CFD Trading Strategies And Tips For Beginners
There has been a lot of buzz regarding CFD trading. Due to a lack of proper CFD trading strategies, traders lose thousands of dollars.
This creates a negative image of CFD trading in everyone’s mind. In reality, it’s the new traders who make rookie mistakes and lose all their money.
They don’t research on how the CFD markets work and functions. Those who question its effectiveness don’t realize the profit potential in CFD trading due to leverage and margin trading.
This results in failure and as a result, they give up trading. We don’t want that to happen to you.
This is why we are going to list the best CFD trading tips to take your trading game to the next level. We’ll first know what CFD’s are and how you trade them.
What Are CFD’s And How Do You Trade Them?
CFD stands for Contracts for Difference. As the name suggests, it is a contract or an agreement between the buyer and seller.
No actual exchange of assets takes place. Instead, traders speculate on the price of the underlying asset.
If the price of the asset rises, the buyer makes money. If the price decreases, the seller makes money.
CFD’s are not limited to one or two financial instruments. CFD trading allows you to trade in stocks, shares, currencies, indices and other assets. The buyer doesn’t have to pay the full price of the asset.
Instead, he pays a deposit to open position in the market. We call this deposit as margin. It lies anywhere between 3% to even 50%.
The ability to open large positions using only a small deposit is leveraged trading.
Example: Let’s consider an online CFD trader who wants to open a position of a CFD stock.
To trade CFD’s you have to pay a margin to open a position. The margin amount depends on the total number of CFD’s you want to trade.
For example, if a trader buys 10 CFD shares. He buys these shares because he thinks the price of the asset will rise soon. Each share costs $50 and the margin is at 10%.
So the trader only pays 10% of the total cost ($500) as margin. So by investing $50, he is trading $500 worth of CFD shares.
If his prediction is correct, he will make a profit. If he’s wrong, he’ll face a loss. His losses may exceed his investment depending on the price drop.
This is why leveraged trading such as CFD’s are very risky.
We realize now that proper strategies are important before investing our precious money.
The CFD market is unstable and ever-changing so the risks can’t be completely eliminated.
But our CFD strategies and techniques will cut down your risk. We will discuss these in depth.
CFD Trading Strategies And Tips
We offer you our comprehensive list of beginner CFD tips and tricks.
Apply these and skyrocket your chances of succeeding at CFD trading. We listed these tips on the basis of their importance.
Intermediate and advanced traders can apply these tips too. After all, it never hurts to brush up your basics. Let’s get started.
Research and Educate Yourself
The first CFD trading tip is doing your research on CFD trading.
This should always be your first step to CFD trading. Do your research on how CFD’s work.
Educate yourself on how CFD trading works. There are abundant resources for CFD trading. Read textbooks written by authoritative figures.
You can read journals, articles and research paper on CFD trading as well.
Apart from books, there are many financial websites that educate on CFD trading. There are websites dedicated only for CFD trading.
Our website has a range of articles on CFD trading you can read. It covers all CFD related topics.
Internet and smartphones have made learning convenient. There are many free videos on CFD education on the internet if that’s your style of learning.
The main point lies in the importance of knowledge.
You can’t trade without a plan and expect it to be profitable every time. Compare a well-informed trader and someone knowledgeable on what they’re doing with their trading.
Who do you think will succeed? Who do you think will end up losing all their money?
The answer is simple. Learn first. Use the knowledge and apply it. With enough experience, you will see yourself mastering CFD trading.
Practice (Demo Account):
Next CFD trading strategy would be practice. Put your knowledge to use and start practicing what you learned.
You need to trade in CFD assets to practicing. You may not be willing to risk your hard-earned earnings on CFD trading.
So you might be wondering how to practice CFD trading without actually live trading CFD’s.
CFD brokers have come up with a solution for that: Demo trading. So what exactly are demo trading and demo accounts?
Demo trading is a virtual trading platform. Here CFD trading takes place using virtual cash. Brokers provide demo trading to promote their own platform.
If traders like the demo, they will most likely engage in their live trading platform.
So how can beginner traders take advantage of demo trading? They can choose any one platform from a wide array of online platforms available to them.
Traders get an initial deposit which the broker provides. This deposit is virtual and has no real value in live trading.
The deposit ranges anywhere from $10000 to $100000. This is quite a high amount to start with. Most traders don’t invest this much in live trading.
Brokers provide a high initial deposit so traders can try out different strategies. As a beginner trader, you are going to make a lot of mistakes.
This is natural and expected. You learn from these mistakes and gain experience. You are not limited to one broker either.
Try out as many as you can and compare their features. Go with the one that suits your needs.
There is no fixed rule on how much time you should be spending on a demo account. It completely depends on you. Some think 2 months is enough while others need more time.
Take as long you need and then finally switch to live CFD trading.
This is a crucial strategy for beginner traders. You are going to invest in CFD’s which are risky.
It will take a lot of testing and fine-tuning to get good at it. Start low. Invest a small percentage of your earning.
Even if you fail and lose your money, the damage would be minimal. You are learning from every small trades you take part in.
CFD’s have leverage involved. You may end up losing more than your deposit.
You may think you have spent enough time with a demo account and can apply that experience to live trading.
Traders who do that end up failing most of the time. We have to remember demo trading is after all a virtual environment.
Brokers claim it mimics real market conditions. In reality, the live trading environment is complex and changes a lot. There is slippage, the difference in position size and the risks involved are real.
In conclusion, start low, and get a solid understanding of the market. Then increase your investments as you gain confidence.
Not A Get-Rich-Quick Scheme
If you’re looking to trade CFD’s to make some quick cash, then you’re wrong. CFD trading isn’t something that makes you rich overnight.
If that were the case, most CFD traders would be earning millions. It is a long grind and takes time to get good at.
You may get lucky every once in a while but the majority of the time you’ll lose money.
CFD brokers state 70-80% of traders lose money when trading with CFD’s. Most people don’t realize CFD trading takes a lot of skill and patience.
Beginner traders lack patience and get frustrated. Don’t fall into this trap. Take things slow. Take a break when you go on a losing streak.
Even experienced traders lose money. Be practical and accept small defeats. You will start getting results soon. Don’t turn it into a get-poor-quickly scheme!
Chose Between Short And Long-Term Trading
Most traders prefer to opt for short-term (an hour to a day) than long-term (a month to years).
The main reason is the costs associated with short-term trading are less.
The risks involved are lesser too. Another reason is that CFD’s needs regular monitoring. Doing that on a long-term basis discourages most people from investing in long-term CFD’s.
The CFD day trading strategies differ from long-term strategies. The main benefits of long-term trading are bigger leverages and larger profits.
You have to decide which mode of trading you chose before investing. If long-term trading works better for you, then go for it. But for beginners, we recommend short-term trading.
Hedging is a popular strategy used by successful CFD traders. It is a protective measure against future losses.
To explain, consider this: You have a long position on a CFD asset as you predicted the price to rise. But instead, the price of the asset drops.
As a result, you lose money. Here’s where hedging comes to the rescue. You open a short position on the same asset where you opened long.
The long position loses you money but the short position earns you profits as the price is dropping. This neutralizing or counter-balancing of positions to reduce risk is hedging.
For beginner traders, this is a life saver. Most of their positions might go against the market flow when they start trading. Hedging will help them decrease their losses.
Hedging has some disadvantages as well. It introduces some opportunity cost as some profit gets compromised.
CFD’s are popular due to their high-risk high-reward nature. With the inclusion of hedging, risks reduce and so reward (profits) decrease too.
Another problem is the complexity of hedging on short-term trading.
As the prices fluctuate a lot, beginner traders will find it hard to keep up with the flow. Even so, it is a useful tool for CFD trading.
Don’t Get Greedy On Leverage
In CFD trading, leverage can either be your best friend or worst enemy.
It can earn you some quick cash or empty your bank balance. When starting out keep your leverage ratio and position size low.
If a position goes in your favor, don’t feel greedy and increase your position size.
If the market flow goes in the opposite direction, you end up losing more than you started with. Keeping a low leverage ratio will help cut losses. Patience and persistence is the key.
Use Stop Loss Orders
Let us understand stop-loss orders with the help of an example.
Say you own 100 CFD shares of a company. Each share is worth $5. You expect the price to rise within the next few days.
However, as a security measure, you ask your broker to close your position if the price drops to $3. This process is placing a stop loss order. Here, the stop loss was placed at $3.
So when the market price actually drops to $3, your broker stops your position.
And you lose $200 in the process. This helps in minimizing your loss if the price keeps dropping.
If the price further drops to $2, you end up losing $300 instead. Having a stop order saved you from further losses.
Now, this is only an example. In real trading situations, stop loss can prevent you from even bigger losses.
We would recommend beginner traders to use this feature always when they open a position.
If your broker provides a guaranteed stop loss order (GSLO), use that. It is better than a stop loss order as your broker guarantees a stop loss.
If we, consider the above example, the difference here is that the broker guarantees your shares to sell at $3 even if the price drops below that.
Using GSLO requires paying a premium and not all brokers offer this feature.
However, there are drawbacks to using stop-losses. In case the price drops at $3 and then rise back, your shares get sold for $3. You will miss the profits from the price rise.
Another drawback is the added losses from slippage. If it is a market where price changes are rapid, and your order gets placed later than you want it to.
This will cause you to lose more money than you planned. There’s also a trailing stop feature. Here your position gets closed if the market flow moves against you.
CFD Dividend Trading Strategy
In case you were wondering if dividends have anything to do with CFD’s, then the answer is yes.
In CFD’s you don’t own actual financial assets so the dividend rules for owning stocks and shares don’t apply to CFD’s.
There are two situations here:
Hold a long position on CFD shares before ex-dividend. You are eligible for, an amount equal to the dividend amount.
If you are short selling a CFD asset, you owe the broker an amount equal to the dividend.
There are certain trading strategies for CFD dividends.
We will discuss the most popular dividend strategy: dividend stripping. As discussed before, going long on CFD’s before ex-dividend date earns you dividends.
After the ex-dividend date, you sell it. If the price drop Is lesser than your divided amount, you gain some profit.
And since there’s leverage in CFD’s, whatever you earn gets magnified. This makes this strategy attractive to traders.
Read more: Dividend Stripping
Believe In Yourself
Yes, this last tip isn’t anything technical but vital. You must believe in your abilities and trade with confidence.
If you follow all the CFD trading strategies and tips above, you will gain the confidence to succeed.
Even if you lose money at first, keep faith in yourself and continue trading. CFD trading is a marathon. Don’t try to sprint your way to profits.
CFD Trading Strategies: Final Words
CFD’s are financial derivates and have leverage. It is gaining in popularity due to its nature of trading.
But the CFD market is volatile and hard to predict. This makes the beginner traders make a lot of mistakes in their trades.
In this article, we listed the best CFD trading strategies and tips for beginners.
To summarize, do your research, learn the CFD basics and understand how it works. Practice by opening demo accounts from different brokers.
Chose the one that you find the most convenient. Use it for at least a few months before trying live trading.
Start with a small investment and invest in assets that have a low leverage ratio.
Be patient and have confidence in yourself. Make sure to hedge your CFD assets. They reduce risks.
Start with short-term trading and aim for small profits. Make sure to use stop-loss orders. They will reduce your losses in case the price drops.
If your broker provides guaranteed stop loss order, that’s even better.
For optimal divided returns, use dividend stripping. Buy CFD shares before the ex-dividend date and sell it after.
As you are investing on margins, you will get leveraged returns. That is all for now. You can now trade your CFD’s with confidence and success.