The leverage offered by CFDs makes them a desirable option for both novice and experienced traders. By increasing accessibility, as well as potential profit, it’s easy to understand why many people can sign up for a CFD trading account with the £ symbol in their eyes.

But high-leverage trades carry risk, and if you aren’t careful you may wind up seeing the downside of CFD trading. To avoid sizeable losses and missed opportunities, it’s important to approach CFD trading with caution in mind.

Trading without a sound strategy is a sure alleyway to failure, so if you’re serious about trading CFDs, it’s important that you treat it as a business, rather than some get-rich-quick scheme.

Today we look at some common pitfalls encountered by CFD traders, and how to avoid them.

1. Don’t give up

Abandoning the strategy you go in with is not always a bad thing, but you shouldn’t jump ship just because of a few early losses. No one wins or loses every trade, so if you’ve crafted an approach you believe is well-founded, don’t give up just because it turned out not to be perfect.

2. But don’t get carried away

Conversely, don’t get carried away after a few early wins. A lot of people set goals, but when they reach those goals, just roll the profit over. It’s OK to reinvest your profits of course, but make sure you aren’t sacrificing tangible gains to chase dreams of a private jet.

3. Do your research

Increasing your stakes too quickly, without any knowledge of a particular asset price and its history, is like climbing Mount Everest without any training. Get to know your markets inside out, and always keep learning about the assets you’re interested in.

4. Take a breath

Trading when you’re going through an emotional time is usually something you want to avoid. Even if your plan is to approach the market with mechanical precision, trading when over-stressed, upset or jubilant can lead to impulsive decisions. It’s best to take a breath and come back tomorrow.

5. Take your time

While it’s natural to want to dive in and make a fortune your first day, that’s not realistically how CFDs work. Beginners should trade in stable markets to get a feel for the intricacies of CFDs before taking any big risks.

6. Don’t overdo it

Over-trading is another common mistake. Watching your account balance go up is fun, but it is important to avoid the temptation to use up all your leverage as soon as it becomes available to you. If there aren’t any trades you are confident in, bide your time.

7. Spread your risk

Being eternally optimistic that every market will soar is a common mistake of new traders. Maintaining a few short positions will help you spread your risk so your portfolio is more diverse.

8. Use Stop Loss and Take Profit orders

Some people react to losses by immediately seeking the fastest way to recover them. This is an easy way to multiply them. Instead, take precautions to mitigate losses with a Stop Loss order. Always remember to exit positions once you’ve reached your target.

9. Diversify

Some people underestimate the power of good leverage, and refuse to acknowledge that one terrible trade can wipe out their account. That’s why diversification is key. Play different markets, go long, go short and spread out geographically. Varying your investments as much as possible protects you from the downside of leverage.

10. Have a strategy

Don’t go in without a purpose. Treating CFD trading like a business that requires money invested for profit is a great perspective to take. Trading for ‘fun’ can be haphazard, requiring little to no research, and will require a lot of luck to make any money at all.

11. Learn about leverage

Avoid the mistake of trading all the way up to your maximum leverage point. Using leverage in this way is risky, and new traders can find themselves in a dismal situation if a highly leveraged trade goes awry.

12. Use trading tools

Ignoring the benefit of automated orders is a mistake many traders don’t even realise they are making. You can only keep your eye on the market so much – plan ahead by placing an order to purchase or sell when a market reaches a certain point so you don’t miss out while you sleep.

Avoiding these mistakes can sometimes be hard, but that’s why it’s so crucial to educate yourself as well as possible. And remember: you need patience and endurance to succeed in any risk-involved financial investment.

Published: 18 September 2018

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.