will rise or fall in value. Unlike with other forms of trading, you don’t buy or sell a specific stock or currency, instead you wager on how it will perform in the future. However, while this may seem similar to gambling, the losses and the gains are magnified.
Many new traders want to dabble in CFD (Contract for Difference) trading because they don’t want to actually own the underlying instrument but would rather make an investment based on how a particular market is moving. They will, quite literally, wager how one stock, for example, is moving against another. They make their trade based on how they think they will move in relative position to each other within a given timeframe. This may sound easy at the heart of it, but there are some common mistakes that many traders make, new and old. These are the CFD trading mistakes you won’t want to make.
By Boris Dzhingarov
Not Understanding the Market of the Underlying Instrument
Even traders who have long ago gotten their feet wet in derivatives don’t understand all markets. No one can be expected to unless they are in the business as a broker. Even there, brokers make mistakes – sometimes due to errors in calculations or not accurately assessing the history of movement within a particular market. Inaccuracy is not about the experience, it is sometimes about the lack of concentration and that is why it is more preferable to have an analytical tool, rather than make it all manually, taking a risk to make a mistake and end up with loss. Generally, this happens when analysing performance of instruments over long periods.
Not Establishing Clear Trading Criteria and/or Sticking to It
Whilst most new CFD traders study the FTSE UK 100 to watch market movement and have some idea where they would like to enter and/or exit a trade, most don’t have enough knowledge yet to set a clear list of criteria which must be met. When they begin understanding how the market moves and learning a bit about how far from the position they want the underlying asset to be, they sometimes get a bit impatient and move too quickly. This often results in a minimal movement triggering a stop and that can cost you dearly. Set a clear set of criteria and then stick to it.
Don’t let excitement or impatience get the best of you when you see the market moving in the direction you want to ‘bet’ on. Remember, rarely is the market in stasis so you will get another chance. Keep watching live market prices and stick to your criteria. Make a checklist and if all your conditions are met, it’s time to make the move. Impatience will get you nowhere, just like when you choose low quality branding as opposed to quality branding services.
Making the Mistake of Doubling Up
There are a couple of main ways in which a trader can double up, which is a risky strategy at best. Usually this happens when a trader sees a price going down that they have traded at a higher price so they sell or buy more of that instrument at the new price that is lower. Averaging out any profits against the trade that was already made will result in a much lower figure. Another way in which doubling up can happen, albeit inadvertently, is when impatience sets in and the trader jumps on a stop that is way too close to the current figure. As mentioned above, even a small amount of movement with the stop being too close to the current value can trigger the stop, netting a tiny profit if not a loss altogether.
Failing to Recognise that Zero Does Not Equal Nothing
Ah, when do you ever add a zero to add profit? Actually, you do in CFD trading! One of the big mistakes that many new (and old unfortunately) traders make is to forget to add that extra zero that will significantly reduce their margin of profit or to inadvertently add an extra zero or two which will then result in a huge loss. The advice given here is to check your open positions once you have placed the order to verify that you have placed it correctly.
The Biggest Mistake Is to Trade Unprepared
When all is said and done, you need to remember that you are quite literally trying to forecast the difference between market movements between underlying instruments. It’s much like the Forex market where you ‘bet’ that one currency is going up while the other one is losing value. Maybe a bit like spread betting as well, if that helps you understand the theory. The biggest mistake you can make is not to have the proper analytical tools and then acting prematurely.
Learn what you need to know, itemize criteria that must be met and then start small to keep initial losses small. CFDs are an exciting way to trade on the open market, but study the mistakes to avoid and you will be trading like a pro in no time flat.