Why is CFD trading so hard? (2024)

CFD trading is very popular worldwide and often rewarding. As CFDs (Contracts for Difference) are leveraged financial derivatives, the potential to make huge gains is high.

However, CFD trading is often considered challenging due to the volatility of markets, which can lead to substantial losses if leverage is not managed properly.

In this article, we’ll discuss some of the reasons that make CFD trading hard for some traders.

Key reasons why CFD trading can be hard

1. CFDs are highly leveraged

Leverage is borrowed funds that allows traders to open larger positions with a smaller amount of capital. This provides the opportunity to earn higher returns while also increasing trading opportunities. But if trades move in the opposite direction, leverage can also cause huge losses.

The challenge lies in knowing how to manage leverage properly so that you don’t lose all your capital. This requires constant monitoring of the market and price movements, as well as using effective risk management to protect your funds. Trading can be highly volatile, and price movements of underlying assets can happen rapidly and/or unexpectedly.

Some of the most popular risk management tools used in CFD trading are stop-loss and take-profit orders. Trailing stops and guaranteed stops can also be used. These orders are triggered when an asset reaches a particular price or threshold and are designed to reduce the risk of large losses on a particular position.

2. Monitoring market volatilities

In CFD trading, you speculate on the change in value of the underlying asset, predicting whether its price will go up or down. The underlying assets differ from one CFD to another, providing access to a wide range of financial markets. However, managing the complexities and volatilities of each market can be quite challenging, especially for beginner traders.

Understanding the factors that influence the markets is very important. There are many factors that cause market volatility, and they include central bank announcements, economic releases, market or investor sentiment, interest or inflation rates, etc.

As well as understanding how these factors influence the markets, you must also monitor them closely. This involves following the news and using an economic calendar to help you in tracking events, news and indicators to better plan your CFD trades.

3. Technical and fundamental analysis

Analysis is considered a challenging aspect of CFD trading as not everyone finds technical and fundamental analysis easy. However, analysis is an important part of making informed trading decisions. While not everyone can analyse data in the beginning, learning this skill is essential for trading success.

Technical Analysis

Technical analysis involves learning how to read and assess price charts to identify specific patterns or market trends. Traders use technical indicators usually provided by their chosen trading platform.

Popular technical indicators include Bollinger Bands, RSI (Relative Strength Index), MA (Moving Average), EMA (Exponential Moving Average, Fibonacci (Retracements), MACD (Moving Average Convergence Divergence), Stoch RSI (Stochastics), Support and Resistance, Ichimoku Clouds, and many others.

Fundamental Analysis

On the other hand, fundamental analysis examines the intrinsic value of the underlying asset. This involves analysing financial statements, earnings reports, P&L etc. Fundamental analysis also considers economic news, central bank announcements, and other qualitative and quantitative data.

Both forms of analysis are important and play a role in executing trades. Fundamental analysis is particularly useful for long-term investments whereas technical analysis is crucial for making quick decisions about trades. This is especially important in CFD trading where quick decision-making is crucial.

4. Managing CFD trading psychology

CFD trading is fast-paced, so decisions need to be made within minutes, if not seconds. CFD trading has a reputation for being challenging; staying on top of your game 24/7 can be very stressful on your overall psychology.

The ability to think fast to react to unexpected market movements or price fluctuations in a way that is profitable isn’t easy for everyone. Emotive trading, often driven by fear, anxiety, impulsive thinking, and even greed, can lead to adverse trading outcomes. Managing these emotions is key to success. But how does a CFD trader develop a stronger trading psychology to handle the challenges of CFD trading?

• Awareness of your emotions is crucial. Once you identify your triggers, it becomes easier to manage them effectively.

• Incorporate risk management tools into your CFD trading strategy to reduce the stress caused by the risk of losing all your money.

• Keep a trading journal. Record your trades and write down the reasons for your trading decisions. Over time, you’ll have a historical record of your trading behaviours, allowing you to identify patterns and make necessary changes.

• Don’t overtrade. FOMO (Fear Of Missing Out) is real, but don’t let it be the reason you lose money. Trade based on proper analysis and education but take a break when necessary. Move away from your screen, relax, and get back to trading once you’re calm and focused.

• Commit to continuous learning. Stay informed and continuously update your knowledge and skills with the latest CFD trading-related information. By doing this, you’re likely to make better-informed trading decisions driven by reliable insights rather than influenced by your emotions on a particular day.

• Consider signing up for a demo account. You’ll gain access to a simulated trading environment where you can practice trading using virtual funds. It allows you to experience real-life market conditions, learn technical and fundamental analysis, and gain a better idea of live trading without risking your own money. By staying informed and gaining practical expertise, you’ll increase your ability to manage stress in CFD trading and make informed decisions based on knowledge rather than emotions or speculation.

5. Choosing the right CFD broker

Another part of CFD trading that could be considered challenging is selecting the right CFD broker. There are so many brokers available, so it’s vital to find a broker dedicated to helping you achieve your financial goals. Here’s how the right forex broker can support you:

• Providing educational resources such as videos, podcasts, blogs, webinars, seminars, e-books, etc. to help you become a better trader.

• Offering flexible trading conditions, including competitive spreads, multiple trading accounts to choose from, fast trade execution, and quick withdrawals and deposits.

• A dedicated multilingual customer support team can help you in your spoken language for convenience and understanding.

• A wide range of assets allows you to trade according to your preferences.

• Providing an innovative and easy-to-use trading platform to meet the needs of both beginner and experienced traders.

In summary

In conclusion, while CFD trading can be challenging, thorough planning is crucial. Before starting CFD trading, it’s essential to develop a trading plan that suits your current level of trading experience.

This plan should align with your specific trading and educational goals, as well as your budget and risk tolerance. Implementing effective risk management techniques is important to protect your capital and trade with caution and rationality, avoiding impulsive decisions.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.