker
You should also think about the kind of broker you are trading with and how their fee structures, account types, and policies help you. Many people do not put too much thought into choosing a broker, but you really should. Consider the assets you can speculate on, and the broker’s spreads. The tighter the spreads, the better in CFD trading, and not all brokers will have the same spreads. Therefore, it is incredibly important to do your research.
4. Don’t go overboard with leverage
Next is to limit your use of leverage. For some, it may seem strange. Why limit leverage, when it is what can potentially earn you huge profits? The truth is that markets are unpredictable, and you can never truly predict where prices will head. This is especially true if you are a CFD rookie.
Leverage can produce great gains, but it can also cause you to suffer huge losses. If you use high leverage, even a very small move in the markets against your predictions may force you out of your position. Your broker will issue to you a ‘margin call’, which is when you need to provide more funds to continue keeping your position open. In these cases, even when the market does bounce back, you may not be around to benefit from it.
5. Learn about the asset you want to speculate on
The next tip you should know about is also related to knowledge. Specifically, how much you know about the asset you are speculating on. Many traders get caught up in learning the complexities of CFD trading that they forget to educate themselves about the asset they want to speculate on. If this is a stock, you should learn what drives the stock price, how its company management and operations are doing, and learn about its previous price patterns. If this is a currency, learn about the country’s GDP, interest rates, and inflation.
6. Hone only one or two trading strategies
You should always have a trading strategy, but it is important to stick to one or two at most. Many beginner traders believe that you must be well-versed in a library of strategies to be considered a true trader. However, that is not the case. In fact, it is much better to be an expert in one or two strategies and grow your winning streak that way, than to be a jack of all trades and not sharpen your skills in most of them.
7. Do not overtrade
When the markets are doing well, there is a tendency to overtrade, hoping to make as many profits as possible. However, that is a bad idea. Trading requires consistent monitoring of your positions, and it requires attention. Additionally, markets may reverse their trends at any time, and it may become difficult for you to recuperate from the excessive losses you experience.
Even if the markets are doing well, you should open positions that you can handle, and not many more than that. Remember that it is much better to miss out on an opportunity than to make a mistake, as more opportunities will come.
8. Pay attention to your budget
When trading, it is more important than ever to pay attention to how much money you are allocating your money to.
Some traders believe that you should never open a position that is more than 2% of your overall funds. Others believe in a different number – 1%, 1.5%, or 3%. What percentage you set depends on what you are comfortable with, but you should be consistent with your budget. This way, you ensure that you never put more money than you can afford to at risk.
9. Establish your trading goals
Another tip that CFD traders should keep in mind is related to trading goals. Before you trade, think about what you want to achieve. Do you want to make some extra money to supplement your primary income? Or perhaps you want to hone your trading skills over time. Whatever your goals are, you should set them clearly.
Proper goal setting can lead to more conscientious trading, as you will be less inclined to overtrade or panic-trade. You should also make sure your goals are realistic and match your ability level. Remember that big gains do not happen overnight. You can always adjust your goals when you are more confident in your abilities.
10. Diversify your portfolio
Finally, CFD traders should remember to diversify their portfolio when trading, by speculating on instruments from different product types. Alternatively, you can also seek to diversify your portfolio by investing in different industries.
For example, if you are a Stock CFD trader, you may want to trade CFDs on US healthcare stocks, Asian manufacturing stocks, and perhaps on MENA technology stocks. This can help you create a much more well-rounded portfolio, lowering the risk of experiencing huge losses should stocks in one sector depreciate.
The bottom line
CFD trading can potentially be a lucrative way to make profits. However, as a rookie trader, you should ensure you know what you are doing before attempting to dive in. This means reading up on the markets, the contracts, and paying attention to your trading plans, budgets, and goals. With time, you can hone your trading skills and take more on in the world of trading.
