The financial market is a world where there are innumerable opportunities and challenges, but it can be easy to make mistakes when you haven’t spent enough time in the market to see your losses pile up. These mistakes can range from using an incorrect outlook to using risky strategies before fully understanding how they work.
When learning about the different ways that people have lost money on CFDs, I researched what new traders do wrong so that hopefully, you won’t fall victim to these same pitfalls.
Let’s start with not having a plan or strategy at all. It alone will put you behind the 8-ball of being prepared for trading – you need some framework or process that tells you what to do when something goes wrong. If you react to what is going on, your emotions will likely get in the way of making decisions in your best interests. Here are some mistakes you should try and avoid:
Not having a stop loss
If you start taking positions without setting a stop loss, then your account will most likely quickly lose value as you continue to trade. You may use trailing stops or take partial profits, but if no position ever closes at zero, then you cannot lose more than what you have invested.
Suppose your account falls below zero because the market goes against your positions. In that case, this is an emergency, and you should close all of your positions and fix the issue immediately.
Many new traders are too eager to get involved in trades, which leads them to take more risks than they can afford. If this is you, you should work on being patient with your trades. As a rule of thumb, never have more than one trade open at a time. You should also have enough capital that the negative balance would not cause any significant damage to your account if your worst-case scenario took place.
Not understanding ‘delta’ On CFD brokerages
It is possible for users to buy stocks without owning them. It means you’re entering into a contract for differences, hence ‘CFDs’. When buying foreign exchange, these contracts are known as ‘forwards’. Since you do not own the asset, knowing what would happen if the market moves against your position is essential.
This relationship between stock price and CFD price is called ‘delta’. A delta of 0.8 means that if the underlying stock increases by $1, then your CFD will increase in value by $0.80 (or vice versa).
You should always set a stop loss or take profits when the delta reaches around +/-1. If you choose to use this strategy, it can be challenging to determine how much money you stand to gain/lose after each trade.
Not understanding margin calls
When trading on margin (using margin loans from CFD brokerages), you must always have something called a maintenance margin. It is the minimum amount of money that your account must be worth to keep trading with your current positions.
If you ever go below this percentage (usually 20-30% of the total value of your assets), then all of your open positions will automatically close and trigger a margin call. You should only trade on margin if you are willing to risk losing all of your previous investment.
Incorrect time management
Even though most people think they do not have enough time, successful traders manage their time efficiently. Being busy isn’t an excuse; many apps can assist with planning and keeping track of your progress during the day. You should also analyse your mental state; are you too tired to trade, or is it an optimal time for trading?
You may have noticed that all of these errors revolve around being reckless. To be a successful trader, you need to have discipline and patience. Many new traders do not understand what is happening when they suddenly lose money, but if you follow these five simple rules, you will quickly learn from your mistakes and become a better trader.