Overtrading is a common challenge faced by CFD traders. It refers to buying and selling securities more than once in a short period, which can have dire consequences on your trade performance.
The above definition may be vague for those who have never dealt with CFDs before. For those who do not know what CFDs are, here’s what it means, a CFD (Contracts for Difference) is a way of ‘betting’ on the prices of assets.
It is essential always to be aware of your profit and loss graph to know when it is time to cut your losses. With the use of an effective graph, you can see where you are standing in terms of profit or loss at any given time during trading hours.
A profit/loss chart with ‘limit’ points marked out will help you avoid buying too close to the market top and selling too close to the market bottom.
Divide your investment into the number of units you want to trade at any one time. Ensure that this does not exceed your unit size as dictated by the company providing the CFDs. Limit yourself to trading only one unit at a time. For example, if you want to buy one lot of 100 CFDs, don’t start buying it at £1 per pip and stop buying when the price reaches £2 per pip.
It could be half-day or full-day and remember to place a ‘profit’ period accordingly. This helps you ensure enough time to close all orders before profits are potentially locked in for good. For example, if the timeframe is set to half-day, you should place all limit orders before 20:00 GMT.
Do not trade on a margin of 1:50, and do not use a lot size of 100 to maintain your positions. The lower the leverage, the better. You can still make a healthy profit while trading with low risk because you can’t afford to lose money if prices move against you.
In case your broker is an investment bank, they might be engaging in proprietary trading activity, which means that their traders may be trading against your positions or that trading done by other departments will affect your positions. You must know where all your funds are invested before making any trades so that they cannot take advantage of this information. It’s why it is essential to know the source of your broker’s funding.
If margin trading always ensures that your account is adequately funded to meet potential requests for additional funds – otherwise, you may be forced to liquidate positions which would result in significant losses. Also, consider using limit orders so as not to miss out on profitable trades due to lack of capital.
Limit yourself to one unit per trade (for beginner traders) or less than 100% margin (for more experienced traders). Ensure that you have sufficient time to close all positions during the day/weekend before profit-locking takes effect. If not, you risk locking in losses for good and getting caught up in stop hunting frenzies (note: this is a difficult strategy used by some brokers). Avoid trading on margin unless you can afford it.
Limit your losses by setting stop-loss orders on all existing positions. Don’t just rely on the ‘close button’ to limit losses – even if you can get out before prices move against you, there is no guarantee that they will retrace back within your profit-taking zone. Use a stop-loss order, so your losses are automatically limited when the market reverses.
Because of the uncertain nature of financial markets, it is not always possible to prevent oneself from engaging in overtrading. However, if you mindfully stick to the tips above and avoid making impulsive decisions based on emotions alone, you can improve your chances of avoiding this pitfall altogether.
Now that you are aware of how to prevent overtrading, why not try CFD trading with Saxo?