When you trade CFDs, you are essentially betting on the price movement of an underlying asset. If the price of the underlying asset moves in the direction you have predicted, you will make a profit. However, if the price moves against your prediction, you will incur a loss.
CFD trading is risky, and there is always the potential to lose money. However, inevitable mistakes can increase your risk of incurring a loss, and you should avoid these at all costs. So what are these six mistakes?
Not using a stop-loss order
A stop-loss order is an order you place with your broker to sell a security when it reaches a specific price. This price is typically below the current market price for a short position or above the current market price for a long position.
Stop-loss orders are essential because they help limit losses if the market moves against you. Without a stop-loss order, you could lose much money if the market quickly moves against your position.
Not using limit orders
A limit order is an order you place with your broker to buy or sell a security at a specific price. Unlike a market order, which will execute at the current market price, a limit order will only execute at the price you specify.
Limit orders are essential because they help you control your entry and exit points. By using limit orders, you can ensure that you’re getting into and out of trades at comfortable prices.
Trading too much
Trading too much is one of the most common mistakes that traders make. They see security moving in the direction they want and get impatient. They enter the trade and get out as soon as they’ve made a few ticks. It is a mistake because it leads to two things: first, you’re not giving your trade enough time to work; and second, you’re racking commissions and fees that eat into your profits.
Not using a risk/reward ratio
A risk/reward ratio is a simple way to manage your risk. It’s the relationship between the amount of money you’re willing to lose on a trade and the amount you aim to make.
For example, if you’re willing to lose $100 on a trade and aim to make $200, your risk/reward ratio is 1:2. It means that for every dollar you’re risking, you’re looking to make two dollars.
A risk/reward ratio is important because it helps you manage your risk. Knowing how much money you’re willing to lose before entering a trade can help limit your losses if the trade doesn’t go your way.
Not using a trading plan
A trading plan is a layer of rules you follow when entering and exiting trades. Your trading plan should consider your entry and exit points, risk/reward ratio, and overall strategy.
Creating and following a trading plan is crucial because it helps you discipline yourself. It’s easy to get caught up in the heat of the moment and make impulsive decisions. But if you have a trading plan, you can force yourself to slow down, think through your trade, and ensure that you’re comfortable with it before entering it.
Not manage your risk
Risk management is the process of managing your risk exposure. It includes setting stop-loss orders and using a risk/reward ratio.
Risk management is vital because it helps you protect your capital. By managing your risk, you can help ensure you don’t lose more money than you’re comfortable with.
By avoiding these six simple mistakes, you can help ensure that you keep more of your money in your pocket. So take the time to educate yourself about the markets, and make sure you’re using stop-loss and limit orders.