CFD trading is similar to shares trading, but you trade a contract rather than owning the share. When you invest in CFD, you do not actually buy or trade the asset but buy a contract between yourself and the CFD provider.
Contracts for Difference (CFD) are traded based on margin, which means a deposit is lodged initially with the CFD broker, letting the investor buy or sell multiple CFDs and extra leverage overstock purchases.
The investor downright does not own the stock but enters into a contractual agreement with the CFD broker to exchange the difference in cash between the stock opening and closing price. One CFD equals one share, except you just need to put down 5-20% of the contract value. This means you can use the same capital to buy several such contracts. There is also risk associate with this. You may end up losing more money as compared to stocks and end up owing funds to the CFD provider, which does happen if you buy physical shares. This is why you should get to know every aspect of trading such as brokers, trading platforms, etc. To learn more, read through tradingguide.co.uk
Having said that, traders do fail a lot in CFD trading, and there are several ways to avoid them by just thinking ahead of the mistakes that can be made.
- Not Creating a Plan:
Trading is thrilling, which is why many newbies love to jump into this right away. Spending money on a field you do not have much knowledge about is not a clever choice to make. Invest some time to educate yourself about trading. Experienced and educated traders create a plan well before investing in trading. They create strategies based on their past experiences and market analysis. Just jumping into trading without any plan is like jumping into the ocean without a life jacket.
Trading plans should cover simple answers such as the markets you will trade, the time of trading, how long you will hold a trade and how much risk you are willing to take.
- Not Being Disciplined About Following the Plan:
Creating a plan is not enough as sticking to it throughout the trading process is as much essential. It is not good to ignore a trading plan if you seek long-term success. The market is volatile, which means it can fluctuate at any given point in time, but there is a trend it follows. Your strategy must be based on that trend; hence with every minor fluctuation, do not switch to a different strategy, or else you will end up losing more than you make.
Layout your plan in front of you when you trade. Take a printout of the rules and stick it to your desk sidewall to be always aware of what you need to do next and not deviate.
- Complacency:
After a series of winning trades, you may feel over-confident and conclude that your strategy is perfect, which means you cannot lose. In such a movement, influenced by the winning streak, you may end up trading more than regular, increasing your loss chances. Unplanned trades may use up your funds which you were not ready for.
The idea is to take a break from trading after a huge win to digest the news and enjoy the win. Once your mind is back in the game, you can rejoin CFD trading.
- Revenge Trading:
Human emotions make us do several things which we would usually avoid. After losing a series of trades, it is natural to want to trade more, which is also known as revenge trading. This is the opposite of complacency. The feeling of taking revenge on the market by conducting a big CFD trade to win back what the market has stolen from you can go either way. This may cause a bigger loss than before. Doing trade with such an emotional mindset does not usually work, as you will not stick to your strategy. These kinds of trades are actually very close to gambling. You may win, but that would just be your sheer luck.
The best way to avoid this is by taking a break from trading for a short span of time to regain your cool and strategize better.
- Over-trading:
Trading more than what you had planned initially is known as over-trading. Over-trading simply means trading too much. Even when you see a trading opportunity, take a look at your funds to ensure that it allows you to take the opportunity. It is unnecessary to grab every possible opportunity and spending all your funds. Trading can force you to make impulsive decisions but still have some ground rules set.
The Bottom Line:
CFD trading is one area where you can gain good interest if you stick to a good strategy and the Irish of losing is also higher. Educating yourself well of all the positives and negatives and thorough market research, and staying updated with the latest market trends will give you a boost.