Techniques for CFD Trading
If you are new to CFD trading or just looking for some new techniques to improve your profitability, you have come to the right place. We will explore a few different methods you can use when trading CFDs. Whether a day trader or a long-term investor, these techniques should help you achieve better results.
So let’s get started.
Understand the different types of CFDs and their uses
The first step to becoming a successful CFD trader is understanding the different types of contracts for difference and their uses. There are two main types of CFDs: those that track an underlying asset and those that don’t.
The former is asset-backed CFDs, while the latter is cash CFDs. Each type has its advantages and disadvantages, which we will discuss in more detail below.
The main advantage of asset-backed CFDs is that they provide exposure to the underlying asset without actually owning it. It means you can trade assets such as shares, indices, commodities, and even foreign exchange without buying and selling the underlying asset.
Another benefit of asset-backed CFDs is that they often offer leverage, which can be used to boost your profits (or losses). However, leverage is a double-edged sword, so it is essential to use it cautiously.
The main disadvantage of asset-backed CFDs is that they are generally more expensive than cash CFDs. It is because you are paying for the privilege of not having actually to own the underlying asset. In addition, asset-backed CFDs are usually only available on major exchanges and can be subject to daily price limits.
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As their name suggests, cash CFDs do not track an underlying asset; instead, they provide exposure to the difference in prices between the start and end of the contract. Because there is no need actually to buy or sell the underlying asset, cash CFDs are generally much cheaper than asset-backed CFDs.
Cash CFDs also offer leverage, although this is usually lower than asset-backed CFDs. The main disadvantage of cash CFDs is that they are a more speculative form of investment. It is because you are effectively betting on the market’s direction rather than investing in an actual asset.
Techniques that should help you achieve better trading results
Let’s look at some techniques that should help you achieve better results.
Pick your battles
Once you have decided which type of CFD you want to trade, the next step is to pick your battles. It means choosing the right asset to trade and the right time frame.
The time frame you choose will depend on your investment objectives and risk tolerance. If you are looking for long-term capital growth, then you will probably want to choose a longer time frame. On the other hand, if you are more interested in short-term profits, a shorter time frame will suit you better.
Set your stop losses
Once you have chosen your asset and time frame, the next step is to set your stop losses. A stop loss is an order that automatically closes your position if the price falls below a certain level, and this level is known as the stop-loss price.
Stop losses are used to limit your losses in a trade. If the market moves against you and the price falls to your stop-loss price, your position will be automatically closed, and you will only lose the amount of money you have put at risk.
It is essential to set your stop losses at a level that you are comfortable with. If the market falls sharply and your stop loss is triggered, you may lose more money than you had initially planned. On the other hand, if you set your stop loss too close to the current price, you may find that your position is frequently closed by small fluctuations in the market.
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Take profit orders
In addition, to stop losses, you can also use take profit orders. A take-profit order is an order that automatically closes your position when the price reaches a certain level, and this level is known as the take-profit price.
Take-profit orders are used to lock in profits in a trade. If the market moves in your favor and the price rises to your take profit price, your position will be automatically closed, and you will make a profit.
As a stop loss, setting your take-profit orders at a level, you are comfortable with is crucial. If the market moves too quickly and your take profit is triggered, you may miss out on other profits. On the other hand, if you set your take profit too close to the current price, you may find that your position is frequently closed by small fluctuations in the market.