Ten Tips to Profit with CFD Trading

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Expert traders reveal ten tips for profitable CFD trading. Learn how to manage risks, leverage fundamentals and technicals, and boost returns through swing trading and more.

Contract for Difference or CFD trading allows traders to take advantage of the markets without having to put up high amounts of capital. It is not surprising then that trading with CFDs is the most popular way for retail traders.

While there is a strong temptation to open a CFD trading account, not all traders who do so make money. The markets can be unforgiving, and traders can end up becoming the collateral damage.

CFD trading gives you the opportunity and also presents the risks of both making and losing money.

We outline ten tips on how you can profit with CFD trading. These ten CFD trading tips will you to build a solid foundation that will put you on the right track.

1. Choose your CFD instruments smartly

One might say that no matter what CFD instrument you trade, they essentially behave the same way.

This is partly true. After all, CFD trading is all about speculating on the direction of the underlying markets. And markets can either go up or go down or move flat.

However, there is more to trading with CFDs than just this. Each market can behave differently depending on the underlying factors. Hence, while one asset class may rise, the other may fall, and vice versa.

The reasons behind the direction of the markets also plays an important role. Not all CFD instruments behave the same way.

Even when you look into a single asset class such as currencies, for example, you will find that different currency pairs can behave differently.

Before looking to venturing out into CFD trading, traders should understand how the instrument they want to trade behaves. This can begin by analyzing how the prices have moved in the past. Traders can then dig deeper to learn about the reasons behind the instrument’s behavior.

Understanding the CFD instrument that you are trading can be an important role that will help you further in risk management.

For the most part, CFD traders simply look into the easiest currency pair to trade. They think that making money on such instruments will be as simple as clicking the buy and sell button.

But as one realizes sooner, rather than later, this is not the case. Gaining familiarity with the CFD instruments you trade will give you a better idea of what to expect and what to avoid.

2. Get a grip on the fundamentals of the CFD you are trading

Fundamental analysis focuses on the underlying factors that are driving price.

Whether you are trading currencies, indices or commodities, there is always some reason why prices are behaving the way they do. While traders largely pay attention to technical analysis, the fundamental analysis is also important.

The tip to picking winning CFD trades is to combine fundamental analysis with technical analysis. Depending on the markets that you are trading, fundamental analysis will help to build a context.

Therefore, traders should typically start off their analysis by looking at the underlying narrative. For the currency markets, it is always the speculation about interest rates. Similarly, the equity markets also pay attention to what the central bank may do.

Gaining familiarity with the main fundamentals such as the GDP, unemployment rate, and inflation are critical to build a solid foundation in fundamental analysis.

One does not need to have a degree in economics to do this. You can simply read a couple of articles from reputable financial outlets to get an understanding of what investors are thinking about.

Once you have this basis formed, you can then jump into technical analysis. Coinciding with the economic calendar, fundamental analysis can complement your trading efforts.

3. Technical analysis matters

Technical analysis is perhaps one of the first things that a beginner to trading will learn about. There are many different ways to apply technical analysis. They can be primarily categorized into:

  • Trend trading
  • Breakout
  • Wave counting

Depending on what method you choose, the focus should be on understanding how the concepts work.

When one talks about technical analysis, traders unwittingly focus on a trading strategy using a bunch of technical indicators. But this is not how it works.

Technical analysis is all about gaining the market context. This will in turn increase the probability of picking winning trades. With CFD instruments, the markets behave in the same way as the underlying market with some subtle differences.

These differences can be seen primarily in the price. Because CFDs are offered by your broker, the prices for bid and ask may vary by a few ticks. So, you will not always see the exact price when comparing CFD to the underlying market.

Hence, when taking into account the technical analysis methods, traders should give some room for what price they want to set their take profit and stop loss levels.

No matter what methods of technical analysis you choose to work with, support and resistance remain the common denominator. While it can be subjective, support and resistance levels play an important role in technical analysis.

The CFD markets are no different and the sooner one grasps these concepts, the better they are at understanding how to trade.

4. Should you day trade or swing trade with CFDs?

With CFD instruments, traders should understand the risks and benefits of day trading versus swing trading.

As you already know, CFD instruments are derivatives. Hence, there will be overnight financing costs. These financing costs can provide additional sources of funding. At the same time, if the overnight rollover interest is negative, then it comes as an additional cost.

When planning to swing trade a CFD instrument, traders should learn about the instrument that they are trading. This means knowing whether the overnight interest will be credited or debited to your account depending on whether you are long or short.

Knowing this can help you to adequately allocate the funds to your trades.

Different CFD instruments have different costs, so it pays to get an idea of the overnight costs.

When it comes to day trading, as long as you close your positions during the day, there are no such additional costs. You would, at best pay just the spread, which is the difference between the bid and ask price.

However, with day trading, there is also a risk of overtrading. Hence, the chances of picking losing trades can greatly increase if your primary focus is to day trade.

Traders should find a balance between day trading and swing trading when it comes to CFDs.

5. Risk management matters for CFDs

Risk management is all about ensuring that you do not risk too much of your trading capital. According to the Random walk theory, the markets are unpredictable. While technical analysis can help you to predict the future price movement, it is still not guaranteed.

Hence, traders should bear this in mind. Many traders do not pay much attention to risk management and end up risking too much or too little when trading with CFDs.

This will eventually either wipe out your trading equity or will bring you profits that are relatively small.

For starters, CFD traders should stick to the one percent rule. It states that you should not risk more than one percent of your trading capital on any trade. This helps to increase your longevity in your trading and in turn gives you more trading opportunities.

Another key tip when trading with CFDs is that you should always focus on removing the risk from the trades. This means, starting out with a stop loss and focusing on moving your stops to break even. This will help to protect the profits you already made.

Of course, focusing on break even trades requires familiarity with the markets and your trading system itself.

6. Find a strategy that works

Having a trading strategy is important when it comes to trading with CFDs. It is one of the main aspects that will determine the success and failure of trading.

CFD trading is no different than trading any other market. Hence, the same principles of technical analysis holds for CFD markets as well. When picking a strategy, make sure that it is well tested. Take advantage of the demo accounts to forward test your trading system.

Before putting your trading system to work, make sure to understand the markets, that we covered in point #2. It also helps to back test your strategy. This could mean that you can either develop your strategy into an Expert Advisor or code it as a custom indicator.

Taking advantage of the MT4 trading platform, you can make use of the in-built strategy tester to see the past performance.

While it will not be beneficial for you to take the information as is, the historical performance can help you to gauge the effectiveness of the strategy.

One of the key winning tips when trading with CFDs is to start small with your trading strategy and slowly build it up. This means you need to gain familiarity with your trading system to the point that you understand its strengths and weaknesses.

7. Look to other markets for information

Not many know about this but there is always a strong interplay between different markets. While CFDs are synthetic instruments, they still follow the same market rules.

When trading with CFDs, it helps the traders to dig in into the intermarket analysis. For example, in many cases, the CFD instruments that you trade also have other derivative instruments.

Take the example of the US500, which is the CFD equivalent of the S&P500 index.

There are different derivatives of the S&P500, which includes the S&P500 futures, and options as well. Paying attention to the futures and options can give you insights into which way the market may be move.

Too many PUT options over CALLs can signify that investors are wary of the market moving lower. Likewise, when CALL options outweigh PUT options, it can signal a very bullish market. This will help you to ascertain the direction in the market.

Traders can also look to how the futures markets are faring. Since the futures markets are exchange settled, you are able to see legitimate data. It can help you see how the CFD index is shaping out to be before the US markets opens.

Having this information on hand can be of great benefit when trading CFD instruments.

8. Remember that you are trading on leverage

CFD trading is leveraged. This means that without having to put up the entire amount, traders can only pay a small amount. The remaining amount is then borrowed from the CFD broker.

This is leverage for short. CFD trading is highly leveraged. Nowadays, traders can choose a leverage of as high as 1:100. While leverage is good, it can also be the reason for you to blow up your trading account.

There are many recorded cases where traders choose leverage without giving too much thought. And when the markets start to misbehave, the trading equity is lost in a moment.

Leverage, as they say, is a double-edged sword. Hence, traders should have a thorough understanding of how leverage or trading on margin works. This will ensure that the correct lot sizes and the most appropriate stop levels are chosen.

The trick with using leverage wisely when trading CFDs is to ensure that you do not risk too much when you are unsure. On the other hand, when the markets start moving in the anticipated direction, you can then pile into the trade.

This will help ensure that you win big when you are right, but you limit your losses when you are wrong. With leverage, grasping this concept is important. When you are right, the potential to make higher returns is big.

But you can also lose equally the same amount if you do not pay attention to the risks involved.

9. Monitor your performance of your CFD trading activity

For most traders, the moment one trade is closed, the next one is opened. The psychological reason behind this is the fear of missing out, or FOMO. Trading continuously without knowing how your past trades have worked can be a disaster.

CFD traders must monitor their trading performance on a periodic basis. Ideally, you can analyze your performance on an end of day basis or on a weekly basis. Taking stock of the situation can play a great role in knowing how you are faring.

It is not just about taking stock but also figuring out the reasons behind your winning trades and losing trades. This will help you to gain experience and also understand any potential obstacles that you are facing.

These days, there are many third-party apps that can help you to automatically build up statistics on your trades. The apps also help you to take snapshots of how the market was when you initiated the trade and how the markets were when the trade was closed.

Monitoring such information and building a mental inventory will help you to build an all-round trading strategy with CFD instruments.

10. CFD trading is risk!

At the end of day, no matter how cautious you are and how experienced you may be, CFD trading is risky. Many retail traders end up losing all their trading equity within the first few months of trading.

As a CFD trader, you should be wary of these risks. Do not trade CFDs because you want to make money. Trading is not easy and requires a lot of patience, practice and efforts on your part. Still, even the best of seasoned traders do take a hit with losing trade.

The key is to limit the risks that you take on a trade when using CFDs. And this is something that you cannot learn overnight or by reading a few books and articles. You need to build up the screen time and experience before you can actually start implementing this.

Take away

In closing, here are the most important CFD trading tips to remember:

  • Carefully select your CFD instruments based on behavior, trends, and fundamentals
  • Utilize technical analysis and chart patterns to identify trading opportunities
  • Manage risk prudently by using stop losses and limiting position sizes
  • Find an edge with proven CFD trading strategies tailored to your style
  • Monitor performance frequently to understand wins/losses and refine approaches
  • Recognize that leverage can exponentially increase risks and losses
  • Build experience over time before committing real capital to trades

By following these essential CFD trading tips, you can trade CFDs in an informed manner and potentially generate sustainable profits. However, also accept that markets can be unpredictable, and apply sound risk management above all else. Master these tips through screen time, practice, and learning from both wins and losses.