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CFD Trading for Beginners: Top Tips to Get Started

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FOREX EDUCATION

Interested in trading the global financial markets without the hassle of physically owning the assets you trade? If so, Contracts for Difference (CFD) trading might be right up your street. 

A CFD is essentially a contract between a trader and a broker, allowing speculation on the movements of financial instruments like forex pairs, indices, commodities, ETFs, and individual stocks. Profits and losses are determined by the difference between the buy and sell prices of each contract.

Of course, it’s not quite as simple as diving into the markets and opening your first CFD trade. There are multiple steps traders should first get familiar with in order to start your trading journey in the right direction.

In this beginner’s guide, we’ll provide jargon-free, easy-to-understand insights into trading CFDs successfully.

Top CFD Trading Terms for Beginners

First things first. Aspiring or new CFD traders should get to grips with the basic terminology used by CFD traders and brokers alike. 

Margin – the amount required to maintain any existing open trading positions.

Leverage – the ability to control a larger trading position, identified as a ratio. For example, a leverage ratio of 1:100 means that for every $1 you deposit, it’s possible to make 100 times that amount in profits. However, leverage will also magnify potential losses.

Commodity CFDs – Commodity CFDs allows you to trade the underlying value of assets such as gold or oil.

Index CFDs– Index CFDs, or indices, allow you to trade leading stock indices such as the FTSE 100, the Dow 30, the Nasdaq 100, or the S&P 500.

Going Long –‘going long’ in a trade means you to take a buy position on a CFD, allowing to profit if prices subsequently rise.

Going Short – ‘going short’ in a CFD trade means you to take a sell position on a CFD, allowing to profit if prices subsequently fall.

Equity – the total funds you have in your trading account to invest.

Swap fees – interest charges applied by your CFD broker in order to keep open positions open overnight.

Stop loss – an order that closes your positions if the traded asset’s value falls below a predetermined price level.

Take profit – another order that closes your positions if the traded asset’s value reaches a predetermined profit level.

Slippage – the difference between the price you intended to buy or sell an asset at and the actual price.

Pip – the smallest unit of price movement in forex trading.

Bullish – A type of market sentiment indicating optimism and an expectation of rising prices 

Bearish – Another type of market sentiment indicating pessimism and an expectation of falling prices.

Top CFD Trading Tips for Beginners

1. Always Use Stop Losses

Stop-loss orders the most full-proof way to limit your losses and stop you from getting liquidated – essentially blowing your entire account. Along with drastically improving your risk management, stop losses also mean you you don’t have to micro-manage your open positions every ten seconds.

2. Practice on a Demo Account

Starting on a demo account lets you familiarise yourself with the trading platform, instruments, and tools available to you from your CFD broker. You’ll also be able to trade with fake funds, usually anywhere from $1,000 to $100,000, which you can use to learn the fundamentals of opening and learning how the markets work before you dive head-first into real trading.

3. Don’t Over-Leverage

The greater the leverage you take from your CFD broker, the less breathing space you give yourself. If the market starts to move against you, you’ll have precious little opportunity to close your position without incurring a big loss. Remember that the bigger your leverage, the easier it is to lose your entire account.

4. Have a Trading Plan

Without a clearly defined trading plan, it’s all too easy for CFD trading beginners to steer away from the script. This can lead to overtrading i.e. getting involved in trading setups you wouldn’t ordinarily take based on your original trading strategy.

5. Control Your Emotions

Maintaining your trading psychology is paramount in CFD trading. Emotional decision-making often leads to impulsive actions, which can result in unnecessary losses. By staying calm and disciplined, you can make rational decisions based on your trading strategy rather than moving toward fear or greed.

Popular strategies for Beginner CFD Traders

1. Day Trading CFDs

Day trading with CFDs is a popular short-term strategy that involves entering and exiting a trade with the aim of closing out the position by the end of the day. This is with the intention to profit from small but frequent price movements. As you are required to monitor price charts meticulously for this strategy, day traders often focus on price action and technical analysis rather than fundamental factors that may be affecting a financial instrument.

A day trader will study support and resistance levels from the previous trading day/week in order to decipher possible reactions that the price may take when it arrives at those identified levels. 

2. News-Related CFD Trading

Trading the news is another short-term strategy that involves staying up to date with economic announcements and market expectations for the near future. While this is considered a much riskier strategy, news traders require strong decision-making skills and to the ability to make quick judgements for potential trading opportunities. This is a particularly useful strategy for volatile markets that react quickly to external factors, such as oil, indices, certain stocks and currencies.

3. Hedging Using CFDs

Hedging is a strategy that allows traders to offset risk within their trading portfolio. Some examples of effective hedging strategies include pairs trading and the use of derivatives, such as forward contracts. You can also trade safe haven assets as a hedge, such as gold, government bonds, the US dollar, and defensive stocks, as these financial instruments are generally considered less vulnerable to negative market shocks than others.

4. CFD Position Trading

Position trading essentially entails taking an investment-like buy and hold approach. Position traders may opt to hold trades for months or even years, ignoring minor price volatility and focusing on long-term trends. Position CFD traders tend to rely on fundamental analysis over technical, such as macroeconomic trends and historical price patterns.

The most important thing to keep in mind if you’re considering a position trading approach is that CFD positions held overnight may incur holding costs known as swap fees/rollover fees. Position traders can get around this by opening a swap-free account, sometimes referred to as an Islamic account too. However, be prepared for higher commissions and trading spreads if you select this account type with your CFD broker.

Key Traits of Successful CFD Traders

If you want to transition from a beginner trader to a successful, long-term CFD master, there are many things you can learn from already established, successful traders. Here are four common traits that unite the 1% of consistently profitable CFD traders.

They Master Risk Managment & Trading Psychology

It’s important to accept that trading the stock markets is an emotive business. Accepting risk and losses is not something the human brain is trained to do. The most successful CFD traders remain level-headed in the markets. They do so by utilising risk management tools and techniques to limit the effect of emotions and biases when active in the markets.

They Learn Common CFD Beginner Mistakes and How to Avoid Them

Consistently profitable CFD traders dedicate time and energy to learn from the mistakes of others. They understand the risks of over-leveraging and over-trading, and they make the conscious effort to only trade within their trading strategy. They also go back and analyze their winning trades just as much as their losing trades – a technique known as journaling, which can help traders review past trades and adjust future strategies.

They Learn From Their Own Mistakes

Let’s face it. No matter how much preparation you make or knowledge you acquire, when it comes to trading, everyone is bound to make mistakes in the beginning. The most successful traders have more than likely lost money or even previous accounts before becoming consistently profitable. Don’t be too afraid of making mistakes in the beginning. After all, learning from them will be your most valuable lesson in the long-term.

They Trade How it Suits Them

As a beginner CFD traders, you’ll likely come across so called ‘trading gurus’ and financial influencers on social media, sharing their strategies and trading advise. While some of their information may be useful, you should remember that imitating someone elses trading strategy letter by letter won’t always bring you the same results in principle. Every successful trader acknowledges that what works for them may not work for others, and as a result, you should adjust every minor detail of your trading strategy and setup to suit yourself. This will mean identiying the assets to trade, analysis methods, platforms, risk to reward ratio, and trading times that make most sense to you.

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