Trading contracts for difference (CFDs) can be both a profitable yet tricky process for investors.
In order to become a successful CFD trader, one must be able to weather the daily challenges of trading with a clear, informed, and dedicated approach to every trade executed.
Achieving this level of expertise can be difficult, especially when there are so many common mistakes that CFD traders can so easily fall victim to.
These mistakes not only hinder your chances for profit, but can also result in a large sum of losses incurred.
Therefore, to give you the best knowledge for a successful trading experience, this article will teach you the top five mistakes to avoid when CFD trading.
- Trading on an inadequate platform
A detrimental mistake that so many traders often overlook comes before you even start trading – choosing the wrong trading platform.
Your CFD trading platform is arguably the most vital component in your trading journey, and when it’s not up to standard, it can massively affect the success of your trades.
Traders should seek out an expert trading platform, that provides them with a swift and accessible way to trade CFDs across multiple markets, as well as a plethora of tools to aid in their investments.
By choosing the right platform, you can avoid a bumpy start to your trading journey, and get off on the right foot instead.
- Not devising effective strategies
Another mistake that CFD traders tend to make is not effectively approaching their trades with the best strategies.
There is a vast amount of skill involved in CFD trading, and in order to have the most success, you must apply a high level of knowledge and preparation into every trade you make, no matter the value.
Take time to thoroughly assess which strategy would work best for each asset. For instance, position trading might work best, where you open a position and hold it for a prolonged period of time, to make a long-term profit.
By dedicating time to devising the right strategies, you will be able to enter accurate trades, and increase your chances of profit.
- Failing to monitor market performance
Paying insufficient attention to market performance, or having poor methods of monitoring it, is another mistake you must avoid when CFD trading.
The performance of a market is crucial to informing every trade decision you make, including when to trade, which position to open, and how long to trade for.
One efficient method of market awareness is using technical indicators. These mathematical calculations are used to measure the performance of markets, including which direction asset values are moving in, how rapidly, and to what extent.
By having effective methods of monitoring market performance, you will have a firmer foundation on which to make your trades, thus improving the accuracy of your positions.
- Ignoring the benefits of risk management
Many traders ignore the risk management tools on their platform, or simply choose a platform that doesn’t have any, and this is a huge mistake when it comes to mitigating risk.
As with any trade, losses are inevitable with CFDs. But when they do occur the main goal of every trader should be to make sure they are kept to a manageable amount.
Risk management tools help achieve this, and one example being automatic orders. These allow you to set specific values on your positions, where if the asset drops below this value, the trade will automatically close.
By managing risk, you help keep your reward to loss ratio much more optimal.
- Being reckless with leveraged exposure
A great benefit of trading CFDs is the use of leveraged exposure. However, this can also be a great downfall for traders who use it carelessly.
Trading with leverage allows you to open a position with a deposit much less than the assets total value, but still gaining you a high amount of exposure to the market.
On the one hand, this means you can receive large profits from significantly smaller deposits.
However, what many traders disregard is the fact that this process applies to losses also. If you incur a loss, this will be based on the leveraged exposure amount, not the amount you put down as an initial deposit.
Therefore, to avoid this detrimental mistake, ensure you take time to understand exactly what leverage is and how it works, and pay close attention to how much you are risking in each of your leveraged trades.
Now that you know of these top five CFD trading mistakes, you will be much better equipped to spot and avoid them, making your trading journey smoother and more successful.