Avoid These 7 Classic CFD Trading Mistakes

0
26
Avoid These 7 Classic CFD Trading Mistakes

May 15, 2021 6 min read

The opinions expressed by the entrepreneur’s contributors are their own.

How can one person be consistently profitable when trading CFDs while another cannot? We are all human, so it is important to overcome these very human mistakes.

I really believe that it is better to learn as much as possible from other people’s mistakes. – Warren Buffett

You don’t have to be the next Buffett or George Soros to win trading CFDs. Profitable trading strategies are not rocket science. As with many other activities, the difference between making money with CFDs or not is related to the attitude and process.

This list is not comprehensive, but if you can overcome these seven mistakes you will be better off than nine out of ten new CFD traders.

1. I don’t have a plan

Trading can be very exciting, especially when you are first starting out. The ease with which your balance can grow and fall at the touch of a button is fascinating. However, this should be a stage that you go through before you start trading seriously. Some time and energy needs to be invested in trading education, which includes everything from technical analysis to order types to trading psychology. This training gives you the foundation for creating a trading plan.

The trading plan doesn’t have to be complicated, but it should cover at least the following points:

  • What markets are you going to trade
  • What time of day to act
  • How long will you hold the trades
  • How much to risk per trade
  • A list of your best trading setups

Related: Trending Tech Stocks To Buy This Week? 4 To know.

2. Don’t follow the plan

The old saying goes, “Plan the trade and trade the plan”. It is not good to have a trading plan if ignored. Trading CFDs, Forex, cryptocurrencies, or other markets in the same way will consistently show whether you have a recipe for long-term success. Logically, if you do something different on each trade, you will get different results each time and not be able to judge whether the process you are performing will be successful in the long term.

The best way to ensure that you are following the plan is to have it in front of you when trading. Print out your plan and put it on your desk. If you are doing your part for the rainforest, check out an excel sheet of your basic trading plan and rules before each trade.

3. Over-trade

Over-trading means too much trading. Exactly how many trades are too many depends on your trading style and plan. The important point is this: you should only act when the opportunity arises and when your money management allows you to seize the opportunity.

For example, suppose you are trading a stock index breakout strategy like the S&P 500. Your plan is to buy index CFDs when they are above a 20-day high. But the indices are range-bound and the options are minimal. So you see that a forex pair jumps 50 pips and you enter a momentum trade. This is an over-trade, especially when done multiple times.

Over-trading usually comes from boredom. To fix this, you need to make sure that you are not looking for your trills in the trade.

4. Don’t use stop loss

In order to maximize your upward trend in trading, you must also minimize your downward trend. It’s not that you have to use a stop order, but you do need to know when to reduce your losses. Unless you have a plan where to stop the trade at a loss, you have to think that profit from the trade is guaranteed.

That mindset needs to change as winning a trade is never guaranteed. Anything can happen to take your position off course. A stop loss is about expecting the unexpected and protecting your account.

5. Overfunding

Overfunding doesn’t just apply to CFDs or individual traders. Huge hedge funds like Long Term Capital Management and more recently Archegos Capital have been blown up due to margin calls on trades with excessive leverage. However, leverage CFD abuse is widespread.

Too many traders think about the leverage ratio offered by the CFD broker, but this misses the point. What matters is making sure you are using the correct position size. If you set the size of your trade and your stop loss so that you risk 2% or less of your account per trade, it doesn’t matter whether your broker is offering 30: 1 or 200: 1 as you will not be overfunded.

Related: 2021: Make It Your (Middle) Year of Financial Freedom

6. Revenge trade

Revenge trade takes place after a streak of bad luck. Again we are only human and we all feel the same human emotions. After a series of lost trades, we try to “take revenge” on the market for receiving the lost trades. It does this by placing a large trade in an attempt to win back what was stolen from us. Of course the market is not a conscious being and does nothing “with us”. Because this type of trade is essentially a game of chance and is usually poorly thought out, it often fails and exacerbates the losing streak.

The two most effective ways to avoid revenge trading are to take a break from trading after a set number of losing trades before temptation settles, or to automatically lower your stake size in your trades after a set number of losses.

7. Complacency

This is the opposite of vengeance trading because it happens after a winning streak. There’s nothing like feeling “I’m a genius” after a series of successful trades. As humans, our brains consider the fact that we have won all of these trades and conclude that we cannot lose. At this moment, complacency leads us to place unplanned trades or increase our position on something we are really not ready for. The complacency leads us to break our trading rules.

The same techniques for avoiding trafficking in revenge can be used to overcome complacency. Take a break after a winning streak in the markets. Play golf, train triathlon or whatever. Examine what you may or may not have done differently in the winning trades than in the ones that did not.