Many novice CFD traders start trading the hard way, without learning from experienced traders that have made many of the expensive mistakes traders make on their path to success. To help understand the most common errors made by traders and to save you from making the same errors with your own capital we've outlined some common errors below.
1. Trading for the wrong reasons.
A lot of people commence trading with the intention of making a return from day one. However, there are some people that invest for entertainment. Should you be serious about making a return, it's important that you treat your trading like a business. Those that invest for entertainment will be lucky if they make money in reality more often than not they'll lose.
2. Over-Trading.
You should stay away from the temptation to over-trade. Over trading is a risk for all those traders that aren't following a method, choosing to sit down on the sidelines until a clear trend emerges is in itself a legitimate strategy. It is important to avoid the mistake of fully leveraging your positions just because you have got free equity on hand. It's also important to ensure that you do not invest with money that you cannot afford to lose.
3. Psychological and Emotional Mistakes.
Developing the mind-set that you have to get every trade correct is often a dangerous mistake to make if you can't accept the fact that you'll make mistakes and may even find it hard to close out of a losing position. Instead, your mind will find ways to convince itself that the trade will swing around and happen to profitable. There is a risk that subconsciously you could become blind to evidence that suggests that you're incorrect.
It's essential to recognize that you will not get every trade right and that you don’t need to get every trade correct, this will permit you to manage your trades effectively. Being wrong is something that we frequently feel terrible about. We are taught through positive reinforcement that we should feel better about being right. This often presents problems when trading.
Losing trades can cause emotional distress and stop you from correctly analyzing the market. This could present a danger that you'll start over-trading so that you can make back losses or to “get even” with the market. On the flip-side, winning trades can produce feelings of excitement and invincibility. If you make the error of allowing this emotion to take hold, you could find yourself taking too much risk or making silly errors through negligence.
It is best to aim to keep your trading related emotions under control. Wise traders will focus on the downside risk potential of every trade and will make sure that this is within their pre-defined parameters outlined in their trading strategy.
4. Not understanding the suitability of CFDs.
Trading CFDs has enhanced the trading opportunities for a great many retail traders. CFDs are an ideal product for traders with a short-term time horizon as well as a desire to increase their market exposure on a small amount of money.
Contracts for difference are not always suitable for long-term traders due to financing expenses that may build up over time. Additionally traders who do not watch their open positions won't find CFDs appropriate. You always need to make sure that the amount of money that you choose to allocate to your trading account is an amount that you would be able to afford to loose.
Before you start trading CFDs you should be familiar with the risks connected to the product. Like all geared financial products, the risks are going to be higher if you don’t take the time to understand the product.
For traders that understand how CFDs work and learn to minimize their risks, there are usually significant benefits from CFD trading. Through the use of gearing and also the efficiency of trading, retail traders now have greater opportunities than they have ever had before.
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 publications and held a number of seminars on buying and selling CFDs you can download and read many of his notes on CFD trading for free.
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