Contract for Difference (CFD) trading has been a popular derivative in the financial industry. It allows investors to pay minimal capital upfront which may result in high returns. However, although it’s tempting to use CFD, especially for beginners, it’s not something everyone can use for successful trading.
As a CFD trader, you can be a partial owner of an underlying asset. However, since you’re under a contract, it doesn’t guarantee returns, especially since the market moves most of the time.
Meanwhile, if you think CFD trading is for everyone, it’s not. There are certain skills, strategies, and levels of risk tolerance used to become a successful CFD trader. In this article, we’ll discuss the signs that can help you decide whether CFD trading is for you.
1. Lack of Risk Management Skills
Risk management skills are essential whether you’re a beginner or a professional trader. It allows you to assess your risk tolerance, and create suitable strategies to avoid significant losses. Meanwhile, if you find yourself trading impulsively, this can be the first sign that CFD trading isn’t for you. More importantly, you may not be cut out as a trader at all.
Sure, you may think it won’t affect your trading portfolio since you’re not trading using the full value of an underlying asset, but it doesn’t work that way. Even your smallest loss can be accountable for your overall performance. So, before opening a trade, secure the use of stop-loss orders, and assess your risk-reward ratio.
2. Easily Influenced by Emotions
Do you get too emotional whenever the market goes in a different direction? When you become emotional, you may end up making irrational decisions. For instance, if you lose, it’s possible that trading in a different direction can help you recover your losses. Unfortunately, it’s not the case. Trading without following your well-planned strategy will just make things even worse.
Sure, it can be hard for new traders to control their emotions, especially since they don’t have enough experience in this matter. However, if you’ve been a CFD trader for quite some time and you still end up trading impulsively, it can be another sign to quit.
3. Limited Market Knowledge
As you know, trading isn’t the same as gambling. It requires enough knowledge and understanding of fundamental and technical analysis. Unfortunately, many people think they can just jump into CFD trading without knowing anything about the market.
On the other hand, having enough knowledge about CFD trading and financial markets allows you to create a more reliable trading plan. And it’s not just about having general knowledge about trading. If you already know something about CFD trading, it’s not enough to improve your performance. Regular research and staying updated about the current market condition are still needed to succeed.
4. Unable to Handle Volatility
Volatility is one of the main characteristics of financial markets. Meanwhile, CFD trading doesn’t just magnify gains, but also losses. So, with the leverage involved, the volatility doubles in the case of CFD traders.
Even if you’re leveraging, make sure that you can still afford the leverage with your current financial situation. The case of overleveraging is common among beginners. They think it’s wise to overleverage since a win can solve all your problems. Unfortunately, it can end up in a trading disaster.
5. Seeking an Easy Way to Get Rich
Although you’re just paying for the partial value of underlying assets in CFD trading, it doesn’t mean you can get instantly rich. Besides, one of the rules in risk management is to limit your trading size. Putting all your eggs in one basket isn’t ideal in any form of investment. At the end of the day, the more diverse your trades are, the higher the chances of winning.
Meanwhile, if you think you can easily become rich in CFD trading, might as well gamble. In gambling, you won’t lose as much as you will in trading, and luck can be your partner.
6. Can’t Afford to Lose
If you can’t afford to lose, you pick the wrong way of investing. In CFD trading, you might be given leverage, but you should be able to pay for losses in the end. When you reach your margin, you need to deposit more money into your account before your account closes. If it does, it may significantly affect your financial stability, and you’ll go back to square one.
7. Can’t Commit
If you’re too busy to monitor the market conditions and can’t commit to tracking your trading performance, CFD trading may not be for you. Instead, you can look for other forms of investments that don’t need much of your time. Sure, you can go long or short in CFD trading, but going long still needs monitoring that busy individuals might not accomplish.
Final Thoughts
Although CFD trading offers potential for profits, it may not be suitable for everyone. If the signs listed above resonate with you, it’s time to reassess if you can still improve, if not, maybe it’s time to look for another way to invest.
