10 basic trading rules for trading success

Beginner CFD traders should possess a relatively strong capacity to handle risk, as the trading world can be volatile and unpredictable. It's essential to approach CFD trading with a well-researched strategy and a clear understanding of the market dynamics.

Here are 10 basic trading rules to guide your CFD trading endeavours. These principles will equip you with a strong knowledge foundation and enhance your competitiveness in the financial market.

1. Portfolio diversification

Many traders often confine themselves to trading a single asset, dedicating their attention and effort solely to what they believe will yield potential earnings. Yet, a fundamental trading principle for optimising your trade's potential is diversifying your financial portfolio.

Portfolio diversification means trading in various contracts for difference (CFD) asset classes or industries. It is one of the first basic trading rules you must remember before trading.

Diversification can help you minimise the impact of a single market event on your portfolio. For example, if you only traded tech stocks and something unforeseen happened to the tech industry that could affect its price, you could experience a financial setback.

But if you also traded commodities like oil or natural gas, you'd spread out your risk. This way, when one part of the market takes a hit, the other assets might still do well, and your overall financial situation is safer.

Your diversified CFD portfolio helps protect your overall capital. It reduces the chances of losing all your money and provides you with the opportunity to explore and gain knowledge about other assets that could potentially bring substantial rewards.

2. Set stop-loss orders

A stop-loss order is placed to sell or buy a security once its price reaches a certain level. A stop-loss calculator can be a valuable tool in your trading arsenal. This tool helps you determine the price point at which you should sell or reconsider a trade, enhancing your risk management strategies and overall trading competence.

Let’s say you traded a stock at £50 per share. You can set a stop-loss order at £45. A stop-loss order is a precautionary measure that ensures that if the stock’s price drops to £45, your position is promptly closed, preventing further losses.

It’s wise to combine diversification with risk management techniques like stop-loss orders to safeguard your acquisitions while exploring new opportunities in the financial markets.

3. Practise risk management trading

Risk management in trading is a fundamental rule that everyone should follow. It is an essential part of basic trading rules for beginner traders. This strategy empowers you to protect your capital while pursuing trading opportunities. It enables you to risk only a small percentage of your capital on a single CFD trade, ensuring that a single loss won't devastate your overall portfolio.

It is strongly recommended to exercise caution and adhere to a conservative approach when managing your capital. A common rule of thumb is to allocate at most 2-3% of your total trading capital to any single trade. A trading account with a balance of £5,000 should consider restricting each trade to a range of £100-£150. This prudent strategy helps to mitigate the risks associated with trading, ensuring that you can sustain losses without jeopardising a substantial portion of your trading capital.

Overall, risk management ensures in the event of a string of losing trades, your overall trading capital remains protected. But remember, how effective a strategy is depends on how hard you work, like sticking to a plan and trying out new techniques after learning about them.

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4. Stay informed on trading news

Many of us avoid reading the news because it takes up time, but when it comes to trading, it's a crucial step. You should stay updated with the news before trading any asset.

Basic rules for trading any assets include financial market analysis and industry news. CFD traders knowledgeable in industry and financial news make better-informed trading decisions. It gives them a prior advantage in adjusting their strategies and applying them to their traded assets, reducing risk and achieving their financial goals faster.

Some news you must read and anticipate are economic conditions, corporate earnings reports, geopolitical events, etc. In addition to the news, you must also understand the trading psychology that influences traders' decisions in a specific market. Analysing their behaviours could give you a knowledge of why market sentiment affects the supply and demand of an asset, eventually affecting their prices.

Always remember that news can control the price of an asset. A way to keep up with the latest news is by checking out CFD platforms and other trusted media outlets.

5. Use leverage wisely

Financial leverage is the amount of debt you borrow from a broker to magnify your capital return potentially. Using leverage can be likened to a double-edged sword: while it can amplify your profits, it can equally magnify your losses, sometimes leading to amounts even greater than your initial investment.

A cautious approach and never risking more than you can afford to lose is a golden rule for any trader, regardless of their experience level.

A beginner trader who wants to learn how to trade in CFD must use a low leverage ratio. For example, suppose your trading account holds £5,000. In that case, you can utilise a 10:1 leverage ratio when trading a CFD asset rather than a 50-100 plus leverage. This lower leverage limits potential losses and provides a more forgiving margin of error while you're still getting the hang of trading.

Basic trading rules to remember in leverage: High leverage increases the risk of losing capital. You need to practise more in trading and build a solid plan before using high leverage.

6. Stick to a trading plan

CFD traders must stick to a well-defined trading plan to maintain discipline and reduce the likelihood of making impulsive or emotional trading decisions.

Basic trading rules in a trading plan include precise entry and exit points, risk management rules, and financial targets. You must set trading boundaries at all times to lessen risk in trading. For instance, your trading plan specifies that a trade should be exited once a target income of 10% is reached, you must comply with it. It prevents you from being swayed by greed or fear, leading to impulsive decisions that may not be in your best interest.

7. Monitor market sentiment

CFD traders need to pay attention to market sentiment indicators to gain valuable insights into the current state of an asset. You can utilise the Relative Strength Index (RSI) indicator. While the RSI is a powerful indicator, it should be used with other analysis techniques to create a well-rounded trading strategy.

Basic trading rules in RSI: Below 30 RSI levels indicate an oversold or undervalued condition, and above 70 RSI levels suggest an asset is overbought or overvalued. At the same time, a 50 RSI level denotes a neutral balance between bullish and bearish positions. These guidelines can assist you in determining the best entry and exit points for your trades.

Commitment of Traders (COT), a weekly publication that displays the combined holdings of various market participants in the US market, often reveals large institutional traders’ positions. You can also use this report to determine whether you should take short or long positions in your trades. Market sentiments can help you optimise your trading strategy by indicating the right timing for entries and exits, managing risk, and maximising your earning potential.

8. Keep emotions in check

A CFD trader should always conform to basic trading rules to avoid emotional trading.

Poor decision-making due to temptations of trading chart patterns may cause instant regret of losing your hard-earned capital. You must maintain discipline.

A successful CFD trader follows each trade with a break, sets a fixed point when to stop, doesn’t act on anger, and maintains a positive attitude.

9. Learn from mistakes

A trader’s mistake is a step toward new, successful beginnings. You need to study your trading patterns and learn trade skills to reduce the occurrence of your common mistakes.

For example, it is your habit to trade on a gut feeling or a peer’s tip without research. You must change that habit and start to do your trading homework. This approach will increase your confidence and reduce reliance on non-factual news.

These basic trading rules to learn and change your trading habits enhance your overall trading skills. You will become more adept at identifying opportunities and managing risk.

For further information, browse this article: 5 common trading mistakes to avoid

10. Stay informed about fees and costs

Another basic trading rule in CFD trading is to stay updated with your positions' fees and costs. You should be aware of all the expenses associated with your trades, as these can significantly impact your overall profitability. Transactional costs in trading may include brokerage charges, taxes, stamp duties, and more.

Neglecting these costs can decrease your potential returns, making it vital to factor them into your trading strategy and financial planning. Keeping a complete record of all fees and expenses associated with your trades ensures you clearly understand your financial commitments.

You can keep yourself updated about the fees and costs of trading by thoroughly reviewing the terms and conditions provided by your chosen brokerage. Trading fees can also be accessed on your broker's website, making it easy to access this information.

If you have any doubts or questions about the charges associated with your trading activities, feel free to contact your broker's customer support or account manager. They can provide detailed explanations and help you navigate the financial aspects of your trading account.

Get started on CFD trading with markets.com

As an aspiring CFD trader, make sure to follow these 10 basic trading rules outlined in this article to save you from the embarrassment of considerable losses in your trades. Successful trading focuses on prudent risk management and continuous learning, which will help you become a more knowledgeable and proficient trader over time.

You can start trading CFDs on one of the best CFD trading platforms. At markets.com, we provide a user-friendly platform where you can begin your trading journey. Our platform offers a range of tools and resources for beginner and experienced traders. With real-time data analytics, interactive charts, and a vast array of educational materials, we aim to equip our users with the knowledge and insights they need to make informed decisions.

See our complete list of assets you can trade with CFDs. With this diverse range of instruments, you can tailor your trading strategy to suit your financial goals and risk tolerance.

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When considering "CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.