Articles of Interest

Let’s face is not everyone is cut out to be a scalper or day trader after all sitting in front of your PC for hours on end watching numbers go up and down can be stressful. For most people day trading is too difficult as it’s a high risk reward job and requires a medium to large capital outlay at the start. The emotion of day trading often gets to novice traders, being able to manage your emotions is what distinguishes good traders from bad. The fact is not everyone can be a day trader.

When looking inside them minds of successful traders there are certain characteristics that always stand out. Some of the most common characteristics are:

Analytical Mind
Good day traders have analytical minds and are able conduct quick calculations and think on their feet, they must be able to identify trends and patterns without relying on a fancy chart or computer program.

Confidence
All successful day traders are confident, they are decisive, able to think quickly and have no time for uncertainty or self-doubt as this is what often leads to missing some of the best trading opportunities of the day.

Self Belief
Self belief goes hand in hand with confidence, you have to believe in your decisions and run with them. If you are indecisive perhaps day trading is not be a suitable career for you. 

Discipline
All successful day traders need discipline, once you have a plan stick to it. When day trading you can lose money as well as make money, as losses can result in an end to your career you need to manage your risks, know where to set your limits and stop loss orders accordingly. Once you have met your objectives do what you planned don’t let greed or fear take control of you.

Decisiveness
Good day traders don’t hesitate, they run with their decision and trade what they think is right, hesitation often results in missing out on good trading opportunities.

Passion
Day trading involves being passionate about the market, a good day trader never switches off tracking the market day in and day out following news globally, analysing charts and looking at quote screens. This all has to be processed as quickly as possible, this is of course is what will give a good day trader an edge.

Dealing with Failure
You can never expect to win all the time this is a motto every day trader should remember. You will lose on some occasions and win on others however, as long as you ensure that over time you win more than you lose you will always be successful. If you cannot accept losses then day trading is probably not for you as all good day trades will suffer losses at some stage.

Concentration
When day trading you will need to quickly analyse allot of data and reports in order to arrive at decisions quickly and act fast, this all happens in real time so you must be able to focus and avoiding all distractions during the trading session.

If this sounds like you then perhaps you should take up a career in day trading and learn more about CFDs in this very informative free CFD guide.

Many amateur CFD traders start trading the hard way without learning from experienced traders who have made all the expensive errors traders make on their path to success. To help you understand the most common errors made by traders and to prevent you from making the same errors with your own money we've outlined a few common mistakes below.

1. Trading for the incorrect reasons
Most people will commence trading with the intention of making a return from day one. However, there are a few people who trade for entertainment. If you are serious about making a profit, it's important that you treat your trading like a business. Those who invest for entertainment will be lucky if they make money, in reality more often than not they will lose.

2. Over-Trading
You should avoid the temptation to over-trade. Over trading is really a risk for those traders that are not following a technique, choosing to sit down on the sidelines until a clear trend emerges is in itself a legitimate strategy. You should avoid the mistake of fully leveraging your positions simply because you've got free equity available. It is also important to make sure that you don't invest with money that you cannot afford to lose.

3. Psychological and Emotional Mistakes
Developing the mind-set that you need to get each trade right is often a dangerous mistake to make if you cannot accept the very fact that you're going to make errors. You may find it hard to close out of a losing position, instead your mind will find ways to persuade itself that the trade will swing around and happen to become profitable. There is a danger that subconsciously you will become blind to evidence that suggests you are wrong.

You have to recognize that you will not get each trade correct and that you don’t need to get each trade correct, this will enable you to deal with your trades effectively. Being in the wrong is something that we frequently feel bad about. We're taught through positive reinforcement that we should feel better about being correct. This repeatedly presents problems when trading.

Losing trades may cause emotional distress and prevent you from correctly analysing the market. This can present a risk that you'll start over-trading in order to make back losses or to “get even” with the market. On the flip-side, winning trades can produce feelings of excitement and invincibility. If you make the error of permitting this emotion to take hold, you may find yourself taking unnecessary risk or making stupid errors through carelessness.

You should aim to keep your trading related emotions under control. Wise traders will focus on the downside risk potential of each trade and will make sure that this is within their pre-defined parameters outlined in their trading strategy.

4. Not understanding the suitability of Contracts for difference
Trading CFDs has enhanced the trading possibilities for a great many retail traders. CFDs are an ideal product for traders with a short-term time horizon along with a desire to increase their market exposure on a small amount of capital.

It is important to remember that contracts for difference are not always suitable for long-term traders due to financing expenses which can build up over time. In addition traders who don't supervise their open positions won't find CFDs suitable. You always need to ensure that the amount of money that you allocate to your trading account is an amount that you would be able to afford to loose.

Before you start trading Contracts for difference you ought to be familiar with the negative aspects linked to the product. As with all geared financial products, the risks are going to be higher if you don’t take the time to understand the product.

For traders that understand how CFDs work and learn to minimize their risks, there can be significant benefits from CFD trading. Through the use of leverage plus the convenience of trading, retail traders now have greater opportunities than they have ever had before.

If you would like to learn more about CFD trading and how to develop a trading plan you can download and read our free CFD Guide.

Day trading can be considered a made to order profession. To a large extent you can work when and where you want. You can dictate exactly how you want to spend your day, working from your office or home, or even when travelling.

You can live anywhere in the world and you can finally have a sense of having control over your financial affairs. You are solely in control. So what is the downside? The very fact that you have total control is sometimes a frightening prospect for many, especially those who find it difficult to create their own timetable.

Technically speaking the only difference between day trading and other forms of trading is the time frame used. Instead of taking positions for weeks or years, day traders typically hold positions throughout the day, often liquidating positions before the market close. Active day trading requires much more focus than other types of trading due to the shorter time frame and because the market moves quickly over the shorter term.

Consider the thoughts and motivations that are running through your mind and if your thoughts are a little off don’t hesitate to take a break. Day trading is hard work and it requires constant attention. You need to be motivated when you are day trading.

Discipline is by far one of the biggest attributes of successful traders. Keep a watchful eye on your bad habits. Know what they are and look to work on them as soon as possible. One way to check to see if you are trading in a disciplined way is to see if you are following your rules. There is a reason why you wrote your rules this was to ensure that you follow them to their completion.

From a day trading perspective you are best off evaluating your rules at the end of each month due to the shorter time frame of this style of trading. Keep in mind that you will break your rules occasionally and this is not a good habit to have.  Find ways to overcome breaking your rules and look to rectify the problem as soon as possible.

Money management is essential if you want to become a successful day trader. In fact money management is one of the essential elements of successful trading over any time frame.  Certainly if you want to be around for many years trading you are going to need to apply successful money management strategies. 

There are whole books dedicated to the area of money management. You need to find a method that you are comfortable with.

Always look to enter trades that have the potential to gain twice what you are risking on the trade. This is known as your risk versus reward. If you can maintain a risk reward in excess of 1 to 2 then you are well on your way to being a profitable trader.

Never forget to use stop losses when you are placing your orders into the market. This is your insurance policy. You need to be aware of exactly where your stops are prior to even entering the trade. This is a good discipline to have and will ensure you are constantly thinking of your downside protection.

Trading should be effortless and you must remain calm. This is especially true when you are faced with a loss. Maintain your calm and react in accordance with your rules. Mentally rehearse your worse case scenarios, so if they occur you can remain calm because you are mentally prepared.

Only ever discuss your trade with a technical analyst and do not discuss open positions with other traders. They will want to give you their view of the market with no consideration of your trading methodology. Remember no one has put as much effort into your trading system and style as what you have. You know your time frames and your stops so you need to stick to them. Other traders will have a bias whereas a technical analyst can appreciate your style of trading and give their thoughts accordingly.

Maintain your independence. If you find yourself reaching for the phone or looking to send an email to someone in order to back up that your view is correct then exit the trade. It is likely this trade is not correct and you should exit. 

Once you have conducted your analysis and you have done your numbers then do not doubt yourself. There is a reason why you have come up with your entry and exit signals at your key points so believe in those numbers and do not second guess yourself.

Again emphasis needs to be placed on the importance of being patient when trading. If there is nothing to trade then there is nothing to trade full stop. Do not force yourself to trade. Once you are in sync with the market you will find that trading becomes rather effortless.

If you are unsure at any stage then be prepared to walk away from the market and come back later. The market has a tendency to do this from time to time. Don’t be fooled and simply walk away.

Listen to your intuition as it usually knows something that your conscious mind may not. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. If you feel you’re getting stressed then get up and do some form of exercise or even get a massage. Day trading is a stressful exercise and one that requires constant attention and motivation so it’s easy to get stressed. Get some perspective about trading and life. There is more to life than just trading. Spend time with your family, friends and loved ones.  Schedule time for some relaxation and sporting activities to refresh and recharge your batteries. 

When you are trading it’s also necessary to be flexible with your positions.  Market conditions can change rapidly so you need to be flexible with your thoughts on the market.

Stick to your chosen market and your particular time frame and do not stray from those. When you trade like this then you are in control instead of the market being in control of you. Only look to trade in high volume periods.

Never be afraid of taking profit. You cannot go broke taking profits! If you find yourself getting out of a trade at a profit and the trend continues then let the other traders fight over the last part of the move. If you continue to worry that you are missing out on profits after you exit, then simply design and test a re-entry technique that you can build some confidence around.  If, as a short term trader, you find yourself making profits on a daily basis then it’s going to be very difficult to lose money long term.

When you are running a particular trade you should look to write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you increase your learning curve and success dramatically.  Take the extra time to do this and you will become a better trader.

You need to understand whether you are in front or behind for the day, week or month. Keep these numbers handy as you need to take responsibility for them. 

We all know that hindsight is a great educator, so after you have completed a month’s worth of trades take some time to evaluate what you have done and ask yourself the question: “If I could do this trade again what would I do differently?”  This will assist you in becoming a better trader and a more consistent and successful trader in the long term.

You can find out more about day trading CFDs by downloading our free CFD Guide.

Contract for difference traders are not just competing with each other in the market. They are competing with themselves. Traders can be emotional and irrational, and that can make them their own worst enemies. 

Feelings and Instincts can bring trading successes, but they are more likely to result in trading losses unless we learn to be in control of them. This is why appreciating trading psychology is vital. 

Many CFD traders would like to disconnect themselves from their feelings. Unfortunately, this is not possible, and some feelings may even add to their trading successes. Therefore, it is more useful to learn to understand yourself as a trader, recognizing your own strengths and weakness, so that you can decide on a trading style that suits you best. 

In this section, you will learn about four psychological biases that may adversely change your trading results, and you will understand what you can do to overcome them. The biases are:
 
1. Overconfidence
2. Anchoring
3. Confirmation
4. Loss aversion
 
1. Overconfidence Bias
Overconfidence bias is an magnified belief in your competence as a trader. Any trader who finds themselves thinking that they know the business inside-out and that they have nothing more to learn and that profits are theirs for the taking, may well suffer from an overconfidence bias. 

Dangers of Overconfidence
Overconfident traders tend to get themselves into trouble by trading too frequently or by placing tremendously large trades with the plan of making a killing. It's not inevitable, but an overconfident investor invites misfortune. 

Are You Overconfident?
If you want to identify whether you have a tendency to be overconfident, ask yourself, “Have I ever delayed or reversed a decision because I couldn't accept that I was wrong?” Likewise, you could ask yourself, “Have I ever placed more on a trade than what I know is really sensible?” 

Overcoming Overconfidence
One way to overcome an overconfidence bias is to stick to a strict set of risk management rules. These rules should limit the number of markets you invest in, the number of Contracts for difference you trade at one time, how much you are willing to risk on any one trade and how much of your account are you willing to lose before you take a break from trading and re-evaluate your trading strategy.
 
2. Anchoring Bias
Anchoring bias is a perception that the future is going to look very similar to the present. When you anchor yourself too closely to the present, you may fail to notice dramatic changes in the offing. 

Dangers of Anchoring
Anchored traders tend to get themselves into trouble because they wrongly believe that current trends will never end or that companies they've always followed will never let them down. Because they are emotionally attached to a Contract for difference, they continue to make investments in a way which is not optimal in changed circumstances. With each trade, they lose more money because they are bucking the trend. 

Are You Anchoring?
If you want to know if you have any anchoring tendencies then ask yourself, “Have I ever lost money because I couldn't accept that a trend had ended?” If you have done this, you need to be aware of that tendency. 

Overcoming Anchoring
One way to overcome anchoring is to seek a new perspective. Look at different time-frames on your charts. If you usually rely on hourly charts for data, look instead at the daily and weekly charts to examine long-term trends as well as levels of support and resistance. You could also examine shorter-term charts to see if trends are reversing.
Broadening your standpoint in this way will help you to avoid anchoring yourself to any one point.
 
3. Confirmation Bias
Confirmation bias is the habit of only looking for information that supports your beliefs. If you anticipate the price of BHP Billiton (BHP) is going to rise, for example, you will only really take in news and data that support your belief. 

Dangers of Seeking Confirmation
Traders who pursue confirmation of their beliefs tend to miss warning signs that would otherwise protect them from preventable losses. Ultimately, this can only lead to losing money because decisions to buy or sell, or even to do nothing, are being made on false premises. 

Do You Seek Confirmation?
To know if you have any confirmation bias tendencies, ask yourself, “How often do I look for signs that I may be wrong in my analysis?” If your answer is rarely or never, you may be a confirmation seeker and you need to actively work to ensure that such a bias never influence your better judgment. 

Overcoming Confirmation Bias
One way to overcome confirmation bias is to find an individual or group with whom you can discuss your trading. You don't need somebody who will simply flatter you or perpetually agree with you. Traders with different views and thoughts will help you to be more vigilant. Sometimes your convictions will only be reinforced by talking with other traders, but at other times, they may force a total and timely rethink. 

4. Loss Aversion Bias
Loss aversion bias is based on the theory that losing $1,000 will have a larger impact on you emotionally than gaining $1,000 will. In other words, fear is a more influential motivator than greed. 

Dangers of Loss Aversion
Ironically traders who fear losses are much more likely to hold onto losing positions than traders who are able to accept short-term losses and exit their trades. A reluctance to give up a losing position will not only cause you to incur larger losses but also stop you from finding better trades. 

Do You Fear Losses?
If you want to know if you have any loss aversion tendencies, ask yourself, “Have I ever held onto a losing position, beyond the point where I knew I should have quit, because I hoped the trend would reverse and wipe out my losses?” If you have, then you need to be aware of that tendency. 

Overcoming Loss Aversion
One way to overcome a loss aversion bias is to trade with automatic stop-loss orders. Many traders trade with just a mental stop-loss that, when it comes to the crunch, they fail to honor. They let their emotions interfere with their better judgment as they try to justify irrational decisions that prevent them from quitting and cutting their losses. 

In summary, as soon as you buy a CFD you should set your stop-loss order. It should be physically set, operate automatically, and you should respect it. 

If you would like to understand more about the psychology of CFD trading you can download our free CFD Guide.