CFDs, or contracts for difference, have recently seen a surge in popularity – and for good reason. Whether it’s the ease with which they can be accessed or simply the variety of products that their derivative status allows you to access, CFDs are great in a whole host of ways. However, despite their popularity, CFDs still require some work in order to ensure that they are a successful investment. With that in mind, this article will look at the top five rules for trading CFDs.
Learn the basics
Before you get started in the world of CFDs, it’s important to first get a handle on the basics of the trade. CFDs don’t actually provide you with the underlying asset that they represent, but instead let you enjoy the fluctuations of the market without being committed to actual stocks. In this way, they’re known as derivative products. They’re also powered by leverage: your original CFD deposit will usually be multiplied by a certain number, and this means higher profits if it works out but higher losses if it fails.
Find a good broker
The difference between a bad CFD broker and a good one can be huge. Not only do good CFD brokers provide platforms with excellent features such as charting tools, but they also often have more competitive commission structures – and you don’t run as high a risk of getting scammed. A list of CFD brokers who get good ratings can be sourced online, so it’s worth checking one out.
Don’t involve your feelings
CFD trading can be quite an emotional experience, especially when you’re starting out. Seeing a market downturn can cause fear to set in – especially in the context of CFD trading, where losses can be amplified quite strongly. It’s important to have a strategy: if you always know that you’ll leave a trade at a certain point and not before or after, say, then you’ll feel much calmer and will make more clear-headed decisions.
Consider your market niche
If you’re at the stage where you’ve only just started trading CFDs, then you’ve got a golden opportunity ahead of you – and that’s to specialise in a certain CFD niche. Choosing to specialise in natural resources companies, for example, means that you can become very well-versed in this sector by reading industry news and looking over historic data to find patterns.
Let yourself fail
Hardly any successful trader, whether in the world of CFDs or otherwise, is going to get it right every time. There will always be occasions when your trade doesn’t quite work out, or where you end up kicking yourself because you made the wrong choice. Provided it doesn’t happen often or wipe you out, it’s fine – and it’s simply something that you’ll have to experience and overcome.
It’s apparent, then, that trading CFDs is the sort of task that requires a bit of extra effort. From the way that investors need to learn the basic differences between them and other asset classes to accepting the inevitable successes and failures that a new trader will inevitably experience, there’s a lot to learn. However, by finding a decent broker and accepting that failure is just part of the process, it’s possible to lay the groundwork for CFD trading success.