Day trading may be a highly profitable undertaking. However, historically, most people who start their trading careers fail. According to the European Securities Markets Authority (ESMA), between 74% and 89% of all new CFD traders fail and lose money. So, let’s look at some of the most common reasons why this happens.
1. Lack of patience
Trading all types of financial assets requires a lot of learning and preparation. Most experts believe thatbeginners should spend several months learning about the market and crafting a good trading strategy.
They do this without having a good understanding of the different concepts involved in CFD trading like position size, leverage, risk management, and money management among others.
This mistake can be solved by taking time to learn more about how the CFD market works and coming up with a good trading strategy. Fortunately, there are many resources available to learn about all these – from web resources, and books, to YouTube videos.
There are several YouTube channels with live trading. They can help you learn more about how to analyse and execute trades.
2. Poor risk management
Risk management is an important concept that any CFD trader should know about. It refers to a process where a trader reduces their risk exposure while working to maximise their returns.
Unfortunately, many traders who fail do so because of poor risk management strategies.
For example, they may open trades without protecting them with take-profit and a stop-loss orders. A stop-loss is a tool that halts a loss-making trade at a preset level. On the other hand, a take-profit stops a trade when it hits the profit target, locking in wins should the market move against you later.
A trailing stop loss is better than the standard stop loss because it is not fixed. As a result, it retains the profits in case of a sharp reversal. In addition, they have poor position sizing strategies and trade with substantially high leverage. Leverage is like a double-edged sword since it can also lead to considerable losses. These mistakes can be corrected by working to reduce their risks in the market. For beginners, it is recommended to start with small lot sizes and use small leverage. While combining a small lot size and leverage will lead to smaller profits, it will help reduce your risk exposure.
3. Trading without analysis
Another common mistake that CFD traders make is executing trades without analysis. In most cases, many beginners simply open trades after just looking at a chart and predicting whether an asset’s price will rise or fall.
This mistake can be solved by changing how you research and execute a trade. There are two main ways of analysing any CFD. First, you should always conduct fundamental analysis by looking at the potential drivers for the asset. This refers to looking at the news of the day and the economic calendar. For example, when trading gold CFDs, you could look at key economic data from the United States like non-farm payrolls (NFP) and Federal Reserve minutes.
Second, there is technical analysis, which refers to chart analysis. It involves looking at chart patterns and using indicators like moving averages and Relative Strength Index (RSI) to predict the direction of an asset.
4. Timing the market
Timing the market is another reason why most people don’t succeed in CFD trading. It refers to a situation where a trader attempts to predict the best time to get in and out of an asset. In timing the market, a trader can decide to buy a CFD whose price is in freefall or sell one that is rising.
Timing the market, when done without conducting a thorough analysis, is not ideal. Instead, most successful traders are those who follow an existing trend and exit when they see it fading. Trend
indicators like the moving average, Ichimoku Kinko Hyo, and Bollinger Bands can help you avoid this mistake.
Another common mistake that many CFD traders make is overtrading. These traders usually believe that opening more trades will lead to more profits. In reality, opening more trades, often without doing any analysis, usually exposes a trader to more risks. Most successful traders solve this mistake by executing a few well-researched trades per day.
CFD trading can be a highly profitable practice for patient individuals. Indeed, most people have been able to outperform the broader market by trading CFD assets like commodities and shares. Some of the other top mistakes why people lose money are following the herd, averaging a loss-making trade, not having a trading journal, and trading without a well-tested strategy.