Tips for successful CFD trading
CFD stands for Contract for Difference. Forex CFD is that agreement where in two parties sign the contract stating that the seller would pay the buyer the amount which is difference between currency value at present and currency value at the time of agreement. Forex CFDs can be used in two ways to make your profit. Firstly, you buy the currency when you anticipate a rise in its value in recent future. Secondly, you sell it off when you feel that a decline in value is nearing.
Benefits of Forex CFD
Once you trade with Forex CFD, you will realize the benefits over conventional mode of trading. First of all, price charged for CFD is treated as the base price, so the trader is not bothered about the highest and lowest value of the pair of the currency. Another advantage that you will come across is that you would not require to invest in full. You need to pay a margin of the actual price. But the profit remains same like conventional mode of trading. With Forex CFD, you can hope to earn profit even with a declining economy.
Advantages of CFD trading
1. CFD requires very little capital to start (like most other FOREX transactions). Leveraging enables the trader to purchase currency using amounts 50 to 400 times the amount of money they have.
2. Profits can be realized irrespective of whether the market is doing well or badly. This is because the trader is concerned with the difference between the base price (price when contract was signed) and the price when the contract was realized. He does not really need the maximum or minimum values of the currency.
3. There are also quite low commission rates with CFDs.
4. The execution of the deal is immediate.
Things to Remember about Forex CFD
When you are trading with Forex CFD, you need to manage your money very efficiently. If you overuse the leverage, the bottom-line would undergo severe impact. The market makers play an important role in Forex CFD trading. Due to their influence you can even end up selling your currency at a price lower than the price you had bought for. Also, since it is easy to access and needs really low margin of investment, there is a tendency in the traders to go for overtrading which can have negative impact on the business.
Disadvantages of CFD trading
1. Abuse of leveraging can lead to insolvency in case of projections turning sour. It is in fact recommended to use leveraging sparingly or to have the necessary back-up funds to cater for any fall in revenues if the market does not go the trader's way. Overtrading can lead to many losses, even causing the trader to fail. Experts concur in saying that a trader who cannot trade unleveraged should probably not look at CFDs.
2. Certain brokers may work against you by influencing you to sell your currency at a loss.
A Helpful Measure
You can maintain a diary to keep the tab of your trades. The mistakes you make will help you improve your skills. Often when you take Forex CFD trade, you keep thinking that what made you take it and it turns out to be a success whereas where you had been confident to make profit, you may end up making some loss. The thought process before both these deals should be entered in the diary so that when you go through the pages later, you can utilize the same thought process in your favor.
Also, it will help you remember some crucial calculations intrinsic to Forex CFD like mean win to mean loss, the ratio of possible risk reward and the percentage of your wins to the losses you make. After you have already made more than 20 trades and keeping a note on each of them, you will develop a pattern of your own. This pattern will reflect both your strength and weaknesses. Henceforth, you can dedicate some time to improvise on your weaknesses without keeping the diary. Though it is not much of a tiring job, still you may feel lethargic to document every step each time you trade. But at the end of the day, you will reap the benefit in form of profits in Forex CFD.
Tips for successful CFD trading
1. Adequate Risk Management-providing for stop loss orders is essential. These allow the trader to exit the market very rapidly if the market moves too fast. With CFDs, the losses can easily exceed the capital. Stop orders are therefore crucial in managing the risks.
2. Set up a profitable strategy-this can be done by testing the viability of the strategy against market events of the past. However, successful strategies based on historical events are not guaranteed to succeed in real life. Some platforms offer practice accounts that can be very useful to evaluate your strategies.
3. Recognise market conditions-if your strategy is not adapted to current market situations, take steps to correct it immediately. This will ensure long-term success.