Avoid Common CFD Mistakes
By putting in the effort to understand the mechanics and terminology of CFD trading and knowing how to use your trading platform you will be able to avoid many of the most common mistakes. Most of the others can be avoided by taking care when placing and amending orders and keeping it your emotions in check.
Most importantly, you should not make the mistake of placing trades to the limit of your funds. The leverage you can get with CFDs, whether trading indices, shares, currencies or other financial instrument, is a friend when you make the right trades but is your enemy when you have a losing position. When entering any position, you should always calculate how much you stand to lose if it turns against you, and make sure that it is something you can live with. Many traders try to limit their possible losses to 1% or 2% of their account on each transaction, which may sound like a small amount but ensures that a run of losses will not end your trading career.
Another trading mistake is to think that you must always be active, and have open trades in order for your money to be working for you. Sometimes the market will not have a good option, and you should not be concerned about standing on the side-lines and waiting for the right opportunity. This is a far better option than making trades that compromise your selection criteria.
A common CFD mistake is to be emotionally attached to the funds that you are trading with, so that you cannot think clearly about what you are doing. You should never trade with funds that are needed for a particular purpose, such as paying the mortgage, and if you can maintain a detachment from them you will be a much better trader. You must realize that you will not get every trade right, but that trading is a percentage game where you want to stack the odds in your favour.
For good reason, there is a lot of emphasis in trading circles on the psychological aspects of trading. Until you trade with real money, you will not appreciate how hard it is to stay focused on your trading plan, and to avoid the effects of fear and greed. With a succession of winning trades, you may become excited and believe that you can’t fail, which can lead you to over trading to satisfy your greed. Fear can work to make you take your profit too early, as you fear a reversal, and you can also become desperate from fear of having to tell your friends or spouse when you have a losing run.
Common CFD Trading Mistakes
We all make mistakes right? But making mistakes when trading contracts for difference or any form of trading can be costly. We hear many stories of would be traders who start out with high hopes but often end up making some of the most common cfd trading mistakes.
They make a few trades, win a bit, take some more trades then loose, panic and trade more and guess what they loose more. At this point many just give up and never look at cfd trading again.
Making common cfd trading mistakes can be costly and very demotivating.
A good starting point to avoid the most common trading mistakes will be to learn from other traders who have seen this all before and therefore know all of the most common CFD Trading mistakes. We have put together the top five most common contracts for difference mistakes for you to take a look at based on feedback that we have had from our trading community.
1) CFD Trading isn’t a quick and easy
One of the most common bits of feedback we get is that most beginners have an expectation that they can start up, make a few leveraged ‘big trades’, earn a lot of money quickly and then spend a few minutes a day checking their trades from an iPad while sat on the beach drinking from a coconut. The first thing to take on board is that trading can be tough and it will take effort and experience.You wont become an expert overnight.
Trading can be tough and it will take effort and experience.
2) Trading markets you don’t understand
When you set out trading make sure you are trading a market that you understand or that you have done some research on. All too often we see novice traders jumping straight into a highly volatile market a completely the wrong time and then watch it completely tank against them. Making sure you do your research and having trading discipline is critical when you are starting out to avoid this number two of most common CFD trading mistakes.
Making sure you do your research and having trading discipline is critical.
You will find that over time and with adequate research and experience, you will get to know what markets suit you and your style of trading. We have put some information together on the most common markets that people trade when trading CFDs. Check out the link below for more details.
3) Letting losses run
This one is a big mistake. This is when you are in a losing trade and the trade continues to go against you and you loose more money. A lot of novice traders will let this run in the hope that it will turn around and make your money back. This can happen but invariably it doesn’t. It is human nature kicking in as we don’t want to see a loss.
A lot of novice traders will let losses run in the hope that it will turn around.
Always remember to cut your losses early and don’t get caught by one of the more common trading mistakes. If you are sticking to your trading plan and strategy then you should have some sort of stop in place to manage your risk. Don’t ever move your stops and also never add to a osing trade. Keep your head, stick to the plan and remove the emotion. Become a trading robot doing trades on an automatic level…
4) Not having a trading plan
If you fail to plan you plan to fail. Having a trading plan will will provide structure and guidelines, to define your trading activity. It can be an extremely useful tool to help you focus on planning and executing your trading strategy.
Having a trading plan will will provide structure and a set of guidelines, to define your trading activity.
There is no such thing as a perfect trading plan every person will be unique, and different styles will suit different traders. There are however some accepted best practice elements to consider when building your own plan. We have put together some advice on building your own trading plan, so check it out below.
5. Making things too complicated
At number five in our list of common CFD trading mistakes is making sure you don’t over complicate things. Remember KISS? No not the 70’s glam rock band… Keep, It, Simple, Stupid. Best approach will be to make sure you have the three key points covered.
- Know the markets you want to trade.
- How long you stay in a trade.
- How much you are willing to risk.
Always try and stick with markets you know and are comfortable with. This means you should know them inside out, what they consist of, their trading hours and what influences them.
Next, you need to know what sort of time period you are going to trade. This will help to determine the way you trade. If you are looking to be short-term, you’ll being placing many trades within one day. For medium term it’ll be fewer trades within a week or a month. If you are working on a longer time frame then this will entail fewer trades again over a monthly or even yearly period.
Always try and stick with markets you know and are comfortable with.
Lastly, how much are you willing to risk? We would advise not to starting with big trades. Try starting off starting small and the more comfortable you get you can possibly consider increasing your stake size.
The majority of people who take up trading fail and give up in the first six months. If you can avoid common CFD mistakes, educate yourself in the markets that you are trading, and approach trading as a business, then you will be able to avoid becoming another one of those statistics. CFDs are an excellent vehicle for trading profits, as long as you treat them with respect and understand their advantages and disadvantages.