While there are many conventional forms of trading as far as forex, commodities, stocks, shares and indices are concerned, over the past few decades the role of CFDs is becoming quite important. This is because there are some obvious advantages and benefits associated with Contract For Differences which one should be aware of.
They help in trading with a small investment and since there is no actual transfer of ownership, the risks to the buyer is reduced to that extent. Stamp duty exemption is also available making it an attractive investment proposition. However, like all financial investment, understanding the psychology behind improved CFD trading is important. We will look at 10 such principles which perhaps could be helpful. In fact many forex and commodity service providers like CMC Markets talk about the need to understanding psychology and then get into the markets.
Overconfidence: While being knowledgeable and also being aggressive is find, it should not transgress the limit and fall into the domain of overconfidence. Many traders lose out because they fall into a zone which is known as trading euphoria. While going through a winning streak one should be careful not to overstretch the limit.
Mental Comfort Zones: Being in a comfort zone and thinking that a good market will continue forever is another common psychological mindset that many of us fall into. This should be avoided. Believing and acting on obsolete and old information is often borne out by this psychological mindset.
Confirmation Bias: While looking for information is without any doubt important for CFD trading, basing decisions on information which you believe are confirmed and authentic could often be the undoing. There are many traders who believe in getting information particular source and believe that is perfect in all respects.
Aversion to Loss: Being in the CFD market calls for taking some bit of risk and being able to absorb losses once in a while. Many traders have deep rooted psychological barrier of loss aversion. This could be counterproductive in more ways than one.
Staying entrenched in the past: Many old time traders often have the problem of remaining in the past practices without realizing that technology and ways and methods of trading have changed. This psychological mindset has to change if one needs to make it big in CFDs.
Acting On Gut Feeling: Many traders do not research and act based on instincts and gut feeling. This is a deep rooted psychology that could result in taking decision based on emotions rather than facts and figures.
Believing In Getting Rich Overnight: Another big reason as to why many people do not succeed to the level they expect is because they believe in the psyche of getting rich quick. While there could be some bit of speculation involved in CFDs, one has to understand that there is lot of research, hard work and focused trading involved. It cannot happen overnight and there are no magic wands.
Thrill And Excitement Will Take You Only Thus Far: It also would be pertinent to mention that many traders get into CFD market with a casino and gaming mindset and psyche. This should be avoided at all times because investment using CFD route is serious business and there cannot be a cavalier approach to it under any circumstances. One should know that it is serious business and a cowboy type of psyche could damage the final objective.
Use Of Absolute Terms: Many traders have the habit of using absolute terms like 100% sure 100% not possible and so on. These are borne more out a deep rooted psyche and gut feeling rather than being based on facts. There is nothing sacrosanct about CFD trading because there are a number of factors which could make or break a day.
Taking umbrage under words like “if only” or “but for’: There cannot be any ifs and buts as far as CFD trading is concerned. It is based on hard facts and what happens in the markets. Therefore taking shelter in a theoretically perfect situation would not be the right way to move forward. The market cannot be perfect and at the same time cannot be imperfect. Traders should know to take each day as it comes.