We can all use a little help when we try something new, and when it comes to CFD trading tips for beginners, we are more than happy to oblige. CFD trading can be a great way to access financial markets, but it can also be a little complicated for CFD beginners.
It is important not to treat CFD trading in the same way you would look at investing. Even though these both revolve around financial markets, the way in which you need to analyse opportunities and entry points is quite different indeed. We have identified 10 different CFD trading tips to help you get up to speed on the basics.
CFD Trading Tips
Here are our 10 top CFD tips to help you get started:
CFD Trading Tip 1. Have a clear plan and strategy before entering any trade.
This will help you to know your entry and exit points, as well as how much risk you are willing to take on. If you understand your goals before you enter a position, you will be much more likely to get your exit right than if you go into your CFD trades blindly.
CFD Trading Tip 2. Always use a demo account before trading with real money.
This will allow you to test out different strategies and get a feel for the markets without risking your hard-earned capital. CFD trading can be more complicated than certain other forms of trading such as ETFs, or stock; and as such you should test your strategies and plans on a demo account before you begin to move into a real trading environment.
CFD Trading Tip 3. Start small and gradually increase your position size as you become more comfortable.
There is no need to go “all in” when starting out, as this will only increase your risk of losses. You should look to slowly build your portfolio and position size over time, but without haste. If you rush in CFD trading, it usually ends up badly. You will have seen the statistic that more than 70% of CFD traders lose money no doubt, and position sizing is one of the big reasons behind this. With the volatility of certain instruments, and the added impetus of leverage, if you do not manage your position size properly, you can find your account wiped out if things move against you.
CFD Trading Tip 4. Manage your use of leverage wisely.
Leverage can be a great tool to help you increase your profits and minimise your capital requirement, but it can also just as easily amplify your losses. Be sure to use stop-loss orders to protect yourself from excessive losses due to leverage, and during periods of high volatility, consider reducing your use of leverage to keep your risk in line with your comfort levels. Many brokers and CFD trading platforms in South Africa will allow you to adjust your leverage usage per trade, so you should not feel like you always have to use the maximum available. Use leverage when you need it, and rein it back when you don’t.
CFD Trading Tip 5. Use a reputable CFD broker that offers good customer service and tight spreads.
Having a trusted trading platform, or CFD broker, to trade with is a vital component towards becoming a successful CFD trader. There are platforms that are suited to CFD trading for beginners, and those that are far more advanced in their offering just the same. By working with a broker with tight spreads, you will be keeping more of your trading account balance for trading, and spending less on fees… makes sense of course. Using a trusted CFD broker with FSCA regulation means that you will not have to be concerned as much about bad practices, manipulation, or scams; which again can only be a good thing! All this will help to ensure that you have a positive experience trading CFDs, and that you are getting the best possible value for your trades.
CFD Trading Tip 6. Be aware of the costs associated with trading CFDs.
In addition to spreads, there are also commission fees charged by some brokers on each trade, and with other brokers, you will find inactivity fees, overnight fees, and custody fees. Make sure you are taking these costs into account when planning your trades, and ideally, try to find a low cost CFD broker that is not going to eat into your account too much for every little thing you do.
CFD Trading Tip 7. Pay attention to your risk-reward ratio.
Your risk-reward ratio is the amount of potential profit estimated compared to the amount of risk you are taking on. A lower risk-reward ratio means that you are putting less capital at risk for the potential of a larger return and would be a better scenario for you. When you are planning out your CFD trading, a tip would be to project both your price target and your stop loss level out in advance so that you know your potential upside, as well as the potential loss you are prepared to take on the trade.
Ideally you will want your profitable trades to be a minimum of 2-3 times the amount of your losing trades; and yes, there will be losing trades as part of CFD trading. If you are operating even at 50% win/loss ratio on your trades, but every winner is twice the amount of your losses, you will still be building a healthy account balance assuming you stay consistent.
CFD Trading Tip 8. Have realistic expectations when trading CFDs.
It is possible to make large profits, but it is also possible to lose money; even the very best CFD traders do, it is a part of the game. Don’t expect to make a fortune overnight, and don’t get discouraged if you have some losing trades. It can be easier to keep this in mind if you have a clear trading plan, and know exactly how to counter your losing trades with winning ones. Many of the other CFD trading tips can also help you with your expectations, as demo trading, risk management, etc… will all give you an idea of what to expect.
CFD Trading Tip 9. Stay up-to-date on the latest market news and events.
Fundamental analysis is not the core of CFD trading but it can help you to make better informed trading decisions, as you will know what is driving the markets, and where to look for trading opportunities. Having a understanding of macro trends, and macro-economic news is never a bad thing in any kind of trading, and once you have decided on your financial instruments to trade, you will want to absorb as much information as possible on the topic.
CFD Trading Tip 10. Learn to get very comfortable with charts, and technical analysis.
You will want to ensure that you are able to read charts, and understand the basics of technical analysis, before you embark on a CFD trading journey. With many successful CFD trading strategies having the tendency to focus on shorter time horizons, and trend capitalisation; being able to understand what is happening on the charts, and when the best entry and exit points are from a technical perspective will stand you in good stead.
Even if you are not planning to be a purely technical trader of CFDs yourself, knowing the support and resistance lines, and the pattern recognition to understand what other technical traders are looking at can still give you an advantage on the market… often times, that is all you need to extract a profitable trade.
These are just a few of the many CFD trading tips that can help you to be successful, but even then, there are still no guarantees in the markets.
You will want to remember to always use a demo account first, start small, have a clear plan, and practice risk management. This means always using stop-loss orders, trading with trusted CFD brokers, and limiting your use of leverage. By doing so, you can protect yourself from excessive losses and increase your chances of success in the long run.