Overtrading has to be one of the major dangers when trading contracts for difference. Over trading is easy to do especially for those traders who are not following a trading plan, and when things go wrong it is often hard to recover from. With the leverage available with CFDs, it is simple to over commit your funds and not realize that until something goes wrong.
‘I did okay at the start, but I didn’t really know what I was doing. For me, all too often I’d get this kind of overriding, heart-racing moment where I thought things are going to turn around.’
I believe the above quote said it all… I don’t think the problem is CFDs as a trading product. I believe the problem is people trading CFDs who don’t know what they are doing, investing with their emotions and don’t have any plan or risk management strategies in place.’
There are several factors at play here. One of them is a feeling that you need to be doing something all the time, otherwise you’re not working at trading. The truth is that sometimes you are better off keeping your money out of the market and waiting for the right opportunity, rather than diving in to trade a less than optimal setup. Capital preservation should be your focus, and that will allow you to stay solvent for long enough to make money.
Assuming that you wait for the right trading opportunity, the next way that you may overtrade is by putting too much money into the trade. You must always consider the downside and entertain that it may happen, even without you making any mistakes. That is the nature of trading, as the market will always do what it wants to. Particularly if you’re using contracts for difference, or another derivative leveraged product, you have to consider that your losses can be leveraged too, and operate strict stop losses to avoid disaster.
There are psychological reasons that you may be tempted to overtrade. If you have had a run of losses, and you are embarrassed to admit that, perhaps even to yourself, then you may be tempted to put too much into the next trade in an effort to make it back up. The opposite can also lead you into problems. When you’re having a winning streak, it’s very tempting to double up your stake to make even more, and that may be just when your luck runs out.
One answer to prevent overtrading is to have a trading plan and stick with it. This is easier to say than to do, but it is essential if you want to survive and prosper as a trader. Your trading plan will have detailed money management strategies which will forcibly limit the amount you risk on each trade, keeping it down to a level that will allow you to survive a row of successive losses.
With CFDs you can easily be tempted to keep on opening new positions for the simple reason that you’ve got free equity available. However, taking on too much leverage is a mistake. A general rule of thumb is that you do not risk losing more than 2% of your trading account on any one position. Some traders think even this is too much. You need to consider where your stop loss is to be placed before you enter the trade, and calculate backwards how much you should put into it. CFDs make it easy to be tempted by large rewards and to forget that there can be a downside, and this can be terminal to your trading career.
Overtrading, whether it is trading too often and losing lots of money covering the spreads between bid and ask prices, or just over committing your funds, is something that you can overcome but you have to take an active role in management of your own money. What many fail to understand is that remaining on the sidelines until a clear trading setup emerges is in itself a position and valid trading strategy.