Contract for differences (CFD) trading is a financial instrument that helps trader achieve their trading goal. But, of course, just like other financial instruments, a contract for differences (CFD) has risks. On the other hand, it’s recommended for beginners and experts who don’t want to invest too much money just yet.
When you trade using a contract for differences (CFD), you need to speculate the value of a certain financial asset, including forex, indices, and commodities. They can either rise or fall over time.
Recently, CFD gained popularity as it doesn’t require a large sum of money upfront. Moreover, investors can open positions without the need to buy the entire stock. Since using CFD is about being a partial owner of the stock, the payment is also partial.
Are you getting curious and want to start trading with the contract for differences (CFD)? Here are five tips to help you succeed!
1. Make a plan
Trading is not an online game you can casually try when you’re bored. It’s something that needs to be taken seriously since you need to spend some money and create a portfolio.
So similar to other types of trading, when you use contract for differences (CFD) as a financial instrument, you need to set your goals or make a plan. If you’re lost, think of the things you can actually do when trading using CFDs.
For instance, what do you do when the underlying asset jumps up to 5%? Do you have a target number of positions for a certain time? It depends on your trading behaviour, but once you set a plan, make sure to stick to it.
2. Find a reliable broker
Trading contracts for differences (CFD) will never be successful if your broker is a scam and your trading platform isn’t going well. Meanwhile, if you have a combination of a reliable trading platform and a promising broker, it’s not impossible to reach your plan in a matter of time.
When looking for a broker, you should look at their profile and read some real reviews. If you think the reviews are invalid, it’s time to look for another one. If you’re a beginner, it’s safe to explore from the top and popular brokers. Just compare them based on your wants and needs, and pick the one that suits you the most.
Since trading can be expensive, pick a broker that offers the true value of trades. If they ask for too many fees, it would hurt your plans in the long run.
3. Take advantage of the demo account
Practise makes perfect, but you shouldn’t waste your money if there’s a demo account you can use. Demo accounts are free of charge, it’s better if you use them to be familiar with how things work.
For instance, if you have a specific amount of money to use for trading CFDs, you can try trading it using a demo account. If you win, you can do exactly what you did in the demo. However, you need to consider the timing and other factors to make sure you can win.
On the other hand, if you didn’t win, keep on training yourself using the demo account. Remember that the actual movement of the market is happening in the demo, so you should always take it seriously.
4. Don’t forget to study
Aside from the hands-on training, you should also study everything you need to know about contracts for differences (CFD). of course, no one’s going to quiz you about the terms and tips, but you will surely need them in the future.
If you’re not in a hurry, you can read one concept per day. Make a habit to learn something every day, so that the knowledge stays with you. If you’re going to cram them all in just a week before starting the actual trading, you’ll just experience information overload.
However, there are times when you don’t need to study terms. Watching online videos from professional traders can also help you move forward.
5. Limit the leverage
Of course, you can’t limit the leverage per se, but as much as possible, don’t take a contract offering high leverage. Although it seems like a safety net for the brokers, leverage can be dangerous if things didn’t go well.
For instance, if you’re a beginner, you would think that having leverage is fine since you can trade more than the money you have. Unfortunately, there are consequences like having to close the position right away when things go the way you didn’t expect them to.
So even if you’re not ready to let go of that certain position yet, you’ll be forced to since you’ve exceeded the limit of your ownership.
Trading using contracts for differences (CFD) has both positive and negative effects. It’s just up to the trader whether they can manage it. So before trying, ensure that you’re prepared enough. Also, let us know what you think of CFD trading by leaving a comment below!
ABOUT THE AUTHOR:
Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.