How to Trade CFDs?

Contract of Difference, more commonly known as CFD, is an agreement where two parties decide to exchange the difference between the closing and opening price of a contract. When trading CFDs, you are basically dealing with derivative products. This allows you to trade on the live movement of market prices without having to own the underlying asset. All you have to do is to speculate about the direction of price movement, i.e. whether it’s going to rise or fall. If you decide to go "short", you will benefit from the falling market prices and if you decide to go long, you will benefit from rising market prices. Before you start to trade CFD however, there are some things you need to know.

Use a Strategy

One of the most common mistakes traders make with CFD trading is relying on a hunch which can result in huge losses. Even if you are a novice trader, you should use the experience of other traders as an example when it comes to making successful trading strategies. It is important you make all the decisions after you have carefully analyzed calling trends, spotting patterns and market moves.

Also, keep in mind that a single strategy might not work for two different people. In order to come up with a winning strategy, you have to consider your own goals, your investment needs and your risk-taking ability first. Even then, there are chances your strategy might fail initially due to lack of practice. To avoid such a situation, it is important you first master your strategy using demo accounts which offer CFD trading.

Keep Your Emotions Out of It

When trading CFDs, the market is unpredictable and might shock you at times with unexpected trends. In such instances, staying disciplined and keeping your emotions in check is important. If you have incurred a loss, don’t try to make up for it by investing more money than you planned. Take the losses as a natural part of your trading process and deal with them patiently. However, if you are experiencing a string of losses, you might need to review your trading strategy considering the new micro- and macro-economic factors.

Don’t Stop Diversifying

When the time is good to trade CFD, you can make a lot of profit, which often makes investors act carelessly. However, when the market is bad, you can lose much more than you have gained in a short time. Therefore, it’s important that you diversify your portfolio even if you find CFDs more profitable at a specific time. Also, don’t invest more than 2% of your capital on a single CFD at any given time. Here too, you need to diversify your trade as much as possible, across industries and companies.

Set Limits before You Start Trading

Before you get started with trading, it’s important you set some limits for yourself. You should decide your entry and exit points and stick to them even if things are going slightly unexpectedly. Also select a stop loss level when you’d get out of the market. It’s important you stick to these limits in all cases so you can get a clear picture of how your trading strategy is performing.

If you are careful with trading CFDs, you can make sufficient profits provided you make and follow a good strategy.

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