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The fact that you have landed on our webpage and are skimming through this article is proof enough of your interest in this financial trading tool. CFD (Contract for Difference) provides several advantages against the traditional tradable instruments, the most important of which is that you don’t have to own the underlying asset. This one feature leads to numerous other benefits including the fact that it magnifies the return and minimizes the probability of loss. However, a CFD is not a magic wand that you just waive and it will fatten up your bank account. Alternatively, you can make it your magic wand provided you use it smartly.
Here are some tips on CFD trading that will help you make the most of this trading tool:
Set a Specific Goal
The first and most important thing that you should do before putting in your hard earned money in CFDs is to define your risk and return objectives. And remember, this should not be subjective! Analyze the market for the asset that you intend to buy or sell and set specific and realistic goals before you enter into any CFD or forex trading agreement.
For example, if you intend to buy the shares of a specific company through CFDs your investment objectives could be to achieve 15% return and maximum 5% loss. Let’s make it more specific. You decide to sell the shares as soon as the market value goes up by 15% or declines by 5%. This would give you an idea of how much you would make or lose, provided you follow your objectives strictly.
Use Stop and Limit Orders Smartly
Continuing with the example above, you can place a limit order to sell the shares if the price increases by 15%. At the same time, you can place a stop loss order to sell the CFDs if the price falls below 5%. Make maximum use of CFD orders, especially if you are a passive trader and don’t get time to monitor your positions.
Start Off With Small Investments
You may be thoroughly prepared and may have done extensive research and analysis on the asset you intend to buy. Nevertheless, if you are a new trader, then you are bound to make some mistakes. It is highly recommended to invest small in any new market you enter. Get to know the market mechanism and analyze the trading activities of experienced traders before putting in big money.
Never Act on Impulse
Sentimental analysis is the least reliable type of financial analysis. You may be tempted to invest in a highly lucrative asset that everyone else is investing in. Acting on impulse or sixth sense is not a sound practice, especially if you are a new trader. Conduct thorough fundamental and technical analysis before putting in any money.
Diversify
Whether it is forex or CFD trading, diversification is the best and most effective strategy to minimize the risk. Invest in a variety of markets and assets. Here is a simple tip: try and make a portfolio of assets with a correlation coefficient less than one. The less correlated your portfolio is, the more benefits you will get out of diversification.
Invest Smartly!
It is your hard earned money. Invest it smartly. The small efforts required to analyze the markets in order to make well-informed decisions could be the difference between winning and losing money.
