CFD trading has been more well known recently.
So what are the top mistakes?
Let’s have a look right now.
1. Not trading with a system.
Believe it or not, many people trade without a system. You will know that many people make this mistake and some even make a profit doing it, but it is likely that after an initial period of luck, that their trading may go the other way!
Some CFD strategies are based on fundamental analysis and some experienced traders and investors offer an advisory or signal service.
Of course check their percentage returns over a good period of time. Other CFD trading strategies are based on mechanical triggers and can be partly programmed into Amibroker, TradeSim, WealthLab and other tools to help automate the process. In this case, backtesting is available to check out its historical performances. However future performance will differ.
So get a good system and make sure that it suits you.
2. Having money management that is overly invested.
Firstly, many people do not understand the importance of money management or even know what it is. It is something that will allow someone to profit from the winners in the CFD strategy and weather the losses, so that overall, you are in profit.
When some people place too much funds into each trade, what happens is that you can make a large loss, or a few in a row and wipe the account. But then the winning trade is a huge one compared to the losses, but it’s the one coming up next. Guess what, if they can’t get into it. We don’t want to be in that situation.
3. Too many positions in the market in dip buy systems during strong market corrections
In a mean reversion or ‘dip buy’ systems, you buy when a stock corrects or falls in value. The strategy is based on backtesting or forward testing to show that a stock corrects up in a short term time frame.
Sometimes during very strong market corrections, there are many triggers and many stocks that meet the criteria for entry. If you are in many of them and can ride any further dips and ride the rapid gains afterwards that’s great. But if you are in too many, and the portfolio value falls too much, you can get a margin call. If you can’t meet this, then you may be stopped out of positions involuntarily. This means that you have sold at a loss and thus missed out on the rise and thus profits.
4. Trading when there is no signals.
This can also be called overtrading. For some people who love to be very active in trading and really want to trade every day and put on many trades a day to keep active, this can be a trap. When there are no signals to enter, then some people mistakenly look for entry signals when there is none.
5. Trading with a system that has too large a drawdown.
If you backtest a system or if you are looking at a trading system with real historical performance data, look carefully at the drawdown.
Past drawdowns may be smaller than future drawdowns, though they could be smaller. Temptingly, some systems have a very high return per year, however, they may be the same systems that have the highest drawdowns. You have to be prepared to potentially have this drawdown or similar drawdown (to an extent) in order to trade the system. Of course if the drawdown is much worse than before, it’s time to evaluate and ideally plan ahead of time when to stop trading the system so that there is a so called out clause for trading that system.
6. Getting emotionally attached to certain stocks.
Sometimes people can be tempted to buy a stock because they think that they should be in it, even though the market price has way overtaken the entry price. Sometimes you may be lucky and get in and the stock continues up, but sometimes, you may have caught a temporary peak and the stock goes down.
So the lesson here is to think of not necessarily the name of the stock, especially if you are doing technical analysis.
7. When emulating a mentor’s system of advisory service, not following adequate position sizing and position number rules.
When following any system, there are a typical number of trades that the system gets into and this has to be taken into consideration. Why? Because there are fixed costs to trading.
With all trading and investments, seek your own independent financial advice before trading or investing.
8. Not double checking your orders.
With all new activities, trading can be new for some people, and they may be using new CFD trading platforms as well. In this case, it’s very important to be familiar with the platform so that you can tell which positions you’re in, how many and where the stop loss is.
In many CFD or contract for difference platforms, there is no visual line on the chart to show you the current stop loss for a stock, so you will have to look at the number and double check that you can got it in the right position. Also, check for slippage. If there is a large one, you can check with the broker in case this can be corrected.
So what to do? Check and double check your orders each time.
9. Not practicing a system that has discretion enough and checking that you are accurate.
Some systems are not mechanical. They cannot be programmed. Such indicators as resistance lines, support lines, double tops and double bottoms, breakouts from congestion depend on experience.
Non systematic systems take a lot of practice and should not be entered lightly.
So what to do? Don’t be shy and ask your mentor any questions!
10. When trading, not trading according to the rules.
It may be very tempting to trade upon pure discretion, such as when we see a stock which has a hot tip, or a chart pattern that looks good but is not triggered. Well if you are trading penny stocks, it may depend on news and tips, but if not, be aware that you are trading outside the system.
But just realise that when you are doing so, that you should record it as a separate system, call it your discretion system if you will. Also ensure that you have rules, even in this discretion, such as stop losses, trade sizes etc. Maybe part of your strategy is discretion for a proportion of trades, but trade it and record and measure it as it is.