Maria’s Golden Rules for Trading CFDs Part 2

As seen in this month’s Master Investor Magazine

Now ladies and gentlemen, the time has come to continue with my Golden Rules for Trading CFDs, a subject that we started discussing in my last article (May edition of the Master Investor Magazine), where you will find the first four Rules. So starting with Rule five, here are the rest of them:

Rule 5 – Have a plan, and stick to it

This is one of the most important rules of trading, and it remains the same regardless of whether you are trading CFDs or any other financial product. Every trader, every investor has different goals, different experience, different risk tolerance, and really a different life and personality. Your plan should be such that it is suitable for you personally, having taken into account all of the aforementioned criteria. ‘’Wanting to make money quickly’’ may be something I keep hearing from traders and investors over the years, but I can ensure you that it is in no way a viable trading plan. It is simply and only a wish.

Furthermore, it is not enough to have a plan; you also have to follow it. Otherwise, even the best plan in the world will have zero value to you.

Rule 6 – Select markets and financial products that are suitable for your risk tolerance, your experience, and your financial situation

These products may or may not include CFDs. I do not have the right answer for you without knowing you, and discussing things with you in person. The FCA’s ‘’Assessing Suitability and Appropriateness’’ tests can help you and your advisors assess this one.

What I can and will say however is that you need to fully understand any financial product and the risks associated with it prior to trading it. No one was born with this type of knowledge: we all have to learn, we all ask stupid questions, and we all get things wrong when first approaching any new product. So do please ask questions, clearly understand the answers, and then choose that which is suitable for you.

Rule 7 – Only risk money you can afford to lose

This applies to any given moment in time and to any financial product you trade. It is even more so the case with derivatives products like CFDs, Futures, and Options, where you can lose more than your initial investment. To clarify, I am in no way implying that you should not trade derivatives products (I personally tend to prefer them to cash/equities/bonds, as they are much more ‘’flexible’’). I am only repeating the point made earlier that you should understand the products you trade, so that you can then assess whether specific trades will not entail risking more than you can afford to lose.

In reality, the point I am making is the same for any financial product, because I am actually making a point about you. You have to take a view on the amount of funds that, if lost, would realistically not make a change to your life (and by life I do NOT mean your ego; I mean things like your rent, your children’s school fees, your retirement plans, etc). This amount is your risk capital, and this is the maximum and only capital that you should put at risk in the markets (and elsewhere, if I may add).

Rule 8 – Keep emotions out of your trading, and even more so out of your CFD trading

Why? Because to begin with, as we have discussed in my previous articles, emotions simply do not have any place in trading and investing, so do keep them well out of the way. I can ensure you that although most of you will never witness this, I am rather emotional when it comes to my personal life, and yet I am not emotional when trading. I have trained myself to do this, and so can you.

So why the ‘’even more so out of your CFD trading’’? Simply because when you trade CFDs, your exposure to the asset you are trading is magnified, so you may as well not magnify any loss of control issues you have through it. You are better off ensuring you can control yourself before trading anything, including CFDs.

Rule 9 – Use CFDs to diversify

In other words, do not ‘’put all of your eggs in one basket’’. CFDs allow you to take the same exposure you otherwise would when buying physical shares in a company by putting down just a small initial deposit (otherwise called margin). So do use the remaining funds in your trading account in order to buy/sell other stocks, commodities, or whatever better suits your goal to profit from the prevailing market conditions.

Rule 10 – Protect yourself, use CFDs for hedging when necessary

Once again, CFDs are a flexible tool. They allow one to go long or short, and as such allow one to profit from both rising and falling asset prices. Take advantage of this flexibility. Nothing goes up or down in a straight line, so there are bound to be opportunities on both sides of the market over any given period of time. Use them to make money.

Furthermore, if you are for example a long-term equities investor, and you are scared that World War Three may just be starting (imaginary scenario obviously), do use CFDs to protect yourself. How? Go short a related index, buy some ‘’stress and fear antidotes’’ such as gold or government fixed income CFDs, just to name a few options.

Remember, the markets will only ever do to you what you allow them to, so whatever the situation is, just learn to use the right tools to protect yourself and the value of your trading account. CFDs are one of the best products to achieve this so long as you use them wisely.

This concludes my Golden Rules for Trading CFDs. I hope you enjoyed this article, and as always I welcome your questions and feedback.

Until next month,

Happy trading everyone!

Maria Psarra is a Senior Derivatives and Equities Trader who has headed several Advisory Trading desks in the City over the course of her career. In her most recent role as Head of Trading at Prime Wealth Group, Maria determined the company’s trading strategy, supervised a team of experienced brokers, and advised high-net-worth individuals on suitable investment strategies. Maria employs different investment styles in order to construct personalised portfolios best suited to the risk and return preferences of her clients. Typical portfolios primarily comprise UK and European equities and equity indices, and, to a lesser extent, commodities and fixed income exposure.

Maria appears on Tip TV on a weekly basis providing investment tips and market commentary, writes for a number of financial publications, and is often invited to present her views during conferences such as the Master Investor Show, the London Trading Show, and Inside ETFs Europe, Europe’s largest ETFs conference.