What makes for a good CFD trade?

  • By Noah Schumacher

  • May 20, 2021
  • 12:41 am BST

The essential metric for determining if a CFD trade is good is basically whether it makes a profit. While some other forms of trading based on the ownership and transfer of assets might be “good” in some situations even if they make a loss, this is not the case for CFDs.

A loss-making sale of an asset might actually be part of a trader’s longer-term strategy to shore up a particular position, and in other cases, it might be the best course of action to minimise further losses. However, when it comes to trading CFDs, the bottom line really is the bottom line when it comes to determining success or failure. 

Good practice

Of course, simply stating that whether a trade makes money or not is the key to measuring success can come across as somewhat glib. There are many reasons why investors take advantage of the versatility of CFDs, and the options for creating leverage on a 24-hour trading basis means that learning how to use best practice is key.

As with most disciplines that involve gaining knowledge about a subject to develop skills and techniques that lead to success, CFD trading is an area where practice can make, if not perfect, then at least more lucrative. Deciding to go long or go short is not something that you can determine on the flip of a coin, as up-to-date market data, price information and a good idea of the influencing factors at play are all essential elements to making a good trade.

Choosing a market for success

CFDs are available on thousands of individual markets, and although forex is one of the most popular, shares, various indices, commodities and even changes to interest rates are all options to consider. This is where a personal element of CFD success comes into play, as an investor will have knowledge of certain sectors or areas built up through experience in business and investment strategies or simply by having a specific interest in a particular niche.

Identifying trading opportunities that offer the chance to apply personal insight is another strong indicator for CFD trading success and means that an individual can develop a trading style to his or her best advantage.

Margin and leverage 

As a leveraged product, a CFD only needs a trader to deposit a small percentage of the full value of the trade to take a position. This type of trading on margin means that losses as well as gains can magnify, so a well-thought-out risk management strategy is a vital element in any successful CFD trade.

Adding stop and limit orders are techniques that can automatically close a trade if the market reaches a certain level and close your open position once it hits the level that you have set. This can help minimise losses that are an in-built risk of trading in leveraged products.

Technical analysis  

The use of technical analysis is another factor in the success of many CFD investors, both on an individual level and for large companies and hedge funds, so it should be considered when asking what makes a good CFD trade.

As a tool or short-term analysis of charting and patterns, technical analysis monitors trends over less time than fundamental analysis does. However, this does not mean that technical analysis is only suitable for short-term, high-frequency or day trading. This is because the time periods used can range from minutes to months.

Using technical analysis in combination with more personalised strategies has led to success for many CFD traders, but although the technique is relatively simple to apply in practice, it does require that you use a dedicated learning program to fully understand it. One of the biggest pitfalls that a novice CFD trader can fall into is believing that ready-made software solutions are a substitute for personal knowledge and experience. To be effective, technical analysis needs more than pre-produced data, which is why the personal aspect of trading CFDs is always a key element in success.

Less restrictive environment

Global markets for CFDs mean that trading them is essentially a 24-hour trading environment that offers opportunities for success that are not available elsewhere. As CFD trades can short at any time without borrowing costs due to traders not actually owning an underlying asset, various regulations that can stifle other forms of trading do not apply. This is another reason why successful CFD trading can differ greatly from other forms of market investments.

Another way that the CFD market is less restrictive is evident in the way that minimum amounts of capital to day trade and limits on the number of day trades made within certain accounts do not apply.

Leave a losing trade 

The other side of success is failure, and although you can and should employ risk management tactics and use strategies and tools such as technical analysis, there really is no guarantee of backing a winning CFD trade. One of the benefits of experience is having endured losing trades and knowing what to do in the future. The simple answer is to quickly cut losses, and a key factor for profitable trading is keeping inevitable losses small.

Disciplined success

After you factor in all other elements and acknowledge that a successful CFD trade is one that turns a profit as a basic measure, you will need to understand one more essential piece of the puzzle. The ability to take emotion out of CFD trading is possibly the largest single personal influencer in success. Being disciplined and ruthless does not come easily to some investors, but these are essential skills to employ in the fast-moving world of CFD trading.