Trading mistakes are often made by even the most skilled professionals. Most mistakes made by traders come about because of a lack of research, information or discipline. Whilst it is very important learn from your mistakes, it's even better and far less expensive to learn through the errors of others.
Below are a few of the more common errors made by CFD traders:
1. Too much Gearing.
One of the most important benefits of CFD trading is the ability to gain exposure to a share, index or foreign exchange contract with a comparatively small capital outlay. Rather than paying for the full notional value of the Contract for difference position CFD traders can enter into positions with margins as little as 5% or even less. You will need to note that although a less significant capital outlay is required to open the position the CFD trader continues to be exposed to the price movement of the share CFD for the full notional value of the position. A CFD trader trading a CFD at 5% margin is leveraging their opening expenditure by 20 times, meaning a $5,000 deposit could possibly be utilized to open a $200,000 CFD position.
Because only a portion of the face-value of the trade is outlaid when trading CFDs a small price change could result in sizeable gains but also sizeable losses. For instance when trading a CFD with a margin of 5%, a price rise of 1% in the underlying instrument may result in gains of 20%, on the other hand, if the price fell by 1%, it might result in a loss of 20% of the amount necessary to open the position.
It is important to remember that leverage is a double-edged sword not only can it work for you but when not managed correctly it can also work against you, often beginner trades do not take into account the fact that if unmanaged gearing can result in substantial losses.
2. Not understanding the impact of trade sizes on your account
As a result of the leverage linked to Contract for difference trading, relatively small outlays can result in considerable moves within your whole account balance.
For instance buying 10,000 CFDs priced at $2.40 on a margin of 5% necessitates an outlay of only $1,200. With an outlay of only $1,200 you are able to hold a $24,000 CFD position. Should the value of this position move one cent it is going to have an impact of $100 on the profit or loss on the traders account.
If the purchase price of the this position increased by 12 cents a profit of $1,200 would have been made. However, if the price of the position fell by a similar amount a loss of $1,200 would have been made.
The impact of any price movement will depend upon the traders overall account balance. For a trader with an account balance of $1,500, the aforementioned trade would have had a big impact on the traders account profit and loss. Should a trader with an account balance of $40,000 take the same position the effect would be much less significant.
A loss of $1,200 on a $1,500 account would result in 80% of the total account balance being lost. However, a loss of $1,200 on a $40,000 account would result in a losing only 3% of the account balance.
3. Trading in too large parcels
You will need to calculate the exposure of your trade size prior to placing the trade. It is common for newbie CFD traders to simply trade the maximum size available to them based on their account balance without taking into consideration the amount of market exposure resulting from the position.
There are a number of methods traders can adopt in order to calculate position size. A simply strategy is to work out a suitable amount of risk capital should the trade go against you and calculate a suitable position size base on this.
In case you wish to limit losses on any given trade to $200 you would work out your position size according to your stop-loss price. As an example, if the CFD was priced at $1.40 and you stop-loss was at $1.15 your risk amount would be $0.25, to determine your position size you would basically divide the loss you would be ready to take by the risk amount. In this case this would be $200 / $0.25 = 800, as a result your position size should be 800 units.
The method outlined above is called fixed fractional position sizing in which a specific percent of the overall account balance is risked on each trade. Other methods incorporate allocating a set dollar quantity to each trade, buying or selling a fixed quantity of Contracts for difference in each trade or varying the size trades according to the profitability of your account.
Using a position sizing strategy may help you prevent the mistake of placing all of your eggs in a single basket.
Author Resource:
Matthew Jones is a expert CFD trader with one of Australia's most popular CFD companies IC Markets. Matthew has written a number of guides and held a number of seminars on buying and selling CFDs you can obtain many of his notes on CFD trading for at no cost.
![[Valid RSS feed]](http://www.look4articles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
![[Valid RSS feed]](http://www.look4articles.com/images/rss.jpg "XML Feed For RSS")