Before you begin trading Contracts for difference it is important to obtain a few suggestions from the experts to make sure that you do not make many of the expensive errors that newbie traders make. Below are three trading pointers that can help you in your CFD Trading success.
1. Manage your Positions
Repeatedly new traders spend a large amount of time selecting, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it’s the exit that will determine whether a trade has been profitable or not.
It’s human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the anticipation that prices will move in the correct direction and decrease losses or even turn them into profitable trades.
Lots of new traders ignore the old proverb “Let your profits run and cut your losses short”. As the saying states if you have a profitable position, you should allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small return. On the other hand, if you hold a position that is moving against you, you need to move quickly to get out of that position, before the loss becomes too great.
If you’re managing your trades correctly, your average winning trade should be much larger than your average losing trade. Once you have the discipline to buy and sell in using this method, you should be able to attain overall profitability even when only half of your trades are winners. A lot of traders make the error of not closing poorly performing positions quickly enough. One tool that makes this a lot easier is the stop-loss order.
Once you have determined a price level that corresponds with the amount of risk that you’re willing to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.
It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will likely be activated if the price trades at or beneath the nominated stop level. Every so often, this may result in trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.
2. Understand the instrument that you’re trading
Being over-the-counter products, there are many differences in the contract specifications of CFDs. If you’re trading these products, it is essential to know what these specifications are.
You should also become familiar with the influence that currency price changes could have on your holdings. If the base currency of the CFD increases against the base currency of your account your earnings could be eroded by any currency fluctuation or your losses might be made worse.
Most CFD traders trade CFDs based on stocks listed in their own country. The simple motive for this is that traders are more comfortable trading CFDs that they are familiar with. Most traders also enjoy the convenience of trading their home market as it isn’t practical to sit up for half the night to trade a CFD over a share listed on an exchange in another part of the world?
In lots of cases it is much better to stick to Contracts for difference quoted on equities listed on exchanges that you are familiar with as opposed to buying and selling CFDs based on shares listed on markets you don’t fully understand.
3. Use the correct order types
You should treat trading as a serious business. As such, you might want to take some time to ensure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been stopped up out of trades at the wrong time simply because they placed the wrong type of order.
At the very least, it is advisable to become familiar with these order types:
Market order: This sort of order is utilized to execute a trade at the present market price.
Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that is worse than prices currently obtainable in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be positioned at a level greater than present market prices.
Limit order: A limit order is utilized to exit a trade. Limit orders are positioned at a level that is better than the current market price. When seeking to lock-in gains on an open long position, a limit order to sell would be located at a level higher than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be located at a level below current market prices.
You must always understand that as Contracts for difference are geared and that trading them can be risky. However if used properly CFDs will become a priceless tool in your trading arsenal.
