CFD trading has gone from being an institutional product to one that is heavily traded by the retail market and fast replacing traditional shares trading as the product of choice for flexible, cost-efficient trading. Online trading platforms such as XTrade Europe offer a wide range of markets. Dealing with CFDs can be profitable, providing you know your stuff. Protect your investment money – and learn to trade in a careful and well planned way.
Spread your funds wide
Don’t put all your eggs into one basket – Any trader who invests too much trading capital into a single trade is potentially heading for disaster. By never risking more than 5 per cent of available capital on any single trade, a trader can ensure that even if they incur a loss, it won’t have a crippling effect to their daily trading.
Target various industries
Even if the trader never risks more than 5 per cent of his trading capital on a single CFD trade, it does not guarantee a well-diversified portfolio. What XTrade Europe offers is tutorials on how to properly diversify your trading portfolio – it would be beneficial for a trader to learn about the latest news and tips before expanding into new markets. If you stick to just one type of commodity or just one market, that’s just the same mistake as investing all your capital in one single trade. Let’s say you invest in 5 companies all in the same industry – chances are that if one goes in the ‘wrong’ direction, the others will follow. Diversify across industries to avoid major loss.
Use stop losses
A great way to minimize risk is to set a stop loss on each trade and stick to it – doubling up simply doubles the risk (see cut your losses below). Trading without a stop loss could lead to an early end of your trading career. A stop order enables you to close a CFD position below the current market price and is the main means stock market traders use to manage risk on each trade that they take out. Use stop losses, but give the market enough space to settle. The market goes through its natural fluctuation. Ups and downs will happen before heading in any particular direction.
Tip: The expected initial target should always be at least twice the stop loss. If the average stop loss set is 3%, the CFD trader should look for 6%-plus gains on each trade as a starting point.
Remember: While guaranteed stop losses are extremely useful when limiting risk, they usually are expensive and have limited lifespan. A trader must take care to pay attention to the expiry period and to monitor the sum being spent on their guaranteed stop loss order to make sure that it is a beneficial arrangement.
Cut your losses
A good trader learns to distinguish between range-bound and trending markets. Without that skill you will easily make the fatal mistake of adding to a losing trade because of the mistaken expectation that the price will turn around. A simple technique is to make use of trend lines.
Switch it up
Another great thing about CFDs is that you can easily switch between asset classes. If traders are bearish about the market, they tend to move in to indices and short the index. They switch back to speculating on individual stocks when they’re more comfortable with the performance of the equity markets.
Many traders using platforms such as XTrade Europe like the fact that they can trade any size position with CFDs – however big or small – preferring small positions during overnight trades. There are no time limits on CFDs. You don’t have to worry about missing the expiry date. The index and stock CFDs have no time limits anyway and with commodities the contracts are automatically rolled into the next month.
Tip: Minimizing risk can be tricky, but trading hours and the guaranteed stop order function offered by CFD brokers such as XTrade Europe, can greatly reduce overnight risk. The expanded trading hours are very comfortable compared to the limited hours on the local exchanges.
CFD trading is all about finding the right balance for you – factor in the risk and the potential and you should be well on your way to creating a great trading portfolio