CFD (contract for difference) trading allows you to speculate on the price movement of different assets without actually buying them.
The high risk, high reward nature, and the increasing popularity of this trading type attract new traders daily. However, beginners may feel a little lost at first. That’s why it’s essential to establish a solid foundation before diving into CFD trading. In this article, we will share some tips and best practices to help you get started.
Dos: the best practices of CFD trading
Choose a reliable broker and the right platform
It is absolutely necessary to check the credibility of any institution involved in your financial activities. The same applies to CFD brokers – the companies providing the CFD trading services. You need to make sure the broker you choose is regulated and its licences are legitimate and updated. It’s also a good idea to check the reviews of other traders and select the right user-friendly platform that will suit your trading needs.
Here at Deriv, we aim to provide the best trading experience for our customers. That’s why we keep all our regulatory information in the open access. We also offer two options for CFD trading: the popular Deriv MT5 (DMT5) platform and the new fully customisable Deriv X platform. Our customers can trade CFDs on forex, stocks and stock indices, commodities, cryptocurrencies, and our exclusive synthetic indices on these platforms.
Do your homework
Many CFD trading terms are likely to be unfamiliar to beginners. Do your own research about the commonly used tools and terms before you place your first trade. Once you feel comfortable, you can create a risk-free demo account with Deriv to try out the practical aspect of your newly obtained knowledge. It is loaded with virtual 10,000 USD and will give you a perfect opportunity to learn CFD trading in detail.
However, learning doesn’t end there. As the trading industry keeps evolving, you may encounter unfamiliar terms or concepts occasionally. To stay abreast, check the latest trading updates posted by your broker or seek advice from the online trading communities. After all, even experts need to refresh their knowledge periodically.
Diversify your portfolio but keep it balanced
With so many assets across various financial markets to trade on, CFD trading can quickly become overwhelming for some traders. Don’t spread yourself thin trying to learn about all the markets and assets at once, but don’t focus all your attention on one particular asset or market either. Find a balance that works for you personally.
As a starting point, it’s better to focus on 2-3 assets and markets only. For example, if you decide to trade CFDs on stocks, choose stocks that belong to different industries, and try trading CFDs on indices too. It will give you a chance to study the markets in-depth and understand how the prices react to various triggers.
Diversifying your portfolio across industries may also help you avoid losing more than you are comfortable with if an asset in one industry doesn’t perform well.
Don’ts: things to avoid when you trade CFDs
Don’t over-leverage your account
Most traders prefer to trade CFDs on margin, also referred to as leveraged trading. Trading on leverage means that you only need to pay a certain percentage of the asset value to open a trade while your broker covers the rest. Leverage allows you to enter the market with larger positions but smaller initial capital. Leverage may vary depending on the market you trade on, your country’s regulation, the broker you choose and several other factors.
Using leverage is a great way to open larger trades, which can lead to larger profits too. But while it can increase profits, losses are also amplified. The rule of thumb here is that as long as you are able to pay the total amount of your trade, not just a percentage, you are safe. And if you can’t afford that, chances are you set your leverage number too high.
You can also use stop loss to minimise potential losses. Stop loss is a handy little feature in CFD trading that automatically closes your trade if your loss reaches the amount you’ve set; that’s why it’s highly recommended to have it set for all your trades.
Don’t fall prey to emotions when trading
When faced with potential loss, many traders start making impulsive decisions to win their money back, which usually leads to even more losses. Stick to a trading strategy and understand the reason for your loss, rather than emotionally placing a trade just to recover your money.
Another example of emotional trading is when people develop an emotional attachment to certain assets. But no matter how you feel about their future price movements, don’t change your plan. Stick to your initial strategy.
Don’t forget about the overnight fee
It’s a common practice among CFD brokers to charge an overnight fee on open positions. It’s very important to bear it in mind and make sure that it’s worth keeping your trades open overnight.
For example, you have an unprofitable trade, and you hope to recover and turn it into a profitable one the next day. If the market still goes against your prediction, you’ll end up with an even bigger loss and an extra fee to pay for keeping your position open overnight. The same applies to the trades with a very small profit. The overnight fee may just wipe the profit out. So it’s always better to review and consider the trades you are not sure about.
On the other hand, sometimes keeping a trade open overnight can bring you even higher profit. However, you need to define a time frame within which you expect to see a profit on that particular trade. If it’s not profitable by a certain time, review it and decide if it’s worth keeping.
There are, of course, many more lessons to learn on the way to becoming a successful CFD trader, but knowing some of the essential dos and don’ts is the first and foremost step. If you’d like to find more details about how to trade CFDs and how profits/losses are calculated, check out our What is CFD trading blog post.
Deriv X is not available for clients residing in the EU and UK.
CFDs on cryptocurrencies are not available for clients residing in the UK.