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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.

Like all financial products there are risks trading CFDs. Risk is generally linked to returns, the riskier the investment the higher the potential returns, however if risk is managed correctly it can be significantly reduced. When trading CFDs this can be done through the use of stop-loss orders and simple portfolio hedging. This article explains the key risks associated with trading CFDs and what can be done to reduce them without having an effect on the significant returns that CFDs can provide.

Before trading CFDs you must understand that CFDs are a leveraged product and that leverage can work for you as well as against you. Like all leveraged products a small price movement can result in significant returns but also significant losses. The variety of orders types available for CFD traders allow the risks associated with adverse price movements to be significantly reduced. CFD traders are able to set their orders at prices which they are prepared to close out their positions and realise a loss. Common order types used to mitigate risk are stop-loss orders, trailing stop-loss orders and guaranteed stop-loss orders.

Stop-loss orders
This is the most common order type used by traders to manage risk. A stop-loss order is simply an order to close an open position that is placed at a price below or above the current market price at a price that the CFD trader is willing to close out their open position. It is important to note that stop-loss orders can be prone to slippage should the price of the CFD gap, this is a common occurrence when trading share CFDs.

Trailing Stop-loss orders
Trailing stop-loss orders are similar to stop-loss orders with the exception that the price of the order moves in accordance with a pre-determined distance from the current trading price, this distance is set by the trader at the time of placing the order. It is important to note that the price of the order will only change if the price of the instrument moves in a favourable direction, should the price move against the trader the price of the trailing stop-loss order will not change. This order type works like a ratchet, in that it can be used to lock in profits as the position moves in favour of the CFD trader without the need for the trader to constantly change the price of their stop-loss order.

Guaranteed Stop-Loss orders
Guaranteed stop-loss orders have become common in recent times due to traders being able to guarantee their potential losses. This order type is commonly used when trading share CFDs simply because share CFDs are prone to slippage and gapping during the opening phase of the market. It is important to note that when using guaranteed stop-loss orders your CFD provider will often charge you a premium, this is like an insurance premium guaranteeing that you will be filled at the price your stop-loss order is placed.

Aside from using orders to manage your risk when trading CFDs many traders use other financial products such as shares and options to hedge their CFD positions.

Shares are commonly used to hedge CFD positions or vice versa, these are often used by traders that hold a portfolio of stocks as well as a short term CFD trading account.  CFDs are often used to trade short term price movements of the stocks within their portfolio without having to sell their stocks and realise any capital gain.

Options are used by some CFD traders as a form of guaranteed stop loss. Options have an advantage over guaranteed stop-loss orders in that they are often cheaper. Hedging CFD positions using options is commonly used by more sophisticated traders that understand the core components of an options contract and how to choose the most appropriate contract to hedge their CFD position.

Aside for managing risk using order types and hedging strategies all CFD traders should ensure that they adopt strict money management techniques, meaning that they should not utilise excessive leverage or overexpose themselves to one particular CFD or sector. Utilising too much leverage is the single most common mistake made by novice CFD traders.

Before opening a real CFD account you should ensure that you practice trading on a demo account to so that you understand how to use the multiple order types available that will help you manage your risk. Remember CFD trading can be extremely rewarding if the risks are controlled.

To learn more about CFD trading you can download our free CFD Guide.