Contracts for differences (CFD) have become popular in the financial markets in the recent past. About 100,000 investors in the UK have used financial spread bets or CFDs in the last year. For those that are starting out, it may be difficult to decide what to place a bet and when to place it. Expertise in CFD trading is built over time.
All you need to do is understand simple but effective strategies to establish a sturdy and growing equity curve with least drawdown. If you are looking to get a solid foundation that will weather all market conditions, here are 5 tips when trading CFDs.
- Establish clearly defined and realistic trading goals
Whether it is at an advanced stage of trading or just starting out, it is important for the trader to have clear goals on what is to be achieved from the trade. These goals could be short-term or long-term; however, it is advisable to have long-term goals broken down into small short-term targets especially at the beginning.
When starting out CFD trading, an almost automatic goal is to keep the account intact and remain in the trade for the first year. Survival is very important especially if you intend to make a sustainable earning from trading CFDs.Write the goals down so that they can serve as a guide while plotting the trading path. Identify what you want and focus on it every day.
It will also help in killing all the distractions such as doubling up or selling off prematurely. They should also include the number of hours to be spent on trading and the times that are most appropriate. Also, touch on important trading aspects such as leverage strategy and levels.
- Prepare a proper trading plan
Just like any other business, it is important to have a plan for the CFD trading. It does not matter if you are a mechanical system or discretionary trader, a sensible plan with proper strategies must be in place. Some of the areas that the plan should address are entry, money management, risk management, in profit stop loss and record keeping strategies. When looking for an entry strategy, test several set ups and then select the one that works.
A money management strategy will guide on how much capital will be put in and if any leverage will be required. A risk management strategy is important in the trading plan to guide the level of risk to allocate to each trade. For instance, for a new trader, the target can be to leverage by about 3 times the current stock level before the end of the first year.
- Keep a CFD trading journal
When in profit, it is important to identify a Stop Loss such as a trailing stop loss. Then keep a record of all the trading statistics for every day. It is actually important to keep a CFD trading journal as a record of reasons for entering or exiting a trade. In the journal, record what was bought or sold and whether it was at a profit or loss, time of the trade, reasons for the trade such as technical, fundamental or tip and a chart to show proposed entry, stop and profit target. This way, it is easy to track progress and market dynamics without forgetting or leaving out anything.
- Avoid trading on impulse or acting on gut feeling
It is actually common for traders to say that they have a gut feeling that stocks from a particular company will go up or fall. Sometimes it may yield results, but in the long run it is too risky to base trading on a gut feeling because it reduces trading to a game of gambling. Often, novice traders look at the chart and decide that the price is at its lowest and cannot go any worse. They then decide to go long – buy because in their opinion the price cannot go any lower.
Such mistakes can be quite costly because of placing a bet against the trend without evidence that there will be a change. It is important that the trader has a reason for a trade and not act on impulse. Long-term and remarkable success in CFD trading can only be attained through brand and market research, together with industry knowledge on future predictions on the performance of a given sector.
Diversification is one of the most effective strategies for risk mitigation. CFD trading allows traders to engage in different industries to their advantage. Multiple pots in different industries will help you mitigate risks in one industry with gains in another.
When stock in one industry goes down, it is highly likely that other stocks in the same sector will go the same path. In the case of a major hit to your portfolio, diversified portfolio allows you to keep stocks from other industries. When it comes to diversification, it is not just about the industries that you are trading in. It is also about the market analysis strategies.
Do not rely on either fundamental or technical analysis; instead, combine the two for a fresh market approach. For instance, CMC Markets recommends using fundamental analysis to trigger a trade and then applying technical analysis for market entry and execution.
These 5 tips when trading CFDs will guide you to a successful investment curve for your future retirement whether you a new entrant or an established trader.