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This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Most investors/traders do so on their own considering themselves immune to the typical mistakes repeatedly made by the vast majority. To help you avoid these pitfalls we look at some of the most common and costly mistakes to help you maximise your profits and trading lifetime
Many individuals think it’s easy to call the direction of a share/index/currency or commodity and just jump in. No plan. No objectives. Just click and hope.
This can prove a dangerous way to start trading. While you may bank some quick profits, what happens if you make a succession of losses? After all, you are risking your money. While you might be prepared to risk the money, you don’t really want to lose it, do you? Consider asking yourself the following questions first.
The first question sounds obvious but it’s surprising how many people don’t immediately reply “to make money”. You are risking your money to make more money. Simple.
The second question helps you focus on what you may already have an understanding of. While today’s trading platforms allow you to trade anything from the Japanese Yen to Sugar to the German DAX, you might not appreciate what drives their prices or how their respective contracts are priced.
If you are an avid investor in Barclays or Sainsbury shares, however, CFDs offer you a simple trading alternative, which is almost exactly the same and typically more cost efficient.
The last four questions are key in helping you decide how much to risk on any one position at any one time if you are to meet your goals while respecting your trading limits. Taking on increased risk has potential to deliver increased profits but with this comes potential for increased losses. Lastly, if you have a plan, stick to it.
When placing a trade it’s natural to focus on the profits that could be made. It’s optimism. It’s human nature. However, it’s also prudent to consider what you could lose on the trade before deciding whether it is worthwhile.
The best traders always also consider the worst-case scenario for each trade, i.e. - how far the price could move against them. While we tend to be quick to set automatic exit points (limits) to close a trade in a profit, it’s equally important for traders to consider doing so at the other end (stop losses) to limit the possible damage from a bad trade.
The best traders weigh up the potential risk AND reward involved in a trade before deciding whether to proceed. While there is nothing wrong with placing lots of trades with the aim of banking lots of small profits (it is a perfectly valid strategy) risking too much and taking too many costly losses along the way is best avoided. See our educational piece on Risk vs Reward.
If a profitable trade wants to become more profitable, why not let it? Trailing stop losses can be used to lock in rising profits. If a trade is going wrong, however, why risk letting it get any worse? After all, you only get one chance to lose all your money.
If trading £10,000 of Barclays CFDs several times a day (day trading), looking to book several gains of £200 by the market close it might be wise to employ stops losses 2% away to minimise the potential loss on each trade to £200.
If trading less often over a longer time period, however, hoping for returns of £2,000 or 20% it might be more appropriate to use stop losses 5-10% away, allowing the price to move around/breathe and avoid you being stopped out unnecessarily during the inevitable daily/weekly ups and downs.
Don’t let pride and ego get in the way of successful trading. If you’re wrong you’re wrong. Exiting a bad trade may hurt, but staying in one can end up hurting more. A trade may be right today but can easily be wrong tomorrow. The clichés are endless. Be honest and move on. As in life, learn from the experience. If there is big news that changes your view on a trade, it may be time to re-evaluate your position.
When a price drops sharply traders often get involved hoping that a recovery and significant gains will ensue. ‘Doubling down’ or ‘averaging in’ are valid strategies, widely used and which can prove highly successful, however, we mustn’t forget that a 10/20/30% fall requires a bigger percentage recovery (see below) in order to achieve breakeven. While the absolute change in price will be the same, but the new lower starting point means that the percentage recovery required is much greater.
Doubling down: a 50% fall requires a 100% recovery to break even!
With information and analysis everywhere we turn, and updated almost instantly, there are millions of reasons to trade, all day every day. Remember though that it is your money at risk and you have a choice. There is no obligation to trade every idea that comes your way.
There will be plenty more opportunities tomorrow. Just as risk increases with bigger trade sizes, so it does with more frequent trading, which is fine so long as it doesn’t take you too far from the parameters of your trading plan. If so, does you plan need updating? The best traders won’t place trades just for the sake of it.
Keeping a record of your trades and reviewing things regularly is a helpful exercise. For a portfolio of open trades, where did you get each idea? Pros? Cons? Duration? Target? Stop loss? Some even say that when reviewing a portfolio of open trades each day, if you can’t see a valid reason for entering one of them today then why should you still be in it from yesterday?
For closed trades did you stick to your plan? Did it work? Did you stay within your parameters? What did you learn? What would you do different next time? Be honest with yourself. You only have yourself to answer to.
A key CFD attraction can also be what generates the most expensive trading mistakes. While CFDs allow you place trades with only a small deposit this doesn’t oblige you to leverage up to the max.
First of all, the deposit is just that, what you need to open the position. The trade still needs room to breathe as the price moves around. Funds or margin are thus required to allow the trade go against you at least slightly. The more positions you have open, the more margin is required. The more you want to allow positions go against you, the more margin is needed to avoid ‘margin call(s)’. Remember what we said about focusing on only the potential profits and forgetting about the potential losses?
Overleverage can be avoided by considering your overall exposure (all exposure on all open trades) and overall margin requirements as well as using stop losses to reduce potential losses (and thus margin requirement) on individual trades. If you believe that the price can fall by X and you can afford to lose Y, then that information can be used to decide an appropriate size for your trade.
If your account is worth £10,000 and you are prepared to lose £1,000 should the current 250p share price fall by 10% (25p), then your trade size should be set up accordingly with the 25p share price fall equating to £1,000 which in turn equates to 400 shares and £10,000 exposure.
Indices
When trading the indices, £10,000 on a CFD account could allow for exposure to 10 UK 100 contracts at £10 per point. With the UK 100 index at 6800 this would mean exposure of £10 x 10 x 6800 = £680,000. Yes that’s correct, more than 2/3 of a million pounds. If the index fell by just 1.5%, however, which is quite possible, your £10,000 account could be wiped out and you left owing an additional £200. You over leveraged yourself.
Most people look to profit from rising prices which is fine so long as prices just rise. But we know they don’t always rise. They rise and fall, to differing extents within differing trends over differing time horizons. That’s what presents the markets with multiple trading opportunities day in day out. Having all your eggs in a Long basket can be a risky strategy if markets take a turn for the worse, even more so if you’re overleveraged.
Another benefit of CFDs is the ability to trade both Long and Short. This allows you to profit from rises AND falls in share prices. Identifying prices which may be set to fall can help you hedge/balance your portfolio, making it less prone to suffering big losses when the markets turn down. However, note that while a share price can only fall as far as zero, they can in theory rise to infinity. This means that Short trading is a more risky option in terms of worst case scenario, especially where stop losses are ignored.
Don’t get enticed by get-rich-quick schemes promising trading strategies that will double your money in a short time period. While theoretically possible, the majority unfortunately tend to involve a seminar (for a fee of course) designed to sell you a book (for a fee of course) which will focus on you trading big, often and with maximum leverage. This is fine so long as you appreciate the risk involved.
Anyway, if said strategies were that good and so successful, why is someone needing to supplement their income by offering fee paying seminars? Why aren’t they trading from a deckchair on some paradise island? Be realistic, there’s no such thing as a free lunch. There is no magic formula, but there is a world of trading opportunities.
Furthermore, starting off with a £10,000 account and expecting to generate a secondary income of £100,000 per annum is unlikely to happen. While objectives and goals are important, they also need to be realistic.
Technological advances have opened up share trading and in many cases put the retail trader on an even keel with Square Mile professionals. Platforms are now sophisticated enough to allow DMA (direct market access) pricing meaning you get a better deal as well as allowing the placing of future time and price dependent orders. Furthermore, charting packages have come a long with their flexibility and technical indicators and news feeds now allow you to keep up right up to date with the markets, abreast of what news is moving who and by how much. Make the most of this situation and enjoy yourself.
At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide the help you need highlighting opportunities which may be profitable to you, the trader, and assist you in making trading decisions which can benefit from the use of leveraged instruments.
Our approach focuses on 3 elements below;
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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research