Many Singapore traders and investors may not know this, but CFD (Contract for Difference) trading is a form of derivative trading. Despite the lack of knowledge on what they are and how they work, it does not stop newbies from trying their luck in CFDs due to the high return rates compared to traditional investments such as shares and forex.
Such high potential returns can easily attract new traders without understanding that there will also be significant order losses, which might substantially bring down their portfolio value. Not knowing about these common mistakes made by new CFD traders has cost many traders their hard-earned money and savings.
Here are five common mistakes that most newbie Singaporean CFD traders make:
Not enough money to start with
One of the reasons new CFD traders make this mistake is that they don’t have a plan going into trading. Without a proper financial plan, one might underestimate how much he needs to open a CFD account and end up not having enough capital in his account when his expected returns materialize.
Not putting a stop loss on every trade
Many newbie CFD traders make this common mistake, although they may not realize it themselves. This is because most CFD trading platforms do not have an in-built stop-loss order function, forcing many traders who are likely beginners to use one of their strategies (if they already know any).
One example would be opening a position with no stop loss and exiting only when the market moves in your favour, without closing the deal at breakeven point or even worse – letting it run until either you close it manually with a significant loss or watch it run into its expiry date.
Not scaling out of losing positions
Scaling out is a good strategy that all CFD traders should adopt as it allows you to cut your losses early and take some profits when the market moves within your favour. This has been one of the mistakes made by new CFD traders on multiple occasions, as once they see their first trade going against them or triggering their stop-loss; instead of exiting the trade with minimal loss, they hold on and hope for a more significant return for them to breakeven and make up for the first loss.
Not understanding the concept of leverage.
Leverage, when used correctly, can magnify your returns when you are either long or short in a CFD position, but high leverage can lead to excessive losses in case you trade in the wrong direction at the wrong moment in time. Many newbie traders use 100:1, 200:1 even 1000:1 leverage levels without fully understanding what the effect would be if they were to lose on their trades.
The higher the leverage rate, the higher your losses will be since each pip movement of the underlying asset price will have a more significant impact on your compounded loss. The only way to avoid this common mistake made by new Singaporean CFD traders is to understand how leverage works in general and then use that knowledge for profitable trading instead of losing money, all because you did not consider that high levels of leverage magnify both gains and losses.
Not setting appropriate risk management parameters
Even if you are using 100:1 or 200:1 leverage, it will make sense to set your stop loss at 50-70 pips away from the entry point so that you can get out with minimal loss if your prediction fails to materialize.
New CFD traders can avoid making these common mistakes by simply learning more about the nature of contracts for difference and how to use them for both hedging and speculative purposes. We recommend contacting a reputable online broker from Saxo Bank to help you get started on your investment journey. For more information, see it here.