5 CFD. Trading Mistakes That Spell Disaster. Contracts for Difference

Transcription

1 5 CFD Trading Mistakes That Spell Disaster Contracts for Difference

2 Page 2 5 CFD Trading Mistakes That Spell Disaster Everyone makes them, most traders have probably been told by someone how to avoid making them and yet investors believe that this is a phenomenon that only happens to other people. However, the reality is that the vast majority of investors make little or no plan when they start trading and setting a plan and a strategy will help make larger profits and avoid unnecessary losses. To help you consider the best course of action when trading or just to refresh your memory, below are some of the main mistakes to avoid.

3 Page 3 1. Little Preparation So many people start trading without a trading plan, thinking they can beat the market. You need to set out your rules of trading and guiding principles. At least covering major components like methods of trading, method of identifying positions to trade, entry and exit rules, risk management and trading reviews

4 Page 4 2. Over trading There are two forms of over trading to be aware of, frequency and open positions. Today there is an abundance of information available to the investor whether received via a newspaper, trading magazine, investor website, trading signal program/platform or direct from your broker, all creates trading ideas for the investor to consider. You need to remember that you have the choice as to which ideas you will trade and how many. The more you trade the higher the risk, rest assured that there will be more opportunities tomorrow. A result of trading too often invariably means that investors end up holding too many positions in the hope that they will all eventually make profit; this distracts you and affects your decision making process and frequently makes your positions unmanageable. You need to consider how much you will be trading within your trading plan and review your frequency regularly and do not stray too far from your set trading limits.

5 Page 5 3. Over leverage One of the biggest benefits of CFDs can lead to the costliest mistake. You have the ability to trade large exposure with a small margin requirement, but this does not mean you have to use the maximum that your platform will allow. Profits and losses are amplified to the size (value) of your positions and not the initial margin. Always look at maximum exposure of all of your positions and the potential losses of these positions. The risk warning Trading using leverage carries a high degree of risk to your capital, and it is possible to lose more than your initial investment. is given for a reason.

6 Page 6 4. Long only portfolios If you only have long positions in your portfolio it is all based around one trading idea that the market will only go up. This long only strategy is high risk; obviously when the whole market goes down all your positions will lose money. You are missing an essential investment tool that allows you to be able to profit from a falling market, hedge your portfolio and have the option to pairs trade. This means varying your portfolio with both long and short positions so that your investments are more balanced. Investors should be aware that in a short position the risks can be very large indeed and are in effect unlimited as the value of an investment could go up ad infinitum.

7 Page 7 5. Unrealistic Expectations You will hear of people doubling their money or see adverts claiming you only have to trade for 15 minutes a day and you will no longer have to work. Anyone can double their money just visit a casino and choose red or black, but the risk is everything you stake. Your trading plan should have set what levels of profit you are trying to achieve and what you are prepared to risk. This should tell you whether the trade is right.

8 Page 8 Always Consider CFDs are high risk and you need to ensure that you manage the risk; this should stem from your trading plan. You should only be trading with what you can afford to lose. Then your rules of trading and guiding principles should be followed when considering; exposure, open positions, diversification and leverage. Also use whatever tools your platform provides such as stop loses, guaranteed stop loses and trailing stop loses. Finally always run through your trading plan before you place a trade.

9 Risk Policy It is Guardians policy that all CFD advisory clients, should be provided with the following two-way risk warning notice: You should not deal in CFDs unless you understand their nature and the extent of your exposure to risk. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position. Although CFDs can be utilised for the management of investment risk, it may not be suitable for some investors. In deciding whether to trade in CFDs, you should be aware of the following points: (i) CFDs can only be settled in cash. Investing in a CFD carries the same risks as investing in a future or an option or other derivative product. Transactions in CFDs may also have a contingent liability and you should be aware of the implications of this as set out below. (ii) Contingent liability investment transactions, which are margined, require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately. If you trade in contracts for differences, you may sustain a total loss of the margin you deposit with your firm to establish or maintain a position. If the market moves against you, you may be called upon to pay substantial additional margin at short notice to maintain the position. If you fail to do so within the time required, your position may be liquidated at a loss and you will be responsible for the resulting deficit. Even if a transaction is not margined, it may still carry an obligation to make further payments, in certain circumstances, over and above any amount paid when you entered the contract. Before you begin to trade, you should obtain details of all commissions and other charges for which you will be liable. If any charges are not expressed in money terms (but, for example, as a percentage of contract value), you should obtain a clear and written explanation, including appropriate examples, to establish what such charges are likely to mean in specific money terms. In the case of futures, when commission is charged as a percentage, it will normally be as a percentage of the total contract value, and not simply as a percentage of your initial payment.

10 Contracts for Difference Guardian Stockbrokers 14 City Road, London, EC1Y 2AA T F E. W. CFD Trading Mistakes to Avoid Guardian Stockbrokers Limited registered in England and Wales. Company No Registered office: Dorset Street, London W1U 7NA Authorised and regulated by the Financial Services Authority (No ). Exedra Capital Ltd is an Introducer Appointed Representative to Guardian Stockbrokers.