To learn how you can make money trading CFDs you need to understand how you can lose it first. This may sound counterintuitive, but believe me – if you don’t know what you are doing with contracts for difference you can and will lose money, and quite quickly!
Here are some of the most common blunders -:
- Martingale – 100%. Very high risk of wiping your account and in any case you will need a huge amount of capital for this, depending on what your initial risk was.
- Ignoring Money Monagement.
- Using a commercially available trading system.
- Not using a time scale appropriate for your trading system.
- Exit at wrong time – The Exit is as important as the Entry. Learn to cut losses short and let profits run.
- Not sticking to your own strategy.
- Random Entry. Although here I have to say that trade management and money management are more important (*).
- Not using Stop losses.
- Do not bother to understand “Buy Stop”, “Sell Stop”, “Buy Limit” and Sell “Limit Order” order types.
- Failure to fund your account adequately
In relation to the last point, make sure that you have sufficient capital. Note that to open a CFD trading account you normally need to deposit some funds with the CFD broker. The amount you deposit is up to your discretion but a word of warning – if your account is not adequately capitalised you are almost certainly destined to fail. This is because when you open a trade you will instantly start the clock running. The CFD provider will monitor your deposit margin i.e. do you have sufficient money in the account to cover running losses? The actual computation they use varies from stock to stock, but if you don’t have enough resources deposited to cover your potential losses at a particular moment in time the broker might automatically close the position (to protect you and himself). This will imply that you would have to gulp the loss, whether this is to your liking or not. Some providers will try to contact you several times if your margin is getting low alerting you to top it up but this is ultimately your responsibility.
(*) Having random entries or dealing in a market you don’t understand is very dangerous however by itself may not lead to disaster. I know of a trader who, to prove his point would buy or sell each day. If he went long the previous day today he would short, and vice versa. Not that his trades went well but his trade management and money management proved effective. He focused on cutting losses short and letting the winners run. He had more than 20 some odd triggers to exit a trade too. It was really all very interesting. I think he netted maybe 2 or 3% over 6 months when I was following him. His biggest thing was not to focus on a perfect entry but rather focus on managing the trades correctly, and keep risk sufficiently small. At the time this helped me stop trying to pick market tops and bottoms.
So there you know how to blow-up an account/ equity so just do the opposite instead and there you go, you’re on the right path, assuming you will stick to whatever trading strategy/ies you will come up with. Keep in mind that even some great traders have blown their account one time or another like the Legendary Jesse Livermore. What’s important is to stay in the game and to have a CFD account sufficiently small relative to your wealth so that blowing it won’t wipe you out.