CFD trading is becoming a hot prospect for investors, yet novices and seasoned investors are making mistakes that are killing their portfolios. If you're just starting to invest, you're probably wondering "what are CFDS?"
Contract for difference (CFD) is an investor (you) and a broker agreeing to pay the difference between an assets price at the time of contract and the price of the same asset at the end of a contract. It sounds more complicated than it is, but it allows seasoned investors to play the market in new, innovative ways.
The 7 rules that Opteck, an exclusive CFD trading platform, recommends to new traders are:
1. Cut Your Losses
A losing trade is an enemy of all investors. Don't let emotional attachment dictate your portfolio's direction. Let profits run, but cut your losses while they're small, and don't look back.
2. Limit Your Exposure
Traders manage their capital properly without putting 50% - 100% of their capital on the line. If traders are putting the lion's share of their capital on the line, they risk wiping out their entire trading account with one loss.
Never risk more than 2% of your capital on a single trade.
3. Fundamental and Technical Analysis Are Key
Fundamental and technical analysis are the keys to a successful trading account. Combining both of these key analysis options allows a trader to be better prepared to make trades that are successful.
Traders who find the most success use fundamental analysis first to do their preliminary analysis and then use technical analysis to time their trade properly.
4. Time Trades Based on Signals
The timing of a trade is vital to the success of the trade. Entering into a trade too early or late can make a potential hot trade a major loss. Triggers, or signals provided via analysis, should be utilized to time a trade as best as possible.
5. Diversify Your Portfolio
Portfolio diversity is essential for success. Risking just 2% of your capital on one trade allows you to diversify your assets and pad the portfolio against potential losses.
6. Use Stop Losses
Stop losses must be used wisely. Trading without a stop loss could lead to major losses. The goal is to utilize a stop loss without being too strict. A tight control on a stop loss doesn't allow market conditions to pan out and leads to frequent losses.
7. Grasp Risk vs Reward
Risk and reward are two major proponents of CFDs. Every trade has a risk and reward, and when the risk is too high or the reward is too good to be true, take caution before making a trade.