Getting Started with CFD Trading

There’s nothing that particular about trading with contracts for difference, or CFDs, compared with trading anything else, although there are certainly some peculiar differences with CFDs that traders need to be aware of as they develop their CFD trading skills.

For the most part though, trading is trading, as far as the foundations go anyway. Trading in general can be summed up as entering into trades which provide a positive expectation over time, and exiting them when the probability changes to the point where staying in the trade results in a negative expectation over time.

Getting Started with CFD TradingAs far as assessing these probabilities, for the most part the skills involved are transferable to trading in general, because we will essentially be using similar tools to judge these things. The differences are in peculiarities with how the assets tend to move, where we’re using similar measuring sticks but what is being measured may differ somewhat.

Much of these differences manifest themselves at the more advanced levels of trading, where one may look to understand more and extract more from certain assets by tailoring their approach more to the peculiar behavior of price changes in the asset.

For example, a more advanced trader will be able to distinguish price cycles and ranges over various time frames much better than a less experienced or less skilled trader will, but the newer trader needs to be concerned more with the basics, how to decide these things in general.

Prices of tradable assets tend to move in fairly predictable ways, and while the predictability here is far from certain, and there no golden path to be able to trade these patterns with any kind of certainty, one can certainly do so with a probabilistic advantage, which is the essence of successful trading.

While having a background in trading prior to trading CFDs certainly does help, it is not required, and new traders can certainly cut their teeth on CFDs, providing one trades sensibly and especially takes a sensible approach to risk management.

Discovering How to Uncover Profitable Patterns

Without the ability to be able to discern profitable patterns, one cannot ever expect to be profitable at trading, and this includes trading CFDs and anything else. Long term traders may be able to rely on luck, since they are only making very infrequent trades and are holding their positions for long periods of time, but this is based primarily on hope, which is of course an inferior approach to trading.

Long term investors are trading whether they admit it or not, and the goal of all trading needs to be or at least should be to be in positions when the trade is favorable, when probability is on your side, and be out of the trade when it is not.

CFDs are not suitable for long term trading though, in any case, as CFDs are traded with a lot of leverage, even though traders can allocate the degree of risk involved by setting aside more or less of their account in cash.

If you traded a CFD long term, you could certainly do so, but the longer the term the trade, the less potential there are for returns, and the high leverage involved means that you’ll be paying a fair bit of interest on your investment.

You can’t really expose that much of your portfolio to this kind of leverage with longer term trades, since they need to be giving a lot more room to move against you, and these moves would expose your account to huge risks, and wipe you out in fact.

If you keep the leverage down and keep most of your account in cash to offset this, then you’re still paying interest on the amount invested, when you don’t really need to, and would be better off investing in something like an exchange traded fund, or EFT.

CFDs are built for trading though, not necessary high frequency trading but a higher frequency than investing for sure, and one cannot stay in trades for that long when the price moves against you. The more often you trade, the more important skill is, because you can’t rely on luck anymore, for instance with buying an index fund at the right time, in a midst of a bull market.

The skill involved here means that you need to be able to become good at picking winners, not just hoping for them, and this primarily means becoming skilled at using technical analysis and coming up with strategies to take advantage of movements in price.

There is no substitute for hands on experience here, and this is why trading on a simulator is so important when you first get started in CFD trading, or any trading, where you get to seek to discover and try out trading ideas and build your skill set.

This will only help you to the degree that you know what you are looking to do, which is why learning at least some basics as far as the theory of technical analysis goes, meaning becoming familiar enough with the tools that we may use to measure movements in price and decide when probability is in our favor and when it is not.

With at least a working knowledge of technical analysis, one can then apply oneself to charts and look to build and develop the kind of skills that are needed in order to trade profitably with real money.

Managing Risk with CFDs

Given that CFDs have the potential to be riskier than trading with cash or trading with much more modest amounts of leverage, risk management is even more important with CFD trading, although it’s important enough with any trading.

Professional traders understand, often through hard lessons, that the most important skill in trading is managing risk. We can think of trading as having two main elements, which we can call offensive skills and defensive skills.

The offensive skills are important enough, as without them we aren’t going to be in a position to make money. As we get better with these skills, this will give us the potential for even greater returns, but this must always be tempered with defensive skills, which is risk management.

Developing a good offense, being able to achieve good or even great returns, takes real skill, and becoming good at defensive skills takes skill as well, but defensive skills are easier to acquire and arguably even more essential to success. With the added risk of CFDs, there should be no argument at all actually.

No matter how skilled we become as traders overall though, we always must seek a balance between offense and defense, between seeking returns and protecting ourselves against loss.

Initially, prior to developing the kind of offensive skills that we ultimately hope to acquire, the kind that allows us to make real good money at CFD trading, we’re going to have a negative expectation, and we especially need to protect ourselves against risk of excessive losses when we are starting out trading CFDs.

This means that, given that you should be assuming that you are going to lose money, at least prior to demonstrating that you are at the level that this is no longer the case, the primary goal needs to be to learn and to keep your losses small while doing so.

If this means that you’re just going to trade with a simulator for an extended period of time as you learn all this, so be it. If it means trading with very small positions when you do start trading with real money, until you have shown that you can make money with your trading, with these small positions, so be it.

If not enough attention is heeded to risk management, you will find yourself in the same position that most traders find themselves in, seeing your trading funds evaporate and being left with nothing more than hard lessons. It’s better to learn these lessons before this happens.

It’s not that it is that difficult to avoid the fate of so many traders where they bust out and have to start over again with new funds, and it’s actually very easy to avoid this, but only if the plan is to avoid it. Those who do have such a plan discover that there is no need for any of this really.

There’s Nothing Like the Real Thing

The reason why so many new traders struggle so much isn’t even that they can’t find a profitable trading plan, it’s that they cannot put their plan into action properly.

When a less experienced trader puts real money on the line, the pressure of this very often affects their performance, where they find that they lack the discipline to put their plan into action. Good plans turn to bad when this happens, as it is a whole different experience watching meaningful money go up and down in your balance in the midst of your trades.

At some point, when we are ready, we must venture out into trading not with paper money or meaningless amounts, but with meaningful amounts. This should be a gradual process though, which is not the approach very many traders make.

Some traders are better at controlling their emotions than others, but this always takes experience and dedication to master, and is the hardest thing about trading to get right.

If you’re going to trade off of a chart and indicators, it is necessary that this be what you are looking at in your trades, and watching the balance of your account go up and down while in a trade is an amateur mistake and a big one.

Professionals in fact do not pay attention to this and will in fact keep profit and loss figures out of view while in trades often times, especially if they are at the point where there’s any risk that seeing this information will affect them. Once you are good enough, having this up won’t matter, but when you are starting out in CFD trading, you aren’t there yet, and probably not even close.

This actually might be the most important lesson that new CFD traders and many not so new ones could learn, to trade based upon one’s trading ideas and not be thinking of money when they are in trades. To paraphrase Kenny Rogers, there’ll be time enough for counting, when the trade is done.

Becoming a successful CFD trader does take some real time, and patience, and discipline, among other things, and we need to realize that this is a path that we evolve with over time, and it does take time to get there.

Realizing how much you need to learn and master and grow with is the first step though. CFDs have some huge potential to achieve success, considerably more than most other forms of trading, and people do get three digit returns a year and grow their accounts into six and seven figures over time. They just don’t do it without putting in the work and especially understanding that this all really does take time and effort and dedication.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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