Published On: Tue, Nov 27th, 2012

Top CFD Trading Mistakes

If one should study the habits of losing CFD traders, a pattern would no doubt emerge. There are a couple of vital mistakes these traders make over and over that prevent them from joining the small circle of success.

Random decision making

Probably the single biggest mistake a trader could make is to base his or her trading decisions on a whim or on the latest news or on recommendations by ‘experts’ on online trading forums.

This is not the way professional traders trade. They have a plan, with set rules for entry points and exit points. They will not enter the market before certain criteria have been met and they will not exit a trade unless certain other criteria have been met. Plan the trade and trade the plan.

Money management

This is most likely the second biggest mistake losing traders make. While professionals will never risk more than a certain percentage of their available funds on a single trade, novices often risk 50% or 100% of their funds on a ‘sure win’. These ‘sure wins’ more often than not turn out to be losers, causing catastrophic losses for the trader. No matter how sure the trader is that a trade will be successful, he or she should never risk more than a predetermined percentage of funds on any single trade.  Implementing a strategy such as the 2% rule is sensible.

Adding to losers

There is an old saying that goes ‘buy low and sell high’. Some traders have taken this view to the extreme: if they are in a long position and the price of a security starts dropping, they have developed a ‘trading system’ which says they should add to the position – and if it drops more, they will add more, all in the hope that it would eventually turn around and make them a bucketful of money.

This approach might have worked during the 20-year bull runs of the 20th century. In today’s markets it is a recipe for disaster. Sooner or later it will result in a disastrous loss.

The Incorrect Use of Stop Losses

Trading without a stop loss will eventually result in a catastrophic loss. There is absolutely no doubt about this. On the other hand, trading with a stop loss will, for most traders, eventually result in gradually eating away their trading funds while not allowing them to make any substantial profits.

This conundrum can only be solved by studying the volatility levels of the market in which the trader is involved. It’s vital that the stop loss takes into account ‘normal’ price movements.

A good option here is to use the Average True Range (ATR) to determine the stop loss level. Setting it at least 1 ATR away from the entry price would ensure that the trader isn’t ‘kicked out’ of a trade because of market noise.

Setting it 2 ATRs away from the entry price would provide the market even more space to ‘breathe’ – but some traders might find this too wide for their level of risk tolerance.

Setting it at half an ATR, on the other hand would simply ensure a whole series of small losses and virtually no hope of ever making a decent profit.




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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.