Tips for successful CFD trading
A CFD is a special investment product that offers you the opportunity to trade with leverage. This leverage results in increased risk. However, once you have mastered the tricks of the trade, you can make use of the advantages that CFDs offer. Below you can read a number of tips that will help you with investing in CFDs . Always remember: investing, including in CFDs, involves risks.
Let your profits run
This is one of the most important principles when it comes to trading CFDs. Figures in the green? Let your positions run and try to maximize the amount of profit you make. You will be inclined to close positions as soon as they are in the plus, but you will not make big profits with this. Milk your profitable positions as much as you can.
Take loss as soon as possible
This is actually the second part of the principle mentioned above. Let your profits run and take losses as soon as possible. In practice, it often happens that investors structurally make losses on CFDs, because they hold losing positions unnecessarily long. By holding such positions, you lose a large part of your investment within a short period of time. Even though it may be somewhat difficult from a psychological point of view to close losing positions, in most cases it is the best thing to do. In short, do you appear to be wrong? Close the position and look for new opportunities, because by maximizing your profits and minimizing your losses, you will make a profit in the end.
Always keep learning
Investing is closely linked to society. Share prices respond to social developments. If you are aware of these developments as early as possible, you can respond quickly by purchasing or selling the right CFDs. In addition, it is always wise to continue learning. A good CFD investor has a lot of knowledge and always remains curious, even if he or she has been doing it for years. By having the right knowledge, you enter positions with more confidence. In this way, you slowly but surely develop into an experienced and well-considered investor.
Risk spreading
If you ask an investor what the key to successful investing is, there is a good chance that risk diversification is the answer. You would do well not to tie yourself to a specific country or a specific sector or currency. In most cases, this is too risky. Compare it to a company that only has one customer. If this customer disappears, the company will go bankrupt in no time. A company that has multiple customers will always have customers left. Ensure rock-solid risk diversification by spreading your investments as much as possible across different sectors, countries and currencies. This provides emotional peace, even in times of crisis. In addition, risk diversification is a way to safeguard your capital. After all, it will ultimately have to be your capital that generates profit for you. Read more about the risks of CFDs.
Work with time limits
Investing in CFDs is not just about making a profit in percentages. After all, you also need to keep an eye on the costs. You pay costs for holding positions. These amounts can increase considerably over time, which affects your profit. By agreeing with yourself how long you will hold a position at most, you cover the risk of excessive costs. You can calculate these costs in advance. In addition, setting a time limit is a method to keep control over your CFD investments.
Use leverage wisely
It hardly needs explaining that a major advantage of investing in CFDs is the possibility of using leverage. However, most CFD investors have also noticed that leverage can work against you. When positions do not go entirely according to plan, leverage can be a real danger. Some restraint with leverage is always recommended. However, by cleverly composing your trading portfolio, you can actually benefit greatly from trading with leverage. For example, it is wise to only use leverage for strong positions. It is therefore not wise to do all transactions with leverage. Not all positions are equally suitable for this. Trading with leverage can be emotionally and financially difficult. However, with some restraint, you can use it to adjust the risk-reward ratio a little more favorably.
Use a stop-loss
It was already mentioned earlier that it is wise to maximize profits and minimize losses. You can minimize losses manually, but it is even wiser to do this by means of a so-called stop-loss . You set a stop-loss at a certain price level and it will then automatically close your position. It is a form of risk management. For example, if you want to close a position with a maximum loss of 15%, you set the stop-loss 15% below the price at which you purchased the share. Using a stop-loss when trading CFDs is always wise, because the market can go in all directions. This effect is even more noticeable through leverage. Using a stop-loss represents a cautious and above all realistic way of investing. It prevents you from letting your positions run into the red indefinitely based on emotion. This can save your capital at crucial points.
Know what you pay
When it comes to investing in CFDs, it is important to know exactly how many costs are involved. After all, it is not just about transaction costs. When you enter into a position, there are several layers of costs that come with it. What these costs are exactly and how high they are, depends on the broker you choose. The costs usually consist of transaction costs and overnight fees . The latter increase the longer you hold your position. It is important to realize that the costs you incur are deducted from your profit. When you incur more costs, you simply make less profit. You prefer to keep the costs as low as possible. It is difficult to invest consistently while you have little insight into the costs you incur. So make sure you know what you are paying.
Set profit expectations
It often happens that novice investors start opening positions without actually linking a profit expectation to it. These investors hope for a bit of luck from the moment of purchase. However, if you are serious about trading CFDs and want to make a consistent profit, it is wise to set a profit expectation. This is again a technique of risk management and portfolio management. In addition, with a profit expectation you set a goal for yourself, it gives substance to what you want to achieve with a certain position. Setting a profit expectation forces you to think about the progress of a certain course. This prevents you from trading on the basis of arbitrariness. Furthermore, you can make calculations with regard to your (future) investment strategy based on profit expectations.
Do not use levers that are too high
It was previously stated that it is advisable to be cautious with leverage . An additional tip is not to use too much leverage. High leverage often indicates an (overly) ambitious approach, but this does not always pay off. Roughly speaking, you could state as a rule that you should not be able to lose more with a certain leverage than you can afford to pay yourself. If you use very high leverage, investing starts to look more like gambling. Slow and cautious is the motto.
Don’t lose more than you want to win
When you enter into a CFD position, you will most likely have a price target in mind. The question then is how much profit you expect to make. Depending on the effect and the circumstances, this will be a high or low amount. In any case, it is important that your profit expectation is higher than the amount of loss that you will make in the worst case on the position in question. This concerns the ratio between potential profit and loss. For example, if your price target is 10% higher than the purchase price and your stop-loss is 10% lower, then the ratio is the same. In a favorable case, the ratio would be, for example, 20% profit versus 5% loss. Do not let positions run into losses endlessly in the hope of an increase. As mentioned earlier: take losses where necessary.
Don’t trade too much
In several aspects of investing in CFDs, the following applies: stay within appropriate limits and do not exaggerate. Here too, it applies that you should not enter into positions that are too large or too many positions. It is wise to focus on a specific group of CFDs, so that you make it possible for yourself to follow these effects closely. If you enter into too many positions, you can easily lose control of your portfolio and this is of course undesirable. However, it is relevant to find a good balance between the number of positions you open and your risk diversification. It is better to open many positions that all fall within a different sector than to open many positions within the same sector. Never be too frugal when it comes to risk diversification. This is especially true when you are dealing with leveraged products. After all, these can provide unpleasant surprises.
Keep emotions out of it
Emotion is the biggest enemy of every CFD investor. For example, emotions give you the feeling that you have not been very lucky or that the markets will surely correct. However, when it comes to CFD trading, there is no karma. The market is cold-blooded and merciless. Always try to place an imaginary wall between your positions and your emotions. When emotions are linked to positions, sleepless nights will be the result. Successful trading in CFDs ultimately comes down to switching off emotions and having a healthy dose of discipline. With a sound risk diversification, it makes little difference if a security, such as a share , is in the red, because with sufficient risk diversification, there is almost always another share that (partially) compensates for the loss.
Don’t follow your losses
When you have done research on a share, you may have the feeling that the price should move according to your expectations. In practice, however, this often disappoints. As a result, many CFD investors continuously adjust their margins and stop-losses to the current price. In this way, you are, as it were, financing your own losses. This is also called following losses; you pay money to then lose it again. This is of course a great shame. It is much wiser to close the position (or have it closed) based on the previously set stop-loss and your research.
Don’t set stops too close to the price
The fact is that stocks will always fluctuate. In other words, prices always move. When a stock rises, it is never in a straight line; a rise always takes place within a trend. It is important to give the price some room when it comes to this fluctuation. If you set the stop-loss very close to the price, there is a chance that the position will be closed before it has had a chance to be profitable. This is a waste of your money. After all, you have paid transaction costs and you are taking a bit of a loss. You need to be realistic when it comes to setting such stops. How close you set the stop-loss to the price depends very much on the stock in question.
Some shares are very volatile, which means that they show a lot of strong movements within a relatively short period of time. Some shares, on the other hand, are less volatile, which means that they move a lot less. The more volatile the share, the more margin you need to leave for the price to breathe. In addition, prices can sometimes jump a lot, for example when the market opens after quarterly figures have been presented. It is difficult to take such price reactions into account, because they are not always predictable. However, to the extent possible, it is recommended to take such matters into account.
CFDs are not for gambling
CFDs are often seen as a gambling product due to the high risk they carry. However, there is a big difference between investing in CFDs and gambling. A gambler gambles that his stake will increase in value, this is based on almost nothing. Purchasing CFD investment products, on the other hand, should be based on research. If you want to make a structural profit, which is possible, then you have to work for it. It does not come easy. Time and again you have to be clear to yourself why you are taking out a certain position. You base this justification on research. It is in principle possible to omit any form of research and treat CFD investing as gambling, but this is of course not recommended. In most cases you will lose your money, except for a random bit of luck. Investing in CFDs is not about calculating chances, but it is about well-prepared trading based on measurable and factual information.
The market owes you nothing
As mentioned above, investing in CFDs is not gambling. It often happens that disadvantaged investors feel that the market owes them something. However, that is not how it works, the market does not owe you a cent. This line of thinking assumes that investing is a game of chance, but that is not the case. Even though there is sometimes an element of chance in certain (small) aspects of investing, most market results are very predictable. When you get the feeling that the market owes you something, you will make unfounded trading decisions. This will cloud your rational view of the market. Trust your research and be consistent with it.
Compare brokers and start trading CFDs
You will have noticed from the above tips that trading CFDs can be a tough task. Ultimately, the most important thing is to have discipline and not to act too hastily. Remember that there are less risky investment products and that investing always involves risks. In addition, comparing brokers is also very important to determine the best broker for you.
Are you excited about investing in CFDs after reading this blog? Compare all CFD brokers via our comparison tool and find the broker that suits you best!
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