A large majority of individuals interested in making money out of market movements find trading with CFDs an attractive mode, but most of these, especially beginners, end up making mistakes that affect the outcomes of their trades. To master the complexities of trading CFDs, one has to understand these common mistakes and be able to avoid them; thereby having a better chance at achieving success.
One of the biggest mistakes in CFD trading is using too much leverage. While leverage will tend to amplify profit as well as loss, the greater the risk of leverage is. If too much leverage is used, a margin may have been borrowed which seems highly tempting and therefore amplifies potential returns, however in case market moves against you, your losses can far exceed the actual investment, so begin low and progress to higher leverages as your experience grows along with your familiarity with how fluctuations affect your trades. By using leverage wisely, you can minimize the chance of huge losses.
Some common mistakes are that people have no clear-cut trading plan. Most of the people enter the market with some vague strategy and make emotional decisions while trading, like waiting too long for a reversal to happen or chasing losers. An appropriate trading plan should have clearly defined entry and exit points as well as proper risk management strategies. For instance, with share CFDs trading, knowing when to take profits or cut losses will keep you from making emotional decisions and keep you on track.
The other trap that most traders fall into is the emotions dictating their trading decisions. Fear and greed cloud judgment and lead to impulsive actions. For example, fear could cause you to close up the trade too early, missing some profits, while greed leads to holding for too long and losing greater amounts. Avoid this by setting stop-loss orders that protect your capital in case the market moves against you, limiting your losses in any case. Stay the course of your plan and avoid making these knee-jerk emotional decisions.
Another common mistake traders make is overtrading. Getting too excited to see the numerous opportunities in the market, they place too many trades, even when conditions are not optimal. Overtrading can quickly drain your wealth, especially in volatile or unpredictable markets. Focus on quality trades over quantity and seek situations that align with your trading strategy. Avoid trading just for the sake of it. This helps you avoid heavy losses and maintain a relatively well-balanced trading account.
Most traders will fail in risk management. In many cases, they would not set stop-loss or risk too much on one position. This will result in huge losses. A basic rule of thumb is to limit your trading capital to a small percent for each position. Even if you have a string of losing trades, you can still trade and learn without getting your account wiped out. Share CFDs trading can be quite volatile, and it is always wise to calculate possible risks before entering into any trade.
Lastly, many traders are uninformed. Knowing how CFDs work and the factors of the market that govern them will give you an edge. By reading up on technical analysis, market news, and risk management strategies, you will be better prepared to make smart decisions. Many brokers have educational resources and demo accounts to trade without risking real money.
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