Table of contents:
- 1 1) too little preparation for CFD trading
- 2 2) trading with the right loss stop
- 3 3) overtrading
- 4 4) excessive leverage when trading CFDs
- 5 5) do not keep a trading diary
- 6 6) costly egos
- 7 7) re-buying is risky
- 8 8) only hold long positions
- 9 9) Unrealistic expectations when trading CFDs
- 10 10) taking too big a risk
Avoid these 10 CFD Trading mistakes. They will cost you a lot of money if you do not beware of it.
1) too little preparation for CFD trading
Many people start CFD trading without a trading plan and think that they can already beat the market. But trading is not that easy.
You have to set your trading rules and guidelines.
At the very least, you need the key components such as trading methods, a procedure for determining trading positions, entry and exit rules, risk management and trading protocols.
Think of your trading as a business.
You need a business plan. Set goals and objectives and be clear about what you want to achieve and answer the following questions:
- Why do you trade? To make money?
If that is your answer, you should think again. How do you want to earn this money?
What is the return you are looking for? Consider the following: The more money you risk, the higher the possible return, but the higher the potential losses.
What kind of losses can you take? What kind of losses keep you awake at night?
- What products do you want to trade? Stocks? Currencies (FX)? Commodities? Indices?
Obviously you can’t be an expert in all these areas, so you should really think about which areas you feel comfortable trading.
In fact, you should only trade what you know.
Since you can trade a variety of products, it is tempting to trade all kinds of products that you may not have any experience with at all.
For example, if you are a regular stock trader and want to trade CFDs, you should trade stock CFDs.
3. What is the value of CFD contracts? How are they structured?
Did you know, for example, that 1 CFD on the DAX future at a price level of 11,000 points has a total value of €275,000 (at €25 per point)?
2) trading with the right loss stop
If you are day trading, you probably need tight loss stops to avoid excessive losses.
On the other hand, if you are more strategic, you probably need more generous loss stops and trade smaller positions. Or maybe you don’t place a stop loss at all?
For example, if you buy €50,000 worth of Daimler shares as daytrade, you should consider a 2% stop loss and not a 10% stop loss, which you could use when investing in Daimler shares as part of a longer-term trade.
There are two forms of overtrading: in terms of frequency and open positions.
Today there is a wealth of information available to the investor, whether it is through a newspaper, a trading magazine, an investor website, a trading signal program/platform or directly from your broker.
All these sources provide trading ideas that the investor should consider.
You must remember that you have a choice as to which of these ideas you will implement and how many.
The more you trade, the higher the risk. And you can safely assume that there will be more and more opportunities in this regard.
A consequence of frequent trading usually means that you will probably end up holding too many positions in the hope that they will all eventually make a profit; this confuses you and affects your decision-making process.
It also often results in your positions becoming confusing.
You need to think about how often you trade under your trading plan, and you need to check the frequency of your trading activities regularly and not deviate too far from the established trading restrictions.
4) excessive leverage when trading CFDs
One of the biggest advantages of CFDs can lead to the most costly errors.
You have the ability to trade large positions with a low margin requirement, but that doesn’t mean that you have to use the maximum that your platform allows.
Profits and losses are based on the size (value) of your positions, not on the so-called initial margin.
Always consider the maximum risk on all your positions and the possible losses on these positions.
The risk warning “Trading with leverage carries a high risk to your capital and it is possible to lose more than your initial investment” is cited for good reason.
We believe that excessive leverage is the biggest destroyer of CFD trading accounts.
Let’s look at the following example: You have €10,000 in your CFD account and buy 20 DAX contracts with a point value of €1.00 when the DAX is at a price level of 10,500. This is then a total of €210,000 risk. If the CFD on the DAX30 Cash falls by 4.5% (which can happen within a few days) you have lost €9,450, which is almost the entire value of your account. This is a classic case of excessive leverage. This means that you have no room for large price fluctuations.
5) do not keep a trading diary
When trading, it is important that you keep a trading diary. When you open a trade, you must document it:
- Why did you buy the stock?
- Where did you read about it?
- When did you decide to sell the share?
- Later, it is very important that you analyze the trade, whether it is a profit or a loss. Was it a good stock selection? Did you stick to your plan? Is this a trade you want to repeat?
All answers will help you develop better trading discipline and improve your future trading.
Well-known stock market legends such as Warren Buffet are relentless when it comes to analyzing their trades and taking responsibility for wrong decisions.
6) costly egos
Do you want to prove you’re right, or do you want to make money? Nobody likes to be wrong. In fact, we always think we are right and the market is wrong, but that can be a very expensive habit.
If the market moves against our beliefs, we have to face the fact that our assumptions may have been wrong and learn from market developments. Instead, many people are sinking more and more money into a losing trade, convinced that they are right and the market is wrong.
In such moments it is useful to remember two quotes from John Maynard Keynes:
“Markets can behave irrationally longer than you and I can remain solvent.”
“If my information changes, I change my conclusions. What do you do, sir?”
7) re-buying is risky
We’ve all been there. It’s a great stock. We know all about it. It has good fundamentals and a growth story.
But now, for some inexplicable reason, it’s down 30%. We buy even more because at this price it is an even better deal and when it starts to go up again, we can make up the initial loss. Then the stock drops another 20%.
The calculation that refers to reaching break-even again may surprise many traders who have not really dealt with it. Because if a share falls by 20%, it has to rise by 25% to reach the break-even point or the entry price.
If a stock falls by 30%, it has to rise by 43% to break even.
If a stock falls by 40%, it must rise by 67%. And, of course, if a share falls by 50%, it has to rise by 100%. How likely is it that a share that has just fallen by 50% will double in value?
It is crucial to limit losses early on. Never fall in love with a share.
8) only hold long positions
If you only have long positions in your portfolio, your entire strategy is based on the basic assumption that prices will only rise.
This exclusive long strategy carries a high level of risk, because if prices fall, all your positions will inevitably result in losses.
What you lack is an indispensable investment tool that will allow you to benefit from falling prices, hedge your portfolio and have the ability to trade pairs.
This means that your portfolio should have both long and short positions so that your investments are more balanced.
Investors should be aware that very high risks, which are virtually unlimited, can be associated with a short position, as the price of a stock could rise indefinitely.
Holding only long positions works well in a market that is moving upwards, but it is not uncommon for prices to fall sharply and suddenly. In this case your losses can increase rapidly.
Short positions in your portfolio can reduce your risk if used correctly.
Another defense strategy is to trade pairs. For example, suppose you believe that the price of Daimler will rise and that of BMW will fall. You can take a long position (buy) in Daimler and a short position (sell) in BMW.
This can reduce some of the market risk as you trade the difference between the two prices.
9) Unrealistic expectations when trading CFDs
You will hear from people who double their money with CFD trading, or see advertisements claiming that you only need to trade for 15 minutes a day and don’t have to work.
Anyone can double their money, just visit a casino and choose red or black, but in either case the risk is always present.
Your trading plan should include the different profit levels you are trying to achieve and what you are willing to risk. This should tell you whether the trade is justifiable.
Many investors expect very high returns. But you need to be realistic about your profit expectations.
For example, it would be naive to expect to earn €2,000 per month from a capital of €10,000.
10) taking too big a risk
CFDs carry a high level of risk and you should ensure that you can manage this risk and your trading plan should ensure this.
You should only risk the trading capital that you can afford to lose.
You should adhere to your trading rules and policies, taking into account risk, open positions, diversification and leverage.
Use all the instruments offered on the trading platform, such as loss stops, guaranteed loss stops and trailing stops.
Always review your trading plan before you place a trade.
If you are risk averse or do not have sufficient funds to lose, then trading CFDs is really not for you and you should not consider trading these products.
Read my other articles about CFD Trading:
- 10 CFD Trading mistakes
- 7 important CFD Trading Tips & Tricks for beginners
- Advantages of CFD trading: Why you should start
- Bitcoin CFD Trading Tutorial
- CFD Broker deposit protection – How safe is your money?
- CFD Broker with negative balance protection & Margin Call
- CFD Brokers: Market Maker And DMA Broker In Comparison
- CFD Trading costs and fees
- CFD Trading Demo Account Comparison | Test for free
- CFD Trading indicators
- CFDs vs. Micro Futures – Which one is better?
- Criteria for a serious CFD Broker – Eliminate scam
- How does a CFD Broker really earn money?
- How to find a good CFD Broker
- Is CFD Trading legal? – avoid scams
- Learn CFD Trading – Basic tutorial for beginners
- My real CFD Trading experience that Can Make The Entry Easier
- The 10 best CFD Brokers
- The key figures of a successful CFD Trading Strategy
- What are Stock CFDs | Explanation & Tutorial
- What is CFD Trading Leverage | Explanation
- What is CFD Trading? – Ultimate Guide For A Profitable Start