Contract for difference trading is where the investor and broker agree to pay the difference between an asset price at the time of the agreement and the price of the same asset at the end of the contract. A hot topic among the investor community has novices and seasoned investors alike scrambling to get a piece of the pie. However, without a strategy and basic knowledge, the results may not always be in your favour. Here are some basic tips that will ensure reap the maximum awards possible.
Educating yourself on how CFD trading works at City Index, for example, is the first and foremost thing you should do before placing any trades. Important to note is that CFD trading is easier to enter than other markets since it is a leveraged product. Unlike forex and share trading, CFD only requires the investor to purchase a percentage of the asset. Just because it is easy to enter the market doesn’t mean one should rush in blindly, rather you should take the time to educate and practice your trading skills. The stories you hear of investors turning massive profits from CFD trading was not due to luck but rather because they knew and understood the asset they were purchasing.
Along with theoretical knowledge, one needs to pay attention to the practical side of trading. Look out for demo accounts on trading platforms so that you can familiarise yourself and practice your trades before putting up real money. In the demo version, you can practice your strategies and familiarise yourself with the process in a risk-free setting. Setting the foundations is crucial to a long and successful CFD trading career.
Once you are comfortable the next step is finding the right broker for you. The marginal transactional costs and the learning information tools provided will be important factors to look out for when choosing a broker.
A few things to remember as you start your journey. Firstly, know when to cut your losses. Stay away from emotionally charged trades and know when cutting your losses while they are still small and manageable. Secondly, learn to manage your capital and do not over-invest on a single investment. A general rule is to not risk more than 2% of your capital on a single trade. Thirdly, you should time your trades based on market signals that are provided to you via your fundamental and technical analysis. Entering too early or too late can be the difference between earning huge profits or making peanuts. Last but not least, one should use stop losses to minimise the effect of major losses. Finding the right balance is key as being too strict on stop losses may negatively impact your investment strategy.
Always remember that becoming good at anything requires practice, patience and determination. You should not be discouraged by early losses, but rather see them as lessons that will eventually turn you into a better CFD trader in the future.