Contracts for Difference is a financial tool that allows you to make a profit without purchasing any assets. You create a forecast regarding the product price and make money both on its growth and decline. However, it also carries certain risks that can be disastrous for inexperienced investors. To understand which pitfalls CFD trading online has and how to bypass them successfully, read the article below.
Improve Your Knowledge
The key to running any business successfully is understanding the basic principles of work and constantly improving your skills. It is information and knowledge that make you a successful investor. If you just started trading, it would be better to postpone CFDs till you get some experience. It is a more advanced step, which is recommended for experienced traders. You should know everything about how the price of a product is formed, how to determine the position size for a trade, how to assess possible losses, and set clear goals correctly. To invest and predict price changes successfully, you need to be well-versed in market trends. Since they are never constant and regularly change under the influence of global events, constantly monitor what is happening in the world.
Don’t Forget About Demo Account
Demo accounts are highly recommended for those who start studying the CFD market. Advanced users often neglect this option and, as practice shows, in vain. Every trusted broker offers a free virtual balance account. With it, you can safely test the changes in your strategy, adjust your actions, check new markets and mechanisms. All the same principles and conditions are observed here as in real trading. A demo account will allow you to gain confidence when switching to real money, which, in turn, will relieve you of the stress and fuss in a difficult situation.
Use Take Profits and Stop Losses
Automatic limits can be excellent helpers if the situation gets out of your control or you don’t always have the opportunity to monitor market changes every minute. Using Stop Loss and Take Profit orders, you can minimize your risks. When the price of a product reaches a specified minimum or maximum, the trade is automatically closed without your participation. Trading without using these limits is not recommended as it might lead to severe losses. Of course, they are not fixed, and you can change them from time to time, depending on your goals and market conditions.
High leverage is the pitfall that can bring you both big profits and huge losses. You can use this tool when trading CFDs and significantly increase the amount you initially invested. However, in the event of unsuccessful transactions, your losses will increase either. Limit the use of leverage, and if you are a beginner trader, it is better not to use it at all at first. The correct strategy is the phased application of this instrument. Try to keep it below your level of risk tolerance.
Stick to Your Plan
The key mistake of inexperienced traders is that they do not follow a consistently established course of action. It mainly happens under the pressure of emotions in a challenging and stressful situation. Do not try to launch the next transaction right after a failed trade to compensate for losses quickly. Such a rush will only lead to even more significant losses. If you have set your own rule to close a transaction after the price drops to a certain level, do it and not wait for the situation to improve. It is essential to stick to the plan and not act in a hurry and under the influence of emotions to succeed in CFD trading.
Diversify Your Portfolio
Professionals do not recommend investing all your capital in one sector. In the current situation, prices for some products are falling, while others are growing. For example, during the pandemic, the oil industry and airlines were severely affected, but the agro-industrial enterprises and petrochemicals showed a significant increase. Of course, you don’t need to invest in all industries at once; you should choose several directions that interest you. It will help you avoid global losses in case one sector suddenly collapses. However, you should not get too carried away with it, as excessive diversification complicates portfolio management.
Invest as Much as You Are Ready to Lose
This rule applies to absolutely all investments, but considering all the risks, it is especially relevant for CFD trading. You shouldn’t use more money than you are ready to lose without hurting your own budget. If your trade does not succeed, you should have sufficient resources to open the next one. It is essential to define in advance the amount which you can afford to lose and stick to this figure throughout the trading session. You should also have an extra amount in your account in case some of your positions reach the minimum margin requirements.
Use Economic Calendars
Such calendars help traders and speculators correctly assess the market’s state at the current moment and draw up the nearest action plan. The essence of this is that volatility increases for some time and at the time of the release of important news, and this process might be quite unpredictable. By studying the schedule, you can predict the market reaction to a particular event. Use special filters to find the information you need. Knowing the exact date and time, you can temporarily suspend the conclusion of transactions or minimize them to wait out the “storm.”
Take CFDs Seriously
Some people unknowingly associate CFD trading with gambling. However, unlike it, it is not enough to have intuition and luck. Success in this area comes to those who study the markets and correctly allocate their finances, know when to take a risk and when it would be better to take a break. Although each investor’s strategy is different and unique, the tips described above are universal and will help you survive in these turbulent times.