Estimated reading time: 3 mins
You learn something new every day. Generally, a trader’s career is long and experienced traders continue to learn well into their twilight. In the beginning, you have the pressure of learning how markets function, how to handle stress, and which strategies work best for you. Before you start trading CFDs in the capital markets, perform some due diligence and find out some of the mistakes novice traders make and how you can avoid these pitfalls.
Got a Hunch, Bet a Bunch
Risking more than you can afford to lose is a classic novice mistake. Initially, many novice CFD traders will confuse the capital markets with a casino. They will hear about a stock like Game Stop that is “Going to the moon” and risk their savings to find out that they were late to the party. Before you enter a trade, you want to have a risk management plan which includes when you enter the trade and when you will exit. “To the Moon” is not a specific take profit level. Generally, this concept overwhelms the novice traders, as they are just thinking about getting rich and not considering what will happen if a stock or currency pair tumbles. Forex trading requires some insights and avoiding a risk management plan will usually lead to failure. The moral of the story is: don’t risk more than you can afford to lose and do your homework before entering any trades.
Trying to Win All Your Losses Back in One Trade
To be successful in CFD investing, you are playing the long game. Winning and getting out of the game is not a realistic endeavor. If you go into the process with this mindset, you are trying to win quickly and get out; if you go underwater, you might try to win it all back in one bet. Trading in a binary nature where you try to win everything all at once is a recipe for disaster. Instead, cultivate knowledge of how the CFD trading process works and understand it’s not a quick in/quick out thing.
Anticipating an Event
Another mistake novice traders will make is either anticipating and inventing a particular event or not realizing that the market has already priced in certain news. Predicting an economic event and making a trade on a certain outcome is risky business—beyond the risk which is already inherent to CFD trading. Some economists spend all of their time generating economic events and monetary policy forecasts. Placing a trade ahead of these events can cause a binary option, making CFD trading even more difficult.
Another issue is that novice traders often see a report release and place a trade immediately after that event, not realizing that the market has yet to digest the new information. A more prudent approach would be to give the market time to absorb further details before you place a trade.
Not Using Risk Management
It’s important to trade using a stop loss. Before each trade you place, you should know where you will enter your trade and where you will exit your trade. This exercise includes determining where you will take profit and where you will stop loss. The stop loss is where you decide the maximum risk you will place on a trade. You should avoid moving your stop loss to accept more significant losses. You might consider moving your stop loss up to less of a loss if the exchange rate initially moves the trade in your favor.
The Bottom LineWhen you first start trading CFDs, there are several pitfalls you can encounter. You want to make sure you don’t risk more than you can afford to lose. You want to trade with a stop loss and have a risk management plan in place before you start trading. Don’t try to make back all of your losses on one trade. Additionally, you don’t want to anticipate events where you are not an expert. Wait for the market to settle down after a critical report, and then place a trade once the market has absorbed the new information.