CFD trading allows you to trade and profit from fluctuating asset prices without actually owning the assets. With the help of leverage, you can take bigger trading positions through CFDs by only investing a small part of the total trade.
But to benefit from CFD trading and increase your profits, there are specific rules that you need to follow. Let’s take a look at the top 10 important rules for CFD trading that every trader should know.
1. Build knowledge around CFDs
Enhance and build your knowledge about CFD (Contract for Difference). Read all about how CFD trading works, the assets you can trade through CFDs, and how to identify assets that align with your trading goals.
Here are some basic things you should know before you start trading CFDs:
- A CFD is a contract between a trader and broker
- You can trade forex, stocks, gold, commodities, and even cryptocurrencies through CFDs
- Traders can trade the future price movements of an asset through a CFD without any expiry date
- CFDs are one of the most highly leveraged products with leverage as high as 100:1
2. Always stick to your CFD trading plan
Devise a trading plan and actually stick to it. Your trading plan should include rules, strategies, profit targets, risk appetite, money management criteria and goals to help you make more profitable trades. You should also make sure that your trading plan is curated according to your long-term trading goals and objectives.
3. Formulate CFD trading strategies
Your CFD trading strategies should outline how you are going to move forward with your trades. They should help you find the right entry and exit positions and the tools/indicators that you can use for increased profit.
Though note that CFD trading strategies can differ for every trader as they depend on how much you want to earn, how much time you can give and how much capital you can invest. Some traders earn from speculative gains, while others trade for long term profits.
4. Use stop-loss orders
Using stop-loss orders in CFD trading ensures that you limit your losses to only the bearable extent. Study the historical prices and movement of the asset you are trading to identify the significant stop-loss orders. If you are planning to go long, you can place the stop loss order right below the CFD’s market price and right above the market price if you are shorting the trade.
5. Make use of leverage
One of the best parts about CFD trading is that it allows you to trade with leverage. This means you only have to deposit some part of the total trade value to hold a more prominent trading position.
For example, if the leverage is 2:1, it means that for every $100 in your account, you can borrow and invest $200 and hold trade positions double of what you can actually afford. If you invest this $200 in a CFD and the prices go up by $50, you gain $50 by actually locking in only $100 worth of money.
6. Diversify your portfolio
Since CFD trading gives you access to several markets and assets, you can diversify your portfolio with it and make significant profits from both rising and falling markets.
For example, commodities and foreign exchange CFDs are said to trade well together, especially when you are looking to hedge against inflation. Commodities prices increase and are the first ones to get affected by rising inflation even if the forex comes down, ensuring that you do not lose the trade altogether irrespective of the market’s direction.
7. Research about the CFD brokers and choose wisely
Choosing the right forex broker helps you trade in the market seamlessly and learn about the market in-depth while you trade. Look at the trading fee, features, markets covered, spreads, tools and resources a platform offers before making the final call.
8. Do not add to losing trades
Traders may feel tempted to buy more of the falling CFDs to average out the rate that leads to lesser losses in the future, but it doesn’t always work.
For example, if you buy a CFD at $100, and it falls to $80, a trader might want to buy another one at this rate to bring the average purchase cost to $90 ($100+$80/2). However, it is recommended not to catch a falling trade since it might lead to even more significant losses if prices continue to drop. A good trading behavior suggests that traders should wait for the market to be stable before opening a new trade.
9. Analyze the asset market you are trading
When trading CFDs, the prices are greatly affected by the actual asset you are trading through the CFD. This is why it is recommended to closely follow the asset market and analyze it to make profitable CFD trades. For example, if you are trading oil as a commodity through CFDs, you must analyze the commodities market and the historical price movement of oil. Any global news related to oil also marks a difference in its increasing or decreasing CFD prices.
10. Practice trading with a CFD demo account
Most CFD brokers offer a demo account that you can access for free to get an authentic look and feel at how CFD trading works. Before opening a real trade, it is recommended to trade through these demo accounts and practice trading to ensure that you make successful trades in the actual market situation.
Follow these tips to make profitable CFD trades
These CFD trading tips are guaranteed to help you make powerful and profitable trades. But you don’t necessarily have to stick with all of these rules. You can make up your own strategies and rules as you go.
Blueberry Markets is a leading trading broker that offers a transparent, reliable and secure trading environment along with tight spreads.