The world of CFDs can be intimidating if you are a newcomer to them. Even once you’ve wrapped your head around the way they work, there’s still a lot to get to grips with them. Let’s say you’ve got some money set aside, and have found a reputable broker, what then?
Stick To What You Know!
The first thing to work out when considering what CFD is best for you is to consider your own background – what industries and sectors are you familiar with, what companies do you have a good awareness of, or what commodities you would be comfortable trading. Whilst with CFDs you never trade the underlying product, it is important to have an in depth understanding as to what it is you are trading.
There are a vast range of CFDs to trade in, including Stock index CFDs, Forex CFDs, and Commodity CFDs – whatever your expertise is, there is a CFD out there that will fit your bill and trading platforms such as Stern Options can provide you with access to such investments. There are even CFDs on Inflation and Carbon Trading, if you feel that these are areas you’re knowledgeable about.
What’s Your Trading Style?
So you’ve found an area you’re interested in, now what? You need to figure out your trading style, and what specific CFDs are appropriate for that. There are four key trading styles you need to consider: Position Trading, where you hold for a long period of time (potentially years), Swing Trading where you hold up to weeks at a time, Day Trading where the trader purchases and sells the option within the same day, and Scalp Trading where options are held for only seconds or minutes.
We can generally discount Scalp Trading due to the spread involved with CFDs, making it unlikely that Scalp Trading would be profitable at all. Whilst the additional leverage of CFDs allow makes them a great vehicle for Day Trading, although Day Trading is generally not advised for people first getting into trading.
Day Trading
Whilst there are plenty of people out there advertising Day Trading as a ‘get rich quick’ scheme, without proper planning it is little more than gambling. It is a comparatively complex and risky way to trade. If you’re someone with a good understanding of market fundamentals, have enough capital that you can set aside some risk capital that you can afford to lose, have a well-defined strategy, and are a disciplined trader, then Day Trading presents the opportunity to make you a large profit. If not, then it’s nothing more than a quick way to lose your money.
Swing Trading
Whilst Day Trading absolutely must be disciplined, that doesn’t mean you can get away with sloppy trading with Swing and Position trading. Swing Trading still requires a large amount of technical analysis to determine when to enter and when to exit, and the discipline to exit when a profit target is reached. It is more ‘forgiving’ than Day Trading, in that if you’ve got poor investing habits you won’t lose your money quite as quickly, but is still complex enough to necessitate a proper entry plan.
Position Trading
Position trading, being based more on fundamental analysis, is perhaps the ideal place for a beginner to start trading CFDs. Mistakes, once identified, can be rectified at a lower cost than if you had dived into Day Trading, and the extra equipment and access institutional Day Traders have is less of an issue.
Once you’ve got an idea as to what style of trading you want to get into, then you’re finally ready to choose your CFDs. In short, find your broker, choose your market, choose your style, and then choose what CFD is best for you!