Contracts for Difference or CFDs have become increasingly popular amongst traders in recent years. They present traders with a new and cheaper way of trading indices, stocks, currencies, and commodities minus the need for a huge capital to begin.
Most people love trading CFDs because they are not required to own the underlying assets they are interested in trading. CFD trading uses leverage and margins offered by brokers. This makes it possible for players to purchase market positions with less than they would need to actually own the asset and still manage to enjoy the full benefits when the market moves in their favor.
If you are just getting started on CFD trading, it is important to learn the best tips and tricks to ensure you make the most of your trading strategy. Here are timely tips that will help you get started on trading CFDs.
Choose a regulated broker
As a beginner in CFD trading, you need to ensure you can trade with peace of mind. This starts with choosing a regulated CFD broker. Working with a regulated broker guarantees the safety of your funds on a trading platform. It also means that they are qualified to offer guidance and learning resources for trading.
Some of the features offered by the best-regulated brokers include:
- License from a coveted financial regulatory body, like the ASIC, FCA or ESMA
- Range of financial instruments
- State-of-the-art trading platforms
- ECN pricing
- Multiple trading tools
- Knowledge resources
- Reputed liquidity providers
Once you have a reliable CFD broker, it is advisable to first practice your trading on a demo account. This gives you room to make mistakes and try different strategies without risking real money.
Educate yourself on derivatives products
Derivatives are financial products that promote market efficiency and allow traders to access assets that would have otherwise been difficult to acquire. While they are benefits, derivatives come with a lot of volatility.
Before you can become an active trader, it is important to understand how the market works while understanding what different terms mean. As a beginner trader, you need to be well versed with terms like margin, going long and short, lot size, variation margin, slippage, take profit, stop loss, and settlement date.
Trade what you are familiar with
The CFD market presents a wide range of CFDs markets you can participate in. while this may be tempting, you need to avoid jumping into unfamiliar assets as this can burn a hole in your capital. As a new CFD trader, it is better to pick a few CFDs that represent markets you are already familiar with. This way, you can trade in familiar markets while building your confidence. With time, you will be able to try your hand on more diverse portfolios.
Learn risk management rules
For your CFD trading to be profitable, you need to have a risk management plan in place. This helps you to mitigate risks by learning your risk/reward tolerance before entering a position. Money management is an important part of CFD trading as this helps you to know how to navigate loss spells and recover when you have your winning streak.
As a rule of thumb, any trader willing to lose $200 on a trade should have a bankroll of not less than $7000. This way, you are able to increase your position size when the market is moving in your favor. As a trader, you should also limit open positions to three at a time. In CFD trading, one major swing in the wrong direction can quickly wipe out your capital, making it important to monitor your positions actively.
When trading CFDs, you need to learn to access losses as part of your everyday trading activity; even the best traders suffer losing streaks. Your main goal should be recording more net gains than losses.
Trading CFDs is not different from most other types of trading. The trick is tilting the odds in your favor while using a solid trading strategy to have a market edge. The best way to ensure you invest in potentially profitable CFDs is to follow trends using indicators. In CFD trading, chance favors the prepared, and the only way to prepare is to have the right numbers aiding in your trading decision-making.
The bottom line
Successful CFD traders are not made overnight. Just like any other trade, it takes persistence and patience to master the market. With the tips in this article, you will have an easier time getting started on trading CFDs.