Andrew Bezen

Financial Writer

ForexTips

How To Trade Contracts For Difference Effectively

How To Trade Contracts For Difference Effectively

Trading successfully is no simple feat. It’s especially hard because of the tremendous risks involved with CFDs. What does it take to be a consistently successful trader? We look at some important strategies to implement and mistakes to avoid.

  1. Leverage Control

One unique aspect of CFDs is that there can trade without owning an underlying asset. They only put up a small percentage of the value of an asset while obtaining the full benefits of the asset’s full value.

Leverage is an essential tool especially when traders have made the right trade and correct speculations. The way CFDs work, traders get the difference between the opening price and the closing price. The margins are usually amplified because they are based on the underlying asset’s actual value. However, it is a two-edged sword. Traders can make amplified losses just as easily as they can make profits.

To reduce the risk of losses, leverage needs to be controlled. A large position size means larger margins which can lead to serious losses if the prices don’t move as predicted.

Traders, especially those who are just starting, should consider starting small. A small margin may not give a very high profit but it will protect against devastating losses.

  1. Use Stops

CFDs allow traders to speculate on price movement rising or dropping. This means they can make a profit regardless of the direction of price movements as long as their predictions were correct. The downside however is when prices move against the trader. Using stops can help reduce the losses made. There are several stops provided by brokers to help protect traders.

Stops help curb the urge traders get to make trades based on their emotions. It is easy to let a trade run even when it making losses. A stop will automatically close an open position once the trade has met the predetermined levels.

  1. Practice

Trading requires practice to do effectively. A demo account is a great way for newbies to learn the trade without the actual risks. The advantage with this is that the price movements are based on reality which helps the trader see how they would have fared if they were trading for real.

Many brokers offer demo accounts. This also allows traders to test their strategies and their knowledge. It promotes growth and builds traders’ confidence. When traders are a little more confident in their abilities they can switch to live accounts.

  1. Education

It takes a lot more than practicing on demo accounts for traders to be successful. Trading requires in-depth analysis and study. The more knowledge a trader has, the higher their chances of trading successfully.

Many resources on trading are available to traders. Many of them are free to use. Some of these resources include;

  • Courses
  • Articles and blogs
  • Videos
  • EBooks and hardcopy books
  • Podcasts
  • Guides

Investing the time to learn about trading shows a level of seriousness. Everything they learn brings them closer to success.

  1. Documentation

This may seem trivial but is a key step to CFD trading success. Most CFD trades are short-term. Traders need to monitor price movements closely to make the best decisions. Documenting findings helps traders notice trends and patterns. It will also help traders notice past mistakes and see where they can make the appropriate corrections.

Some of the details to include in a trading journal include;

  • The instrument traded
  • Entry and exit points
  • The means and strategy used
  • Whether the trade resulted in a profit or loss
  • Trading performance
  • Whether rules were followed or broken
  • Lessons learned

Journaling past trading experiences may seem tedious and time-consuming. However, it will provide the actual result to review. It also provides a quick, accessible, and easily under stable reference point. It helps bring back to memory countless details that traders would have otherwise not remembered. Traders can learn from experience and become better traders because of it.

Wrapping It Up

CFDs are a way for traders to speculate on price movements without owning the underlying assets. Traders benefit from the differences in the opening and closing prices.

Traders need to take some measures to ensure their success as they trade. Investing in education and practicing through demo accounts is an essential step, especially for novices. It helps reduce the chances of making mistakes that lead to losses. Controlling leverage and keeping records of past trades are great ways to curb the risks involved in CFD trading.

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