So, you’ve decided to trade CFDs—congratulations! You might be asking yourself, “I’m an experienced trader, but I don’t know much about CFDs. How can I make money with them?
Just like you have ample forex trading tools, there are a few tips and tools to help you better manage your CFD trades too. Here are the five most common mistakes that new traders tend to make when trading CFDs.
Chasing trends
When buying and selling currencies in the foreign exchange market, there is one golden rule: buy low and sell high. It applies both to spot forex and CFDs. With a spot trade, this means that if a currency pair is moving upwards in value consistently, you want to enter into a long position when its price is low relative to its recent rates of appreciation and then sell it when its price is high.
However, chasing trends can often lead to significant losses when trading CFDs. CFDs are leveraged products—meaning that you can trade a much more prominent position size than your initial investment. And as with all leveraged products, if the market moves against your position, you can lose more money than you originally invested.
For this reason, it’s generally advisable to wait for a trend to mature before entering into a CFD trade. This way, you’ll avoid getting caught in a volatile market move and losing money on your investment.
Ignoring stop losses
A stop loss is an order you place with a broker instructing the broker to sell a security or currency at a specific price. It is often used as a risk management tool to help traders protect their investments from excessive losses. Look here for more information on brokers.
When trading CFDs, it’s essential to always use stop losses. It’s because, as we mentioned earlier, CFDs are leveraged products and can result in substantial losses if the market moves against your position. You can limit your losses and protect your investment capital by using stop losses.
Trading without a plan
One of the biggest mistakes new traders make is trading without a strategy. It often leads to impulsive decision-making, which can be costly in the long run.
When trading CFDs, it’s essential to have a clear trading plan laying out your entry and exit points, as well as your stop losses. It will help you stay disciplined and focused while trading and will help you avoid costly mistakes.
Trading too big
When trading CFDs, it’s essential to trade small to limit your risk. This means that you should trade only a small percentage of your account balance on any given trade. For example, if you have an account balance of $10,000, you should not trade more than $1,000 per trade.
This will help ensure that you don’t lose too much money if the market moves against your position.
Over-leveraging
One of the biggest dangers of CFD trading is over-leveraging. Leverage is an excellent financial tool in many situations, but when it comes to CFDs, over-leveraging can lead to substantial losses.
For example, if you bought $10,000 worth of Apple Inc. (AAPL) shares and used an 80:1 leverage ratio (meaning you borrowed $80 for every $1 of your capital), your initial investment would be 1% of the stock’s price. However, if AAPL share prices dropped 10%, your losses would be much greater than 1%. And because we’re dealing with leveraged products here, this means that instead of losing just 10% of our total portfolio value (which was $100 in this case), we could end up losing 100%.
Bottom line
Trading CFDs can be a profitable endeavour, but only if you avoid making these five common mistakes. By following this advice, you’ll be on your way to becoming a successful CFD trader.
