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Note: As with any investment, do your own research before diving in too quickly.

It’s a fact in investing that if you don’t carefully select the right trade to make, you put yourself at risk of large losses.

A lot of the best traders even keep a trading diary, so they cannot just analyse the justifications of why they make the trades they do, but keep a track of their emotional state, decision making process, and ultimately learn from.

What is a CFD (Contract for Difference)?

A contract for differences (CFD) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than by the delivery of physical goods or securities. This is generally an easier method of settlement, because both losses and gains are paid in cash. CFDs provide investors with the all the benefits and risks of owning a security without actually owning it. –Investopedia

Choose the Right Market

When selecting a CFD to trade, the most important thing is to choose the right market.

You should know any market you choose to trade in, inside and out. If you are new to trading, before looking at selecting a CFD to trade you should take some time to choose and learn about a market. It could be an industry that you have a great deal of personal interest in or one that you have previously worked in. It doesn’t necessarily need to be something you have a personal connection to, but it should be something that you have a degree of background knowledge on, and that you will be comfortable spending a large amount of time researching.

What’s Your Trading Style?

The next important step of selecting the right CFD trade is to look at your trading style.

Are you looking to hold onto a CFD for an extended period of time, or are you looking to day trade CFDs?

What sort of risk and volatility can you manage?

A lot of this depends on your needs as a trader; obviously someone who is looking to day trade full time will have very different needs to someone who is just looking to diversify their long term investment portfolio.

Be More Specific

Once you have the market you want to trade in, and an idea of what sort of trade you are going to make, it’s time to decide on your specific trade. During your research into the market, you should have managed to get a good grasp on what would be good to invest in.

For instance, if you had extensively researched the smartphone industry, then you should be able to look at the major players of the smartphone market and figure out what sort of performance can be expected of these major players in the short, medium, and long term.

Gain Control

The final thing to consider before placing the trade is any potential Limit Orders and Stop Losses that you could make, for greater control over your investments.

For instance, if your research makes you think that an asset would be worth purchasing at slightly below the current market value, then you should think about placing a Limit Order to purchase the asset if it reaches that value.

There are very few occasions where you shouldn’t put a Stop Loss on your CFD trade, as to limit the amount of money at risk.

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