One of the main reasons why most retail traders fail to make money trading CFDs is their lack of understanding when it comes to risk management. They still view the world of trading as fixed as a full-time job, when in reality this is one of the most flexible environments. Luckily, for those who want to find ways to have risk diversification and keep the numbers in their favor, CFDs can be a very useful tool.
Hedging with CFDs is a common practice among traders owning “solid assets” like stocks, ETFs, or bonds. By doing so, they have a long exposure on the market, but unfortunately, prices don’t go up on a straight line. By keeping these assets in the long run, they can profit from the value appreciation and at the same time, collect dividends.
With CFDs, they can profit from bearish periods, given that swaps on short CFD contracts are always small. Having s short-term approach by using them, while at the same time keeping a long-term market exposure is a common practice among professionals.
#2 Strict risk parameters
Maybe you’ve had a strong winning streak with 10, 20 profitable trades in a row. What most of the beginning traders do in such cases is to increase their risk, confident they can’t be wrong. When you buy or sell CFDs, you are not trading an asset. In reality, you are trading a probability. Even though your strategy has 80% accuracy, that 20% will show up at some point and result in large drawdowns if you don’t stick a strict risk parameters list.
You won’t take the big hit with a single trade, but you will become successful long term if you manage to control yourself when the instinct is telling you to risk more.
#3 Rules-based trading regime
Discretionary trading is common among most retail traders, especially after a few losses when frustration is very high. You need to have a rules-based trading system and trade it no matter if you come after a loss or a win. Rules are not subjective to your mood and discipline will be one of the hardest skills to develop in trading.
How to analyze the market (technically and fundamentally), when to open a trade, how to set stop loss and take profit, how to constantly adjust the risk management as your account balance changes, and how to analyze your trading performance, are just a few of the things you must include in your strategy.