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Contracts for Difference: Tips for Beginners

Are you interested in CFD (contracts for difference) trading but need a few strategy suggestions to get started? If so, you’re in the same boat as thousands of others who choose this kind of simple, exciting way to get involved in the securities markets. Not only are CFDs an excellent entry point for new traders, but they’re also a convenient way for advanced practitioners to quickly move into and out of sectors and asset classes as they wish. However, it’s essential to use common sense when building your own strategy, one that can help you reach income goals and streamline the whole process of buying and selling. Here are key details about how to set stops, use limits, manage everyday risk, employ wise money management, and prepare correctly for every position you take.

Use Limits and Stops

Limits and stops can save you a lot of headaches and prevent losses in most situations. Always place an upper profit limit and a lower stop loss when you purchase a contract for difference. The principle works exactly as it does with traditional securities like stocks. If either the upper or lower price is touched, the trade automatically closes out.

Manage Risk

It’s important to understand that one of the main benefits of a contract for difference is that you are not committed to owning traditional securities like stocks and bonds. Even though the price of the CFD contract is linked to the underlying price of the asset, you’re only responsible for the CFD itself, not the asset it represents. Managing risk is a core component of any strategy. One way to minimize risk is to know your total upside and downside on every position you take. That way, as long as you set proper upper limits and stop loss points, you will always know the exact amount of potential profit or loss on each trade.

Practice Conservative Money Management

What is the definition of conservative when speaking of money management? For most traders, the term implies never putting more than two or three percent of your account balance at risk on an individual trade. At risk amounts are the total potential amount you stand to lose if the position moves against you. Always do the math before making a purchase and stick to a low percentage of buy-in, based on your total available capital.

Start with Markets You Know

Begin trading in markets you already know well, only later expanding to new ones after you get the hang of using CFDs. Some people actually prefer to just trade one market, with the aim of specializing and gaining in-depth knowledge.

Do Research and Analysis on Every Trade

It’s tempting to enter attractive trades quickly and hope for the best. But, instead of hoping, do detailed research on every trade you place, making sure to use the same set of criteria to gauge the potential of each one. No matter how well you know a particular niche or market segment, never jump into a position without assessing the potential upside and downside, checking the history of price action for each company, and performing technical or fundamental analysis, or both, before placing your funds at risk.

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