CFD Trading Don’ts

Don’t Overleverage

Don’t fall into the all too common trap of overleveraging on a transaction. Overleveraging occurs where you ambitiously take on too much leverage in a position than you can afford to personally meet, and as a rule of thumb, you shouldn’t be leveraging up beyond what you can personally afford to fund. Leverage is a tool for trading, not for gambling, so make sure that you apply it in stages to help amplify your account where possible, rather than using it to drive the whole ethos of your trading. The more significantly leveraged you are, the greater the chances of trading disaster – when in doubt, keep your positions small. Slow and steady always wins the race.

Don’t Lose More Than You Want To Gain

As you embark on each trade, you will have an expectation of the sort of profit portions you’re looking to take from the transaction. Depending on the market and the amount of capital and leverage you have exposed to the position, this may be a substantial or minimal return. But as a crucial rule of thumb, having established this expectation, don’t accept a loss that is greater than what you would have taken as a profit. Assuming that probability is on your side is dangerous, and hanging on for a recovery is amongst the worst trading mistakes you can make. Don’t ever let a position get to the stage where you’re having to swallow humble pie with a loss larger than the profit you would’ve been satisfied with from the very same trade – it does nothing for morale, or your wallet.

Don’t Overtrade

Similar to overleveraging, overtrading is when you engage too much of your capital at any one time. So, rather than being too heavily exposed to one position, your account is too fat, with too many different positions (and potential liabilities) operating at one time. Finding loads of different trading opportunities is great, and shows that you must be doing research with some volume of output. However, in the event that you have multiple positions, it’s often better not to spread yourself too thinly, for fear of burdening yourself with any number of active positions that could quickly head pear shaped. Especially when leverage is thrown into the mix, it simply isn’t worth your while to take on too sizeable a portfolio.

Don’t Get Emotionally Attached

Traders all too often fall into the trap of thinking that they’ve been unlucky, or that markets will correct in time to balance out in their favour. Karma doesn’t exist when it comes to CFD trading, but leverage most certainly does, and it can slap you ferociously if you end up becoming emotionally connected to your positions. Realise that trades are transient, and one day Company X might be up while the next Company X might be down – this doesn’t matter. What matters is that you are dynamic enough to make money on both the up and the downside, and having sufficient discipline to understand when to draw a line under a loss and move on.

Don’t Chase Your Losses

Finally, loss chasing is the single biggest error you can make as a trader, yet it’s one that feels all too natural, if not counterintuitive. The tendency is, having invested time and effort in researching positions, to assume that the markets have yet to come round to your way of thinking. As a result traders keep funding obvious losses, and keep adjusting their margin requirement to continue to fund the position as it continues to lose money – in the hope that it will eventually return. Chasing losses is nonsensical – you’re simply throwing good money after bad. Cutting out as quickly as possible and allowing losses to lie where they fall is central to good portfolio management.

Don’t Set Stops Too Tightly

When setting stop losses, there is a tendency to get a little overcautious. Obviously the amplification of leverage makes each incremental price drop a significant concern, but it takes a cool, objective head to determine how the market might behave in the near future to set stops accurately. The balancing consideration is that if stops are set too tightly underneath the market price, trades will be closed automatically and unnecessarily, at great expense and inefficiency to your trading account. While stops are there to prevent loss, its important to always allow for some breathing space in your position, as opposed to setting a stop immediately underneath current market prices. The extent of the breathing space you’ll require is dependent on the volatility of the market, and any other factors that might prompt a price jump in either direction, but nevertheless the principle of balancing these needs is an important one to bear in mind.

Don’t Gamble With Your Capital

CFDs are often described by the ill informed as high-risk, market ‘gambling’ type investments. Gamblers lose eventually because they take unmerited risks – they gamble. Investors invest. Traders trade. There is a stark difference that must be upheld – in gambling, forecasting outcomes with any certainty is not possible. There are two many variables, and while skill may play a part to a certain extent, it is proportionately offset by the role of chance. In CFD trading, you can make gambling-like earnings, but you have to work for them. That means researching trades before you jump in, and making sure you reason out why you’re making a particular trading move. Make sure you don’t ever gamble with your capital, supporting a position because you have a good feeling about it or because you want to support it. CFD trading isn’t about chance – it’s about knowing your stuff and making shrewd decisions based on measurable market data.

Don’t Feel The Markets Owe You

A common tendency amongst aggrieved traders is to feel that they are due a return, or their owed a lucky break from the markets. This mindset, which assumes that market outcomes are random, or chance driven, leads to silly trading decisions, and clouds the judgement of the trader in making calls on the directional market movements. In reality, while there may be some elements of chance to the markets along the way, the overwhelming force of markets responds in predictable ways to a number of prompts – the magic of calling it lies in weighting these often contradictory prompts to decide which way the market is likely to move. This simply can’t be achieved by feelings of being denied opportunities on some idea of fate or luck – the markets don’t owe you a penny, and every winning trade you make will be hard fought and hard earned.