The prize for becoming a successful CFD trader is what lures most investors into the contracts for difference markets. Tales of wild riches and sudden, steady trading income are banded around Internet forums and trading blogs all too readily, and it’s no wonder that with the draw of significant earnings simply from playing the markets, CFD trading is becoming an increasingly popular investment style. Behind the hype, becoming a successful trader takes hard work, determination, and a sensible and reasoned approach to playing the CFD markets. While we can’t guarantee success, there are nevertheless a few key pointers you should bear in mind to increase your chances of profiting from CFD trading.
Know Your Stuff
The first, and definitely the most important, point you should bear in mind is that trading CFDs successfully and consistently requires an intimate and expert knowledge of what CFDs are, how they work and what’s going on in the respective CFD markets. Many inexperienced traders make the assumption that they can simply ‘feel’ the markets, or they rush in two-feet first to take a position in anticipation of getting started. What’s worse is when this initial recklessness is rewarded, by chance, with a successful trade – this reaffirms their belief that trading CFDs is easy.
Unfortunately, like anything in life, succeeding at CFD trading requires you to invest time and energy in learning the basics and keeping on top of ongoing developments. Make sure you know your stuff before you commit to any position – only then can you begin to trade with you money. Anything short of a fully researched and reasoned trade is no better than gambling, and pure gamblers don’t tend to perform well in trading scenarios.
Don’t Get Greedy
One of the main traps which catches out traders of all experience levels is greed. Before writing off greed as a problem that won’t affect you, understand that greed is a natural human response – after all, when faced with the temptation of upping the ante, upping the leverage a little more to make more money from a transaction, many traders are more willing to take the risk. Especially when they’ve already seen the fruits of their previous successful trading and risk-taking, pushing things that bit further tends to be an easy stumbling block to run into.
Successful traders appreciate the dangers with getting too greedy, and successful trading is more about balance than it is risk taking. Of course, there are opportunities that call for relaxing your risk appetite slightly, but generally speaking, cautious, diversified trading is the most effective long term strategy. Slow and steady wins the race – with CFD trading, the in-built leverage will deliver the profit for you, without having to constantly up the stakes.
One of the key lessons to be learned from the world’s most successful traders is that diversity is the key to minimising risk. Diversity across instruments is important, but diversity across markets is even more essential, and successful traders ensure they are never left wide open to the possibility of a total market collapsing. For example, banking securities plummeted in 2007 as the financial crisis began to raise its head, and many CFD traders lost significant sums of money through being too heavily exposed to that sector. Contracts for difference are extremely useful trading tools that can make you fortunes, but only if they are used in a sensible, logical and cautious way. Stack the odds in your favour – diversify your exposure with your CFD positions for best effect.
Don’t Get Too Attached
Another essential lesson to take on board as a successful trader is to become objective about your trading decisions, to allow you to bank your profits and cut your losses in the most appropriate fashion. This is easier said than done, and many traders find themselves becoming frustrated when a position they’ve researched in-depth takes a turn for the worse. Remember that a wayward trade doesn’t mean you’ve made a bad call – it just means you didn’t go the right way on that occasion, and it’s far better to cut out of a losing position early than to wait around spending money in the hope that it will eventually recover. The most successful traders are ruthless and decisive, and aren’t afraid to change their minds when the numbers start to make it clear that a position is firmly in losing territory.
Follow Your Markets
The markets are intangible and inanimate, but they behave in an extremely interesting way by virtue of their collective nature. The markets are essentially driven by supply and demand, which is prompted by a variety of external factors, and coming to terms with what these factors are and how they are likely to affect the mindset of other traders is a vast area of trading and economic theory that can be explored.
In addition to the theoretical basis for market behaviour, you should also have access through any broker platform to past mast data, which allows you to witness how the market reacted on certain days, thereby allowing reconciliation with potential outside factors. Understanding this facet of CFD trading allows you to identify potential stimuli for market reactions in either direction, which will enable you to profit from a leveraged CFD position.
Knowing what drives the markets is one thing, but keeping up to date with those factors as they happen is quite another. With all the theoretical knowledge in the world, you will still fall down as a trader unless you know what’s going on around you, both in terms of market-specific news and current affairs. Keeping up to date with developments allows you to be in a more responsive position, and ensures you don’t get caught out by any essential missed triggers. This means adopting a hands-on approach to your research, reading financial newspapers, blogs and forums, while keeping a close eye on news developments throughout the day. As an area in which you can definitely excel and grab a competitive edge with hard work and determination, keeping up to date with goings on is an invaluable asset to your trading, and will stand you in good stead for picking rational, and hopefully profitable trades.
Becoming a successful CFD trader isn’t something that will happen overnight, and if you want to truly hit the ball out of the park, you should prepare yourself for the reality that you will experience losses and difficulties along the way. However, by keeping a clear, rational head, and reasoning out every single trading decision, you should give yourself the best possible chance of consistent, long-term success trading CFDs.
Knowing what you do inside out and back to front is something that will generally happen of its own volition over time as you immerse yourself in the markets, but there’s no advantage in leaving it to chance – becoming an expert in CFDs and the markets as quickly as possible is the quickest key towards succeeding as a CFD trader.