Played well by a prescient mind, contracts for differences (CFDs) can lead to immense yields. They are agreements to pay out the difference between the executing and closing price of a share. As highly leveraged financial derivatives, CFDs can be lucrative substitutes to buying stocks. With a CFD, you can make money without ever actually owning the shares (or commodity, currency, market index for that matter); you usually only need to pay around 10-25 percent of their value at the outset. You can then profit or lose as if you own 100 percent.
To succeed in the arena of CFD trading, you need to have a good money management system. Here are some tips on how you can magnify your profits with CFD trading:
Start small.
Don’t enter into massive agreements straight away; start small. This holds truer if you’re still learning how to trade CFDs. Use no more than 10 percent as initial margin per trade. This is a way to make sure that your losses are smaller than your winning trades. Remember that losses in CFDs often surpass your initial equity. Attune yourself to the idea of making a string of small losses and a few large gains.
Stick to your guns.
Always plan ahead when trading any instrument; establish which level you will be trading at beforehand. Decide on your entry and exit points in advance. You need to have a pair of exit points, for when the outcome is either in your favour or not. Then you need to be stolid about your trading decision. Wait until the price reaches your chosen level. Otherwise, don’t be tempted to shift too early, unless you can justify your doing so.
Stick to your stop losses.
To hew yourself to your exit levels, establish a stop loss order for every trade, especially if you are just starting out as a trader. Do this and you will cut losses as soon as possible. Moving a stop further, on the other hand, only defeats the purpose. Then again, monitor your positions regularly. Should they defy you, you can react accordingly.
Have the wisdom to bail.
It is the hallmark of any successful trader to have the forethought to get out of a losing trade. The fact is, all seasoned traders suffer losing trades. What separates them from amateurs is that they have enough self-restraint to get out of the markets. So don’t let your losses run; step away and replenish. Close positions, and keep the losses small.
But allow your profits to run too.
However, have the wisdom to know when your profits deserve to run. Do not take your profits too soon, lest you should miss out on a streak of large gains.
Diversify.
Spread your capital. Start CFD positions across various equities and economic sectors. It would surprise you to know which sectors are ‘hot’ right now. At the same time, taking on many markets would be overkill.
Learn any way you can.
Ideally, as a trader, you should not have to go chasing waterfalls, as it were. Stick to the instruments in which you know you have honed your experience. When you’re ready, you can tackle other instruments. But first do your research. Read financial news, look at corporate reports, and know the company’s trading hours and ranges.
In the inevitable moments when you err and lose, you only have to learn from them. Expensive as these realisations are, they will be priceless down the road. You could say it’s just like taking a long position. The old adage applies: “Fool me once, shame on you; fool me twice, shame on me.”