Trading CFDs is a more complex way to add to your portfolio. Novice traders must make sure they understand the product, and how to make it work for them, before venturing into this challenging, albeit exciting, instrument. Let’s look at some rules to follow when trading CFDs:
Golden rules for CFD trading
1. Always use a stop-loss order to protect your capital
A stop-loss order is placed with a broker to sell a security or commodity when it reaches a particular price. This type of order is designed to limit the investor’s losses if the security or thing falls in price.
2. Do not overtrade
Overtrading is one of the biggest mistakes that investors can make. When you overtrade, you are investing more money than you can afford to lose, increasing your risk exposure. It is important to remember that CFD trading, especially for stocks traders, is a high-risk investment, and you should never trade more money than you can afford to lose.
3. Always use limit orders
A limit order is an order to buy or sell a security or commodity at a specific price or better. This type of order is designed to get the best price possible for the investor. It is essential always to use limited orders to get the best price possible for your trades for CFD trading.
4. Do not chase prices
When you chase prices, you are buying or selling securities or commodities when the market moves in the opposite direction of what you expect. It increases your risk exposure and can lead to significant losses. It is important to remember that CFD trading is a high-risk investment, and you should always trade according to your research.
5. Use stop limits rather than stop losses
A stop-limit order is placed with a broker to sell a security or commodity when it reaches a particular price, but not at any less than the limit set in the order. The advantage of this type of order is that it guarantees the investor will receive at least their desired (or limit) price for whatever quantity they decide to sell.
6. Never panic and sell
When the market moves against you, it is important not to panic and sell. It will only lead to more losses. Instead, stay disciplined and stick to your trading plan.
7. Use a demo account to practice before trading with real money
A demo account is an account that allows investors to trade securities or commodities without using real money. This account is ideal for beginners who want to trade CFDs before investing their hard-earned money.
8. Always diversify your investments across the various CFD symbols and sectors available
When you diversify, you spread a certain percentage of your portfolio equally among several different investment vehicles. For CFD trading, it is essential to continuously diversify across other symbols and sectors to lower your risk exposure while trying to achieve higher returns.
9. Maintain a tight stop loss on winners and a loose stop loss on losers
A stop-loss order is placed with a broker to sell a security or commodity when it reaches a particular price. This type of order is designed to limit the investor’s losses if the security or thing falls in price. For CFD trading, it is essential to maintain tight stop losses on your winners and loose stop losses on your losers.
10. Always use a risk management strategy
A risk management strategy is a plan that outlines how much money you are willing to lose on any given trade. This type of strategy is essential for all traders and should be used with a trading plan. A risk management strategy will help you avoid significant losses and stay disciplined while trading CFDs.
11. Make sure you understand the risks before investing
CFD trading is a high-risk investment, and it is essential to understand the risks involved before investing any money. When you trade CFDs, you buy or sell securities or commodities using a combination of margin and leverage, which increases your risk exposure.
12. Do not trade many contracts at once until you become experienced
CFD trading allows investors to trade with many contracts on their investment amount, but this should only be done after becoming more experienced in this type of trading. In general, it is ideal for beginners to start small by investing smaller amounts on fewer symbols or sectors before increasing their trading capital over time.