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Before you start trading Contracts for difference it is important to obtain a few tips from the professionals to make sure that you do not make many of the costly mistakes that newbie traders make. Below are three trading pointers which will help you in your CFD trading success.

1. Manage your Positions
Repeatedly new traders spend a significant amount of time selecting, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit which will determine whether a trade has been profitable or not.

It is human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the correct direction and reduce losses or even turn them into profitable trades.

Numerous new traders forget about the old saying “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, it is best to allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small return. On the other hand, if you happen to hold a position that is moving against you, it is best to move quickly to exit that position, before the loss becomes too great.

If you're managing your trades properly, your average winning trade should be significantly larger than your average losing trade. Once you have the discipline to buy and sell in this way, you should be able to achieve overall profitability even when only half of your trades are winners. A lot of traders make the mistake of not closing poorly performing positions fast enough. One tool that makes this less complicated is a stop-loss order.

After you have determined a price level that corresponds with the amount of risk that you are prepared to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.

It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if the price trades at or beneath the nominated stop level. Occasionally, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.

2. Understand the instrument that you're trading
Being over-the-counter products, there are various differences in the contract specifications of CFDs. If you are thinking of trading these products, it is critical to know what these specifications are.

You must also be aware of the influence that foreign exchange fluctuations might have on your holdings. If the base currency of the CFD rises against the base currency of your account your profits could be eroded by any currency fluctuation or your losses might be made worse.

Most CFD traders trade CFDs based on stocks listed in their home country. The simple reason for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also benefit from the convenience of trading their home market as it isn't practical to sit up for half the night to trade a Contract for difference over a share listed on an exchange in another part of the world?

In lots of cases it is much better to stick with CFDs based on equities listed on exchanges that you're familiar with as opposed to trading Contracts for difference based on stocks listed on markets you don't fully understand.

3. Use the correct order types
You should treat trading as a serious business. As such, you must take some time to make sure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been stopped up out of trades at the wrong time just because they placed the wrong kind of order.
                   
At the very least, be certain to become familiar with the following order types:

Market order: This kind of order is utilized to execute a trade at the present market price.

Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that's worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be placed at a level greater than present market prices.

Limit order: A limit order is used to exit a trade. Limit orders are placed at a level that is better than the present market price. When seeking to lock-in profits on an open long position, a limit order to sell would be placed at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level underneath current market prices.

You must always understand that as Contracts for difference are leveraged and that buying and selling them can be risky. However if used correctly Contracts for difference will become a valuable tool within your trading arsenal.

To find out more about CFDs you can download our complimentary CFD Guide.

There are numerous different CFD order variations, many of which are hybrid varieties of the two major order types market and limit. A market order is simply an order designed to trigger the buying or selling of a CFD at the current market price. A limit order is an order which allows you to specify the buy price or sell price of a CFD. In the case of a buy limit order the price would be below the present market price and in the case of a sell limit order the price would be higher than the current market price.

Limit Orders
Limit orders are used to enter or exit positions. As an example, as a way to enter a long CFD position, you could use a limit order to buy the CFD if the price trades at an exact price or lower. Generally limit orders can only be placed during the times specified by the exchange on which the instrument the Contract for difference is based on is listed. There are however some CFD companies which will allow you to place limit buy orders outside the hours specified by the exchanges, these CFD providers will hold your order off-market and place the order automatically when allowed to do so by the exchange. Which means you will be able to get into the market the next day if the CFD trades at or below the price of your order.

In some other cases, it is possible to exit a long CFD position with a limit order to sell. Assume that the price of the CFD is $1.25 and you're in the market to buy. You set a limit sell order at your profit target which is $1.75. If the price rises to or exceeds the $1.75 mark, your CFD position is going to be closed at your profit target.

Stop Orders
Orders which are used to buy CFDs when the price trades at or higher than a limit price are know as CFD stop orders, orders which you use to sell the CFDs during a time when the price trades at or beneath the limit price are also known stop orders. Exactly like limit orders, stop orders can be used to enter or exit a position. If a trade goes against you, stop orders are usually used called “stop loss” orders and are used to exit a position. For example, assume that you have bought CFDs at a price of $1.50 and the stop loss order is set at $1.25. If the price of the CFDs falls to or below $1.25, you will sell the CFDs and will exit the position. You can use stop orders for taking profits on trades also, lets assume that in the instance above you set your stop order at $1.75. If the price of the CFDs rise to $1.75, you will sell the CFDs and exit the position, stop orders utilised in this way are known as "take profit" orders.

Stop orders can be utilized not only for exiting positions but also for getting into new positions. To illustrate, let’s say the present price of a CFD is $1.50 and you placed a stop buy order at $1.80. Your position will be opened if the price rises up to and above $1.80. The exact same logic applies should you wish to short sell the CFD at a price below the price at which it's currently trading. Using the example above if you wished to open a short position when the price falls to $1.30 you would place your stop sell order at $1.30. Should the price fall to $1.30 your short position will be opened.

If Done Orders
"If done" orders are a specific form of order that allow traders to activate an order only after another order is filled. For example, in the event you place a limit order to enter a CFD position but don't want the stop loss order to be activated until the position is opened you would use an "if done" order. Using "if done" orders will let you set a limit order to enter a CFD at a target price and set your stop loss or take profit order to be placed before your limit order is even filled. Using "if-done" orders means that you will not need to regularly monitor your portfolio to check whether your limit order is filled. 

Order Execution
Not all CFD providers execute orders in the same way. Some providers may require that before your stop loss is filled a sufficient amount of underlying stock is traded at the price of your stop loss order. On the other hand, some providers might require only that the underlying stock was traded at the price to in order for your order to be filled.

Remember, before you start using some of the more complex order types mentioned above it's essential to understand how they work and whether or not they  fit your trading strategy. 

You can learn more about CFD trading and the way they work in our free CFD Guide.