Given that there is no secret recipe for becoming a billionaire by trading CFDs, it is important to keep the following things in mind if you wish to avoid some of the typical pitfalls of CFD trading.
Make a Demo Account
Start your CFD trading career with a demo account, which is available from many online brokers, rather than by jumping right into it. For those who wish to try out CFD trading techniques before putting their own money at risk, a demo account is an excellent way to start. Open a demo account with an amount equal to or more than the amount of money that you would be willing to trade in real life before you begin trading in the demo account. You will notice more realistic returns and performance as a result of doing so.
Always Set a Stop-Loss Order
The most important CFD trading advice is to be sure to limit your downside exposure by utilizing stop-loss orders or even guaranteed stop-loss orders. A lot of trading misfortunes by traders are because of not setting a stop-loss order. Most beginners tend to ignore this very important feature because of excitement. Having a stop-loss order guarantees that you will not end up losing all your funds in a trade.
Information Is Key
Be familiar with terms and the fundamentals of trading CFDs. Do not start trading unless you understand what a limit order or a market order is. It is ideal to specialize in one area and stay with it. Do not attempt to trade forex CFDs until you have fully grasped the distinction between a USD/CAD and a CAD/USD quotation. In addition, don’t expect to become an expert overnight.
Limit Your Leverage
When using leverage, keep in mind that it is unreasonable to expect the price to move in the right direction immediately after you create a trade. If your leverage is very high, a small move in price against your position will have a great effect on your trade and end up closing it. As a result, you will not be able to earn a profit when the market returns to your favor. If your leverage is very low, a small move in the wrong direction may not force you to close out your position. However, at least in the EU, authorities have set a 30:1 maximum restriction on leverage for key currency pairings, despite the fact that leverage levels as high as 400:1 are not uncommon.
Avoid Putting Your Eggs In One Basket
CFD trading provides a trader with access to a broad range of markets and assets. If you believe oil stocks are the next big thing, don’t go long in Shell, Exxon, and BP as well as crude oil all at the same time, for example. Moreover, if you are proved incorrect, you will be severely punished since all of these assets are highly linked and are most likely to move in the same way. Furthermore, in a broader perspective, it is probably not a good idea to make a livelihood only from CFD trading. It is possible to earn significant profits through CFD trading, but it is also possible to suffer significant losses, so be sure that this is not your main source of income.