On the surface CFD trading often appears to be deceptively simple seeing as all you need to do is predict whether the price of a stock is going to increase or decrease. When you actually start to trade however you’ll soon see that although CFDs themselves are easy to understand – it can be tricky to be successful when trading them.
Assuming you want to learn how to successfully trade CFDs and make a profit – there are 3 crucial tips that you need to follow:
Always preserve your capital
While this may seem like common sense, the truth is the biggest mistake most beginners make is failing to preserve their capital. In particular that tends to happen when you take on a losing position and then are tempted to ‘ride it out’ in the hope that things will improve.
The problem with riding out losing positions is that as your capital begins to bleed away the difficulty in recovering that capital increases exponentially. That is why it is always better to cut your losses sooner rather than later – and use CFD stops so that you never end up losing too much of your capital in the first place.
Use leverage extremely carefully
Part of the reason why CFD trading is so enticing is because you can leverage your capital and make bigger trades. For example a $1,000 starting capital could be leveraged at 10:1 so you can trade in CFDs with $10,000 and make a bigger profit.
It is important to remember however that while leverage can help you to make bigger profits, it also has the same effect on losses. As such if you leverage your capital and take on a losing position, you could end up quickly losing a big chunk (or all) of your capital. That is why it is important to use leverage with extreme caution.
Diversify and limit your exposure
Successful CFD traders often diversify their trades and limit their exposure. The first step to doing that is to make sure you don’t risk all your capital in a single trade, but spread it out over several CFDs. By doing so you’ll ensure that a single bad trade won’t bankrupt you.
On top of that by diversifying your CFD trading across different markets such as forex, equities and commodities you will reduce your exposure further. When you spread your trades across various entities, you won’t have to worry about a particular event that affects one market affecting all your trades.
By following these three tips you’ll be off to a good start with your CFD trading. Of course it also helps to have a reliable platform to trade on and ETX Capital will not only give you that but also afford you the choice of trading on other financial markets. Bear in mind that many of these tips can be applied to trading in general – so you should be able to dip your toes in them if you choose to do so.