The popularity of CFDs has grown recently, yet traders still don’t know how to use them effectively. When it comes to trading CFDs, there are 10 principles to follow that can help you reduce your risk, increase your return, and become more like a professional trader in the process.
- Cut losses and let profits run
This guideline is probably the leading cause of traders losing money on their trading accounts: they don’t follow it. A succession of modest wins and a handful of catastrophic losses will come from holding on to a losing trade and cashing in on a winning transaction too soon.
- Don’t trade with emotions
An investor who relies only on “gut feel” to make trading choices may sometimes come out on top, but in the long run, he or she is extremely unlikely to become consistently successful. This is why it’s so critical to set trading rules and abide by them at all costs.
- Limit risks by limiting exposure
An investor who makes a wager equal to or more than half of his trading capital on a single transaction is no longer an investor, but a gambler. A trader may protect his trading account from being wiped out by a single occurrence by never putting more than 2% of his available money at risk on a single transaction.
- Use technical and fundamental analysis
A CFD trader who utilizes both fundamental and technical analysis has a higher probability of success than someone who just uses one of the two techniques. You should always utilize fundamental analysis as a trigger and technical analysis as a timing tool when entering a trading position.
- Timing is very important
It’s possible to lose a lot of money even if one is correct about the long-term trend of the market. A ‘trigger’ and at least one confirmation signal will guarantee that this does not happen often.
- Let go of losing trades
Market trend identification is an important skill for every trader. In the absence of such ability, he or she is more likely to add to a losing transaction in the hope that the price would reverse course. Using trend lines is a basic strategy.
A well-diversified portfolio is not guaranteed even if the trader never puts more than 2% of his trading capital at risk in a single CFD transaction. Investing in a variety of oil company shares is one illustration of this. If one company crashes in price, there’s a high chance the others will too.
- Recognize your weaknesses
The psychological component of a trader may make all the difference in the world when it comes to winning or losing. In order to be a successful trader, you must learn to control your emotions such as greed and fear. Trading CFDs according to a strategy and strictly adhering to your capital management plan can help you deal with this issue.
- Always use stop-losses properly
Investing without a stop loss may lead to a rapid and total loss of all your invested capital. When you use stop losses that are set too low, you run the risk of suffering a slow but irreparable loss. Avoid taking unnecessary risks by using stop-loss orders, but let the market “breathe” before making any major decisions.
- Identify risks and rewards
Everyone who trades CFDs should be aware of the risk/reward trade-off. Never engage in a transaction when the possible profit outweighs the potential danger. Consider going long right before a market turns in a range-bound environment. The downside risk here is enormous when weighed against the potential reward from the transaction.