Learn CFD Trading Mistakes The Cheap Way
Before you commence trading CFDs it is vital to obtain a few tips from the professionals to ensure that you don’t make many of the expensive errors that amateur traders make. Below are three trading pointers that will assist you in your CFD Trading success.
1. Manage your Positions
Repeatedly new traders spend a large amount of time finding, planning and executing new positions, however they often make the mistake of exiting these trades with much less thought. This is unfortunate as it’s the exit that will determine whether a trade has been profitable or not.
It’s human nature to take profits quickly while the fear of incurring a loss will see the same trader leaving poorly performing positions open with the expectation that prices will move in the correct direction and reduce losses or even turn them into profitable trades.
Many new traders forget about the old proverb “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, make sure you allow that trade to achieve its full potential, instead of closing it out at the first sign of a tiny return. On the other hand, if you happen to hold a position that is moving against you, you should move quickly to exit that position, before the loss becomes too great.
If you are managing your trades properly, your average winning trade should be considerably larger than your average losing trade. Once you have the discipline to buy and sell in this way, you should be able to achieve overall profitability regardless of whether only half of your trades are winners. A lot of traders make the mistake of not closing poorly performing positions promptly enough. One tool that makes this a lot easier is the stop-loss order.
Once you have determined a price level that corresponds with the level of risk that you are willing to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human element from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.
It is important to understand that a stop-loss order simply gives you a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will likely be activated if the price trades at or beneath the nominated stop level. Once in a while, this can result in trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.
2. Understand the instrument you’re trading
Being over-the-counter products, there are several variations in the contract specifications of Contracts for difference. If you are trading these products, it is imperative to know what these specifications are.
You should also understand the impact that foreign exchange price changes might have on your holdings. If the base currency of the CFD increases against the base currency of your account your gains could be eroded by any currency fluctuation or your losses might be made worse.
Most CFD traders buy and sell Contracts for difference based on shares listed in their own country. The simple motive for this is that traders are more at ease trading CFDs that they’re familiar with. Most traders also benefit from the convenience of trading their home market as it isn’t practical to sit up for half the night to trade a CFD over a share listed on an exchange in another part of the world?
In many cases it is better to stick to Contracts for difference based on equities listed on exchanges that you are familiar with as opposed to buying and selling CFDs based on shares listed on markets you do not fully understand.
3. Use the correct order types
You should always treat trading as a serious business. As such, you might want to take some time to ensure that you thoroughly understand the tools of your business. Many Contract for Difference traders miss chances or have been closed out of trades at the wrong time simply because they placed the wrong type of order.
At the very least, be certain to understand the following order types:
Market order: This sort of order is used to execute a trade at the present market price.
Stop-order: This order type is used to exit a trade at a specific price. Stop-orders are placed at a level that is worse than prices presently available in the market. On a long position, the stop-loss order to sell would be positioned below the current market price. Conversely, on a short position, the stop-loss order to buy would be located at a level higher than current market prices.
Limit order: A limit order is utilized to exit a trade. Limit orders are placed at a level that is better than the current market price. When seeking to lock-in gains on an open long position, a limit order to sell would be placed at a level higher than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level lower than current market prices.
You should always keep in mind that as Contracts for difference are leveraged and that trading them can be risky. Though if used correctly Contracts for Difference will become a priceless tool within your trading arsenal.