While CFDs have been increasingly popular in recent years, there is still a lack of awareness on how to efficiently trade them. If you’re thinking about getting into CFD trading, we’ve put up a list of ten rules to assist you to reduce risk, increase profit, and ideally be a professional trader.
- Allow your profits to grow and your losses to shrink.
Due to non-compliance with this law, more traders lose their trading accounts than for any other reason. Holding on to a lost transaction and cashing out on a profitable deal too soon will result in a series of small gains and a few catastrophic losses.
- Logic over feelings
A trader who relies on “gut instinct” to make trading decisions can occasionally make a substantial profit, but he or she is unlikely to be consistently lucrative. This is why it is vital to create trading laws and to follow them at all costs.
- Reduce your exposure to a single trade
A dealer who stakes 50% or more of his market capital on a single transaction is no longer a trader; he or she has become a gambler. By never risking more than 2% of usable money in any single exchange, a trader may ensure that no single transaction will wipe out his trading account.
- Fundamental and technical analyses should be combined.
Those who trade CFDs that use both basic and technological research have a better chance of succeeding than someone who only uses one of these methods. These analyses are very important in order to determine when it is ideal to enter and exit a trade.
- Timing is very important
Entering a trade too soon might result in significant losses, even if the prediction of the long-term market is correct. Waiting for a “cause” and at least one correct signal would prevent this from happening frequently.
- Additions to lost deals should never be made.
A skilled trader can distinguish between range-bound and surging markets. Those who don’t have this skill set are prone to committing mistakes such as adding more to a losing trade thinking that the price will eventually turn around. The use of pattern lines is a key tactic here.
- Broaden your horizons.
Even if an investor never puts more than 2% of his trading capital at risk in a single CFD transaction, a well-diversified portfolio is not guaranteed. One example is trading in the stock of various energy companies. When one individual takes the ‘wrong’ road, the others are more inclined to follow suit. Diversify as much as possible across markets.
- Take into account your own shortcomings.
The biggest crucial difference between a successful and losing dealer is most likely their internal mindset. A successful trader has learned not to be swayed by emotions like greed or fright. Trading on a set schedule and adhering to rigorous money management rules would go a long way toward resolving this issue.
- Stop losses should be used carefully.
Trading without a stop loss might lead to a complete and instant loss. Trading with excessively tight stop losses can lead to a delayed but nevertheless disastrous wipe-out. Stop losses, on the other hand, give the market enough room to ‘breathe,’ that is, to pass through its normal change of price in either direction.
- Recognize dangers and rewards.
The risk-reward trade-off might be considered by both CFD traders. Never engage in a transaction when the potential gain outweighs the risk. Going long right before the expected turning point in a range-bound sector is one example. In this circumstance, the risk of the trade benefiting you in the future is extremely high.
