Contract for Difference (CFDs) are complex financial instruments that should be approached with a great deal of care. If you are new to financial trading in general, it is best to be familiar with simpler instruments such as stocks and bonds before getting into CFDs. Nonetheless, anyone new to CFD trading should keep the following tips in mind in order to minimize your risk-not only the risk that comes with trading in general but the added risk that comes with lack of experience.
Trade with small amounts
When you are just starting out, you don’t want to trade with all you have. Rather, start with what you can comfortably afford to lose, because as a new trader you will inevitably make mistakes. In CFD trading, losses can exceed the amount you initially deposit so make sure you take calculated risks.
Make informed trading decisions
When observing the depreciation and appreciation of a contract price, avoid simply executing a trade out of impulse. Whatever you do, it must be based on information you have gathered and carefully analysed. Trading on impulse usually ends in losses and it does not help your portfolio in the long run.
Take a course
It is also a great idea to take part in the online, or physical trading courses provided by your broker. In addition to helping you learn fundamental and advanced techniques and strategies, some providers such as CMC Markets also do hands on sessions with their market analysts.
Know when to enter and exit the market
After having done your research, you should be comfortable with the price at which you are entering. You should also be clear about when you plan to sell. This is where discipline comes in. Regardless of where the market goes, you should be able to stand your ground and trade when the time is right. Most novice traders bail out at the first sign of trouble, but an experienced trader always has confidence in their trading decisions.
Make use of stop losses
Stop losses are effective but little used trading tools that are available to any investor. Stop losses also ensure that you exit at acceptable prices, rather than hold on to false hope that the price will rise again. Once again, discipline is important. You should cut your losses as quickly as possible and preserve your capital.
Make use of Charts
Charts are a sophisticated way to observe market trends. The Simple Moving Average based on 100 days of trading is a good way to guess where the market will be going. However you should not rely solely on this to make trading decisions. In addition to the charts, you should also have data on other aspects of the market.
Buy into strong sectors
When selecting a CFD, do thorough research on the sector to which the underlying instrument represents. If mining is showing strong growth then you should purchase a CFD that mirrors the mining sector. If you are confident in the performance of the sector then delay cashing in so that you can maximise your profits. As with losses, discipline is crucial with gains. You don’t want to trade too soon or you might miss out on potentially larger profits. Knowledge of the market and confidence in your judgement helps you to stick to your plan.