CFD trading has a few golden rules which investors can only ignore at the risk of trading careers. They include:
1. Have profits cut your losses
Sticking to loss making stocks, while cashing in on profitable stocks early is probably the single most important factor to tackle trading account wipe offs. It will result in a number of small wins and few but catastrophic losses.
2. Rely on logic, not emotion
Relying on emotions instead of logic may result in profits sometimes but will not fetch consistent profits. For successful trading, a trader should clinch to the trading rules at any cost.
3. Single trade limitation
Never invest 50 per cent or even 100 per cent of the total capital available on single trade. The invested capital should not be more than 2 per cent of the available investment amount to ensure not getting wiped out by single event.
4. Fundamental analysis-technical analysis combination
The good option is to combine fundamental analysis and technical analysis. A trader using fundamental analysis to ‘trigger’ the trade and technical analysis for actual entry stands a better chance.
5. Timing is vital
You should wait for a ‘trigger’ and at least one confirmation signal before entering the market even if the long-term direction of the market is known. Not doing so or entering early may cause significant losses.
6. Never add to losing trades
Always distinguish between range-bound and trending markets. Otherwise, you could be easily adding to a losing trade expecting that the price will turn around. A simple technique is to follow trend lines.
7. Diversify portfolio
Diversifying across industries is the key. Not trading more than 2 per cent of the available capital on single CFD is not going to help. For example, trading in range of oil share is not profitable because if one is not going ‘good’, chances are others will follow.
8. Be aware of your weaknesses
Psychological makeup is probably the single most difference between a successful and losing trader. The successful trader does not submit to emotions as greed and fear, and sticks to a definite plan and money management rules.
9. Use stop losses wisely
Without stop loss, it could be a quick and complete wipe-out but too tight stop losses could lead to gradual but destructive wipe-out. Let the market have its normal ups and downs before it gets a direction.
10. Understand risk versus reward
Understand trade-off between risk and reward. Always avoid a trade in which the potential reward is bigger than the potential risk. For example, go long just before the expected turning point in a range-bound market. The downward risk here is huge compared to the expected profit from the trade.