10 Ways to Prevent Overtrading in the CFD Market
As the popularity of CFD trading continues to grow, more and more retail brokers are entering the market. The aspect of overtrading is an essential concern for these online brokers because if they allow their clients to trade too many contracts in one day, the losses incurred will outweigh any commissions made.
So How Can You Prevent Overtrading
Restrict Trading in Your Account
Some online CFD brokers allow the client to buy and sell unlimited amounts in a day. However, other accounts may be restricted only to allow 200 trades per day. If you are unsure what the policy is for your broker, contact them directly; otherwise, it’s up to you to prevent yourself from overtrading by adhering to the company’s rules.
Trade When the Market Opens or Closes
An easy way of preventing overtrading is avoiding trading at certain times of day altogether. For instance, trade after lunchtime instead if you know that price movements are usually exaggerated during UK morning hours. Or, if volatile markets bother you so much that they make it difficult for you to trade, avoid the Asian session.
Trade with Money You Do Not Need
This is a common saying among forex traders. Some day trading strategies are risky, which means you could end up losing your initial deposit if you’re not careful. CFD trading is slightly different because it allows you to “short” the market, where you bet against it. However, be aware that with this strategy comes an increased risk of loss. If your account falls into the red and you cannot afford to pay the brokerage fees anymore, close your position and don’t look back. That way, you can prevent yourself from overtrading and learning a hard lesson along the way.
Cutting Losses When You’re Wrong
One way to reduce the risk of overtrading is by only trading when you are sure about the price’s direction. For example, if you predict that GBP/USD will rise in the next hour, place a limit order that executes at a specific price point. If your assumption was incorrect and you end up selling too low, exit your position before you’ve lost more money than intended.
Don’t Chase Price
Traders who chase price usually do so because they believe the market has missed their entry by one tick. To avoid this common pitfall, rather than jumping into trades right away or placing limit orders just under the current market asking price, try waiting for prices to retrace to your entry point before making your move. That way, you can be confident that the trade is not a mistake.
Know Your Order Types and Chose Wisely
Another way to avoid overtrading is by knowing which order types are appropriate for different market conditions. For example, use a limit order if you want to take advantage of a strong up move in a central currency pair.
Only Trade When You Have Access to the Market 24/7
This may seem obvious, but some traders have access to trading platforms during set hours only. These brokers usually offer trading from 9 am until 4 pm EST Monday through Friday. If you don’t live on those hours or do not have access to an internet connection during that time, you cannot trade. Rather than preventing yourself from trading altogether, only trade when you have access to the market.
Know Your Strategy and Practice It on a Demo Account First
Practice makes perfect, they say. A good way of making sure your strategy is sound before using it with real money is to apply it in a demo account first. Let’s say you came up with a nifty way of entering trades at key support and resistance levels; try applying this strategy on a demo account for several weeks or months until you are sure that it works as intended.
Only Take Trades You Fully Understand
This is a common saying among professional traders. To avoid overtrading, make sure you understand the implications of every trade before entering it. For example, if you don’t fully grasp how “long” and “short” positions work or what they entail, it might be best not to take any trades until you’ve done your research.
Identify Market Trends from an Early Stage
If you’re new to day trading with CFD in the UK, the chances are that you have limited market experience. An easy way of preventing yourself from overtrading is by sticking to straightforward trading strategies that follow market trends without predicting price movements.