Contracts for difference are some of the most liquid and lucrative investment tools currently available. Consequently, there has been a great deal of interest in recent years regarding how such instruments can be used to supplement one’s wealth.
It is still a fact that a certain segment of the investment community has had rather troublesome experiences. The majority of these circumstances revolved around a few simple mistakes as opposed to “bad luck” alone. So, what strategies can be used in order to cut down on any risks while maximizing your overall profit?
It is first necessary to address the emotional side of a CFD investment. One of the reasons why novices are prone to losing money is simply due to the fact that there appears to be so much to gain. As a result, greed overtakes prudence and logic.
Unwise amounts are placed into a single position in the anticipation of a sizeable reward. This is a nearly certain way to torpedo what may have otherwise been a sound approach. Therefore, emotions must be kept in check at all times. Should you feel nervous, stressed or mentally fatigued, it is best to walk away and trade another day.
Appreciating the Benefits and Pitfalls of the Leverage
Leverages are frequently associated with CFD trades. These are naturally attractive due to a lower initial deposit combined with the potential for a disproportionately large return. The issue here is that any leverage “out of the money” can prove to be devastating to one’s capital returns.
Some investors will even be responsible for more funds than were initially allocated towards the trade. It is best to only begin leveraging once a thorough understanding of the CFD markets can be displayed. Otherwise, they should be avoided under most circumstances.
Knowing the Spread
In the past, many would-be investors shied away from CFD trading as a result of the commissions that would have to be paid to a broker. As these figures were relatively high, the chances to enjoy short-term profits off of a single trade were dramatically reduced.
As electronic trading platforms include commissions within their spread, such fees are no longer a concern. Still, different trading frameworks will offer different commission levels.
Hedging is a common strategy utilized when the markets are seen to be particularly volatile. Some may choose opposing positions within a market in order to offset the potential losses of a single trade.
Or, the more common technique is to quickly buy and sell a single financial instrument. Either of these methods will help to mitigate the risks associated with an unpredictable marketplace.
On a final note, prudent investors choose to only work with respected trading platforms such as CMC Markets. Boasting numerous financial tools alongside cutting-edge software, the chances to walk away from a winner while still playing it safe are very real.