6 Common Mistakes Beginners Make When Trading CFDs

One of the trading types many people do today is CFD. CFD or Contract for Difference is usually a short-term contract between an investor and an investment bank or spread betting firm. A trader earns from the differences in the settlement between the open and closing trade prices. There is also no delivery of physical goods or securities when trading CFDs.

 

According to Investopedia, CFD trading is more of an advanced trading strategy by experienced traders and is unavailable in some countries. Because of CFDs, traders can trade the direction of securities, which is popular in foreign exchange and commodities. Most investors use CFDs to make bets on the price of an underlying asset or security.

 

One of the reasons CFDs are popular is because of their high leverage. With leverage, traders can maximise their potential profit. But despite that, it could also wipe their funds away once a minor unforeseen price change happens. That’s one of the reasons professional traders don’t recommend CFDs to beginners immediately.

 

Since CFDs can be complex, taking the time to learn about them is essential. In this post, let’s understand the typical mistakes beginners make when trading CFDs.

 

1 – They don’t understand and utilise risk management.

Risk management refers to minimising potential losses in trading. There are various risk management tools traders can use to minimise their losses and make the most out of their funds. Most traders use the risk/reward ratio in analysing the cost-benefit of their investment returns. They do so by comparing the risk they’ll take with those they could earn.

 

Many traders use the stop loss and take profit orders as risk management tools. One of the reasons many beginners have a negative experience with their CFDs is that they don’t take the time to understand the importance of risk management. Many beginners realise too late that utilising risk management tools impacts their trading positively in so many ways. It’s best to understand and utilise risk management before starting to avoid experiencing that.

 

2 – Making decisions based on gut feeling rather than understanding the markets.

One of the common mistakes of new traders is relying on their gut feeling when making trading decisions. Since most new traders only trade because of peer influence and pressure, many don’t know what they’re doing. Because of that, many make decisions based on their gut feeling rather than educating themselves about the market.

 

In CFD, you can trade various commodities and securities. That means you must take the time to learn the background of the commodities and securities you’re trading. By doing so, you can learn how the market moves and make better decisions that will benefit your trading. Instead of leaning on your gut feeling, you can make decisions that prevent your funds from losing and make the most of your trading.

 

3 – Relying too much on trading software without understanding its features and uses.

Another common mistake beginner traders make when starting CFD trading is relying too much on trading software without understanding its features and uses. There are so many trading software and platforms today that many beginner traders use. Before, there were only a couple of platforms that the trading community used. Now, there are many options that traders can use when choosing a platform for trading.

 

When choosing a trading platform, it’s critical to educate and familiarise yourself with its features to utilise them best with the strategies you’re planning for your trades. There are cases when traders can’t utilise their risk management tools efficiently because traders don’t adjust their strategies based on the market’s movement. Overreliance on your trading software can lead to poor trading gains and losses.

 

4 – Overexposing their trading position

New traders can either be reckless or conservative with their trading decisions. Some beginner traders are conservative because the negative stories they hear about losing money overpower their confidence. Some, on the other hand, are more reckless because they have the confidence that the market will move in their favour despite not learning enough about them. As a result, they overexpose their trading position.

 

Overexposing a position is when a trader puts too much capital in one market. Many do that because they believe that putting in ‌massive capital can increase their chances of earning larger profits. What they forget is that doing so also increases the inherent risk of their position. If you’re new, don’t overexpose your trading position.

 

5 – Over-diversifying their portfolio without getting the hang of the market’s performance first.

Aside from overexposing, over-diversifying can also put your portfolio at risk as a beginner. Over-diversifying is a strategy many experienced and professional traders use as a fallback when their asset’s value declines. Yes, over-diversifying can increase your potential returns, but it also puts you at risk when you don’t manage them wisely.

 

As a beginner, it’s better to focus on two to three assets before exploring others. Again, CFD trading is complex. That’s why it’s better to take your time assessing and exploring its nature before putting your eggs in various baskets for financial safety.

 

6 – Being too confident in trading more after making a profit.

Last but not least, beginner traders become too confident in trading after making their initial profit. The feeling of earning a profit as a beginner in trading feels incomparable. It also gives traders an immediate confidence boost that their positions will do well. However, you must keep your emotions and confidence in check to avoid impulsive decisions.

 

This last point connects to my second point earlier. Once a trader experiences the taste of a glorious profit, they’re more likely to be confident in making more risky decisions. That’s why even though you win a massive profit, don’t be too confident and always be rational with your decisions to utilise your trading.

 

Learning about the market is the key to avoid making mistakes.

As a beginner, it’s inevitable to make mistakes along the way. There are many times when the market will move against you and cost you a lot of money. That’s why it’s critical to do your best to learn about the market and avoid making mistakes. 

 

It’s possible to encounter many losses and make various mistakes when trading. However, if you continue to keep yourself updated and learn about the market, you’ll likely encounter less of those and have more gains in the future. 

Written by Bianca Banda

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