The popularity of CFD markets is increasing at a rapid rate. Every passing day, more people are getting to know about this relatively new way of trading. CFDs are derivatives– they don’t represent ownership of the asset they track, rather only the rights to potential gains or losses in price movements. It makes them infinitely more flexible than other types of instruments available for trading.
Also, since you can trade CFDs on popular indices and single stocks, commodities, and currencies, there are many ways to invest their money in what has now become an incredibly lucrative market. This flexibility draws thousands of investors into using CFD trading every day; however, with such ease comes another major problem.
What are the risks involved in CFD trading?
Not only do CFDs give you the chance to make money in both rising and falling markets, but they also allow for much higher levels of exposure when compared to traditional types of instruments. Traders take on much higher risks than before- and with such risk comes a much greater potential for loss.
The only way to combat such losses is by using very effective risk management strategies; however, this will require stop-loss orders. Stop-losses are automatic orders placed to sell or buy an instrument once its price reaches a preconfigured level and triggering these usually eliminates any chances for further losses.
What is overtrading?
Instead of using stop-loss orders and other similar tools, most CFD traders choose to overtrade. In simple market terms, this means that a trader chooses to trade more money than is required or recommended. Overtrading is a risky business- and the only way of checking it is by using risk management tools such as stop-losses.
It also makes testing your trading strategies easier- since the only limit on the number of trades you can take part in for any given day will be your hardware’s capacity to process those orders. Therefore, it is advised that one not spend too much time researching various potential trading opportunities, as it could lead them down the path of overtrading.
Instead, spend just enough time finding ideal trading opportunities and place very few bets at a go to avoid the pitfalls of overtrading. It may seem like more effort than one would require- however, this same focus on limiting your exposure will help you gain more experience and become a better trader in the long run.
The risks of overtrading
You often hear about people losing their entire savings due to overtrading. Many traders become addicted to the thrill of trading or watching their investments go up and down in value. It includes those that start with penny stocks. As a result, they end up spending hours looking at prices.
They begin to take more risks as they believe they are seeing signs of an incoming trend. It is what leads them towards overtrading – taking too many trades without proper research, without understanding market fundamentals, simply because they are hooked on the idea of making money quickly.
How to prevent overtrading in CFD Markets
One way to prevent overtrading is by setting a strict schedule for when you’ll place trades. You can also set up filters on your computer, tablet or phone that will flag you through certain events – like the price of each asset reaching a specific value before allowing you to choose a trade.
Many trading applications allow you to set maximum losses per position, among other things. If your chosen maximum risk per trade is $100, but your investment jumps $1000 right after you’ve placed it, then the application will automatically close out your open position with minimal loss.
Overtrading is an issue that affects both seasoned and new traders. It refers to the excessive trade in tradable assets, such as Forex pairs, equities, commodities, and so on.
It emerges when a trader is overcome by greed or anger over missed profits. As a result, excessive trading leads to speculation and, as a consequence, considerable losses.
New traders wanting to invest in CFD markets can try the demo account offered by Saxo Bank before investing real money.