How is it that one individual can continuously benefit from CFD trading while another cannot? Because we are all human, it ultimately boils down to conquering our very human flaws. CFDs are valuable financial products that can assist you in achieving your trading goals if you select suitable Forex brokers offering stock CFDs.
You don’t have to be the next Warren Buffett or George Soros to succeed with CFD trading. Trading techniques that are profitable aren’t rocket science. The difference between generating money with CFDs and not usually boils down to mindset and process, as it does with many other endeavours. This list isn’t exhaustive, but if you can avoid these missteps, you’ll be ahead of nine out of ten beginner CFD traders.
- Not Having a Strategy
Trading can be exhilarating, especially when you’re initially getting started. It’s fascinating how quickly your account balance may rise and fall with the touch of a button. However, this should be a stage you go through before getting serious about trading. Trading education, which includes everything from technical analysis to order varieties to trading mindset, requires some time and effort. This training provides you with the foundation for creating a trading plan.
The trade plan doesn’t have to be complicated, but it should include the following components at the very least:
- Which markets will you trade?
- When is the best time to trade?
- How long will you keep the trades?
- How much are you willing to risk?
- A list of your most successful trading strategies.
- Failure to Stick to the Plan
Make sure you understand what you are doing. It’s pointless to have a trading strategy if you don’t use it. Trading CFDs, Forex, cryptocurrency, or any other market in the same way over time might reveal whether you have a long-term winning strategy. If you do something new on every trade, you’ll logically receive different results each time, and you’ll have no way of knowing whether the strategy you’re using will lead to long-term success.
When trading, the best method to ensure that you stick to the plan is to have it laid out in front of you. Print out your strategy and keep it on your desk, or, if you want to help the environment, check an excel sheet with your fundamental trading strategy and rules before each trade.
Trading too much is referred to as overtrading. Your trading style and plan will determine how many trades are too many. The key message is that you should only trade when there is a good opportunity, and your money management permits you to do so.
Let’s imagine you’re using a breakout technique to trade stock indices like the S&P 500. When index CFDs break above a 20-day high, you plan to buy them. However, because indices are rangebound and chances are limited, you observe a forex pair jump 50 pips and enter a momentum trade. This is known as overtrading, especially when done multiple times. Overtrading is usually the result of boredom. Make sure you’re not pursuing your trills through trading to fix this.
- Not using a Stop Loss
You must minimize your loss in order to maximize your trading upside. You don’t have to use a stop order, but you do need to know when to cut your losses. You must believe that winning the trade is guaranteed if you don’t have a plan for where to exit the deal at a loss.
Because winning any single deal is never certain, this thinking must shift. Anything unexpected can throw your plans off track. It’s all about anticipating the unexpected and safeguarding your account when using a stop loss.
CFDs and individual traders are not the only ones who overleverage. Margin calls on transactions with high leverage caused hedge funds like Long Term Capital Management and, more lately, Archegos Capital to collapse. Misuse of leveraged CFDs, on the other hand, is all too typical.
Too many traders focus on the CFD broker’s leverage ratio, but this is missing the point. What’s important is that you employ the proper position sizing. You won’t be overleveraged if you set the size of your transaction and your stop loss so that you’re only risking 2% or less of your account per trade, regardless of whether your broker offers 30:1 or 200:1.
- Revenge Trading
After a losing streak, revenge trading occurs. We are, after all, simply human, and we all experience the same range of emotions. After a string of losing trades, we try to “retaliate” against the market for the losses. This is accomplished by executing a big deal in order to reclaim what has been taken from us. Of course, the market isn’t a sentient creature and isn’t acting “towards us.” Because this type of deal is essentially a gamble and is usually poorly planned, it frequently fails, exacerbating the losing streak.
The two most effective techniques to avoid revenge trading are taking a short break from trading after a certain number of losing deals or automatically reducing your investment size in your trades after a certain number of losses.
Because it occurs after a winning streak, this is the opposite of vengeance trading. Nothing beats the sense of “I am a genius” following a string of profitable trades. Our brains look at the fact that we have won all of these trades and decide that we cannot lose. Complacency drives us to make unplanned trades or expand our lot size to something we aren’t equipped for at this point. We break our trading guidelines as a result of our complacency.
Complacency can be overcome using the same tactics used to avoid revenge trading. After a winning streak in the markets, take a rest. Play golf, train for a triathlon, or whatever it is you want to do. Examine what you might have done differently in trades that worked out against deals that didn’t.