Contracts for difference, commonly abbreviated to CFDs, have been experiencing an impressive surge in the recent years. Even though the notion has been around for about two decades, it’s only lately that it’s begun to attract an increasing number of investors equipped with varying levels of expertise and ambition. CFDs forex exchange is just one example of a short- to mid-term investment strategy that appears to be extremely alluring these days.
This article explores vital aspects to factor in before and while you invest in CFD trading to ensure a truly beneficial engagement. These are the essentials not to miss out when you are just starting your journey with CFDs, but you might also find the tips useful if you already have some experience and feel like your trading approach lacks structure.
Manage Your Losses Before They Arrive
Losing is inseparable from gaining, especially when you view the process from the longer-term perspective. If CFD trading is your preferred investment strategy, be prepared to risk or part with a certain amount of money. It is common practice among experienced traders to apply a flexible approach where you put at stake a certain percentage of your capital rather than a fixed sum.
Diversify Your Investment
Just like relying exclusively on a single customer is unwise for a business, putting all your money on a single currency pair or another specific CFD trading sector means risking too much. Be sure to extend your exposure across the industry but not to the point where it becomes confusing and unmanageable.
Avoid Leverage Abuse
Leverage is a great way of gaining access to new opportunities, often unavoidable if you are desperate to up the ante. Yet, overleveraging your portfolio will bring about nothing but dramatic losses if the worst case scenario is applied.
Do Not Neglect Stops
Stops such as stop loss and stop limit tend to attract additional costs, but they are also powerful instruments that help automate part of the decision-making that goes into successful CFD trading. By committing to a predefined risk rather than going with the flow, you will be able to implement a consistent strategy without giving in to your emotions. This helps minimize losses due to poorly informed decisions.
Risks and Opportunities: The Inevitable Tradeoff
Great opportunities come at a great cost. Vague as it may sound, the rule certainly applies to CFD trading as excessive use of leverage and overtrading are likely to create risks that you might find yourself unable to manage. On the contrary, using leverage in moderation according to a predefined strategy gives you a solid chance to profit. Pair this with automation tools to eliminate unwise hasty decisions and plan ahead when it comes to how much you are prepared to lose to further increase the probability of success.
Which of the above aspects do you find to be the most challenging? You’re welcome to share your experience and/or apprehensions in the comments section.