Is overtrading a risk with CFDs?

  • By AdminFund

  • April 1, 2019
  • 8:31 pm BST

The dangers of overtrading can be severe as having limited funds might mean stretching things too thin via an over enthusiastic trading schedule. However, with a leveraged product such as contract for difference being able to take positions that don’t rely on having to pay the full amount up front means this particular problem has an easy solution. Even so, this can lead to a totally different form of risk caused by overtrading.

Avoiding the temptation to overtrade is admittedly made more difficult when leverage is added to the mix. That’s why a clearly predetermined trading plan is key to success with CFDs as exposure to margin call risk can be very damaging. Knowing when to trade and when to sit one out is something that can make the difference between overall success and dismal failure, and ultimately it is something that can only truly be learned through trial and error. Thankfully though, there are ways that a trader can prepare themselves to avoid the worst pitfalls and build up confidence and a successful approach by minimizing much of the risk involved.

Trading frequency

Working out a trading schedule can be closely likened to the overall aims involved, as trading frequently means ensuring that more money is made than is spent in costs. This might seem a simple thing to state but it does mean that novice CFD traders must acquaint themselves with the ins and outs of working with brokers before they get started.

Once things are up and running, managing existing CFD trades must take priority over opening new positions, even if the latest market or underlying asset looks like the most exciting so far. This is one of the basic rules that needs to be adhered to but, at the same time, it highlights the requirement to stick to a trading plan at all times, as each individual methodology will consist of its own set of rules.

Multiple trades

Of course, the frequency of trading goes hand in hand with how many trading positions are held open at any given time when it comes to an assessment of any overtrading risk. Once more, this is an issue that leverage can complicate, as having sufficient funds on deposit should still be a priority in a worst-case scenario of being stopped out on margin.

Even taking into account the advantages of using a leveraged product such as contract for difference, if deposit funds don’t cover potential losses there is always the risk of all open positions being forcibly closed. Not trading at full margin capacity is always good advice, but ultimately the only way to manage multiple trades properly is to make sure that each one is carefully considered on its own unique merits so that it fits within planned risk parameters.

Too many markets

Another issue connected with multiple trades is having access to so many markets via CFDs. Many brokers offer an extremely wide range of markets with a full spectrum of underlying assets that are all accessible from one platform. This is one of the great appeals of using CFDs, but it can also be a potential pitfall for undisciplined traders or those who have yet to acknowledge the dangers of overtrading.

Trading different markets is a large part of the appeal of CFDs and can be used to great effect when switching trades across short time frames. Of course, each market will have different considerations to take into account, such as opening and closing hours and the effects of using different currencies. Not trading in too many markets is another way that strict adherence to a plan and personal discipline come together to play a big role in success. Not only can it be difficult to keep track of open positions and therefore run the risk of missing the most beneficial exit points, but it can also lead to fees and costs mounting up that eat into the profits made by the trades themselves.

Of course, one trade that goes badly wrong can also wipe out the good choices made when several other positions have been taken, and making the mistake of keeping a losing position open too long in the hope of a turnaround can turn this situation from simply being a bad day and instead making it a catastrophic economic event.

Less is more

Concentrating on a few markets can help focus involvement, which can be extremely useful in the fast-paced world of CFD trading. Understanding what makes a market move in either direction is something that needs attention to detail and is the only way to trade effectively. Taking data about previous price movements and analyzing it in whichever way suits both the market and the trading plan is key to success, and it stands to reason that a smaller focus of trades in terms of both markets and numbers makes it easier to get an overview of where things might be headed.

Monitoring markets is far easier today that it has ever been, and the real-time data from exchanges along with multiple international rolling 24-hour news coverage live feeds means that even a DIY trader working from home can be on a level playing field with high-end professionals. However, it isn’t an easy thing to do well, and getting to know the quirks of each market can only be something that comes from experience, so taking on too much too early is never going to be a recipe for CFD trading success.