CFD’s (contracts for difference) stand as one of the most popular derivative products on the financial market, primarily because they enable traders to profit within volatile and variable environments. Used to speculate on a number of underlying financial instruments, CFD’s give traders the opportunity to take both long and short positions in the market according to their needs.
While trading CFD’s is renowned as a flexible and potentially lucrative method of investment, however, it also poses significant risk. If you wish to trade CFD’s as a way of seeking an advantage in changeable markets such as the foreign exchange, then it is necessary to build a core base of knowledge and develop a viable strategy.
Trading CFD’s: 3 Points to Bear in Mind
Before striking the delicate balance between risk and reward as a CFD trader, however, there are several key considerations to keep in mind. Consider the following: –
Establish Achievable and Considered Trading Goals
Before you commit money towards the delicate art of CFD trading, it is crucial that you develop a set of clearly defined and achievable goals. This not only helps you to determine a viable amount of starting capital and an understanding of how best to use it, but it also plots a path along which you can scale your efforts as you begin to gain financial returns. The majority of successful CFD traders have been content simply to remain in profit during the first year of trading, before using heir hard earned experience and long term goals to steadily improve their performance. This is especially important if you intend to forge a career as a CFD trader, and hope to achieve an acceptable annual remuneration.
Take Control of your CFD Leverage
The potential for a margin based return is something that generally appeals to traders, as this leverage enables them to generate profit far in excess of their initial outlay. This also brings inherent risk, however, as it is also possible to incur losses far beyond your financial means. Controlling such powerful leverage is critical if you are to succeed when trading CFD’s, as sudden market shifts can leave you vulnerable and exposed to hostile conditions. If you continue to increase your position out of proportion to your capital base, for example, then you can easily lose far more than you can realistically afford. To negate this, ensure that you start small and keep your level of exposure in line with the tangible wealth that you have at your disposal.
Use CFD Stops to Minimize Risk
Regardless of your trading strategy and level of risk aversion, it is important to minimise your potential losses when investing in CFD’s. Even cautious investors can find themselves cut adrift in a volatile market space, especially if they fail to implement stop losses on their trading account. Stop losses can help you to retain a higher degree of your capital when trading, as they automatically trigger the sale of a security once it reaches a predetermined price. With this in mind, take care to ensure that every individual trade has a well defined CFD stop assigned to it. In addition to offsetting risk, stop losses also remove a great deal of human emotion from your trades and allow you to execute more financially sound transactions.
The Last Word
While CFD trading can be rewarding, it is also an exercise that remains fraught with risk and the potential for loss. As a general rule, it is important that you strive to learn about the art and the market in which you intend to operate, while also developing a core strategy and risk management process. As a starting point, you may wish to make use of free resources on the Internet to build your understanding, visiting pages such as www.alpari.co.uk/en/cfd-trading.html with a view to refining your trading technique.