Make Money from CFD Trading
While CFD trading may not be familiar to everyone, it embodies the increasingly flexible and accessible of financial market investment in the modern age.
As a derivatives product, it is one of several trading vehicles that have become popular since the Great Recession, as investors have sought out agile methods of committing their funds and profiting from declining markets.
Despite its popular and accessible nature, however, profiting from CFD trading is far from guaranteed. In this article, we will look at how you can make money from CFD trading and the practical steps that you need to take:
Decide on Where You Want to Enter and Exit a Trade
As explained here, a contract-for-difference (CFD) is an agreement between two parties where the difference between the opening and the closing price is exchanged. This means that it is imperative for you to decide precise where you want to enter and exit a trade, as this will have a key bearing on the success and the final value of your order.
In this respect, discipline is key to successful CFD trading, as you can ill-afford to be distracted by impulse or prevailing market conditions. By pre-determining your entry point to and exit from the market, you can optimise your risk-reward balance and ensure that your strategy is successful over time.
In fact, we would recommend determining two distinct exit points, one which is taken after a trade has gone against you and another that is followed when you are successful.
Create Informed and Immovable Stop Losses
On a similar note, you will need to take a similar approach by establishing informed and immovable stop loss thresholds on your trades. These help to reinforce any predetermined exit levels, protecting your capital and the integrity of your trades in the process.
The stop losses that you set must be aligned with your CFD trading strategy as appetite for risk as an investor, as this ensures that you established thresholds that you are comfortable with and that can be sustained over time.
Without this, you may be compelled to move your stop loss limit over time, but this simply undermines the purpose of establishing one in the first place. This can place your capital at risk, so strive to create a fixed threshold that creates the ideal balance between risk and reward.
Avoid Doubling Up on a Losing Trade
When dealing with CFDs, some investors deal with a declining and potentially loss-making trade by ‘doubling up’. This process encourages them to buy or sell more of an existing asset class at a lower price, as this brings down the average cost of entry and can theoretically recoup some of your losses.
While such a strategy can be successful, it is extremely risky and more typically results in losses over time. This means that most traders (and particularly those with a risk-averse outlook) should avoid this technique where possible, and instead focusing on simplifying their approach and setting the appropriate stop losses.
If you do decide to double-up, you need to make sure that this is a well-thought-out and strategic move that is tailored to the precise asset class and its likely movement in the marketplace.