5 common mistakes made by new CFD traders

A CFD, or contract for difference, is a derivative traded on margin. It means someone can buy or sell an asset without owning the underlying asset – hence the word ‘derivative’.

With a CFD, you speculate on what will happen to the price of the relevant asset and make money if your prediction proves correct and lose it if it doesn’t.

Let’s look at five common mistakes made by new CFD traders.

Not understanding that it’s just as risky as standard trading

Suppose you’re used to more traditional forms of trading such as buying and selling shares, for instance. In that case, you may think it’s less risky because you’re not actually buying anything but only speculating on its value rising or falling. However, this is a common misconception that can lead to significant losses. You should never enter into CFD trading thinking it’s somehow less risky compared with traditional forms of investing because the truth is you could still lose everything you put in if your prediction turned out to be wrong.

Not understanding the mechanics involved

You’ve probably seen news stories about CFDs being mis-sold or even traded on margin without being aware of what they are, so before committing any money, consider doing some research to learn how they work. If you feel confident enough, read through the terms and conditions carefully to fully understand your risks when trading these products. It might be worth reading through an independent review site, such as Trustpilot, to get an unbiased opinion of others’ experiences with the provider.

Not setting stop losses

Much like standard trading, you must select a stop loss when trading CFDs because if your prediction turns out to be wrong and the asset price moves against you, not having a stop loss means you could lose all your money. A common mistake is people don’t realise they need to do this until after they’ve made their initial investment, and then it’s too late because they can’t get their money back to close the trade without making a loss, which defeats the object of having a stop loss in place in the first place.

Setting unrealistic targets

When starting, it’s easy to want to make quick gains, but often new traders end up taking needless risks in an attempt to make money fast. It would help if you always had realistic targets in mind based on your experience and level of knowledge which you can then build upon as time goes by. Set yourself small goals at first until you’re confident with your strategy before raising the bar a little higher; remember that if something seems too good to be true, it usually is, so don’t risk everything on one trade.

Not using stop limits

Stop limits are preferable to simple stops for numerous reasons because they are more versatile in managing your trades. For example, say you buy a CFD, but the price doesn’t move in the direction you predicted. Hence, it’s time to close your position and a loss: without a stop limit, you can’t set a limit to protect yourself from incurring a more significant loss by waiting for the price to rise again before selling. If the price reaches your desired level with a stop limit, you can enter the order, and your position will automatically close at that specific price.

In conclusion

Many CFD traders make mistakes, which is why it’s essential to understand how they work and what the mechanics of trading involve to minimise risks involved when buying or selling these products. If you want an unbiased opinion of others’ experiences with providers, reading reviews such as Saxo CFD broker may be helpful because users can leave honest feedback about their experiences.