CFD trading or Contracts for Difference have been generating so much interest of late that it's important to understand the basics of this exciting product before getting too involved.
Here I'll show you 3 key tips to keep you safe and give you some key areas to focus on when you do your next CFD trade.
1. CFD trading leverage. CFD trading is just a leveraged stock market opportunity that gives you access to greater funds than what you normally could access if you were trading the stock market.
This can be both good and bad and unfortunately many new comers to CFD trading think that because their stock market trading was bad, it will all turn around when trading CFDs. Unfortunately nothing could be further from the truth. CFD trading and using leverage will only accentuate your stock market losses, so the most critical thing to do is start small and minimise the leverage used.
A good rule of thumb is when starting out, don't use more than 2-3 times leverage on your account. For example if you start your account with $10,000 then don't trade total positions that exceed more than $20,000 - $30,000 in total. Maybe spread your parcels with 4-6 positions at $5,000 each.
Remember CFD leverage accentuates your returns and your losses, so the smartest thing to do initially is start small.
2. Develop a CFD trading plan that suits your personal profile. Developing a solid CFD trading plan is crucial to your long term success. Whilst CFD trading is very similar to trading stocks, you need to tailor your plan to meet you personal objectives.
Initially you want to identify those areas that you excel at and stick to those. You may be brilliant at picking what the CFD index, like the Aussie200, is going to do each day or short term swing trading CFDs might be your forte. Whatever it is that you are good at, stick with it and maximise your opportunities in those areas. More money gets wasted by traders attempting to tackle a new market than any other way.
3. Use stops religiously. Stops enable you to protect your worst case scenario by limiting your downside (unless the stock gaps considerably). This cannot be emphasised enough when talking about a leveraged product like Contracts for Difference (CFD).
In particular I am talking about a stop loss that limits the downside as opposed to a stop that is used when taking profits. The trick with getting your initial stop right is putting it far enough away as not to kick you out too soon, but also not too far away so you don't lose a huge amount when your initial stop is hit.
Discoverthe full list of7 trading tips (plus 3 bonus tips) bychecking out our 7 CFD Trading tips sectionLearn more about the CFD revolution by going to http://www.learncfds.com/
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