CFD trading – Essential elements for success

  • By AdminFund

  • December 12, 2018
  • 1:28 am BST

With contract for difference (CFD) trading now such a popular financial instrument for investors of all kinds to use in the world’s markets, its advantages are becoming increasingly apparent. However, this popular form of derivative trading is also quite different from many of the more traditional models, whether they are similarly based on derivative trading or older “direct buy” ways of doing things.

As trading with CFDs is based on speculating about whether the price of an asset will rise or fall, it is a far more fast-moving trading environment than other investment areas. As such, it certainly requires a thoughtful and well-planned approach.

With underlying assets ranging from forex markets, stocks, commodities, treasuries and even market indices. there are many ways for investors to put their knowledge and skills to good use. Even so, the relative “newness” of CFDs in relation to other so-called “mature” instruments means that there is a tight learning curve for anyone looking to trade them successfully.


Perhaps the first essential aspect of using CFDs to trade is knowing that they are a leveraged product. This makes managing your money and risk even more important than buying and selling shares or other assets.

With CFDs, as with any other derivative, trading takes place on the value of an asset that the trader does not actually own. The fact that this underlying asset, in whatever form it takes, does not need the trader to purchase it means that less capital is necessary to start trading. On top of that, because the asset is a leveraged form of investment, the trader only needs to make a marginal deposit to open a position as opposed to the full contract value.

This allows an investor to maximise the return on capital, but it also maximises risk. Therefore, a very basic essential element for success when trading CFDs is to pay special attention to capital outlay on individual positions.

Traders must calculate and adhere to the amount of capital that they are prepared to risk on an individual CFD trade. There are various risk management tools, such as stop-loss orders, that traders can put in place to manage their risk further, but the most important detail is to always be aware of the situation and factor in potential margin calls.

Think strategically

Although many stock traders may swear that following a gut feeling is their secret weapon for success, in terms of CFD trading hunches, guesses and emotions need removal from the equation.

Even a first-time CFD trader has the benefit of being able to use the experiences of successful traders who have gone before them. This means that there are numerous tried-and-tested CFD trading strategies that have worked for traders over time. Learning how to analyse market moves and spot patterns and trends lies at the heart of becoming a successful CFD trader. Building up an individual set of processes that combine in a unique way is how strategic thinking comes to fruition.

Of course, no strategy is foolproof, so trial and error are often the only ways to learn a mix of analysis, research and decision-making methodologies that suits each person’s needs as an investor. Everyone will have a different set of long-term goals and an attitude to the ratio of risk and return that will vary due to personal character and financial circumstances.

A trading plan

Although a great part of the appeal of CFD trading lies in its short-term “day trading” nature, a trading plan is essential to ensure success over the long term. A good trading plan will include many different factors, each of them a fundamental requirement.

Long-term and trade-by-trade goals will not always be the same, and this is where the classic confusion between strategy and tactics often comes into play. Having a long-term overview means taking a strategic approach to eventual success, and each individual trade may take on a different nature for use in a tactical way.

For instance, this might affect a chosen style of trading, or it might mean using different target markets and underlying asset types at various times.

Money management rules must be in place, not only to determine the size of trades but also to minimise risk. A follow-on from this is using a trade identification system together with an entry strategy for taking positions. Obviously, in order to actually make a profit, a clear exit strategy must also play a big part in any CFD trading plan.

A trading journal 

Keeping a record of all trades is an essential element for success. This must include all entry and exit points and the reasons behind them. The ability to look back and identify points of both success and failure is the only way to find out how well a plan and trading methodology are working. Traders can then ascertain any issues and work on strengths and weaknesses.

Using this approach also covers another major point that anyone looking for success in CFD trading needs to consider, namely that emotions can be the biggest obstacle. As CFDs revolve around underlying assets, it is essential for traders to remain as detached and unemotional as possible so that they can make decisions about positions with a total air of rationality.

Staying disciplined when faced with difficult or challenging circumstances is also another way in which emotions can impact on trading. It can be easy to fall into a trap of chasing losses and increasing risk.

Although patience is not really an emotion and may not be high among people who naturally enjoy the fast-moving world of CFDs, this is another essential element for success. Goals are attainable through a succession of incremental gains as opposed to one spectacular trade, and once again, this is where having an overarching strategy and plan in place is key to success.