I want to give any newbie that is looking to trade CFDs or spread betting some advice. BE VERY CAREFUL. They are both leveraged, which mean you can lose more than the balance in your account. Limited risk is the way to go when you start as your losses are guaranteed to be the deposit used to take the position.
Much of what applies to spread betting applies to CFDs but I’m going to assume you’re spread betting as it’s easier to explain.
Before placing a bet, monitor a few shares for a day. E.g., RIO, BARC are listed on the FTSE100 but are two very different shares. RIO can swing 150p, BARC 25p. These are best/worst cases finger in the air estimates. So for RIO you might want to keep your bet to £1pp but for BARC you might want to bet £6pp. Assuming worst case, you’d lose exactly the same amount of cash on RIO (£150) and BARC (£150). KEY ITEM: It’s important to plan your bet size before you place that bet.
Assuming all is going well, you may want to increase your position. This is the power of leveraged trading but also the downfall as most lose money betting. Let’s say you’re £150 ahead, you could open another bet. The key is not to open one big bet, but to open a number of smaller ones as the price rises. This limits risk as you can close positions in profit to offset a higher position that might turn into a loss. KEY ITEM: don’t be greedy by opening big bets, spread your risk by opening smaller bets as the price rises.
Don’t trade currencies, indexes or oil until you get the hang of trading equities, like shares listed on the FTSE100. Indexes are particularly dangerous, especially the DOW, which can swing 200 points. If you do want to trade the indexes, start at 1pp – don’t go crazy and start trading at 10pp, it’s the easiest way to wipe you out. KEY ITEM: Keep it simple, start by trading equities that have less than 10p intraday swings. If you make more money than losses, then branch out further if you’re confident you know what you’re doing.
Only trade FTSE100 and mid-cap FTSE250, avoid small FTSE350, micro cap and AIM shares at all costs because these stocks usually have higher spreads, very illiquid and harder to unwind or make a profit on due to low volume and/or intraday movements. Trade highly liquid quality shares and those that pay a dividend in case you need to hold that loss making position for a while. KEY ITEM: Trade the most liquid FTSE100 shares. They are safer to trade.
Anyone with questions ask away. Happy to give advice. FYI: I’ve been very happy trading the FTSE100 index, currencies and FTSE100 equities. I don’t trade anything else.