CFD trading, like any other form of online trading, involves risk. While a percentage of traders may gain profits and celebrate the rewards of CFD trading, a considerable percentage incurs losses.
As it has been proven, historically, most people who start online trading fail. The European Securities Markets Authority (ESMA) reported that between 74% and 89% of all new CFD traders lose money. While this is a large percentage, it is worthwhile exploring the ways CFD traders lose money and whether it is possible to take steps to improve your chances when trading.
1. The promise of easy and fast gains
One of the misconceptions and illusions around trading is the belief that you can make money quickly and become rich quickly. This is a very naïve view of online trading, as the exact opposite is true. Experience, knowledge, patience, learning, and practice are important, no matter what instrument you will trade or which market you are interested in. Many professional traders tend to say that beginner traders should spend months learning and preparing so they can develop a good trading strategy.
Unfortunately, many beginners tend to be impatient and either do not have the will or the time to invest in trading or go all in without the right knowledge and expertise, risking all their funds. Impatience doesn’t only lead to the risk of losing your funds, but also disappointment and giving up trading altogether. Instead, if you are starting out, you should register for a demo account and practice on it till you feel confident and ready to start trading on a live trading account with real funds.
By practicing with a demo account, you will begin to gain a deeper understanding of the different concepts involved in CFD trading, like position size, leverage, risk management, and money management.
By taking time to learn more about how CFD trading works and crafting an effective and reliable trading strategy, you will be able to trade more consistently and avoid emotional reactions or beginner mistakes. With so many people interested in online trading, the resources and educational videos, eBooks, and webinars are many, and you only need to dedicate enough time to go through all of them.
IronFX has a tailored library of educational resources, including courses, podcasts, videos, and so much more. Our expert team of traders and researchers has curated a wide range of articles, videos, and webinars where they provide their tips for trading the markets effectively. Give them a try!
2. CFD Traders Reducing risk exposure
One of the main reasons many traders fail is the lack of risk management strategies. By failing to adopt certain risk management techniques and simply opening trades without protecting their trades with take-profit and stop-loss orders, they risk losing all their trading funds. Risk management is very important for any CFD trader, and you should spend some time understanding it and following some basic rules.
For example, a stop-loss will terminate a loss-making trade at a level you have determined at the start. A take-profit will end a trade which has reached your profit target, just in case the market moves against you later and you lose your profits.
Trailing stops moving if the price moves favorably, and once it has locked in a profit or moved to reduce a loss, it does not move back in the other direction. A trailing stop loss is considered better than the standard stop loss because it is not fixed and keeps the profits in case of a sharp reversal.
3. Doing your research ahead of trading
Many beginner CFD traders may execute a trade without doing enough research and analysis of their market. They may open trades after looking at a chart and speculating whether the instrument’s price will go up or down. Instead, conducting both fundamental and technical analysis will give you a better understanding of the market before you execute a trade. With fundamental analysis, you will be able to determine the possible factors that may cause the price of your CFD instrument to fall or rise. So, by looking at the news of the day and the economic calendar, you will be able to find out which key economic data will influence the price of your trading instrument, and you will be better equipped to make an informed decision.
With technical analysis, you will be able to analyze chart patterns and use indicators like moving averages to forecast whether an asset will move up or down.
4. Choosing the best time to execute a trade
Timing is everything, and this also applies to trading. Many people don’t know when it’s the right moment to execute a trade or close a trade.
A common mistake is when traders hold on to losses and let go of wins due to fear of loss. When they start winning, they get worried about losing their gains and close trades early before the price begins to drop again. What they should be doing is holding on to it and closing out just as the price begins to change.
On the other hand, when traders start to lose, they hold on to the losing position much longer than they should just in case the prices change again, but they end up incurring bigger losses than reducing their losses.
To time the market correctly, you need to conduct a detailed analysis so you can follow an existing trend and exit when that trend begins to fade. You can identify trends with the help of trend indicators like the moving average, Ichimoku Kinko Hyo, and Bollinger Bands.
5. CFD Traders tip: Less is more
Many traders make the mistake of opening more trades with the hope of making more profits. However, by opening more trades, they get more exposure to risk, while most times these traders are opened without much research. The ideal path is to open and execute just a few trades per day, which you have researched beforehand and are confident about.
While CFD trading can be profitable for those who are patient, for most traders who are impatient, unprepared, and driven by emotion, CFD trading can lead to losses. By taking a few steps, such as developing your trading strategy and keeping a trading journal, doing your research, and relying on yourself rather than following the herd, you will be better equipped and minimize losses.
CFD Traders in IronFX
When it comes to trading, selecting the best CFD broker is key to your success. IronFX provides extensive educational resources, dedicated customer support, and your own account manager to help you every step of the way. If you are a beginner, ensure you have done your research and developed a solid trading plan so your decisions are based on facts and not on your hunch.
More than 1.5 million traders have chosen IronFX because they know they will receive unparalleled attention and superb trading conditions. If you want to start trading with a leading broker, open a demo account and explore all the tools and resources IronFX provides to its traders.
Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.
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