LONDON, February 16, 2012 /PRNewswire/ --

CFD trading enables traders to speculate the markets by paying only a small fraction of the total trade value, making it an alternative option to traditional dealing.

Potentially, this form of trading can allow you to magnify your return on investment. However, remember that higher leverage can result in losses that could exceed your initial deposit.

With this risk in mind, the following guide will answer questions such as 'What is CFD Trading?' as well as our top 3 rules to help prepare you before you begin trading.

Rule 1: Knowing Your Market

With over 12,000 markets to trade, it is important that you choose a market that you understand and know.

In the long run, this knowledge will help you take a clearer view on the direction of possible price movements within your chosen market, ultimately guiding your price actions, i.e. whether you choose to go long and buy, or go short and sell.

Something as simple as keeping up-to-date with the financial news, share prices, stock market changes and company reporting dates, can affect your trading choices.

Rule 2: Have Realistic Targets

Your trading targets should be realistic and put in place before you start trading within a comprehensive trading plan.

This plan should provide you with a general set of rules of which you can use as a reference point as you begin to trade.

Such rules should cover:
 
• Profit goals (by day, month and year)

• Size of the trade

• Maximum losses you are prepared to take

• Entry/exit point

The final two rules are imperative to managing your risk; these rules will effect where you place your limit orders and most importantly, your stop loss orders.

Rule 3:Manage Your Risk

The first tactic in managing your risk is to apply stop losses to your CFD Trading account.

You can choose between a Standard and Guaranteed stop loss order; with the latter offering the greatest protection, specifically if gapping occurs in your chosen market.

A guaranteed stop loss is an order to close out a position at a level prearranged by you.

For example, if you 'go long' and buy 1 CFD of UK 100 at 5900, but do not want to risk losing more than £200 on your trade, you could set up a guaranteed stop loss order at 5700.

Say that the market was to go against you and hit your guaranteed stop loss of 5700; your trade would be automatically closed, preventing you from incurring any further losses.

There is a small charge, which can vary across different markets, for providing this added protection. 

Summary

When trading CFDs, emotion can take over. Prepare for trading by creating a trading plan, gaining knowledge of your chosen market and practicing with a demo trading account.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, Spread Betting.

We constantly look to improve the performance of our platforms and expand our range of services. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support.

SOURCE City Index