CFDs are appealing to both novice and expert traders because of their leverage. In addition, it improves accessibility as well as profit possibilities.
However, high-leverage deals come with many risks, and if you don’t take proper safeguards as a trader, you can find yourself on the losing end of CFD trading. To avoid large losses and missed opportunities; however, CFD trading should be approached with caution.
As a result, this post will go over seven crucial pitfalls to avoid when trading CFDs so that you don’t end up in the red. Of course, this list is not exhaustive, but if you can avoid these common mistakes, you will be in a better position than most CFD traders.
What is CFD Trading?
Contract for difference, or CFD, is a sort of trading that is a popular and relatively inexpensive option for investors to access the financial markets. Call for difference (CFD) trading allows traders to speculate on the price of a market without owning the underlying asset, allowing them to profit from rising and falling markets by going long or short.
CFDs are a type of derivative trading that brokers frequently offer for standard products such as currency, commodities, and spot metals. Unfortunately, despite the advantages that this sort of trading offers to all types of traders, most of them make several mistakes that put them on the riskier side of the market.
7 Serious Mistakes to Avoid When CFD Trading
The following are the most common pitfalls encountered by CFD traders, as well as how you can avoid them.
Lack of research making and strategy
Many new traders mistake not speculating on assets they are unfamiliar with. This is one of the most common mistakes traders make, as it leads to irrational buy-and-sell decisions.
You simply must be familiar with the history and present patterns for each CFD asset you wish to place before initiating any trade, or the results will always be unpredictable.
It’s also possible to compare not having a strategy to not having a plan. The market is a highly volatile environment that disregards anyone’s experience. So, whether you’re a novice or a seasoned trader, make sure you don’t start trading without first conducting thorough research and developing a comprehensive strategy.
Overtrading
It’s quite exciting to see your account balance rise, but you must resist the temptation to spend all of your leverage as soon as it becomes available. So if you don’t have any trades you’re confident in, wait.
Overtrading is just trading more than is necessary. Only trade when the opportunity presents itself and when your money management permits you to do so.
Overtrading is usually the result of boredom. To prevent this error, make sure you’re not looking for trills in trading.
Revenge trading
When a trader experiences a substantial loss, revenge trading is a normal and emotional reaction. They enter another transaction following their significant loss before thinking about their next move or reviewing their strategy. The goal is to recover from the setback quickly.
You engage in revenge trading when you take on one or more trades to recuperate a significant loss from a previous trade. When we lose money on a transaction, our natural instinct is to want to make it up. Unfortunately, sometimes our desire is so intense that we act irrationally, causing us to lose even more money.
Complacency
This is the polar opposite of revenge trading, which occurs when a winning streak is broken. Complacency will inevitably lead to a hard, losing period in your trading profession. This is the point in your trading career when you find you aren’t as skilled as you believed. You must learn how to deal with huge trading losses, which are unavoidable for all traders at some point. Take a break after a large win on a trade before moving on to the next one. Otherwise, you risk losing everything you got initially.
Not using stop loss and market orders
Some people react to losses by attempting to recoup them as quickly as possible. This is a simple method of multiplying them. Instead, use a Stop Loss order to protect yourself from losses.
A stop-loss restricts a trader’s loss on an adverse move in a position. One of the main advantages of having a stop-loss order is that you don’t have to check your positions constantly.
Although a short-term price fluctuation may trigger the stop and cause an unwanted sale, it is far preferable to exit with some winnings than to lose everything to the market.
Overleveraging
| Margin Required | Maximum Leverage |
| 5.00% | 20:1 |
| 3.00% | 33:1 |
| 2.00% | 50:1 |
| 1.00% | 100:1 |
| 0.50% | 200:1 |
| 0.25% | 400:1 |
Source: Forexbite
CFDs and individual traders are not the only ones who overleverage. For example, margin calls on transactions with high leverage caused hedge funds like Long Term Capital Management and, more recently, Archegos Capital to collapse. Misuse of leveraged CFDs, however, is all too frequent.
Too many traders focus on the CFD broker’s leverage ratio, but this is missing the point. Instead, what’s important is that you employ the proper position sizing. For example, you will not be overleveraged if you select the size of your trade and your stop loss to risk 2% or less of your account per trade, regardless of whether your broker offers 30:1 or 200:1.
Not using other additional trading tools
Many traders mistake disregarding the benefits of automated orders and other tools provided by their brokers. Remember that if their functions are not critical, they will not be present. In addition, you can only keep one eye on the market at a time, so plan by placing an order to buy or sell when the market hits a specific level, so you don’t lose out when sleeping or away from the trading zone.
Closing Thoughts
These are some of the common mistakes people make when trading CFDs. Although avoiding them can be difficult at times, educating oneself as much as possible is critical. Also, keep in mind that any risky financial endeavor, such as CFD trading, requires patience and endurance to succeed.
