Contracts for difference, or CFDs, are neat investment instruments that have become increasingly popular in recent years. As derivative products, they don’t confer ownership rights on their buyers – but they allow those buyers to access a fast and powerful trading world that mimics and follows the ups and downs of the real market. They also bring the concept of leverage to the table, which allows your investments to go further. With this in mind, here are three top tips for a CFD trader to follow.
Embrace leverage
When first presented with the idea of leverage, it may seem a little scary. Essentially, you are borrowing money from your broker in order to increase the size and scope of your investment. Obviously, this is something that shouldn’t be done lightly: the downside is that you can also lose a lot of cash with leverage, as it also multiplies your potential losses. However, if you’re set on becoming a CFD trader, then you’ll need to embrace leverage. Using a tool such as a margin call will help you see at a glance and in real time how much your investment is valued at, and you can always set stop losses – which let you stipulate a maximum potential loss – for maximum peace of mind.
Find a good broker
As is the case with trading other assets such as stocks, finding a decent broker is half the battle when it comes to devising a good trading strategy. One advantage of a good CFD broker is that they will charge relatively low fees, and they may avoid some of the more predatory charges that unfortunately are often seen in the industry – such as inactivity fees. They may also provide access to a well-designed trading platform such as MetaTrader or proprietary software developed with trader needs in mind. There are many CFD brokers out there, so it’s wise to spend time researching the best ones.
Stick to a strategy
A surefire way to risk failing in your CFD investment efforts is to forget to implement – and stick to – a clear strategy. By remembering to do this, though, you can reduce your risk of losses quite substantially – and protect against panicked, instinctive reactions. One example of a CFD trading strategy is the capital preservation approach, which emphasises loss avoidance rather than necessarily making a large amount of money from the outset. Another is to keep a journal or diary that monitors which trades went well and which didn’t: after a few months of doing this, you’ll be able to go back through it and – hopefully – spot some patterns.
CFD trading can be lucrative if done correctly, and it’s certainly the case that these products offer a quick way in and a trader-friendly experience. However, with so many potential pitfalls on the horizon, it’s not always quite as simple as it seems. From finding a strategy to choosing the right broker, you’ve got a lot to think about as a CFD trader – so it pays to do your research!