CFD Trading can be very risky. Unlike Forex trading, the risks in CFD trading are way higher. You have probably heard of a colleague or a friend who got into CFD trading and eventually lost so much money in the market, probably with the notion that they already have enough experience in other financial markets out there. But what are the common pitfalls these traders around you fall into and how can you prevent them? Here are a few things you need to look out for in order to at least minimize potential losses in your CFD trades
As a CFD trader, you find yourself being in a situation where you are offered a myriad of leverage but can not ride out the volatility. You find your position closed but do not have enough in your deposit to meet the margin call. Even when you find yourself making the right decision with the right outcome, you still lose given you were in a position that was forcibly closed at a loss. This is due to a result of mismanagement of your account funds. Some traders however, find so much excitement from the volatility and decide to increase the leverage drastically but do not have the right funding for it.
Sunk Cost fallacy
A sunk cost is any past cost that has already been paid and cannot be recovered. For instance, you have decided to start by putting a small amount of money until you have reached an increase in your investments. This gives you a massive confidence boost and you start maxing out your multipliers, by then you start making additional investments in CFD trading. Eventually you start losing as the combination of high multipliers and volatile stocks starts affecting your investment. You start thinking “Hey, I have already invested X number amount of money in this, I might as well continue and try to recover from my losses” and you try by investing more even if the market was low which eventually lead to more losses.
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Plans are made for good reason. Making sure you have money management rules, ensuring you can continue trading for a very long time is very essential. If you start ignoring calculations and projections, you will not be able to tell when you are to close a prospective position. In fact, you need to find out how much in your investment is at risk. Some traders fail to maximize profits and minimizing losses and ignore their risk management rules, letting emotions be the basis of trades, you find yourself having irrational decisions simply because you can not accept the amount of losses you made and continue to trade until you find yourself bone dry. It is about how much you have gained not how much you have lost. Sticking to a plan can definitely save you from losing tons of money.
You start thinking of preparing your plans in CFD trading and base your trades on analysis and data and during the earlier parts, have made successful outcomes. This, however, eventually brings you to an assumption where you think you know more about the market compared to other traders. You find yourself saying things like “The market will turn, sooner or later and everyone else will start losing except me” given that you have this strong belief that you know more than everyone else. Pride becomes the downfall of any CFD trader. Your success will always be based on a mixture of Logic & Discipline, if not, then it probably was luck all along.