Master the art of CFD trading and strategy building with these simple steps

Trading can be daunting but rewarding when done right

LX

When someone decides to start trading in CFDs, it is essential to undergo a certain level of training in order to understand how the market works.

CFDs are leveraged products that enable the trader to speculate on the rising or falling of markets such as forex, commodities, share and indices; without actually owing the underlying asset. As CFDs are complex financial instruments, a trader must be aware of the risks involved in trading.

Although extensive training or deep knowledge of the market and the traded instruments does not guarantee successful trading, it minimizes the possibility of failure. Even the most experienced traders follow some important steps before or whilst they do trading.

The first step in trading is the study of the market. For example the forex market, we need to study carefully the institutional market, and most importantly the key financial players who have some key effects and shape the economy.

Big financial institutions are responsible for lending, which causes a direct effect on businesses; which controls the demand and supply forces at the institutional level and the overall economy.

The study of the market includes finding the "right" broker. A solid and reliable CFD broker makes all the difference in your trading results. Study the fees, especially the spread cost and commission, and aim for transparency. Regulation is also extremely important, as it offers oversight and control over a broker's operations.

The second step is to come up with a trading strategy or a trading plan.  Your trading strategy will give you a clear plan on how, what, when and why you should trade.

This gives you the desired discipline to avoid making trading decisions based on emotions. It helps you design your own methodology for entering and exiting trades, the tools and indicators that you will use, and your own trading style either is day trading, swing trading or scalping.

It is important to use technical or fundamental analysis to improve your trading (or a better combination of the two). Fundamental analysis concentrates on external events such as macroeconomic data, company announcements, financial and political news.

Technical analysis is the prediction of the future direction of a market by studying historical price charts.

The third step in trading is to test your strategy. There are two ways to test your strategy. Either you use real money or test it in a demo environment, so you can draw the necessary conclusions before you actually trade in your account.

A demo account gives you the opportunity to experience live markets in a risk-free environment. We suggest that your test should reflect your future trading.

For example, open a demo account with an amount equal to the one you would be trading within a real environment, the same leverage, and of course the same trading conditions (i.e spreads).

By doing this, you will test your strategy and see more realistic returns and performance. Be very careful when using leverage. Leverage doesn't only maximize your gains but also maximizes your losses.

And remember, if after all your trading strategy is not working, then be brave to admit and be open to changing it.

The fourth step is the actual trading in a real environment, undoubtedly the most crucial step. This is the time that you need to control your emotions and stick to your plan. Remember, even a great trading strategy cannot guarantee success.

In trading, you will have both good days and bad days. If your trading positions go against you, you have two options to keep enough equity in your account in case, you need to put up additional margin or cut your losses.

The latter is the most awful decision a trader needs to make. To avoid this, you need to be aware of the losses you bear and apply stop loss in every position you open.