Top Tips for CFD Trading
CFD trading continues to make waves worldwide. CFD is an abbreviation for contracts for difference. Many people flock towards CFD trading because it’s a less capital-intensive way of trading. CFD trading enables traders to benefit from market movements and price shifts. However, CFD trading is popular because traders can profit without owning the asset in question.
According to Finder, interest in CFD trading increased by 193 percent in 2020. However, FCA, the body regulating the UK CFD market, suggested that 82 percent of clients lose money when trading CFDs.
Since CFD trading is still new, many people don’t know the secrets to success. Hence, we’ve prepared some tips to help traders become more successful with their CFD trading endeavors.
A CFD trader
Top Tips for CFD Trading
Here are our top tips for CFD trading. They include:
Do Your Due Diligence
Many people think CFD trading will be straightforward because they don’t own the underlying assets. However, that’s not the case. If you don’t understand how CFD trading works, you’ll face severe losses. Make sure you understand CFD trading basics. You can use CFDs to trade forex, stocks, and other asset classes. However, to be successful, consider narrowing down a niche or two. Specialize in these niches until you gain experience. For instance, if you’re trading forex CFDs, make sure to learn about currency pairs and the factors influencing forex markets before starting.
Follow a Trading Strategy
You’ll want to create a trading strategy before trading. Like stocks, forex, or any other asset class, you’ll need a trading strategy to follow when trading CFDs. To create a strategy, select your goals first. Also, decide whether you want to day trade or swing trade CFDs. You’ll have to tailor your strategy according to your approach.
CFDs are derivatives. Resultantly, they have an overnight financing cost. These financing costs can affect your capital or bite into it based on the overnight rollover interest. Therefore, if you’re swing trading, your overnight position significantly matters. If holding a long position, your broker will credit the overnight interest to your account. However, if you’re going short, your broker will debit the amount instead. These are some risks to watch out for when you swing trade CFDs.
Likewise, day trading also has its risks. For instance, most CFD day traders end up overtrading, resulting in them losing money due to bad trades.
Use a Demo Account
Before proceeding with live trading, make sure to practice. Demo accounts are an excellent way to gain familiarity with the market with little risk. Most brokers will allow you to use demo accounts for trading. Demo accounts enable you to trade without risking your hard-earned money. You can also use these accounts to test different trading strategies to find one suitable for you. In addition, you can assess your performance in the market before you trade in real-life.
We recommend setting the same budget in your demo account as your investment capital in real life. For instance, if you’re planning to trade with $1000, set $1000 as your budget in your demo account. By doing so, you can evaluate your performance and get an idea of realistic returns.
Limit Leverage
Many traders like to use leverage when CFD trading. Leverage can be beneficial because it enables you to trade more than your investment capital would allow. However, exercise caution when using leverage. Sometimes, traders get stuck in the loop of believing the more, the better. However, that’s not always accurate. Having high leverage can affect you because even the slightest unanticipated price shift could cause you to lose all your money. In CFD trading, leverage levels of 400:1 are not uncommon. However, that’s unnecessarily high leverage. Most UK/EU regulators have imposed a 30:1 leverage limit. New beginners should try to keep their leverage under 10:1.
Know Your Trading Costs
Trading costs aren’t as clear-cut in CFDs because of numerous variables. When trading CFDs, keep an eye on your spread cost. The spread cost represents the difference between the bid and the asking price.
A trader looking at charts
Focus on Risk and Money Management
Many traders have misconceptions about CFD trading being less risky than other types of trading. That’s because they don’t need to purchase the underlying asset to profit from it. Resultantly, they focus chiefly on profits while neglecting risk management. However, that can be disastrous.
Like any other form of trading, CFD trading also requires excellent risk management principles. The Random Walk Theory states markets are unpredictable. You can use fundamental and technical analysis to gauge the market and predict future movements, but they aren’t always accurate.
Hence, managing risk is crucial when trading CFDs. Most experts recommend sticking to the one percent or two percent rule when trading CFDs. Following these rules, you limit the money placed in a single trade. For instance, let’s assume you have $1000 in trading capital. Under the one percent rule, you’ll only invest $10 in a single trade. Doing so helps reduce your trading risk while increasing your trading longevity.
Another way to reduce risk is by using stop-loss orders. Stop-loss orders help you reduce your trading losses. You can place stop-loss orders with your broker. These orders help limit your loss if the market moves in an unfavorable direction. For instance, let’s assume you have bought CFDs for the GBP-USD currency pair at $1.3541. You believe the price will increase to $1.3700. If the currency pair falls, you will lose a significant amount of money. Hence, you can create a stop-loss order with your broker at $1.3500. Once the currency pair price hits this amount, the broker will automatically sell your CFDs and close out your position, preventing you from incurring significant losses.
A person trading stock CFDs
Start CFD Trading with Crystal Ball Markets
If you’re interested in CFDs trading, you’ll need an online CFD broker or an online CFD trading platform. In such an instance, we can assist you. Crystal Ball Markets is one of the best brokers for CFD trading. In addition, we also have tools that aid you with CFD market analysis. Our tools and resources can support your CFD online trades. You can use our platform to invest in indices CFD, cryptocurrency CFDs, or do CFD share trading. Visit our website to learn more. Alternatively, register with us today to get started.