Contract for Difference (CFD): Five Tips for CFD Trading

This article explains the basics of Spread Betting and Contract for Difference (CFD) trading. Read on if you are new to trading.

C ontract for difference or CFD Trading is part of a growing trend in speculating on the direction of a stock or market. Like the related investment vehicle, spread betting, it allows traders to cash in on sound market predictions without owning the underlying investments. You can open an account with a company like CMC Markets for a small deposit, and many providers will provide advice and training for beginners.

If you're new to CFD trading, here are a few tips to start you off.

1. Lay your trading plans well

It's important to outline your trading plan before you open a trade. Deciding on entry points, exit points and objectives will help neutralize the emotional reactions that are inevitable as you watch the progress of your trade. Unless you have an excellent reason, make only minor changes during the trading session.

2. Follow the leaders

Unless you're an extremely experienced investor, it's wise to follow the prevailing investment trends. Another good way to make money is through being able to recognise a flagging trend. Using relative strength indicators can help you in this.

3. Manage your money

Instead of rashly staking all on a good bet, limit yourself to no more than 10 per cent of your overall equity per trade. For example, if you have £100,000 in your CFD account then only £10,000 should be used for an individual trade. If you break this rule, you could find yourself running into financial difficulties.

4. Lose money to make money

Very few CFD traders are lucky enough to make money all the time. Even successful traders generally make a few losing trades. They are just adept at identifying a losing trade and close that position quickly. Accept that you will make a few losses. The important thing is to win more than you lose.

5. Go short

Don't be afraid to go short on a stock. Around 80 per cent of CFDs are long positions, but short positions can be equally lucrative. One advantage of investment vehicles like CFD trading and spread betting is that they allow investors to profit from falling as well as rising markets.

It is important to ask in detail about the costs of investing in a unit fund before you commit yourself. It's worth using a company like Legal and General to compare unit trusts and judge the level of expense that is usual. Your research will ensure that you do not pay too high the odds to keep your money in a unit trust.

The opinions and statements expressed in this paid article reflect those of its authors and not those of AlphaProfit.

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