Indices trading mistakes to avoid
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Everyone makes them, most traders have probably been told by someone how to avoid making them and yet investors believe that this is a phenomenon that only happens to other people. However, the reality is that the vast majority of investors make little or no plan when they start trading and setting a plan and a strategy will help make larger profits and avoid unnecessary losses. To help you consider the best course of action when trading or just to refresh your memory, below are some of the main mistakes to avoid.
So many people start trading without a trading plan, thinking they can beat the market. You need to set out your rules of trading and guiding principles. At least covering major components like methods of trading, method of identifying positions to trade, entry and exit rules, risk management and trading reviews.
There are two forms of over trading to be aware of, frequency and open positions. Today there is an abundance of information available to the investor whether received via a newspaper, trading magazine, investor website, trading signal program/platform or direct from your broker, all creates trading ideas for the investor to consider. You need to remember that you have the choice as to which ideas you will trade and how many. The more you trade the higher the risk, rest assured that there will be more opportunities tomorrow. A result of trading too often invariably means that investors end up holding too many positions in the hope that they will all eventually make profit; this distracts you and affects your decision making process and frequently makes your positions unmanageable. You need to consider how much you will be trading within your trading plan and review your frequency regularly and do not stray too far from your set trading limits.
One of the biggest benefits of trading indices can lead to the costliest mistake. You have the ability to trade large exposure with a small margin requirement, but this does not mean you have to use the maximum that your platform will allow. Profits and losses are amplified to the size (value) of your positions and not the initial margin. Always look at maximum exposure of all of your positions and the potential losses of these positions. The risk warning “Trading using leverage carries a high degree of risk to your capital, and it is possible to lose more than your initial investment.” is given for a reason.
No risk management
CFDs are high risk and you need to ensure that you manage the risk; this should stem from your trading plan. You should only be trading with what you can afford to lose. Then your rules of trading and guiding principles should be followed when considering; exposure, open positions,
diversification and leverage. Also use whatever tools your platform provides such as stop loses, guaranteed stop loses and trailing stop loses.