Before you begin trading Contracts for difference it is vital to obtain a few suggestions from the experts to ensure that you do not make many of the expensive mistakes that novice traders make. Below are three trading tips 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 selecting, planning and executing new positions, however they frequently 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 is 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 optimism that prices will move in the correct direction and decrease losses or even turn them into profitable trades.
A lot of new traders ignore the old proverb “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, it is best to 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 ought to move swiftly to exit that position, before the loss becomes too great.
If you're managing your trades properly, your average winning trade should be significantly larger than your average losing trade. Once you have the discipline to trade in this way, you should be able to attain overall profitability even when only half of your trades are winners. Many traders make the mistake 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 amount of risk that you're willing 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 factor from the exit, reducing the chance that the emotion of hope will interfere with rational decision making.
It's essential to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if the price trades at or below the nominated stop level. Occasionally, this can result in trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.
2. Understand the instrument you are trading
Being over-the-counter products, there are various variations in the contract specifications of CFDs. If you're trading these products, it is important to know what these specifications are.
You must also understand the impact that currency fluctuations could have on your holdings. If the base currency of the CFD rises against the base currency of your account your earnings could possibly be eroded by any foreign exchange fluctuation or your losses could be made worse.
The majority of CFD traders buy and sell CFDs based on shares listed in their home country. The simple rationale for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also enjoy the convenience of trading their home market as it isn't practical to sit up for half the night to trade a CFD over a share listed on an exchange in another part of the world?
In many cases it is much better to stick with CFDs based on equities listed on exchanges that you are familiar with instead of trading CFDs based on shares listed on markets you don't fully understand.
3. Use the right order types
You should treat trading as a serious business. As such, it is advisable to take some time to ensure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been closed out of trades at the wrong time simply because they placed the incorrect kind of order.
At the very least, be certain to be familiar with these order types:
Market order: This kind of order is utilized to execute a trade at the present market price.
Stop-order: This order type is used to exit a trade at a specific price. Stop-orders are located at a level that is worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be positioned at a level greater than present market prices.
Limit order: A limit order is used to exit a trade. Limit orders are positioned 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 positioned at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level underneath current market prices.
You should always remember that as CFDs are geared and that buying and selling them might be risky. Though if used properly Contracts for difference will become a valuable tool in your trading arsenal.
Author Resource:-
Matthew Jones has been buying and selling Australian stock CFDs for over eight years with one of Australia's most popular CFD providers, IC Markets. Matthew has published a very practical guide to CFD trading, for a very limited period of time you can get yourself a free copy from IC Markets website www.icmarkets.com.au.
![[Valid RSS feed]](http://www.articlelog.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites