CFD trading is an interesting way to invest your money. In CFD trading, you speculate on the rise or fall in price of a particular asset and if your prediction turns out to be correct, you will profit from the trade. Here are a few rules to follow that will help you in CFD trading.
1. Keep Your Emotions Under Control
Fear and greed are the two most common emotions surrounding CFD trading and investing in general. The “gut feeling” may work occasionally, however, emotional trading can also led to impulsive decisions – which you may end up regretting in the future. Logic works better than emotional trading. Thus, if you start to feel a little overwhelmed, it’s time to take a few moments and breathe deeply before making a CFD trading decision.
2. Don’t Put Your All of Your Eggs in One Basket
Placing all of your investing capital in a single CFD trade is the best way to mess up your chances of success. Diversification is probably the most important rule in investing, CFD trading included. As a rule of thumb, each of your trades should be 2% or less of your total investment capital. This way, you will have plenty of trades – and time – to recover from losses. Additionally, by not risking too much in a single trade you will be more able to follow rule #1. That’s two birds killed with one stone.
3. Understand Your Risk Profile
Not all investors can bear the same risk, psychologically speaking. Usually, investors are divided into three types. These are risk-averse investors, those who can bear moderate risk levels, and those who like risk. Your plan, trading strategy, and goals should be aligned with your risk profile. You should analyze yourself and see how much risk can you bear to take. Then, you should make a specific plan or series of sub-rules for each trade you make that will allow you to preserve your mental tranquility at the same time you trade for profits. Also, there is a direct relationship between risk and profits. The more risk you are willing to take, the more your potential of profits in a trade and vice versa.
4. Use Stop Losses
Using stop losses is the best way to manage your CFD trading risks. Even the most temerarious investors can benefit from them. A stop loss will place a limit on the amount you can lose on each trade. This way, you can keep losses at a minimum. Stop losses should never be too close to the initial buying or selling price as it is normal for the market (or an asset) to have a degree of volatility before following or changing its current trend.
5. Use Both Fundamental And Technical Analysis
Never leave your trades to luck. The two types of analysis that should be done in CFD trading are fundamental and technical analysis. Fundamental analysis involves the checking out of news or events that could have an impact on the value of a particular asset. For instance, when oil price goes up, companies that produce oil will most likely than not go up as well. Thus, a news that signals an increase in oil prices such as an agreement for freezing output among oil-producing countries is an indication that trading a CFD on oil or a large oil-producing company is a good idea. Technical analysis involves patterns and other indicators of the chart of a particular asset. With time, you can master both types of analysis.
CMC Markets is a platform where you can trade CFDs. Their platform can also be used in mobiles so any person can trade and use the innovative tools they provide from his or her smartphone.