CFDs can be described as derivative products. This means that
the value of CFDs is dependent on the value of another security or asset. For
instance, if you purchase Amazon shared CFDs, the value of your CFD goes up
whenever the amazon share goes up.
In a nutshell, trading CFDs is the same as betting on a
financial instrument price where you make money when the instrument gains or
loses value. The benefit of CFD trading is that you do not have to own the
underlying asset.
For instance, when trading currencies, you can bet on the
Euro, predicting that it will gain over the pound by investing in the EUR/GBP
CFD. If the Euro goes up against the pound, the value of your currency pair CFD
also goes up.
CFDs are great financial instruments that can be used to help traders achieve their trading objectives. However, just like any other type of trade, they too come with risks. This is why they are mostly recommended to experienced traders.
Here are timely tips to help you trade CFD successfully.
Start with a
demo account
Once you complete your MT5 download and registration, you need to create a
demo account on your MT5 account. It can be tempting to jump right in and start
trading with real money, but any seasoned trader will tell you that this is a
bad idea.
A demo account allows you to test out different CFD trading
styles without risking real money. It is also the perfect account to test out
CFD trading if this is your first time trading. When testing your demo account,
you need to start with as much money as you would trade with a real account.
This will give you a realistic feel of what it will be like when trading in a
live account.
Do your
homework
Before you start trading CFDs:
- Take time to
understand the market and educate yourself on this type of investment.
- Familiarize
yourself with common trading terms used in CFD trading.
- Take time to
learn the difference between the actual currency
pairs and currency pair quotes.
Taking time to learn the market and how CFDs work can go a
long way in helping you avoid losses once you start trading with a real
account.
Make use of
the stop-loss order
As it is often said, the number one, two, and three rule of trading CFD is to always use the stop-loss order. When trading CFDs, ensure you limit how low your trade can go using stop-loss orders. A stop-loss order exits your trade when the value of a CFD goes lower than your stop point. This ensures you do not continue losing money when the market is on a downward trend.
Limit your
leverage
While it is possible to use leverage in CFD trading, it is
important to remember that the price will not always move in your desired
direction every time you open a trading position. When you place high leverage,
a market movement as small as 0.1% in the other direction can easily force you
to close your position, locking you out of a possible win in case the trade
bounces back towards the right direction.
If your broker does not allow you to lower your leverage
manually, you should consider entering a lower trade position.
Remember, leverage works both ways. While it allows you to
invest more than you can bankroll, it can also wipe your account clean when not
used in the right way. You stand to lose as much as you can win with leverage.
Have a
trading strategy
Ensure you have a strategy every time you enter a trading
position. You should also enter a trade with an exit plan in place. This way,
you will avoid second-guessing yourself and your trade by exiting at the right
time.
As part of your strategy, it is also advisable to consider
all possible scenarios in market performance. You need to have a plan for when
the price proves to be too volatile. This way, you will know how to mitigate
your losses or exit trades while you are still making money.
Do not use
emotion to trade
One of the most common mistakes CFD traders make is
abandoning their initial strategy and relying on their emotions to make trading
decisions. Whether your investment is making a profit or loss, you should never
abandon your strategy. More often than not, traders end up regretting it when
they follow emotion to trade.
For instance, if you decided to set your stop-loss at 10%
below the buying price, you should stick to this plan even when the market
seems promising.
Choose your
CFD broker carefully
The CFD broker you work with has a direct impact on your
trade. When choosing a broker, you need to consider their fees. If you are a
frequent trader, high fees can take up a large part of your earnings.
Therefore, it helps to pick a broker with reasonably low fees to ensure you get
the most from your trade. The best broker should also set a reasonable spread
cost. Take your time to choose a reputable broker.
Trading CFDs does not have to be complicated. The tips in this article can go a long way in getting you started.
© EconMatters.com All Rights Reserved | Facebook | Twitter | YouTube | Email Digest