Before you begin trading Contracts for difference it is vital to obtain a few suggestions from the professionals to ensure that you do not make many of the expensive errors that beginner traders make. Below are three trading pointers that can help you in your Contract for difference trading success.
1. Manage your Positions
Time and again new traders spend a large amount of time choosing, planning and executing new positions, however they often make the error of exiting these trades with much less thought. This is unfortunate as it is the exit that will determine whether a trade has been profitable or not.
It's human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open with the anticipation that prices will move in the correct direction and reduce losses or even turn them into profitable trades.
A lot of new traders ignore the old saying “Let your profits run and cut your losses short”. As the saying states when you've got a profitable position, you should allow that trade to realize its full potential, instead of closing it out at the first sign of a tiny profit. On the other hand, when you hold a position that is moving against you, you need to move swiftly to exit that position, before the loss becomes too great.
If you are managing your trades properly, your average winning trade should be significantly larger than your average losing trade. After you have the discipline to buy and sell in using this method, you should be able to attain overall profitability regardless of whether only half of your trades are winners. Many traders make the error of not closing poorly performing positions quickly enough. One tool that makes this a lot easier is a stop-loss order.
Once you have determined a price level that corresponds with the level of risk that you're prepared to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.
It's important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been put on a long position, the stop-loss will be activated if the price trades at or below the nominated stop level. Occasionally, this may result in trades being executed a price that is less favorable than the nominated stop-loss price. This is called slippage.
2. Understand the instrument that you're trading
Being over-the-counter products, there are various differences in the contract specifications of Contracts for difference. For anyone who is trading these products, it is critical to know what these specifications are.
You should also be aware of the impact that foreign currency price changes can have on your holdings. If the base currency of the Contract for difference increases against the base currency of your account your profits may be eroded by any currency fluctuation or your losses might be made worse.
The majority of CFD traders trade Contracts for difference based on stocks listed in their own country. The simple reason for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also benefit from the convenience of trading their home market as it's not practical to sit up for half the night to trade a Contract for difference over a share listed on an exchange in another part of the world?
In many cases it is better to stick to CFDs based on stocks listed on exchanges that you're familiar with as opposed to trading Contracts for difference quoted on stocks listed on markets you do not fully understand.
3. Use the correct order types
You should always treat trading as a serious business. As such, you should take some time to make sure that you thoroughly understand the tools of your business. Many Contract for difference traders miss chances or have been stopped up out of trades at the wrong time simply because they placed the incorrect type of order.
At the very least, you need to be familiar with these order types:
Market order: This type of order is utilized to execute a trade at the present market price.
Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are located at a level that's worse than prices presently obtainable in the market. On a long position, the stop-loss order to sell would be positioned below the present market price. Conversely, on a short position, the stop-loss order to buy would be placed at a level above current market prices.
Limit order: A limit order is utilized to get out of a trade. Limit orders are placed at a level that is better than the current market price. When seeking to lock-in profits on an open long position, a limit order to sell would be placed at a level above current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be positioned at a level below current market prices.
You should always remember that as Contracts for difference are leveraged and that trading them might be risky. Though if used properly CFDs will become a valuable tool in your trading arsenal.
Author Resource:
Matthew Jones has been trading Australian share CFDs for over 8 years with one of Australia's most popular CFD providers, IC Markets. Matthew has written a very helpful guide to CFD trading , for a really limited period of time you can get yourself a free copy from IC Markets website www.icmarkets.com.au.
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