Did you know that up to 80% of CFD retail traders lose money in their first year? Did you also know that despite this statistic, the interest in Contracts for Differences has increased by 200%? The takeaway, based on these figures is that although a large majority of CFD traders lose money, there are still some registering profits.
Like other trade techniques, CFD trading requires strategy and patience. Don’t expect to make a million dollars on your first trade. It will take a bit of time to gain the expertise to navigate the unforgiving fx market.
Why People Lose Money Trading CFDs
80% is a huge figure, it has to be said, and the idea that every trade you make will have a 20% success rate is worrying for any level-headed investors. The fundamental question is why do people lose money in CFD trading, and what can you do to develop a winning strategy?
CFD trading consolidates several techniques to guarantee profitability. A combination of educated guessing, technical and fundamental analysis, and an evaluation of market dynamics. A lazy trader, however, will guess. You can’t gamble into winning positions-you need to do your due diligence. The reason many traders fail is that they take huge, reckless risks to make huge profits.
Remember that Contracts for Differences operate on huge leverages and on a volatile financial market that is mostly unpredictable. Gambling recklessly instead of determining logical trading positions is the reason why many traders lose constantly. Note that while trades can go either way, always ensure you have a strategy when you trade, don’t just stake on positions irrationally or out of greed.
Bad Luck-Pure and Simple
Unfortunately, regardless of how well you research particular positions and how much leg work you put in, sometimes it just isn’t your day. With all the top-class tools available to CFD traders, the markets are still unpredictable.
Bad luck cuts across every trader level. It doesn’t matter if you have been at it for 40 years or one month-there will always be an inexplicable loss. The best way to counter a bad run is to leverage low and take a break to reboot.
Don’t read too much into an unlucky trade or go into an emotional trading frenzy to recoup your losses. A bad day is just a bad day-sometimes there is no explanation for it.
Poor Trade Management
Emotional trading is the scourge of success in financial markets. The four deadly sins in this industry are greed, anxiety, fear, and desperation. These emotions cause even the most seasoned investors to make errors and lose promising positions. Greed will make you close out a profitable trade prematurely, while fear will make you maintain a losing trade, hoping for a turn of luck.
Organize your trades in such a way that you allow a winning position to run its course, and you cut your losses by closing out a losing one. The fundamental principle here is to let your profits run. Base trade management on your ability to strategize and stick to your positions. Never allow emotions to ruin your technique.
Trading Against the Grain
CFD trading is trend-trading for the most part. For this reason, it perfectly suits retail investors who day trade or make short-term money moves. Regardless of how optimistic you are about a trade -never go against the prevailing public opinion. If an asset is in the market is on a downward spiral, don’t buy it. This unmerited risk may seem like it will pay off at some point, but it may just as easily ruin your entire portfolio.
Always keep a close eye on how experienced traders invest. They rarely support losing positions. Never rely on your reasoning when it comes to market movements. Be patient-even if you lose a few points-never go against the grain.
Inadequate Market Research
Many traders lose because they jump in without a fundamental understanding of market dynamics. You can not develop an effective strategy if you don’t know what you are trading and how it affects your profit-and-loss margins. Lack of proper market research also leaves you vulnerable in understanding which order type suits your trading portfolio.
How effective you are in strategy development relies heavily on your understanding of elements that influence price movements. This knowledge is what will help you maximize leverage and prevent you from taking unnecessary risks.
Although Contracts for Differences have provided an avenue for novice traders to enter the fx market, it is still a technique that requires discipline and strategy. By avoiding these five basic mistakes, you stand a better chance of profiting from this financial tool.