CFDs allow traders to trade in the price movement of securities and derivatives. Derivatives are financial investments that are stemmed from an underlying asset. Essentially, CFDs are used by investors to make price bets as to whether the price of the underlying asset will go up or go down.
When trading CFDs you may bet on the price rising or falling. If you expect an upward movement in price you will buy the CFD (going long), but if you speculate a downward movement in price, you’d sell (going short) an opening position.
Trading with CFDs can give you a range of advantages, so it’s viewed as very flexible:
- Trading on margin (leveraged position)
- The ability to go long or short
- The ability to hedge
- Flexible contract sizes
That said,with trading CFDs the risks are high, even for experienced traders. For beginners that haven’t done their homework, learnt all there is to know and made a plan, this can be extremely costly.
Common Mistakes with trading CFDs
Not having an outline trading strategy
Outline a plan that you stick too. Keep it simple, for example, I’m going to trade X market (your preferred, stock, index, commodity), between these hours in the day,and set some rules, like, I’m going to swing trade after an earnings report on a company.
Overwhelming the opportunity becomes a bit like gambling. Easy to fall into this trap when you first open an account. That’s why the plan is so important, as it’s really easy to kill your account by over trading.
Not using stops
Stop loss takes you out of a position if it’s going against you – it’s easy to hold it too long, which can wipe you out. This function mitigates your risk so check your providers stop options.
Having your stops to tight
Where you’ve tried to mitigate risk using stops,having them too tight is also a risk – calculate this carefully and have it wide enough to not be taken out by normal market noise.
Trading too much size
Because of margin it’s very easy to think we can put more money on the table. Take a logical approach within your parameters when taking a leveraged position. Failure to do this can easily wipe out an account.
Unnecessarily interfering with your trade
You’ve done your research and you’ve stuck to your strategy;you’ve got your position. Now it’s time to be patient as sometimes boredom can make you unnecessarily meddle with a trade which doesn’t always go in your favour.