If you have been searching for a new and exciting investment strategy a CFD, formerly known as a Contract For Difference certainly is an excellent way to shake up your portfolio. By definition a CFD is an agreement to exchange the difference in value of an asset from the time that the contract is opened until the moment in which it is closed.
The agreement is actually contracted between an investor and the broker directly. The investor does not own either the asset or the instrument that they have chosen to trade.If the investor believes that the price of the asset will rise they open a buy position.
If they believe the price of the asset will fall the investor opens a sell position. Gains and losses on the investment directly depend upon how the market moves. In essence the investor is betting on a stock or other asset to either increase in value or decrease in value during the period in which they have placed the CFD. For example, if you believe that a particular market will rise, and you purchase a CFD in order to trade it, your profit will increase as the market rises in value.
On the other hand, your losses will increase as the market declines in value.
The exact same rule applies when you back a particular market to fail. Your investment will increase as the market drops in value, and decrease as the market rises in value. Trading CFDs has become an extremely popular investment instrument over the past several years, however certain investment strategies or rules so to speak must be followed in order to succeed.
Failure to adhere to the following guidelines may result in serious financial losses. By following the steps as listed below it will greatly increase your chances of a victorious investment strategy. So without further ado, here is the Comprehensive Guide On How To Trade CFDs More Successfully.
Step One: Do Not Trade Emotionally
In general terms it is never a smart idea to make trades based on emotion. The same certainly holds true when conducting CFD transactions. The first rule of thumb is to keep gut instincts and other emotion based feelings one hundred percent out of the mix. Although your gut instinct may be lucky enough to hit big on occasion, most people do not find success using this method. It is of the utmost importance to establish concrete trading rules, and stick to them no matter what the situation may dictate.
Step Two: Always Cut Your Losses Quickly
One of the most basic rules to successfully trading CFD’s is to cut your losses quickly. A plethora of investors completely wipe out their entire trading account due to the fact that they do not follow this simple rule. Holding on to losing trades in the hopes that they turn around will literally and figuratively break the bank.
Step Three: Incorporate Both Technical and Fundamental Analysis
When an investor incorporates both technical and fundamental analysis they stand a far greater chance of success than an individual that only conducts one form of examination. You should always employ fundamental analysis to initiate the trade, and technical based analysis in order to time it correctly.
Timing is certainly crucial even if you are absolutely correct regarding the long-term direction of any given market. Initiating a trade too early may absolutely result in major losses. It is best to wait for a few confirmations that are based on your technical and fundamental analysis of the situation.
Step Four: Diversification Is Key
Diversification is certainly key to any overall investment strategy, however it is even more important regarding CFD trading. When a person uses all of their trading capital on one single trade they go from being an astute investor to a gambler.
Although it may be tempting to bet the house on what you may deem as a sure thing, it is always wise to risk a maximum of five percent of your entire CFD trading account on any singular trade. This will guarantee that you will avoid wiping out your entire account if something happens to go wrong with any one particular trade.
The other part of proper CFD portfolio diversification is to invest in various categories. For example, if an investor is trading in multiple real estate based stocks and the real estate industry takes a turn in the wrong direction your entire portfolio may be wiped out.
The risk is simply far too great.
Step Five: Do Not Give In To Greed Or Fear
The psychological composition of the investor is perhaps the most important distinction between tremendous gains, and horrific losses. Typically speaking, investors that are successful at CFD trading do not succumb to vulnerable traits such as greed or fear. Both of these weaknesses are known to ruin investors’ rational thinking process. Always stick to the trading plan that you previously set forth.
With CMC Markets, a UK-based financial derivatives dealer you may trade CFD’s on a large variety of markets including stock shares, indices, commodities, and foreign exchanges to name a few. By following the steps as listed above you will vastly increase your chances of becoming a hugely successful CFD investor. We hope that you have found this guide useful.