Are CFDs or contracts for difference suitable for those who are just starting out?
Look: If you’re just a beginner and you’re looking to try to leveraged product, you need to have some other priorities in place before you jump down that side of things.
We can’t emphasize enough…
Leverage is a double-edged sword! Obviously, it does amplify your winds but it also magnifies your losses so you need to be very careful of that.
Your priority when you’re just starting out is to commit to a trading system and commit to 20 or 30 trades of your trading system and get comfortable trading that particular trading system.
You need to:
- Concentrate on the execution side of it.
- Understand the types of mistakes that you make.
- Know the order execution mistakes you’ll be making.
- The time when you forget to put your stop-loss in place.
- The time when you’re away on the leverage position and it moves against you when you can’t access your computer.
When when you’re just starting out, there are too many parameters to take into account for trading a leveraged trading account.
Here’s a fact: You really need to make all those mistakes without any leverage!
The other alternative is if you’re just starting out, CFDs are a great way to access all the global
markets from one account.
So you can access foreign exchange over a short timeframe intraday, end of day, five-minute, hourly or daily charts.
You can trade share, indices, commodities and all of that from one account. If you are just starting out, it is highly recommended that you trade at no leverage.
What does that mean?
That means if you put $20,000 in your CFD trading account, you shouldn’t take positions that exceed more than $20,000.
So you pretty much treat it like a share trading account: zero leverage, zero need for any of that. You use no more than what you’ve got in your account and you trade in a smart and safe fashion.
If you are just starting out, your primary goal is to minimize mistakes. Focus on the execution of your trading system and build the confidence in your trading system.
Once you start building the confidence in your trading system then really one of the powerful benefits of
CFDs is the ability to access more leverage than you can in a share trading account.
So in the share trading account appeared $20,000, you might have the opportunity which means you’ve
actually got all your positions taken up and your $20,000 is in the market.
You can’t trade more than that now. That’s it! Your capital is fully booked.
With CFDs however, you might have that $20,000 in the market but another one or two opportunities comes your way and CFDs allow you to take those extra opportunities.
So instead of having five $4,000 positions, you might have say six or seven $4,000 positions so your $20,000 capital might now be accessing $28,000 in total positions if you had 7 lots of $4,000 positions.
So if you’re just starting out, trade at no leverage.
If you really want to access all the world’s markets and that type of thing, make it easy for yourself in that fashion. But if you are looking to trade on leverage, don’t start out trading leverage with CFDs.
What’s recommended is to start with a share trading account. Focus on the execution of your trading system and on the simple things. Focus on not making mistakes, your risk management, your entry techniques and your exit strategies.
Focus on all of that first before you start introducing leverage.
Hopefully, that gives you a bit of an idea whether you should be trading CFDs if you’re just starting out.