An insight into CFD trading for beginners | Skilling

The top terms for CFD trading beginners to understand

Before you dive in head-first into the CFD markets, it’s important to familiarise yourself with the basic terminology used by CFD traders and brokers alike. The following terms will help you to make better sense of trading CFDs:

Margin – the figure required to pay your CFD broker to maintain any existing open positions in the markets.

Leverage – this relates to the ratio of leverage offered by brokers to enable investors to trade leveraged CFDs. For example, a leverage ratio of 10:1 means that for every £1 you commit, it’s possible to make ten times that amount in profits. Be mindful this also means you can make ten times the size in losses too.

Commodities – CFD commodities allow you to trade the underlying value of assets such as gold, wheat or oil.

Indices – CFD indices allow you to trade the leading indices across the world’s leading stock exchanges, including the UK100 250 and UK100 and the US 30 and US100.

Long –‘going long’ with a trade requires you to take a buy position on a contract, with a view to selling it at a higher figure for a profit.

Short –‘shorting’ a CFD trade requires you to take a sell position on a contract, with a view to buying it at a lower figure for a profit.

Balance – the total available cash in your trading account, taking into consideration closed and liquidated contracts.

Equity – the overall value of your trading account i.e. the funds available to invest today.

Overnight charges – charges applied by your CFD broker for maintaining open positions overnight.

Stop loss – a conditional order that closes your open position in the market if the value of your asset falls below a predetermined loss level.

Take profit – another conditional order that closes open positions in the market if the value of your asset meets a predetermined profit level.

Slippage – the difference between the price you try to buy or sell an asset and the actual price you take.

Trailing stop – a dynamic form of stop-loss, designed to move your stop loss if the price moves in your favour.

Top tips and CFD trading strategies for beginners

Use Stop-loss orders Stop-loss orders are the ideal way to limit your losses. First and foremost, this is a good way of preserving your trading bank when making your first trades. Secondly, it means you don’t have to micro-manage your holdings hour-by-hour.

Practice with demo accounts Familiarise yourself with the trading software and tools available to you from your chosen CFD broker and trade using ‘play money’. This risk-free environment allows you to get a sense of how the markets work before opening a real money account.

Limit your leverage The greater the leverage you take from your CFD broker, the less breathing space you are giving yourself. If the market starts to move against you, you’ll have precious little opportunity to close your position without incurring a big loss.

Always have a trading strategy Without a clearly defined trading plan, it’s all too easy for CFD trading beginners to veer from the script. This can lead to overtrading i.e. getting involved in markets you wouldn’t ordinarily trade based on your original trading strategy.

What are the main factors determining a successful CFD trader

There are three ways you can improve your trading skills and prepare There are three ways you can improve your trading skills and prepare yourself for potential long-term profits in the CFD markets:

1. Embrace trading psychology and risk management
It’s important to accept that trading the stock markets is an emotive business. Accepting risk and losses is not something the human brain is trained to do. The most successful CFD traders remain level-headed in the markets. They do so by utilising risk management tools and techniques to limit the effect of emotions and biases when active in the markets.
2. Acknowledge the most common CFD trading flaws and learn how to avoid them
The most successful CFD traders dedicate time and energy to learn from the mistakes of others. They evaluate their winning trades just as much as their losing trades. Trading diaries can help to review past trades and tweak future trading strategies.
3. Use CFD trading strategies that minimise your risk and maximise potential gains
The most successful CFD traders acknowledge the importance of the risk-reward ratio in their trading strategies. They embrace this metric as a means of improving their chances of achieving long-term profitability in the markets.

Discover more about the basics of CFD trading at Skilling

Knowledge is power when it comes to making financial investments, including CFD trades. Understanding CFD trading strategies for beginners can be a daunting prospect without sufficient education on the tools, market dynamics, psychology and strategies that can be deployed to help you become a profitable trader in the stock markets.

At Skilling, we’ve put together dozens of educational trading guide pages, covering the basics of CFD trading. Although these articles shouldn’t be treated as direct investment advice for the markets, it gives you a clear insight into the traits of successful traders.