Since their entry into the trading market in the 90s, CFDs have become popular among traders. However, despite being around for almost three decades, beginners, as well as experienced traders, still make losses for failing to observe the rules. Perhaps before we start with the rules, we need to first ask ourselves what is CFD trading.
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What Is CFD Trading?
CFDs, short for contracts for difference, are a form of trading that allows you to trade on the difference between the selling price and the buying price of a financial instrument. Such instruments include stocks, currencies, indices, bonds, and commodities among others. It is contractual in such a way that a trader does not own the underlying assets.
In CFDs, you have to speculate on the price movements or spreads. For instance, if you foresee the price going up, you buy with the hope of selling at a profit and vice versa. How do you ensure that you maximize the profits while minimizing losses? Well, you have to stick to the rules. Below are a few of them.
Put Up A Plan:
The first move after deciding to venture in CFDs is to put a plan and a strategy in place. Be sure to stick with them to the very end. It is not wise to rely on your emotions when trading. Relying on logic, on the other hand, willlead you to higher profits.
Manage Risks:
Trading is all about taking risks. Just be cautious with the amount of money you decide to put in the trade. Let it be the amount that you will be comfortable loosing. You also need to carefully manage the risks. You can achieve this by taking small trades. Even if the profits will be small, it is better than trading big and loosing. Another way to limit the losses is by setting a Stop Loss to safeguard you from losing beyond the set level.
Run Multiple Trades:
A good trader is one who does not limit all the capital to a single trade. As long as you keep your risk margin at 2%, the losses will be minimal.
Make Use Of Market Analysis Methods:
Market analysis methods are there to help you understand the best time to trade. Be sure to use them well so that you can navigate your trades with minimal risks. Fundamental analysis will be essential in triggering the trade while the technical analysis will guide you to know when to start the trade.
Always Follow The Trend:
Studies have shown time and again that if the price is going up, it will keep with the trend, but it will eventually start falling and vice versa. It is advisable to ensure that the trades you open do not go against the trend.
Do Not Be In A Hurry To Buy Failing Shares:
When the price of a share starts falling drastically, most people would rush to buy them. This, however, is not a recommended move, especially if the loss is more than 20% in a single day. The most probable move is that it will continue falling to even lower levels.
Conclusion:
Just like any other business, it is very important to first understand CFDs. We are in a digital era where information is easy to come by. Besides following the above rules, it is important to research and fully grasp what CFD trading is about.
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