Do You Want Some CFD Trading Tips?

Posted on August 23, 2010
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Before you commence trading Contracts for difference it is imperative to obtain a few hints from the experts to make sure that you don’t make many of the expensive errors that amateur traders make. Below are three trading pointers that can help you in your CFD Trading success.

1. Manage your Positions
Over and over again new traders spend a significant amount of time finding, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit which will determine whether a trade has been profitable or not.

It’s human nature to take profits quickly while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the right direction and reduce losses or even turn them into profitable trades.

Numerous new traders ignore the old saying “Let your profits run and cut your losses short”. As the proverb states when you have a profitable position, you ought to allow that trade to achieve its full potential, instead of closing it out at the first sign of a tiny return. On the other hand, if you hold a position that is moving against you, it’s best to move quickly to exit that position, before the loss becomes too great.

If you are managing your trades correctly, your average winning trade should be significantly larger than your average losing trade. After you have the discipline to buy and sell in this way, you should be able to attain overall profitability even if only half of your trades are winners. A lot of traders make the error of not closing poorly performing positions promptly enough. One tool that makes this less complicated is a stop-loss order.

Once you have identified a price level that corresponds with the amount of risk that you’re willing to take on a specific trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human factor from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.

It is essential to understand that a stop-loss order simply gives you a trigger point for the execution of an order. If a sell stop has been put on a long position, the stop-loss is going to be activated if the price trades at or beneath the nominated stop level. Every now and then, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is called slippage.

2. Understand the instrument you are trading
Being over-the-counter products, there are many differences in the contract specifications of CFDs. If you are thinking of trading these products, it is important to know what these specifications are.

You must also understand the impact that foreign exchange fluctuations might have on your holdings. If the base currency of the Contract for difference rises against the base currency of your account your earnings could be eroded by any foreign exchange fluctuation or your losses might be made worse.

Most CFD traders buy and sell Contracts for difference based on stocks listed in their home country. The simple motive for this is that traders are more comfortable trading CFDs that they are familiar with. Most traders also enjoy the convenience of trading their home market as it’s not realistic to sit up for half the night to trade a CFD over a share listed on an exchange in another part of the world?

In many cases it is better to stick with CFDs quoted on stocks listed on exchanges that you’re familiar with as opposed to buying and selling Contracts for difference quoted on shares listed on markets you don’t fully understand.

3. Use the correct order types
You should treat trading as a serious business. As such, it is best to take some time to make sure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been closed out of trades at the wrong time simply because they placed the incorrect type of order.

At the very least, you ought to be familiar with these order types:

Market order: This sort of order is utilized to execute a trade at the present market price.

Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that’s worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the current market price. Conversely, on a short position, the stop-loss order to buy would be positioned at a level above current market prices.

Limit order: A limit order is utilized to get out of a trade. Limit orders are positioned at a level that is better than the current market price. When seeking to lock-in gains on an open long position, a limit order to sell would be positioned at a level above current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be located at a level below current market prices.

You should always understand that as CFDs are leveraged and that trading them might be risky. Though if used properly CFDs will become a priceless tool in your trading arsenal.

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