Trading in forex and CFDs involves potentially bigger profits than normal stock trading, but there is also a much greater level of risk. Higher risk comes with the territory in any form of leveraged trading. Here are some trading tips for minimizing your losses.
Live for leverage and know what it involves
Because you don’t need to own anything fully in the way you need to own shares when trading in CFDs, you are using leverage. You are putting down a reduced sum of money and essentially betting that a future outcome will go a particular way. For every point it goes your way, you win big – but the same is true for every point it goes against you. One of the most fundamental factors to get right, therefore, is to always consider your leveraging carefully according to your account volume.
Master market assessment
When it comes to being able to study and gauge the market, the best thing to do is make a meal of it – enjoy it, savor all the courses, and dig in for dessert. If you don’t relish doing this, convince yourself you do as it will be critical to your success. In forex and CFD trading in particular, your profit depends on market movement and how well you anticipate it. Critical to mastering the market is always being familiar with central bank decisions and monetary policies in the areas in which you are trading, especially when dealing with forex. Putting mechanisms such as stop losses in place is essential, provided you don’t factor it in too narrowly.
Use stop losses to help when the market is volatile
Setting up automated stop mechanisms, such as stop losses, to close your trading order is always wise, and it can even be critical in volatile markets. It can’t help you circumvent loss completely, but it can alert you to a tricky position and minimize your losses.
Watch out for market gaps
These show up on trade charts as huge leaps in price. They usually occur when the market is closed, but the market can also open to highly unexpected news, causing the same effect. Even automated mechanisms such as the stop loss will only close orders during the next quote after the jump – they can’t kick in mid-leap.
Understand what to factor in when setting your stop loss
We’ve spoken about a stop loss not being able to kick in during a market gap and the pitfalls of it being set within parameters that are too fine. Setting the right stop loss limit can be tricky, but these are the questions you could ask:
Know that your order size has an impact on profit
Even so-called trading gurus do not make profits with every single trade. It is reasonable to expect five to eight profitable forex trades out of 10. This means you must calculate your order sizes based on whether you have sufficient capital to outlast market movements.
Factor in the unexpected
Always be aware that the unexpected can happen because of external factors. These can range from weak internet connections and power outages to urgent errands popping up in your day that make it impossible for you to trade.
These are some introductory tips and tricks you must have in your forex and CFD armory, but there are many more intermediate ones you also need to know about, such as the Fibonacci Theory. Without a good grasp of the basics, you are doomed. Understanding leverage is key, as is the comfort of knowing you’ve put the correct stop loss mechanisms in place.