A lot of traders have heard about Contracts for Difference (CFDs) but not many of them really understand it. Trading CFDs usually permits leverage at a ratio of 10 to 1, which implies that for each $1 you are exposed to CFDs worth $10, as a little money amount gains weighty leverage. The profit or loss made from speculating the increase or decrease of a share’s value is the ‘difference.’
Gains of CFDs
Though dealing a leveraged instrument like CFDs comes with certain risk, there are a lot of gains from this trade that include:
Steering Clear of Regular Mistakes
Traders have the wrong assumption when they trade CFDs thinking they have leverage in the physical market. In the physical market, you own the shares that you trade, every ownership rights and franking credit access. But in CFDs, you own nothing, but rather get exposure to the flow in the physical share price with the money you pay.
Considerable Strategies for CFD Trading
Know the probable duration of the trade and then employ your guidelines consequently. Most times, CFD trades last anywhere from some days to a few weeks. With that and the leveraging of CFDs, you need an entry and exit guidelines so that you can be quick to respond. One of the very effective guidelines when it comes to CFD trading is Gann’s counter-trend theory. A counter trend is a flow in the opposite way to the predominant trend.
Entry, Stop Loss and Exit
For a counter-trend movement, entering the market in a long position, for example, can be activated when price trades at above $0.01. As a rule, you can have two stop loss points; lowest at below $0.01 and an upper stop loss at $0.01. The essence of the two stop loss here is so that you can choose either the lower or the upper as you trade which will be determined by the risk you want to take. If you go for a lower stop loss of below $0.01 you go for a level of risk that is more than the normal one to two percent of your entire capital. You can decrease your position size or move your stop loss upper. A decent strategy to take on as you enter trading is to get your stop loss up in every following trough. You can exit once the share closed $0.01 cent lower than the previous trough.
Managing Your Money
This is a significant part of your trading irrespective of the market or when you want to enter the trade. For example, you have an investment capital of $100,000 and want to put 10% of the money in trades with high risk. That is you are willing to trade CFDs with $10,000. It is broken down to suitable position sizes of 20% maximum, which is at $2,000 for each CFD trade. CFD trade has a leverage of 10 to1. So with $2,000, you take up a CFD position of $20,000. In observing this rule, you maintain the permissible risk of 1: 2 percent of your entire $100,000 capital (2% of $100,000 = $2,000). Should the trade turn against you, it will only be a marginal effect of your portfolio. This is only a simple trade plan; there are still other ways CFDs can be traded. Should you decide to enter the trade, it is best if you devise your own trade plan and use a weekly chart to backtest it.
Irrespective of your trade instrument, it is important to have a stop loss set to guard your capital. Do not make a wrong assumption of thinking the stop loss you set for a share is the same you will set in CFDs. You will lose money if you do so. You should note that in markets with high leverage you can lose money at a ratio that reaches 10 to 1. Hence, a share price that decreases by 5% can mean your capital is already reduced by half.
When you trade CFDs avoid using all your capital.
You should only trade 10 % of your capital in leveraged products.
The rest can be placed in investments with low risk such as blue-chip shares.
When determining your satisfactory position size, you should consider the risk that you want to take with your money instead of the amount of leverage provided by your capital. Calculate your stop loss and figure your potential loss amount in the trade should you be stopped out. For amounts that are outside your tolerance level, lessen your position size to an acceptable level of risk, usually about 1 to 2 % of entire capital.
Entry and Exit effects
CFDs are not disturbed by time decline; thus the same entry rules as that of traded shares can be used. What is more important with leveraged products is your exit since the market can go against you. A quick exit is essential in CFD trade when there is a strong possibility of a change in market direction. You should know that when you exit very early or very late, it can have a powerful effect on the profits or losses that you could potentially make.