Contracts for Difference (CFDs) provide traders and investors with the prospect of making a profit from price movements without owning an asset. A prevalent type of investment in the past years, CFDs trading represents a less money-intensive manner to trade stocks, indices, commodities, and currency pairs. Efficient CFD trading means reaping the full benefits when a particular asset moves its price without having to pay the face value of that asset itself. Nevertheless, CFD trading involves plenty of risks and potential for loss. For you to avoid such outcomes, we have prepared a short guide on the mistakes CFD traders have to circumvent.
1. You do not develop a Full Trading Plan
Some so-called “trading gurus” may tell you that things are simple: buy when the price is low, sell when the price is high, cash in the profit. They may also tell you about “gut feelings,” “sensing the market,” or “trusting your instincts.”
The market does not usually care about your instincts and feelings. Before you even consider trading CFDs, you need to have a comprehensive and thorough plan and stick to it, just as you do when you usually trade Forex. Consider the following:
- Are you ready to deal with price gaps during the day or between the closing and opening of different markets?
- How do you plan to win when the margin calls increase in frequency?
- Are you ready for larger spreads, overnight changes or political news that may reshape the market in a split second?
Only when you feel 100% ready for your trading day, and you checked and rechecked your plan by investing hours of demo training in it, then you can successfully win at CFD trading. In the lack of a trading design, you are just gambling.
2. You do not research the Markets Enough
When you trade CFDs, you have a wide area of opportunities in front of you: stocks, indices, commodities, currency pairs. While you can expand your portfolio with a high number of investments, you should also pay attention to specific markets and prospects.
For instance, before you learn how to trade CFDs on DAX 30 and use scalping or mixed day-trading strategies, you should understand how the DAX 30 index works, what benefits it offers, and what particular factors influence its position on the market.
If you do your research thoroughly for each index, commodity, or currency pair, you will understand better what lies ahead and how you can adapt your strategies to the best opportunities. Speaking about Germany’s DAX 30 capitalization-weighted performance index, you should know it is one of the most promising CFDs markets out there – the globalization of the 30 blue-chip German companies composing the index offers traders unprecedented growth opportunities.
Sticking to what you know may be a good thing during these troubled times, but exploring new prospects, such as DAX 30 or notable S&P 500 Index Funds may prove a revelation to the well-prepared trader.
3. You Ignore the Risk Management Plan
If you are not new to trading, you know one of the biggest mistake beginners do is ignoring the necessity of stop-loss or stop-limit orders. However, a risk management plan entails more than that. A trading day will register both wins and losses. If your emotions and temperament cannot handle the failures, you should reconsider trading in general.
When it comes to CFDs, your risk management plan should include the following aspects:
- Calculation of the risk vs. reward of any trade before you even enter a transaction. You need to check the risk vs. reward ratio (reward/profit divided by risk/loss). For instance, if you make $2 at every winning trade and you lose $1 at every losing decision, the ratio is 2:1 which, for some traders, is an excellent result.
- You need to calculate your profit factor ratio and integrate the fundamental analysis results with technical analysis results to set up the best trading plans and risk management ones.
- Implement trailing stop-loss techniques.
- Monitor all economic and political events that may have an impact on prices and movements. Many brokers and trading platforms come with integrated news-crunching software signaling the changes about to happen.
- Always introduce in the equation slippages, commissions, fees, and more – you may learn that your reward is not as significant as you might think.
Following our example above with trading CFDs on DAX 30, you need to keep in mind that a volatile environment such as the DAX usually reacts to triggers. Impetus moments can take the shape of announcements of global concern (such as Brexit, the trade war between the U.S. and China, elections in different countries, etc.) or smaller economic events prone to lead to cascading effects (German automotive giant Daimler invests in electric car batteries or expands its operations in China for instance).
The Biggest Mistake
It takes practice and experience, determination and discipline to execute a thorough and smart CFD trade plan. The ambitious ones will learn the nooks and crannies of specialized, strategy-based trading soon. Nevertheless, the biggest mistake even seasoned players make is letting their emotions get the best of them. Frustration and panic, overestimation and blind faith are some of the worst enemies of a trader.
No matter how good you are at fundamental/technical analysis or at “reading” the market, adding to a losing market based only on hope or mixing adrenaline with impatience are the primary factors for losing. The conclusion is that you will win and you will lose. Allowing the losses to guide you in your future trading strategies will prove the less lucrative path you can ever take.
Trading with currencies and CFDs is speculative in nature and could involve the risk of loss. Such trading is not suitable for all investors. Before using the services of Admiral Markets AS please acknowledge the risks associated with trading, terms and conditions of the services and consult and expert if necessary.