CFD Trading Do’s
Do Let Your Profits Run
If ever there were a central principle by which to live your CFD trading life, this has to be it. Let your profits run at every available opportunity. Profits in CFD trading aren’t always easy to come by, and numerically those that turn out for the best will probably by dwarfed in comparison to those that don’t turn out quite how you’d expected. This makes it essential that you allow profitable, winning positions to continue to run on and on as far as possible. While every ounce of your instinct will at first tell you to close and bank a profit, the more money you milk from each winning trade, the best chance you’ve got of succeeding overall.
Do Cut Your Losses Early
Similarly, it’s essential that you realise as soon as possible that losses are a drain on your resources and need to be cut out of the picture as soon as they can. The more ruthless you are in cutting losses, the better chance you’ll have of making an overall profit. When it comes to a game of aggregated, one down on the negative side is as important as one up on the positive side, so it pays to take positive steps towards ensuring your downside liability is minimised. After all, if you intend to sell your position in an hour’s time if it loses an extra 5%, aren’t you better off just saving that 5% loss, taking your medicine and settling right now?
Do Constant Research and Reading
Whatever you do day to day, make sure it involves constant research and reading up on the markets you trade, global current affairs and politics. This is a game of knowledge, and the more you know, the more likely you are to have the capacity to make the best possible trading decisions. Some trading signals can only be identified through experience, and there’s no substitute for real life when it comes to the learning curve, but by making sure you’ve got the theoretical knowledge down, you can be more confident in your abilities as a trader to identify the low-hanging fruit that can make you fortunes.
Do Diversify Your Exposure
Make sure your capital isn’t all tied up in CFDs or in specific sectors or even specific countries – do make sure you take a diverse approach to split the risk over as many different markets and instruments as possible. CFDs are great, but if they represent the entirety of your worldly fortunes you’ll have problems. In much the same way that businesses can’t become too reliant on one client or supplier, so too should you ensure you diversify your trading capital across a number of different investments to make sure that even in worst-case scenario, your capital is protected. It’s all about protection of capital, because after all, it is only your capital that is capable of generating your returns.
Do Set Time Limits
Trading costs with CFDs can often get out of hand when they are left to their own devices, primarily because financing charges are applied daily overnight. Setting strict time limits by which you should expect to realise your profit is important in keeping a firm grip on your positions, and you should take care to set and stick to time limits and earnings targets for determining performance. This is the only means in which you can regulate your trading performance, and as with the research point above, the more you know (in this instance about your own portfolio), the better your chances of succeeding in the markets over time.
Do Use Leverage Sensibly
Leverage is a central part of trading CFDs, an inescapable feature of the transaction that is in practicality its raison d’être. Gearing up the size of transactions in order to effectively up the ante, we all know leverage can be extremely dangerous when things don’t work out, but using it to sensible, effective use can provide real benefits for your trading portfolio. A cautiously leveraged portfolio can have the best of both worlds – exposure to the high potential gains afforded by leverage on aggregate, with a cautious enough approach to preserve capital resources. That means strategies like leveraging only to gear up your transaction capital rather than scaling up your entire account, which would be too risky, and backing positions that have become winners more heavily to maximise yield. Leverage can be a heavy burden to bear, but it doesn’t have to be – remember it’s a tool best used sparingly, and you should help skew the risk/reward ratio slightly more in your favour.
Do Make Use Of Stops
CFDs can be highly volatile, and the slightest bump in market prices can often send much more significant shockwaves through the CFD markets. While CFD trading is naturally and by design a risky business, it is possible to minimise the extent of those risks both through the way you trade, and through the way you make use of stops. Stop losses and limits are central to a cautious, realistic trading approach, and they can help save serious capital damage while allowing profitable positions to fully flourish. While stops do usually attract an additional cost, making use of stops to prevent your capital from becoming too exposed to leveraged trades is the first step towards a robust, risk-managed CFD portfolio. Particularly as a new trader, stops will be crucial in preserving capital and earnings during your initial learning period.
Do Know Your Trading Costs
CFD trading isn’t like spread betting, where all the costs are transparent in the transaction – there are in fact a number of different layers of trading cost that can factor in, depending on the makeup of your transaction and your particular broker, and so it is essential to make sure you have a knowledge of these costs and how they will affect your ability to deliver a profit on a particular transaction in order to allow for informed investment decisions to be made. Particularly for traders contemplating holding a CFD position for over one day, the daily increasing financing charges quickly mount up, and can quickly become a significant handicap on the trade. That’s why it’s important to know what you’re paying, and to calculate your financing and trading costs, in line with your trading strategy, to decide whether or not a trade is viable.
Do Set Profit Expectations
Most amateur traders start off with no real profit expectation. They launch into the markets and hope for the best, and with a bit of good luck take any profit they can get. Unfortunately, for serious traders, life can’t be that simple. Profit expectations perform a central role in the business side of your trading activity. Portfolio management is a business, and as a trader you need to make sure you operate in as professional a way as you can to give the best chances of success. Profit expectations are like sales forecasts – they define what you want to achieve, so you can then calculate cash flow and make further predictions, forecasts, and revisions to strategy. For best effect, look at the size of recent market price movements in the underlying market for your CFD and crunch the numbers to deliver a rough outline of what you could justifiably expect to return.