Why CFD Traders Lose
CFD traders come in a range of different shapes and sizes, and their motivations and concerns are often driven by their individual circumstances. As a result, you might think categorising the common reasons for losing money with CFDs would be a tricky and individualised process. Unfortunately, CFD traders of all stages and experience levels lose out for a number of key reasons that present themselves time and time again, and in doing so they reinforce the dangers present with CFD trading. By taking care to avoid the reasons why CFD traders tend to lose, and the most common pitfalls in CFD trading, it can be possible to stack the odds more reasonably in your favour.
One of the key, and by far one of the most frequent ways in which CFD traders find themselves in difficulty is through over leveraging their exposure to the markets. Over leverage is a difficult thing to judge, and is a process that involves a close balancing act between risk and reward. Unfortunately, the greed motivation is often destructive in dealing with CFDs, and so for this reason caution is an absolutely fundamental discipline to exercise in CFD trading.
Whenever dealing in margined investment products, keeping an eye on your exposure and ensuring your risk is spread and contained is central to long-term success. Without a calm and composed approach to risk, utter devastation can lie round every corner, and many a successful CFD trader has had the rug pulled from underneath them as a result of an over-zealous approach to their margined trading.
Make sure that you can always afford your margin liability comfortably, bearing in mind that the value of other open positions will reflect on your total available margin. The pitfalls of getting caught up in a downward spiral of leveraged trading make it absolutely essential that you take the bull by the horns and ensure you have a firm grasp of your trading financials at all times.
Misreading the Market
Another common difficulty with CFDs comes from fundamentally misreading the markets, often spurred on by a lack of research. Getting lazy is the scourge of the successful investor, and the complacency that can arise from a few successful trades can be catastrophic in terms of identifying future winning positions. Compounding these difficulties is the natural tendency to keep spending in the hope that losses will be recovered - a natural instinct and inherent logical fallacy that you need to control in order to minimise your overall exposure to loss.
When you deal in margined products, the pitfalls of misreading a market can be painful, and the tendency to keep on top of your positions by continuing to finance your exposure is not often a good strategy. If you find yourself backing a losing horse, don't throw good money after bad - these things happen when you're trading CFDs, and if you don't take your loss to heart, you'll be far better off acknowledging you've misread the market dynamic and closing out your position as quickly as you possibly can.
Lack of Stops
One of the most important elements of any CFD trade, and one that should factor in to the decision making process in every single CFD position you take is the position of your stops. Stops are automatic orders to close out a position if the market falls below/rises above a certain level, designed primarily to contain liability. Unfortunately, traders often seem to trend towards neglecting stops over time, which is a real shame given the quiet but essential role they play.
Always position stops at sensible levels, regardless of how confident you feel about a particular trade. Judging where to set the stops is something that comes more naturally with experience, but it's a skill worth learning if you're keen to have any longevity as a CFD trader. Set stops at every available opportunity, to dramatically reduce the impact of singular wayward trades.
You can spend weeks thoroughly researching a position to its logical outcome and still come up with a bad call. That's the nature of the markets, and it's the nature of trading as a whole. Because the markets can and do behave in extremely unpredictable ways, there are trades that just won't work out for you - it happens to even the most experienced traders, and is a multiple daily occurrence in the investment houses and large funds that engage with CFDs. So long as you try to learn any lessons from unsuccessful trades, and ensure every position is supported by logic and sound research, there's nothing more you can do to ensure you don't fall victim of the occasional frown of fortune.
If you're set on becoming a CFD trader, as with all aspects of financial dealing, it's essential that you understand that losses are part of the territory. The trick is to make sure that by engaging with the most common pitfalls of CFD traders that have gone before you, you learn from their mistakes to preserve your own capital when you get started on the markets for real.