How to Trade CFD?
So you are looking to get CFD trading tips and to apply to a live or demo account? Well, you are in the right place as we will provide you some guidance. Be warned tough that unfortunately if you are looking for the next Holy Grail then you won’t be able to find it here. What you will find tough is a solid trading foundation that you can use to trade CFDs but also forex, Dow Jones and many other global markets.
Our experts have focused in providing you with some straight and efficient trading tools and strategies that can be applied to any financial market and CFDs of course. Before we deep dive into CFD trading tips let’s first go through what are CFDs
What is CFD Trading?
If you are a beginner trader you might be asking this question at this point: ‘What is CFD trading?’
Simply speaking Contracts for Difference CFDs trading is the ability to speculate on the rise and fall of financial assets. This means that with CFD trading you can trade stocks, Forex, Indices and Commodities. In fact the majority of CFD brokers allow you to access more than 10,000 financial assets from all over the world.
So with CFD Trading you will be trading financial assets like you would do in the share market but the main difference is that you only need a small capital to get going. The reason is CFD providers allow you to trade on margin via their trading platform so that you can speculate on market moves and hopefully lock in a profit. Another important thing to remember about CFD is that you will never own the underlying asset.
So now that we have refreshed the CFD basics let’s look at the top CFD trading tips.
1. Preserve Precious Capital – PPC
Preserving capital is very important for new traders. Don’t start with the idea that you are looking to make money. Simply focus as much as you can in not losing any. Every pound you have is really precious and you should fight with everything you have to avoid that it will go in someone’s else pocket. After all what is the point of having the best CFD trading strategy if you have lost all your cash? So remember your first goal is to keep your losses small.
2. Ensure you have an edge
In the long run you need to have an edge in the market or you are going to end up being the losing one. Poker players tend to use this sentence: ‘if you look around the table and you can’t see who the fish is, it’s you’. In trading you will find lots of professionals who are just focused in taking your money away from you. How can you fight this? You need to be very diligent, disciplined and confident to get an edge in the markets. If you work hard and stay focus you have a good chance of improving your financial situation.
But what is a trading edge?
- Your money management plan
- Test entry techniques to improve results
- Ability not to panic and to wait for the right opportunities
- NOT making many mistakes and learn from the ones you will make
- Ability to read and trade news and react quickly when news happens
- Your skill could be adding to winning positions and maximising a profitable trade
The list above is just to give you some quick examples. Work hard to improve your skills: enhance your strengths and minimise your weaknesses.
3. Control your CFD leverage
CFD leverage isa very powerful tool especially when things are going in the right direction. It will make you a lot more money without having to put upfront capital. But remember that the loss is always around the corner. There are endless stories of traders who managed to turn a small account into a big account for then give all the winnings back. Remember you are not in a rollercoasters here so be well aware of the risks that are involved with every CFD position you decide to take.
In regards to leverage our suggestion is that you start small and keep your total exposure low compared with your capital base. If you are a beginner trader, trade from zero leverage up to a maximum of 3 times your account size. Anything more and you will be asking for trouble. Also if you are a day trader trading forex on the short term then the leverage should be very small indeed.
4. Use CFD stops religiously
Stop losses are vital. They will allow you to minimise your loss which is the CFD Tip number 1: you have to preserve your capital first. Before entering any CFD trade you need to have a clear CFD stop assigned to it. You should identify the stops before going into live trading.
As you will be able to see emotions can take over when you are in a falling market. Emotions lead to panic and panic leads to mistakes. A typical beginner reaction is to believe that your stock is going to head in your direction miraculously. It is probably not going to happen so ‘hoping’ is not going to bring you success. You need to define a CFD Stop outside of market hours and than diligently follow it. Most of the time you might want to carry on a technical analysis to determine the best stop loss points. Fundamental analysis won’t be too useful if you are trading short term.
5. Establish clearly defined, realistic trading goals
‘All I want is to make a £1,000 a week trading with my £10,000. Is that possible right?’. The first thing you should consider is that your 1st major goal with your CFD trading account is to keep it intact (remember 1st rule) and also stay in the game for the 1st year. You need to survive the ‘beginner phase’ if you ware hoping to make a decent living buying and selling financial instruments.
Here is an example of things you should consider:
- Identify what it is you want
- Focus on it daily
- Kill all distractions that move you away from your goal
- Gently bring yourself back to point 2
6. Keep a CFD trading or Share trading journal
A CFD trading journal will allow you to keep track of the trades you have made. It will give you visibility of the reasons why you have entered or exited a trade. It will be the most powerful way to learn you have in your trading career. This is because it is done in a real trading environment. By analysing your actions you will see certain patterns emerging: some will be clear mistakes to correct while others will be good decisions to preserve.
Those are the items you should record in your CFD trading journal:
- Instruments traded
- Time trade entered or exited
- Reasons for the trade – Technical, fundamental, etc
- Trading was profitable or not?
- Followed Trading rules?
- Out of 10 what is the score of the trade
- Lessons learned?
- Include a chart showing proposed entry, stop and profit target.
7. Have a well-defined trading plan
Having a plan is very important for everything you do and even more for trading:
- Entry Strategy – Test hundreds of entry set ups. Prove to yourself that it works.
- Money management strategy – Ensure that you won’t risk too much capital in every trade and ensure a good bankroll management
- In profit stop loss – You need to make sure you have a Stop Loss when in profit as things can turn
- Initial stop loss – For those trading the fixed percentage risk per trade money management model, you will need to determine your stop loss
- Record keeping strategy – Keep your trading journal updated with results
- Keep the economic calendar close to you – you will need to keen an eye on events that can impact trading daily.
The trading plan is important so that you stay calm during the heat of the trading moments. It will increase your confidence as you will know you. have an edge even if you just had a few losses in a row.
8. Be Disciplined
Now that you have your own CFD trading plan you need to be disciplined and stick to it. Remember how long you have spent into researching the trading strategies and also that you want to make it long term.
Trust yourself and trust that you have found an edge in the markets. Make sure you stick with your system when times are good and bad. Set up a timeframe to review the system and maybe change it then but until the time ensure you are following the rules that you have set carefully. Be disciplined.
9. Scale in and out of your CFD trades
It is fascinating to see how successful traders are neutral for the majority of the year. That means that they are not making profit, yet they are not losing money. But normally there is a window in any 12 month period of 2-4 months where the profits are well above the average. The thing is that you don’t know when this is going to happen so you need to keep your capital intact (remember tip 1 Preserve Precious Capital) so that you capitalise when the profit comes.
All the best traders have studied how to apply pyramiding techniques and then mastered how to execute it on their trading plan.
10. Keep a positive mindset
It is wrong to come to trading thinking it is life or death. It is important that you have fun and take the time that is needed to learn the important lessons that will make you a successful CFD trader.
Always try to keep a positive attitude. Use positive affirmations on a daily basis and keep your mindset always positive.
If you want to make this year your best trading year ever just take action and create a dedicated plan. There is no time like today.