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Before you start trading Contracts for difference it is important to take a few hints from the professionals to ensure that you don’t make many of the costly errors that amateur traders make. Below are three trading recommendations that will help you in your CFD Trading success.
1. Manage your Positions
Time and again new traders spend a large amount of time selecting, planning and executing new positions, however they often make the error of exiting these trades with much less thought. This is unfortunate as it is the exit that will determine whether a trade has been profitable or not.
It is human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open with the hope that prices will move in the correct direction and reduce losses or even turn them into profitable trades.
Many new traders forget about the old saying “Let your profits run and cut your losses short”. As the saying states when you have a profitable position, make sure you allow that trade to achieve its full potential, instead of closing it out at the first sign of a small return. On the other hand, in the event you hold a position that’s moving against you, you ought to move quickly to get out of that position, before the loss becomes too great.
If you’re managing your trades properly, your average winning trade should be significantly larger than your average losing trade. After you have the discipline to trade in using this method, you should be able to achieve overall profitability regardless of whether only half of your trades are winners. Many traders make the error of not closing poorly performing positions fast enough. One tool that makes this simpler is the stop-loss order.
Once you have identified a price level that corresponds with the amount of risk that you’re prepared to take on a specific 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 chance 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 put on a long position, the stop-loss is going to be activated if the price trades at or below the nominated stop level. Occasionally, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is called slippage.
2. Understand the instrument you are trading
Being over-the-counter products, there are various differences in the contract specifications of Contracts for difference. If you are thinking of trading these products, it is important to know what these specifications are.
You should also understand the impact that foreign currency fluctuations can have on your holdings. If the base currency of the Contract for difference increases against the base currency of your account your gains might be eroded by any currency fluctuation or your losses might be made worse.
The majority of CFD traders trade Contracts for difference based on stocks listed in their own country. The simple reason for this is that traders are more at ease trading CFDs that they’re 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 Contract for difference over a share listed on an exchange in another part of the world?
In many cases it is better to stick with CFDs quoted on shares listed on exchanges that you’re familiar with as opposed to buying and selling CFDs quoted on stocks listed on markets you don’t fully understand.
3. Use the right order types
You should always treat trading as a serious business. As such, it is best to take the time to make sure that you thoroughly understand the tools of your business. Many Contract for Difference traders miss opportunities or have been closed out of trades at the wrong time just because they placed the incorrect kind of order.
At the very least, make sure you understand the following order types:
Market order: This sort of order is utilized to execute a trade at the current 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 presently available in the market. On a long position, the stop-loss order to sell would be placed below the current market price. Conversely, on a short position, the stop-loss order to buy would be located at a level above present market prices.
Limit order: A limit order is used 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 greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be positioned at a level underneath current market prices.
You should always keep in mind that as Contracts for difference are geared and that buying and selling them might be risky. Though if used properly CFDs will become a priceless tool in your trading arsenal.
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