CFD trading is a popular way to speculate on financial markets, but it can also be risky if you don’t know what you’re doing. One of the biggest dangers in CFD trading is overtrading when you trade too frequently or with too much capital.
When trading in the CFD market, it is essential to avoid overtrading. Overtrading can lead to excessive losses and wipe out equity balances. It can also lead to missing out on good trade opportunities because all of your capital is tied up in losing trades.
When planning your trades, setting a maximum trade size limit is essential to help you avoid overtrading by ensuring you trade with a certain amount of capital.
For example, you have an SGD10,000 account and decide to set a 5% trade size limit, meaning your maximum trade size would be SGD500. Once you reach this limit, you will stop trading for the day.
This strategy can help ensure you don’t overtrade because it limits the amount of capital you can use for each trade.
Traders can use stop-loss orders to limit losses on a trade. They are typically used to exit a trade when it reaches a specific price point.
For example, you buy a CFD at SGD100 and place a stop-loss order at SGD95, meaning if the price of the CFD falls to SGD95, your trade will be automatically closed, and you will lose SGD5.
Stop-loss orders can help you avoid overtrading by preventing you from holding onto a losing trade for too long.
Take-profit orders are the opposite of stop-loss orders. They are used to exit a trade when it reaches a specific price point.
For example, you buy a CFD at SGD100 and place a take-profit order at SGD105, meaning if the price of the CFD rises to SGD105, your trade will be automatically closed, and you will make a profit of SGD5.
Take-profit orders can help you avoid overtrading by preventing you from holding onto a winning trade for too long.
One of the most important things you can do to avoid overtrading is to trade with discipline, which means sticking to your trading plan and not letting emotions influence your decisions.
For example, if you have a rule in your trading plan that says you will only buy CFDs when the price is below SGD100, then see a CFD that you think is great at SGD102. Even though it’s only a few dollars above your rule, you decide to buy it anyway, which is an example of trading without discipline and can lead to overtrading.
It would be best to stick to your trading plan and not let emotions influence your decisions if you want to avoid overtrading.
A demo account is a simulated trading account that allows you to practice trading without risking real money.
Demo accounts are a great way to learn about CFD trading and test different strategies. They can also help you avoid overtrading by giving you a chance to trade without putting any real money at risk.
When trading in the CFD market, managing your risk is essential. You must know how much you’re willing to lose on a trade before you enter it.
For example, you have an SGD10,000 account and are willing to risk 2% per trade, meaning your maximum loss on any trade would be SGD200.
If you lose SGD200 on a trade, your account balance will fall to SGD9,800. But if you make a profit of SGD400 on the next trade, your account balance would be back at SGD10,000.
Managing your risk can help you avoid overtrading by preventing you from putting too much capital at risk on any one trade.
One of the biggest mistakes traders make is rushing into a trade. They see an opportunity and immediately enter without thinking about it first, leading to overtrading because you’re not giving yourself enough time to assess the situation appropriately.
Before entering any trade, take your time and think about it from all angles. Once you have thought it through, you’ll be better positioned to decide if the trade is worth taking.
You can trade CFDs through Saxo Bank; visit the website here.