Top Tips To Improve Your Trading
Do Let Your Profits Run
If ever there were a central principle by which to live your CFD trading life, this has to be it. Let your profits run at every available opportunity. Profits in CFD trading aren’t always easy to come by, and numerically those that turn out for the best will probably by dwarfed in comparison to those that don’t turn out quite how you’d expected. This makes it essential that you allow profitable, winning positions to continue to run on and on as far as possible. While every ounce of your instinct will at first tell you to close and bank a profit, the more money you milk from each winning trade, the best chance you’ve got of succeeding overall.
Do Cut Your Losses Early
Similarly, it’s essential that you realise as soon as possible that losses are a drain on your resources and need to be cut out of the picture as soon as they can. The more ruthless you are in cutting losses, the better chance you’ll have of making an overall profit. When it comes to a game of aggregated, one down on the negative side is as important as one up on the positive side, so it pays to take positive steps towards ensuring your downside liability is minimised. After all, if you intend to sell your position in an hours time if it loses an extra 5%, aren’t you better off just saving that 5% loss, taking your medicine and settling right now?
Do Constant Research And Reading
Whatever you do day to day, make sure it involves constant research and reading up on the markets you trade, global current affairs and politics. This is a game of knowledge, and the more you know, the more likely you are to have the capacity to make the best possible trading decisions. Some trading signals can only be identified through experience, and there’s no substitute for real life when it comes to the learning curve, but by making sure you’ve got the theoretical knowledge down, you can be more confident in your abilities as a trader to identify the low-hanging fruit that can make you fortunes.
Do Diversify Your Exposure
Make sure your capital isn’t all tied up in CFDs or in specific sectors or even specific countries – do make sure you take a diverse approach to split the risk over as many different markets and instruments as possible. CFDs are great, but if they represent the entirety of your worldly fortunes you’ll have problems. In much the same way that businesses can’t become too reliant on one client or supplier, so too should you ensure you diversify your trading capital across a number of different investments to make sure that even in worst-case scenario, your capital is protected. It’s all about protection of capital, because after all, it is only your capital that is capable of generating your returns.
Do Set Time Limits
Trading costs with CFDs can often get out of hand when they are left to their own devices, primarily because financing charges are applied daily overnight. Setting strict time limits by which you should expect to realise your profit is important in keeping a firm grip on your positions, and you should take care to set and stick to time limits and earnings targets for determining performance. This is the only means in which you can regulate your trading performance, and as with the research point above, the more you know (in this instance about your own portfolio), the better your chances of succeeding in the markets over time.
Do Use Leverage Sensibly
Leverage is a central part of trading CFDs, an inescapable feature of the transaction that is in practicality its raison d’être. Gearing up the size of transactions in order to effectively up the ante, we all know leverage can be extremely dangerous when things don’t work out, but using it to sensible, effective use can provide real benefits for your trading portfolio. A cautiously leveraged portfolio can have the best of both worlds – exposure to the high potential gains afforded by leverage on aggregate, with a cautious enough approach to preserve capital resources. That means strategies like leveraging only to gear up your transaction capital rather than scaling up your entire account, which would be too risky, and backing positions that have become winners more heavily to maximise yield. Leverage can be a heavy burden to bear, but it doesn’t have to be – remember it’s a tool best used sparingly, and you should help skew the risk/reward ratio slightly more in your favour.
Do Make Use Of Stops
CFDs can be highly volatile, and the slightest bump in market prices can often send much more significant shockwaves through the CFD markets. While CFD trading is naturally and by design a risky business, it is possible to minimise the extent of those risks both through the way you trade, and through the way you make use of stops. Stop losses and limits are central to a cautious, realistic trading approach, and they can help save serious capital damage while allowing profitable positions to fully flourish. While stops do usually attract an additional cost, making use of stops to prevent your capital from becoming too exposed to leveraged trades is the first step towards a robust, risk-managed CFD portfolio. Particularly as a new trader, stops will be crucial in preserving capital and earnings during your initial learning period.
Do Know Your Trading Costs
CFD trading isn’t like spread betting, where all the costs are transparent in the transaction – there are in fact a number of different layers of trading cost that can factor in, depending on the makeup of your transaction and your particular broker, and so it is essential to make sure you have a knowledge of these costs and how they will affect your ability to deliver a profit on a particular transaction in order to allow for informed investment decisions to be made. Particularly for traders contemplating holding a CFD position for over one day, the daily increasing financing charges quickly mount up, and can quickly become a significant handicap on the trade. That’s why it’s important to know what you’re paying, and to calculate your financing and trading costs, in line with your trading strategy, to decide whether or not a trade is viable.
Do Set Profit Expectations
Most amateur traders start off with no real profit expectation. They launch into the markets and hope for the best, and with a bit of good luck take any profit they can get. Unfortunately, for serious traders, life can’t be that simple. Profit expectations perform a central role in the business side of your trading activity. Portfolio management is a business, and as a trader you need to make sure you operate in as professional a way as you can to give the best chances of success. Profit expectations are like sales forecasts – they define what you want to achieve, so you can then calculate cash flow and make further predictions, forecasts, and revisions to strategy. For best effect, look at the size of recent market price movements in the underlying market for your CFD and crunch the numbers to deliver a rough outline of what you could justifiably expect to return.
Avoid Mistakes Of Others
Don’t Overleverage
Don’t fall into the all too common trap of overleveraging on a transaction. Overleveraging occurs where you ambitiously take on too much leverage in a position than you can afford to personally meet, and as a rule of thumb, you shouldn’t be leveraging up beyond what you can personally afford to fund. Leverage is a tool for trading, not for gambling, so make sure that you apply it in stages to help amplify your account where possible, rather than using it to drive the whole ethos of your trading. The more significantly leveraged you are, the greater the chances of trading disaster – when in doubt, keep your positions small. Slow and steady always wins the race.
Don’t Lose More Than You Want To Gain
As you embark on each trade, you will have an expectation of the sort of profit portions you’re looking to take from the transaction. Depending on the market and the amount of capital and leverage you have exposed to the position, this may be a substantial or minimal return. But as a crucial rule of thumb, having established this expectation, don’t accept a loss that is greater than what you would have taken as a profit. Assuming that probability is on your side is dangerous, and hanging on for a recovery is amongst the worst trading mistakes you can make. Don’t ever let a position get to the stage where you’re having to swallow humble pie with a loss larger than the profit you would’ve been satisfied with from the very same trade – it does nothing for morale, or your wallet.
Don’t Overtrade
Similar to overleveraging, overtrading is when you engage too much of your capital at any one time. So, rather than being too heavily exposed to one position, your account is too fat, with too many different positions (and potential liabilities) operating at one time. Finding loads of different trading opportunities is great, and shows that you must be doing research with some volume of output. However, in the event that you have multiple positions, it’s often better not to spread yourself too thinly, for fear of burdening yourself with any number of active positions that could quickly head pear shaped. Especially when leverage is thrown into the mix, it simply isn’t worth your while to take on too sizeable a portfolio.
Don’t Get Emotionally Attached
Traders all too often fall into the trap of thinking that they’ve been unlucky, or that markets will correct in time to balance out in their favour. Karma doesn’t exist when it comes to CFD trading, but leverage most certainly does, and it can slap you ferociously if you end up becoming emotionally connected to your positions. Realise that trades are transient, and one day Company X might be up while the next Company X might be down – this doesn’t matter. What matters is that you are dynamic enough to make money on both the up and the downside, and having sufficient discipline to understand when to draw a line under a loss and move on.
Don’t Chase Your Losses
Finally, loss chasing is the single biggest error you can make as a trader, yet it’s one that feels all too natural, if not counterintuitive. The tendency is, having invested time and effort in researching positions, to assume that the markets have yet to come round to your way of thinking. As a result traders keep funding obvious losses, and keep adjusting their margin requirement to continue to fund the position as it continues to lose money – in the hope that it will eventually return. Chasing losses is nonsensical – you’re simply throwing good money after bad. Cutting out as quickly as possible and allowing losses to lie where they fall is central to good portfolio management.
Don’t Set Stops Too Tightly
When setting stop losses, there is a tendency to get a little overcautious. Obviously the amplification of leverage makes each incremental price drop a significant concern, but it takes a cool, objective head to determine how the market might behave in the near future to set stops accurately. The balancing consideration is that if stops are set too tightly underneath the market price, trades will be closed automatically and unnecessarily, at great expense and inefficiency to your trading account. While stops are there to prevent loss, its important to always allow for some breathing space in your position, as opposed to setting a stop immediately underneath current market prices. The extent of the breathing space you’ll require is dependent on the volatility of the market, and any other factors that might prompt a price jump in either direction, but nevertheless the principle of balancing these needs is an important one to bear in mind.
Don’t Gamble With Your Capital
CFDs are often described by the ill informed as high-risk, market ‘gambling’ type investments. Gamblers lose eventually because they take unmerited risks – they gamble. Investors invest. Traders trade. There is a stark difference that must be upheld – in gambling, forecasting outcomes with any certainty is not possible. There are two many variables, and while skill may play a part to a certain extent, it is proportionately offset by the role of chance. In CFD trading, you can make gambling-like earnings, but you have to work for them. That means researching trades before you jump in, and making sure you reason out why you’re making a particular trading move. Make sure you don’t ever gamble with your capital, supporting a position because you have a good feeling about it or because you want to support it. CFD trading isn’t about chance – it’s about knowing your stuff and making shrewd decisions based on measurable market data.
Don’t Feel The Markets Owe You
A common tendency amongst aggrieved traders is to feel that they are due a return, or their owed a lucky break from the markets. This mindset, which assumes that market outcomes are random, or chance driven, leads to silly trading decisions, and clouds the judgement of the trader in making calls on the directional market movements. In reality, while there may be some elements of chance to the markets along the way, the overwhelming force of markets responds in predictable ways to a number of prompts – the magic of calling it lies in weighting these often contradictory prompts to decide which way the market is likely to move. This simply can’t be achieved by feelings of being denied opportunities on some idea of fate or luck – the markets don’t owe you a penny, and every winning trade you make will be hard fought and hard earned.
Final Note: the tips are not easy to follow as they take discipline, time, and determination; but eventually, hard work always pays off.