Your first trade? Let me grab your hand!
Trading in general is a complex and, overall, risky activity, especially for beginners. This is why most quit before making any relevant profit off of it. Because they fail to inform themselves on what the trading business has in store for them. And CFD trading is no different.
Regarding CFD trading, there are 2 aspects I want to detail here:
- The mechanism of placing a trade
- How the market works and what you need to do to secure your profits
The first one is pretty straightforward; the routine you will engage every time you will place a trade. The second one, however, is a bit more complex and, depending on your goals, understanding it will make the difference between a memorable success and a miserable failure.
The mechanism of placing a trade
Here we have several steps you need to follow:
Step 1 – Choose your market
There are literally thousands of markets to go for, depending on your personal preferences. Everything goes, from indices to currencies, commodities, shares or bonds, along with everything in between.
What matters the most is for you to know what you are getting yourself into. Either know the market you are about to enter, or inform on its specifics ahead of time.
Step 2 – Choose your broker
You were going to choose your broker regardless whether I told you or not, because that is how trading works. However, the reason I added this step is because it is essential to know what makes for a good broker for you in particular.
You might want a cheaper one, despite giving you less trading options. Or maybe one who is a bit more expensive, but comes with more benefits along the way. I say don’t focus on that aspect. Instead, go for popularity, expertise and a good reputation. At the end of the day, this is what makes for a trustworthy broker that you can rely on.
Step 3 – Open a CFD trading account and fund it
You will most likely be required to go through a verification process and use your email to confirm opening the account. Simply follow the indications of the broker you have chosen to work with.
After the account is open, the next move would be to fund it. Make a deposit (all brokers have a minimum you can deposit, usually £100, but sometimes could go lower) and, as you are dealing with CFDs, open a margin account as well.
Step 4 – Include a stop loss
This is something you have to do, no matter what CFD you choose or what type of trade. A stop loss is an essential mechanism, designed to protect you from losses snowballing out of control. Every CFD broker will have some similar mechanism in place you can resort to.
The most important part is not to forget or skip this step. Otherwise, you may find yourself in the unpleasant situation of owing a lot of money, in case things go unexpectedly bad.
Step 5 – Choose your trading profile
By this I mean select your CFDs of choice, including their number, decide whether to BUY or SELL and hit the respective option, and monitor your position carefully. For most cases, if you have chosen your trading option carefully, monitoring your position will translate by counting the money.
But if the asset doesn’t perform as expected, you need to make sure you have time to cut the losses. This is why you must never rely on luck when dealing with CFDs.
Step 6 – Close the trade
All you now have to do is to hit the “Close position” or “Close trade” button, located in your position’s window. You only have to manually close your position in 2 cases when trading CFDs: when the stop-loss security feature hasn’t triggered, at which point you want to manually shut down the losses before that point or simply if you want to cash in the profits, or in case you have no stop-loss security feature in place and you have to do it all by yourself.
How the market works and what you need to do to secure your profits
This is the crucial part. Without knowing the details of how to trade CFDs efficiently and with as fewer risks as possible, all you are doing is stepping on the gallows with a big smile on your face. It will not work out well for you, no matter how confident you are.
So, here is what you need to pay extra attention to:
–Be extra careful with choosing your broker – The reason I say this is because not all brokers function the same and not all have the same policies. For instance, in case you forget or choose not to activate a stop-loss order, some brokers will let you know when your margin account goes bad because of an active position.
This will allow you to take actions in time and either close your position or feed more money into the margin account, if you consider that the position is worth keeping. Others, however, will immediately close your position without any prior warning. So, make sure you know what you are getting yourself into.
– Know your game when looking for a trading opportunity – Simply identifying the best rated CFD assets at one given point in time is not enough for a major investment. You need confirmation from multiple sources that what you are seeing is not merely a passing phase.
Always confirm the assets’ financial or economical trend from several sources and always remained wired to any economic news that could influence the course of that asset in particular.
– What to know about opening and maintaining a position – There are several aspects you need to take into account here:
The expiration date. Cash CFD trading are usually meant for short term positions. As a result, if you choose to leave the position open overnight, after the trading day closes, you will be forced to pay a funding fee. If you want to avoid that, be careful about this aspect in particular.
Your position’s size. You can choose between full contract CFDs, mini-contract CFDs and anything in between, depending on the market you are working with and the broker. This is important because knowing your position’s size also allows you to know what to expect in terms of costs and profits.
Watch the spread. The spread is the difference of value between the BUY price and the SELL price. As a beginner, you probably won’t know that knowing how the spread performs over time has the potential to substantially increase your profit.
The best asset to place your bid on is the one that has a tight spread. Meaning that the difference between BUY and SELL is very low. Also, it is important to watch how the spread evolves for the time your position is open, so you can avoid any potential unpleasant surprises.
Stop-loss orders, again. I can’t stress enough the importance of stop losses. Trading with CFDs is generally pretty risky, especially when you are not experienced enough to know when to cut your losses. CFD stop-loss orders can do that for you, preventing you from going too deep into the rabbit hole.
– Be careful about any “hidden” costs – I have used the quotes because they are not actually hidden, but more like ignored. There are a lot of costs that could end up stacking and wipe out all your profits in an instant. We are talking about brokerage fees, commissions, taxes, interest and other costs that could be specific to each broker in particular.
– Know the risks – CFDs work based on leverage, which means both your gains and losses will be multiplied by the same factor. And I know from experience that avoiding losses, in this situation, is more important than increasing your profits.
How to improve and trade CFDs like a pro
I have been active in this industry for quite some time and, as time went by, I ended up figuring out what to do to avoid some of the most common pitfalls, while increasing my profits at the same time.
I have some personal pieces of advices I would like to share with you. For instance:
1. Keep a journal
Use an Excel spreadsheet to record your activity, with all its minute details. Write down the reasons you ended up with that trade in particular, all the necessary details regarding the entry and the exit levels, the trade’s outcome, along with the factors that have led to it, along with anything you want or need to change for the future.
Update that journal every day and record even the smallest trades you make. You never know when those will come in handy.
2. Only use your earnings to trade
I have learned this simple fact the hard way. I have lost a lot of money because of that. What I am trying to say is this: invest, say, $1,000. If you win and double your funds, leave $1,000 untouched and invest $1,000 again. What you did is regain your initial funds and reopened a $1,000-worth position.
The difference is that, this time, you won’t risk your own money. You are risking your earnings. If you double your investment again, don’t go and invest the whole $2,000, but only $1,500. The other $500 you can withdraw into your regular account. That is how profit is being made – with consistency and discipline.
3. Always practice a lot
This is as important as knowing the profile of the market you are about to step in, as well as all the global news that have the potential to influence the balance. As a beginner, you are bound to make a lot of mistakes during trading. And, with CFDs, those mistakes will be extremely costly.
Use demo trading software to practice on your skills and become acquainted with all the features that are at your disposal. This way you can experience what is like to move around the market, without putting your money at risk.
These are all things I have been through and I know for a fact that they will help you become better at what you are doing. Because, after all, this is what trading is all about – improve, adapt, overcome, make profit.
So, create a CFD trading account, follow all these steps and call me back when you are rich.