CFDs, (Contracts for Differences) fall in the derivatives asset class. They allow investors and traders to speculate on various financial markets like indices, forex, cryptocurrencies, and commodities without necessarily owning the basic asset. Here are some tips to help you succeed as a CFD trader.
Use a Demo Account First
Practice and master your CFD trading skills on a demo account before venturing into live trading. Many brokers will provide you with a demo account that you can use for free. Traders can use a demo account to determine whether or not CFD trading is what they want to do. Click here to get a demo account.
Understand CFD trading basics and your specific investment before you can venture into live CFD trading. For example, traders should know the difference between a market order and a limit. Avoid trading with forex CFDs before you understand the difference between a GBP/USD and a USD/GBP quote. Remember, you cannot be an expert in all markets or asset classes. Choose a few specializations and stick to them.
Focus on Preserving Capital
CFD trading strategies should focus on preserving capital because each dollar counts. This way, traders can avoid risks and minimize losses. If you are just beginning, focus on testing and learning different strategies using a demo account. As you gain more experience you can try more aggressive CFD trading strategies.
Pick the Right Leverage
Leverage can help you seize major achievements from the small price changes of the underlying asset. However, if the market fluctuates in the opposite direction the losses will be higher. As a result, traders should exercise caution when picking their leverage. If you are a novice trader, having a conservative risk profile would be ideal. What this means is you will pick ratios like 100:1 or 50:1.
A conservative profile comes in handy especially for shares and indices that higher volatility and lesser liquidity compared to the forex market. While you can utilize leverage, where possible try to balance leverage to a position that conforms to a risk tolerance profile.
Use the Proper Trade Position
Some brokers will not allow you to lower the leverage. If this is the case then you can cut down your trade position instead. Always be on the lookout for your dominant risk level. For example, you may want to maintain a $500 Apple stock position but your broker’s default leverage is 5 and cannot go lower past 1. In such a case you can consider lowering your CFD trade position. As a result, your leveraged position will be $500 = 5*$200.
Consider Asset Correlations
CFDs can come in handy to hedge out risk exposure. For that, however, traders should consider asset correlation (the standard of how two assets flow against each other or together.) Many traders trade two separate Contracts for Difference in one industry (a short and long one). Some traders may opt for two markets that display a negative correlation such as crude oil and US Dollar.
Pair trading help traders leverage on the difference between the two underlying securities. Based on the market trend you may want to select a strong and weak asset. You may consider a short position for the stronger asset and a long position for the weaker one. Often, the general market direction has no impact on the overall results. What matters is the difference between the price of the two assets.
Always have a Trading Strategy
Ensure you configure a strategy for every trade before opening it. For example, you should understand where to close in both the worst and best-case scenarios. Consider potential scenarios of the expected performance of your investment. What happens should there be a 5% increase in the underlying price? What if it reduces by between 5% and 50%? A robust trading strategy helps you remain focused.
You are not guaranteed of success as a CFD trader in MENA Region. However, these tips will help you learn and master your trading skills with time.