Three golden rules to sensible CFD trading

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CFD brokers offer the facility for you to trade the financial markets, but only you can implement a winning strategy to make money trading.  If you are looking for a CFD trading strategy these three golden rules are a good place to start.

1) Run your wins, cut your losses

This requires discipline and one of the main reasons that people lose money trading is because they are too eager to lock in a profit.  trading CFDs is a numbers game and the best hedge fund managers in the world only get it right about half the time.  That means that half of the trades they execute a loss.

The market is based on trend and reversion so technical analysis plays a high part in short and long-term CFD trading.  If you call a trend right you are going to make money if you leave the trade open, if it a loser cut it straight away.  You can do this by using a stop loss or a trailing stop loss.

2) Don’t over trade

This is so important.  If you only have £10,000 to play with you definitely don’t want to put all that into one trade.  Sure if it’s a winner great but if it’s a slow mover or a loss then you are stuck and won’t be able to enter into any new positions when potentially profitable opportunities come up.

Plus, if there is a shock short-term overall market then you’ll get a margin call and be forced to close your positions because you can’t cover the variation margin.  Being forced to close a position is one of the worst things that can happen to your trading strategy.

3) Diversify your positions.

One of the great things that CFD brokers provide the facility for is making money when the market goes down.  This means that you can have a wide range of positions but actually remain fairly market neutral.  For example, if you are short some individual stocks because you think they are badly managed then you are exposed to an upwards move in the markets.  So you can hedge using a CFD position in the underlying index to protect against this.  You could also have some long positions in similar sector stocks as some protection.

The key thing to remember is that profitable CFD traders don’t open massive single positions and hope for the best.

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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.