CFD trading offers many advantages over trading other financial instruments, such as the ability to take short positions and leverage your trades for greater rewards. With this in mind, here are ten tips to help you maximize your profitability when trading CFDs:
- Use money management techniques to control the level of risk attached to each trade. As a rule of thumb, you should never risk more than 10% of your account on each trade. So, if you have a CFD account with £10,000 in it, you should use no more than £1,000 as the initial margin on a trade. If you are successful and manage to double your account to £20,000, you could use £2,000 as initial margin, but if your account fell to £5,000 you could only use £500. It’s all about protecting your bankroll in a proportional way.
Keep an eye on liquidity. You need to check the market volumes before you open a trade, as a lack of liquidity could make it difficult to liquidate a position at the price that you want. Also, if the position goes against you, it may be difficult to get out at the stop loss level that you have set in this situation.- Don’t buck the trends, follow them. If there is momentum behind a trend, there is no point in betting against it, unless you have reason to believe that the trend is nearing the point of exhaustion. Technical analysis tools such as Relative Strength Indicators (RSI) and slow stochastics can be useful to spot when this is happening.
- Make full use of the ability to take short positions. Traders have an inherent bias towards bull markets, and that’s why the majority of CFDs are long positions. However, there is no logic underpinning this trend, as it is just as easy to make money from falling assets as it is with rising ones with CFDs. As a mental exercise to help get rid of this prejudice, imagine that the chart is upside down (or turn your screen upside down if it is convenient), and pretend that you are buying the dips rather than shorting the spikes.
- Examine your losses. Losses are like lessons – expensive ones – so you might as well get the full benefit out of them. By analysing your losses, you can prevent yourself from making the same mistakes time and time again.
Have a Plan. Before you open a trade, make sure that you have a firm trading plan in place, as this will prevent your emotions from taking over the decision making process. Establish your entry and exit points, and your profit targets, and only make minor changes to these during the session if you have good reason to do so. Whatever your plan, you need to stick to it fairly rigidly if you want to achieve your long-term objectives.- Don’t be afraid to lose money. This is part and parcel of any form of trading, and there is no way to avoid it. What you need to strive for is to make your losses relatively smaller than your gains. Many of the most successful traders make more losses than gains – it’s just that the gains are big enough to cover several losses. This means not being afraid to admit when you’ve been wrong, and close losing positions quickly. You have to be prepared to accept lots of small losses, and also be patient with your gains.
- Take a break. A few bad losses in a row can trigger an emotional reaction, which is the last thing you need when you’re trading, and it could also indicate that market conditions are unsuited to your strategy. When this happens, close your positions and take some time to recharge your batteries and reflect on your mistakes.
- Make hay while the sun shines. If there is a sudden leap in the profitability of one of your trades, and you can’t see an obvious reason for it, then you should be quick to take the profit before the correction. This happens more often than you might think, and you need to be on the ball in order to take advantage of it.
- Set trading limits. When things are going well, the adrenaline rush can lead to open more positions than you have the time to research fully. By the same token, if you are losing money, you might end up doing the same in an attempt to quickly claw back your losses. As a rule, the more time you spend researching your trades, the less likely it is that you’ll call it wrong. Set yourself a sensible trading limit, such as one or two positions per day, and stick to it.
Keep an eye on liquidity. You need to check the market volumes before you open a trade, as a lack of liquidity could make it difficult to liquidate a position at the price that you want. Also, if the position goes against you, it may be difficult to get out at the stop loss level that you have set in this situation.
Have a Plan. Before you open a trade, make sure that you have a firm trading plan in place, as this will prevent your emotions from taking over the decision making process. Establish your entry and exit points, and your profit targets, and only make minor changes to these during the session if you have good reason to do so. Whatever your plan, you need to stick to it fairly rigidly if you want to achieve your long-term objectives.
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