CFD Trading Tips

Beginners to CFD trading especially will need to be familiar with these points about CFD trading. With any trading instrument, you should understand what they are about before trading them.

Here are some points about CFD trading:

» That trading is a business like activity, not gambling, unless of course you have excess funds that you’re not worried about losing at all. However because of leverage, you can lose more than your cash float, if you do not have stop losses in place, and do not have sensible money management rules, or if the share price goes to zero for some reason. So treat it as a methodical activity where you apply a trading system to earn profits from the market.

» Get good training on how to trade a CFD trading system. Knowledge and practice is needed to design or learn good systems and to trade them correctly.

» Remember that all systems have both losing and winning trades. The important thing here is to trade a profitable system so that overall, you are making profits. Because the number of losing trades is often larger than the number of winning trades, though the size of the winners are much larger than the losers, you will most likely get some losing trades when you first start trading. So it's inportant to understand the typical behavior of your system.

» Get a feel for whether you want to learn a systematic CFD system or part discretionary one. There are courses for both. With part discretionary systems, you should paper trade the system to prove that you can trade the system profitably, not just the fact that someone else can. Often with systematic systems on the other hand, you will spend much less time at the screen trading, and can be relatively easier to follow. You can backtest many systems, choose one, apply it, and monitor results, remembering of course that past results are not a guarantee of future results.

» Remember the importance of risk and money management. This should be a part of your backtesting anyway, but it is surprising how many people do not even have a plan for their money management.

» To look at the effectiveness of a system, look at the yearly profits (as a percentage of your cash float), the maximum historical drawdown (as a percentage of your cash float), the consistency of returns (eyeball the sizes of returns over the various years), and the profit-loss ratio in combination with the win-loss ratio.

» The role of CFD brokers (providers) in important. CFD providers are important because they determine what CFDs are available to trade, and how many are shortable. Also, they determine what order types may be placed to enter trades, and as stop losses. These two factors can make an impact when you’re backtesting systems. So look at your various options for CFD providers to ensure that what you backtest, can be traded in real life.

» Some traders overcome limitations of different brokers by using more than one broker.

Learn about CFD Trading Systems