Learning how to trade CFDs

Trading is one of those exciting and thrilling industries, with the glittering potential of making a considerable amount of money.

However, without the correct tips, many people struggle. Often, the reasons are more to do with their strategy and approach rather than their ability. There are a number of trading ebooks available and here are some top CFD trading tips.

Start small – to get a feel for it

When you start trading, it is important to start small and get a feel for it. Around 90% of traders fail in their first year – trading systems and platforms are not guaranteed to succeed. Even the most experienced traders have losing trades, and you cannot wholly eliminate losses. However, if you start small, build a strategy and stick to it, you can get a feel for what works for you.

Decide when you want to enter and exit the trade

It is essential to have a well-defined trading plan that includes when to enter and exit a trade. This plan will help you make consistent decisions and minimize your losses. Elements of a plan should include:

  • Entry strategy – test hundreds of variations to prove what works; you may even find the testing enjoyable. If you can’t back test data, then use manual testing which might take time, but is well worth it.
  • Money management strategy – just how much capital you will place on each trade.
  • Risk management strategy – how much risk do you allocate to each trade, using money management rules and stop loss size.
  • Record keeping strategy – keep clear records on your trades, to see what worked and what didn’t.
  • Stop losses – there are in profit stop losses, such as a trailing stop loss or an initial stop loss, when trading the fixed percentage risk per trade. Understand your stop losses and have them in place.

Set stop losses and stick to them

Stop losses are an essential part of trading and learning how to use them would be one of any trader’s top tips. You will mention them as part of your trading plan, but you should go into a little more detail with them. The aim of stop losses is to minimize the losses you make and therefore preserve your capital. You should have a clear defined CFD stop loss, ideally identifying stops outside of real-time trading with prices moving. Don’t allow emotion to come into it – hope or optimism are not your friend in these situations. Instead, use a stop loss and stick to it.

Don’t trade on impulse

Having a plan only works if you stick to it – that means no trading on impulse. You have done your research and your testing, you know what you want to do. Stick to it. If you trade on impulse, all that hard work goes out of the window. Concentrate on following your trading plan and don’t get distracted by something new and shiny.

Know when to close a losing trade

There are lots of different ways to tell when it is time to close a losing trade – stop losses are one of the most popular. Other examples include cutting losses early, breaches of support levels and even indicators. Decide which ones you are going to use and stick to them.

Know when to let your profits run

This tip might be the most important – learn from the mistakes of others. Traders tend to wipe out their trading accounts because they have failed to follow this tip, than for any other reason. Clinging to losing trades or cashing in on a profitable trade too early – both result in small wins and small catastrophic losses. The main point to learn here is to let your profits run and not panic when volatility increases – keep with your plan and have faith in your convictions.

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