Contracts for difference (CFDs) offer the opportunity to trade and speculate on the financial markets. However, they involve risks and challenges you must be aware of and overcome. Here are the 11 best CFD trading tips and tricks to help you sharpen your skills, avoid common mistakes and achieve your trading goals.
What is CFD Trading?
CFD trading is a type of derivative trading where you bet on the price movements of underlying assets such as stocks, commodities, currencies, indices and cryptocurrencies. CFDs are contracts between you and your broker, where you exchange the difference in the asset's value between the time you open and close the trade. You do not take delivery or own the asset, but instead, you trade based on its price change. CFD trading offers the advantage of leverage, allowing you to open larger positions than your initial capital. Your profit or loss depends on the size of your CFD trade and the magnitude of the price movement.
11 Best CFD Trading Tips and Tricks
Now that you have a broad overview of CFD trading, here are some tips and tricks to help you succeed.
Tip 1: Understand the Basics of CFD Trading
Understanding the fundamentals of CFD trading is essential before diving into the market. It's vital to grasp how CFDs work, their advantages and disadvantages and the primary factors influencing their prices.
Leverage and margin are critical concepts in CFD trading. Leverage is the ratio of your position size to the capital required to open it. Although it can amplify profits, it can also increase losses. Margin refers to the money you need to deposit to hold your open positions. It's usually a percentage of the total value of your positions, and if your margin level falls below a certain point, your broker may issue a margin call. This situation could lead to the closure of some or all of your positions to lower your risk exposure.
Tip 2: Choose a Reliable Broker
Your broker is an intermediary between you and the market, providing you with the platform, tools and services necessary to trade effectively. A good broker should be regulated by a reputable authority, have transparent and competitive fees, offer excellent customer service and provide a user-friendly trading platform.
CFD trading is not available to U.S. users. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Tip 3: Develop a Trading Plan
A trading plan is a personalized document that outlines your trading goals, strategies, procedures, rules and objectives. The plan acts as a blueprint that guides your trading decisions and actions, ensuring that you remain disciplined, focused, consistent and accountable throughout your trading journey.
Consider various elements to create an effective trading plan, including your trading goals, strategy, risk management and trading psychology. Your trading goals should be SMART – specific, measurable, achievable, realistic and time-bound. Your CFD trading strategy should specify how you will enter and exit CFD trades based on technical and fundamental analysis.
Implement risk management techniques to limit potential losses and protect your capital. These include determining your risk per trade and day, leverage ratio, margin level, stop-loss orders, take-profit orders and asset allocation. You need to manage your emotions, develop positive habits and routines that support your trading performance, and avoid being influenced by fear, greed, hope or regret.
Tip 4: Stay Informed and Educated
Stay informed and educated on the latest trends, news, events and developments that impact asset prices. Keeping up with economic calendars, market reports, earnings releases, central bank announcements and geopolitical events helps to analyze how these factors affect the supply and demand of assets. Use educational resources from brokers or other sources and learn from experts, peers and mentors. Reading books, articles, blogs and podcasts and watching videos, webinars or courses can enhance trading knowledge and skills.
Tip 5: Start with a Demo Account
A demo account is an excellent way to gain experience in CFD trading without risking real money. It replicates live market conditions and allows you to trade with virtual funds. A demo account will enable you to refine your CFD trading strategy, familiarize yourself with the platform and its features and build your confidence and competence in executing trades. You can also experiment with different assets, indicators and order types.
Tip 6: Manage Your Emotions
When trading CFDs, emotions can hinder success. It's important to manage them and maintain a calm and rational mindset to make informed decisions. To do this, create and stick to a clear trading plan, avoiding deviations based on emotions. Set realistic goals and objectives and don't expect to make considerable profits in every trade. Only trade with funds you can afford to lose and limit your risk exposure with appropriate risk management tools. Don't chase losses or overtrade; accept that losses are part of trading. Celebrate wins but don't become overconfident or complacent.
Tip 7: Diversify Your Portfolio
You can reduce your overall risk exposure and volatility by trading assets that aren't correlated or have low correlation. Consider trading different asset classes, sectors, regions and timeframes to diversify. Diversify wisely and moderately according to your risk appetite and trading style.
Tip 8: Use Stop-Loss Orders
You can limit potential losses and control your risk exposure per trade and day by automatically closing your position at a predetermined price level. Stop-loss orders can also help you avoid emotional stress and pressure by letting the market determine the best time to exit the trade. When setting stop-loss orders, consider factors such as market volatility, trading timeframe and risk-reward ratio. You can confidently trade and achieve your desired profit targets by placing a stop-loss level that accommodates normal price fluctuations but minimizes losses.
Tip 9: Maintain Discipline and Patience
Successful CFD trading requires two essential qualities: discipline and patience. Discipline means consistently following your trading plan and rules regardless of market conditions or emotions. Patience is waiting for the right trading opportunities and not forcing trades or overtrading.
Maintaining discipline and patience helps you avoid impulsive or irrational decisions that may result in losses or missed opportunities, improve trading performance by sticking to proven strategies and risk management techniques and reduce stress and frustration by accepting market volatility. To maintain discipline and patience, have a clear and realistic trading plan, keep a journal to analyze strengths and weaknesses, set trading limits and take breaks to relax and detach from the market.
Tip 10: Review and Analyze Your Trades
Objectively evaluating successes and mistakes helps you adjust your strategy. There are several benefits to this process. You may discover patterns or biases that impact your performance. Reviewing your progress against goals and objectives helps you measure your success. Analyzing your trades enables you to identify areas for improvement in your trading psychology, risk management and strategy. To review and analyze your trades, consider recording details in a journal or spreadsheet, using charts and tools to visualize data or seeking feedback from peers or experts. Performance metrics like win rate, risk-reward ratio and drawdowns can help you evaluate your trading performance.
Tip 11: Limit Leverage
While leverage can amplify gains, it can increase losses if the market moves against you. To mitigate these risks, limit leverage to a level that aligns with your risk appetite and trading style. Doing so can reduce your exposure to risk, avoid margin calls and liquidations and help you use leverage responsibly. When deciding on the appropriate level of leverage, consider factors such as market and asset volatility, timeframe and risk-reward ratio.
Best CFD Brokers
To help you choose a reliable broker for CFD trading, Benzinga has compiled a table that compares some of the best CFD brokers based on their regulations, fees, platforms and education.
CFD trading is not available to U.S. users. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
80.84% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital.com is regulated by the Securities and Commodities Authority.
- Best For:Fast, Reliable Execution and High-Volume Traderssecurely through Forex.com NON US's website
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% to 77.7% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account
Trade CFDs Like a Pro
CFD trading can be an exciting and profitable way to speculate on financial markets. However, success requires knowledge, skills, discipline and patience. Following the 11 best CFD trading tips and tricks in this article can improve your chances of success in this exciting market.
Frequently Asked Questions
Can you trade forex without CFDs?
Forex can be traded without CFDs by buying or selling currencies directly in the spot market or through futures or options contracts with predetermined prices and dates.
Is CFD trading legal in the U.S.?
CFD trading is not permitted in the U.S. due to its classification as securities or swaps by the SEC and CFTC, making it unauthorized and unregulated in the country.
Why do most CFD traders lose money?
CFD traders often lose money because of a lack of education, no clear trading strategy, poor risk management and faulty emotional control.
Get a Forex Pro on Your Side
FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets with low pricing and fast, quality execution on every trade.
You can also tap into:
- EUR/USD as low as 0.2 with fixed $5 commissions per 100,000
- Powerful, purpose-built currency trading platforms
- Monthly cash rebates of up to $9 per million dollars traded with FOREX.com’s Active Trader Program
Learn more about FOREX.com’s low pricing and how you can get started trading with FOREX.com.
About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.