CFD trading strategies for beginners
The benefits of CFDs have helped them gain popularity. There are issues with finding a suitable strategy for beginners. In order to help you understand the product better, we have compiled 10 golden rules of CFD trading.
1. Develop your knowledge of CFDs
It’s important that you understand what CFDs are and how they work before trading them.
CFD is a derivatives product that allows you to speculate on a range of global markets without having to own the underlying asset. You can take a position on rising and falling markets, if you predict the price will fall or rise. A margin is a small deposit that can be put down to gain access to a position.
It’s important to remember that your profit and loss are calculated on the full size of your position, so it’s important to remember that leverage can lead to magnified losses, including losses that exceed deposits for individual positions.
2. Build a trading plan
Successful trading involves knowledge about yourself and your trading goals. A trading plan gives you a clear path to follow when it comes to trading. It helps to shape your behaviour and avoid making decisions based on emotions.
The most important aspects of your trading plan are motivation, time commitment, trading goals, attitude to risk, and capital risk management.
Your plan can be based on someone else’s plan, but you should always keep in mind your own goals and risk appetite.
3. Stick to your CFD trading strategy
A trading strategy includes a methodology for entering and exiting trades as well as the tools and indicators that you might use. If you want to spend a lot of time monitoring the markets, your strategy will be different.
Day trading swing trading is one of the different styles that you can use. It’s important to stick to your trading strategy, as trading based on the parameters you have set will make you less tempted to trade out of fear or greed.
It’s crucial to know when your trading strategy isn’t working. Keeping a record of your winning and losing trades is one way to achieve this.
4. Analyse the markets to time your trades
You need to decide what type of analysis you will use to identify entry and exit points in the market, when you are building your trading strategy. Technical and fundamental analysis are the two types of analysis used by traders.
External events and influences are the focus of fundamental analysis. Technical analysis attempts to predict the future direction of a market.
It is normal to combine the two forms of analysis. You need to decide what type of analysis you will use to identify entry and exit points in the market, when you are building your trading strategy.
Technical and fundamental analysis are the two types of analysis used by traders.
5. Make sure you understand your total position size
The total market exposure is your position size. You should consider the amount of risk you are willing to take when opening a new position. Remember, how much money you can lose is how much capital you need to risk on each trade.
Your total position size will always be bigger than your initial deposit, and you could lose more than you commit to a single trade. One way to manage your risk is to only risk a small percentage of your capital on a single trade.
6. Manage your risk with stops and limits
Risk can be managed by attaching stops and limits to a position. These can be used to help protect your capital. A stop-loss order is an instruction to your broker to close your trade at a less favorable price than the current market price. You have to set your stop-loss based on how much money you are prepared to lose. The limit close order can be placed at a level that is more favorable than the current market price. The purpose of closing your trade is to protect your capital from market movements.
7. Start small and diversify your trading over time
Start small as you make your way through the trading world. It is important to focus on markets that you already know or have an interest in because there are thousands of markets to choose from.
You can begin to spread your exposure across asset classes once you have more faith in your strategy. Gaining access to declining markets as well as rising ones is possible with the help of CFDs.
8. Monitor your open positions
It’s important to review your positions even if you have stops and limits. This will help you identify issues quickly and prompt you to act. To keep your position open, you have to have enough capital in your account to cover the maintenance margin.
If you don’t top up your account, you could be placed on margin call and your position could be closed. You can download a trading app to keep an eye on your positions on the go.
You can access a range of trading apps specifically designed for mobile and tablet devices, and get price alert sent directly to you whenever there is a significant market movement.
9. Never add to a losing trade
No matter how experienced you are, you will always face losing trades.
How trader respond to losses is what makes them successful.
The rule is to remain focused and not act on greed.
When it’s time to cut your losses, you’ll learn over time.
10. Practise trading with a demo account
If you don’t feel ready to trade on live markets, opening a demo account and executing trades with virtual funds is a great way to test your trading plan.
You can experience live markets for free with a demo account. During your time in the demo account, make sure that you understand the financial terms used and the markets that you have access to.
To build a stronger foundation of knowledge, you can use trading courses. You can open a live account once you build up your confidence.
Using the golden rules of CFD trading
Investing in time to build your knowledge can give you an advantage and reduce your risk.
Finding your perfect trading strategy is an ongoing process that should be tailored to your trading goals and personality. Even the most experienced traders can learn more.
If you stick to the golden rules, you will be well on your way to becoming a successful trader.
Frequently Asked Questions
What is CFD trading?
CFD stands for contracts for difference – a derivative product that enables you to speculate on a range of global markets such as forex, commodities, indices and shares, without having to own the underlying asset.
What are the benefits of CFDs?
This means that you can take a position on rising and falling markets – you would go short (sell) if you predict the price will fall or go long (buy) if you predict the price will rise.
What is a Margin?
CFDs are a leveraged product, which means that you can gain access to a position by putting down a small deposit, known as a margin.
What is a trading plan?
A trading plan provides you with a clear path on how, what, when and why you should trade.
What are the key aspects of a trading plan?
These are the most important aspects that should be covered in your trading plan: Motivation Time commitment Trading goals Attitude to risk Available capital Risk management strategies Markets to trade Trading strategy Record keeping Each trading plan should be unique to the individual.
What should I do?
Although your plan can be based on someone else’s, you should always adapt it to your own aims and risk appetite.
What type of analysis do you use?
There are two types of analysis that traders use: technical and fundamental.
What is technical analysis?
While technical analysis attempts to predict the future direction of a market by analysing historical price charts.
What is your position size?
Your position size is the total market exposure of your trade.
What are the risks?
Remember, CFD trading is leveraged, so your total position size will always be significantly more than your initial deposit, and you could lose more than you commit to a single trade.
- There’s plenty of opportunity because there is always at least one stock that moves more than 20% each day.
- When it comes to a single trade, savvy traders usually don’t risk more than 1% of their account balance.