Why is CFD Trading Difficult? 6 Challenges of CFD Trading

While CFD trading is popular as well as potentially rewarding, there are good reasons why it can be frustrating for many traders. Involving trading in the markets, the volatilities posed tend to make the market suffer high risks, and traders have to suffer a great loss without proper management. Financial knowledge is a requirement for successful CFD trading, but you also need knowledge of technical skills, a high tolerance for risk and a good trading mindset.

In this article, we will explore some of the key factors behind why most traders hit the wall when talking about CFDs.

1. CFDs are highly leveraged

In CFD trading, leverage puts traders in a position to control large positions with a reduced amount of capital thus materializing in either higher returns. But that same leverage can work against you if the market starts to move unfavourably and you suffer huge losses. You have to take big risks, but even bigger importance is putting your hand in your pocket when you should. Managing leverage properly is everything.

To be able to effectively leverage the market and prices, traders must be able to constantly monitor the market. However, due to the volatile price changes in the underlying asset, these can happen quickly and unpredictably therefore it is essential to use risk management strategies. Reducing risk, stop-loss, taking profit, trailing stops and guaranteed stops are tools that automatically exit trades once certain price levels are reached.

2. Navigate to market volatility

The biggest challenge with CFD trading is also managing market volatility. In CFD trading, speculating on the price movements of an underlying asset is why understanding and predicting these movements are important. Via CFDs, traders have access to a broad array of financial markets and therefore need to become acquainted with the actual market forces at the core of each asset. Unfortunately for beginners, this can be especially daunting.

To trade successfully, you need to be aware of central bank news, what’s happening with the economy, what investors are feeling, changes in interest rates and inflation. Knowing how these elements work in the market and tracking them through news and economics calendars can help traders plan, and make informed decisions while trading in CFDs.

3. Technical and fundamental analysis

One of the reasons why CFD trading is so difficult is that you need solid technical and fundamental analysis. Data analysis is not intuitive to everyone but it’s a skill every trader should learn because it helps us make informed decisions. That’s why trades without this can be like shots in the dark, increasing your risk of losses.

Technical analysis is that of the study of the price charts and patterns of such studies, in an attempt to identify from showing what further price movements will or may occur. Most of this is done using different technical indicators that trading platforms provide. In contrast to this, fundamental analysis is based on the value of the underlying asset regardless of external factors like the company’s financial health, the economic condition or the market condition in which the underlying asset is listed. The two types of analysis are both necessary to make sound trading decisions.

4. Managing trading psychology in CFD trading

CFD trading is fast and possibly requires split second decision. Mentally exhausting, this is a big reason so many of us struggle to work through this high-pressure environment. Success in the long term many times depends on how you manage your mindset and emotions.

It’s not easy to act swiftly when unexpected market changes occur, but traders have to anyway, often with a clear mind that’s not overly emotional. That can be fear, or anxiety, or impulsiveness, or greed. Any emotional response can lead to poor decisions. Controlling these emotions and keeping things together during trading is one of the first things to learn. The best way for traders to avoid common psychological pitfalls is to stay disciplined and follow up a well-thought-out strategy.

Trading CFDs is a rollercoaster ride of emotional highs and lows, and this can be challenging, but creating solid trading psychology is essential to long-term success. Here’s how to do it:

How to Identify and Deal With Emotional Triggers

You need to understand that your emotions are such a big part of how you’re trading. When you can start identifying what causes fear, greed, and impatience, you can quickly deal with them. If you are aware of these triggers (and you should be), you can keep them from clouding your judgment.

• Keep a Trading Journal

The trades can be documented and you can end up with them. Write down every trade that you do and why you made the decision you did. This journal will act as a behavioural history for you to look at patterns over time. Your weaknesses are revealed to you, it can show your emotional tendencies or where you’ve gone wrong, and you can use that to alter your approach and make it better.

• Avoid Overtrading and Beware of FOMO

Impulsive decisions and overtrading can be a consequence of fear of missing out (FOMO). Rather than chasing anything, be disciplined and trade only when you have sound analysis and better reasoning for what you’re doing. Always remember quality over quantity. Furthermore, be careful about taking breaks when you need to: trading burnout for burnout is never a good trade. Take a break from your screen, get some rest, and then step back when you’re ready to concentrate and be in the right headspace.

If you manage your emotions well, make notes, and discipline yourself you will grow a mental resilience and be able to thrive in CFD trading’s fast-paced world.

5. Financial statements

In CFD trading, traders often analyze financial statements, earnings reports, and other forms of qualitative and quantitative data to make informed decisions. While both fundamental and technical analysis are essential, they serve different purposes. Fundamental analysis, which involves assessing a company’s financial health through reports and data, is more suited for long-term investments. It helps traders understand the intrinsic value of an asset.

On the other hand, technical analysis focuses on short-term price movements, making it a vital tool for quick decision-making in CFD trading. Since CFD trading thrives on speed and market timing, being able to read charts and spot trends quickly can make the difference between profit and loss. Both forms of analysis complement each other, but in the fast-paced world of CFDs, technical analysis is often the priority.

6. Continuous learning

Keeping up with the financial markets means that CFD traders constantly need to know and update their knowledge and skills. One has many sources to support continued learning — blogs, e-books, guides, and videos, to name a few, which are free and easy to find online. The Internet is there to learn and keep up to date with the market trends, so podcasts, webinars, and seminars are also popular ways.

Also, online community forums are a source where worldwide traders get involved to provide and share ideas and strategies as well as insights. Interacting with these communities may also teach you practical tips and different views from which to build your trading style. A demo trading account is another great tool for learning. Practicing trading using free funds, and trading in a free (so to speak) atmosphere is possible by signing up for a demo account. With this, you can obtain real-life market experience, learn the technical and fundamental analysis, and polish your trading strategies devoid of any money risked.

By taking the time to equip yourself with current insights and practical skills, you increase your ability to confidently cope with the stress of trading events and confront stressful decisions based on academic intelligence and less emotional and guesswork.

However, it doesn’t matter how tough CFD trading is, whether you have a solid plan or not. Before you take to CFD trading, create a trading plan that works for your current level of skills and experience, as well as your educational needs, your financial capital reserves, and your comfort level with risk. It should also include the risk management techniques for your capital and keep your thoughts of trading without impulsive decisions. If you plan carefully and continue to learn, you will be much better placed when trading CFD.