May 15, 2021
6 min read
Opinions expressed by Contractor the contributors are theirs.
How can a person still be profitable at CFD trade while another person cannot? We’re all human, so it’s about overcoming these very human mistakes.
I truly believe in learning as much as possible from the mistakes of others. – Warren Buffett
You don’t have to be the next Buffett or George Soros to win at CFD trading. Profitable trading strategies are not rocket science. Like many activities, the difference between making money with CFDs or not normally comes down to attitude and process.
This list is not exhaustive but if you can overcome these seven mistakes it puts you on a better footing than nine out of 10 new CFD traders.
1. Not having a plan
Trading can be really exciting, especially when you are just starting out. The ease with which your account balance can go up and down with just one click is fascinating. But this should be a phase you go through before you take trading more seriously. Some time and energy needs to be invested in trading education, which includes everything from technical analysis to order types to trading psychology. This training gives you the basis for forming a trading plan.
The business plan does not need to be complicated, but it should cover the following at a minimum:
- What markets you will trade
- What time of day to trade
- How long will you hold the trades
- How much risk per transaction
- A list of your best trading setups
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2. Don’t follow the plan
The old saying goes “plan the trade and trade the plan”. It’s not good to have a trading plan if you ignore it. Trading CFDs, Forex, Cryptocurrencies or any other market the same way consistently helps to show if you have a recipe for long term success. If you do something different on each trade, you will logically get different results each time and you will have no way of gauging whether the process you have will bring. long term Success.
The best way to make sure you follow the plan is to have it presented in front of you when you negotiate. Print out your plan and have it on your desk or if you are doing your part for the rainforest, check an Excel sheet with your basic business plan and rules before each transaction.
Overtrading means trading too much. The exact number of excess trades is up to your trading style and your plan. The important point to remember is this: You should only trade when the opportunity exists and when your financial management allows you to seize the opportunity.
For example: let’s say you trade a breakout strategy on stock indexes like the S&P 500. Your plan is to buy index CFDs when they cross a 20 day high. But the indices are limited and the opportunities are minimal, so you see a currency pair jumping 50 pips and you get into dynamic trading. These are upgrades, especially when it’s repeated several times.
Over-trading normally comes from boredom. To solve this problem, you need to make sure that you are not looking for your trills in trading.
4. Do not use stop loss
To maximize your advantage in trading, you should also minimize your disadvantage. It’s not that you should use a stop loss order, but you should know when to cut your losses. Not having a plan to exit the trade at a loss means you must think that winning the trade is guaranteed.
This mindset must change because winning a trade is never guaranteed. Anything can happen to derail your position. Having a stop loss is expecting the unexpected and protecting your account.
Over-indebtedness is not unique to CFDs or individual traders. Huge hedge funds like Long Term Capital Management, and more recently Archegos Capital, have exploded due to margin calls on excessively leveraged trades. However, the misuse of leveraged CFDs is common.
Too many traders think about the leverage ratio offered by the CFD broker, but it misses the point. What matters is making sure you are using the correct position size. If you set your trade size and stop loss to risk 2% or less of your account per trade, it doesn’t matter if your broker offers 30: 1 or 200: 1 as you won’t be over-leveraged.
Related: 2021: Make It Your (Mid) Year Of Financial Freedom
6. Revenge trade
Revenge trading occurs after a series of losses. Again, we are only human and we all experience the same types of human emotions. After a series of losing trades, we try to “get revenge” in the market for giving us the losing trades. This is done by placing a big trade to try to get back what has been stolen from us. Of course, the market is not a conscious being and does nothing “for us”. Because this type of trade is fundamentally a gamble and normally poorly thought out, it often fails and exacerbates the sequence of losses.
The two most effective ways to avoid revenge trading are to take a break trade after a certain number of losing trades before the temptation does – or to automatically reduce your bet size in your trades after a certain number of losses.
This is the opposite problem to revenge trading, as it happens after a winning streak. There is no such thing as the feeling of “I am a genius” after a series of winning trades. As human beings, our brain looks at the fact that we have won all of these trades and concludes that we cannot lose. This is when complacency leads us to make unplanned trades or increase our position size to something we are really not ready for. Complacency causes us to break our trade rules.
The same techniques for avoiding revenge trading can be applied to overcome complacency. Take a break from a winning streak in the markets. Play golf, do a triathlon workout or whatever. Consider what you may or may not have done differently in trades that won versus those that did not.