Most of the mistakes traders make while trading CFD can be avoided by exercising caution. Other mistakes occur due to poor preparation, lack of discipline, or little knowledge on the trader’s part.
Avoiding these mistakes increases your chances of becoming a successful trader. Learning from your mistakes is recommended, but you should also learn from other traders’ mistakes to be on the safe side. Read on to understand some of the CFD trading mistakes you should avoid.
Failure to Have a Plan
Trading can be a thrilling activity for beginners. The thought of your account growing at the touch of a button can be alluring but succeeding in CFD trading requires proper planning. Invest time and energy in trading research and education, and strive to master various terminologies like order types, technical analysis, and trading psychology. This knowledge gives you a foundation to develop a trading plan. A CFD trading plan does not have to be complicated. Your strategy should comprise the following components.
- The markets you will trade on
- How long do you plan to hold trades
- Your preferred trading time
- Your preferred trading setups
- The amount of risk for each trade
Failure to Follow Your Plan
Experts in the CFD trading industry opine that once you plan your trade you must trade your plan. Having a plan and failing and not exercising is a recipe for failure. Using the same plan for your CFD trading venture helps you determine whether or not you have a long-term success strategy. However, using a different plan for each trade gives you varying results every time, and you will be unable to know whether or not your strategy is ideal for long-term use.
Overtrading is the idea of trading beyond your trading plan and style. Traders should only trade when the money management permits them to initiate a position and when an opportunity presents itself. For example, suppose you are utilizing a breakout strategy on stock indices such as the S&P 500.
Your plan requires you to purchase index CFDs when they surpass a 20-day high. However, indices are restricted, and there are a few opportunities. Suddenly you notice a forex pair leap 50 pips, and you leap in on a velocity trade. Doing so amounts to overtrading, especially when you do it repeatedly. Overtrading often results from boredom, and to resolve it, traders should stick to their plans regardless of how the markets move.
Overleveraging is a common practice among individual and CFD traders. Considerable hedge funds have in the past collapsed due to margin calls on trades with extreme leverage. Many traders consider the leverage ratio a CFD broker offers but often miss the point. Using the right position point is crucial.
Assuming you set your stop loss and the trade size so that your risk is 2% or less per trade on your account, your broker’s ratio will hardly matter, seeing that your account will not be overleveraged.
To adhere to the plan accordingly, traders should display it openly when trading. Print your plan, place it on your desk, and follow it to the letter. Check your printout and match it to your standard rules and trading plan before you start trading.
Failure to use a Stop Loss
To maximize your chances of gaining while trading CFDs, you should minimize your chances of losing. Using a stop-loss order is not obligatory, but traders should know when to cut back their losses. Lacking an exit plan means that you are sure of winning the trade.
Traders must change that mindset because not even the most experienced traders are guaranteed success in CFD trading. The forex markets are unpredictable, and they can change suddenly, throwing your position off course. Having a stop-loss order is one effective way of protecting your account from unnecessary losses.
Revenge trading occurs after a series of losses. Losing continuously can be frustrating, and many traders will attempt to revenge on the market for their loss. They do so by placing a significant trade to try and recover from their loss. Worth mentioning is that the market is unconscious and should not carry the blame for the loss. Revenge trading is a poorly thought strategy that usually fails and worsens your losing streak.
Avoiding these mistakes can be all you need to improve your trading strategy, limit your loss, and increase your chances of making a profit.