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Before you start trading Contracts for difference it is important to obtain a few tips from the professionals to make sure that you do not make many of the costly mistakes that newbie traders make. Below are three trading pointers which will help you in your CFD trading success.

1. Manage your Positions
Repeatedly new traders spend a significant amount of time selecting, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit which will determine whether a trade has been profitable or not.

It is human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the correct direction and reduce losses or even turn them into profitable trades.

Numerous new traders forget about the old saying “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, it is best to allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small return. On the other hand, if you happen to hold a position that is moving against you, it is best to move quickly to exit that position, before the loss becomes too great.

If you're managing your trades properly, your average winning trade should be significantly larger than your average losing trade. Once you have the discipline to buy and sell in this way, you should be able to achieve overall profitability even when only half of your trades are winners. A lot of traders make the mistake of not closing poorly performing positions fast enough. One tool that makes this less complicated is a stop-loss order.

After you have determined a price level that corresponds with the amount of risk that you are prepared to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.

It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if the price trades at or beneath the nominated stop level. Occasionally, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.

2. Understand the instrument that you're trading
Being over-the-counter products, there are various differences in the contract specifications of CFDs. If you are thinking of trading these products, it is critical to know what these specifications are.

You must also be aware of the influence that foreign exchange fluctuations might have on your holdings. If the base currency of the CFD rises against the base currency of your account your profits could be eroded by any currency fluctuation or your losses might be made worse.

Most CFD traders trade CFDs based on stocks listed in their home country. The simple reason for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also benefit from the convenience of trading their home market as it isn't practical to sit up for half the night to trade a Contract for difference over a share listed on an exchange in another part of the world?

In lots of cases it is much better to stick with CFDs based on equities listed on exchanges that you're familiar with as opposed to trading Contracts for difference based on stocks listed on markets you don't fully understand.

3. Use the correct order types
You should treat trading as a serious business. As such, you must take some time to make sure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been stopped up out of trades at the wrong time just because they placed the wrong kind of order.
                   
At the very least, be certain to become familiar with the following order types:

Market order: This kind of order is utilized to execute a trade at the present market price.

Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that's worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be placed at a level greater than present market prices.

Limit order: A limit order is used to exit a trade. Limit orders are placed at a level that is better than the present market price. When seeking to lock-in profits on an open long position, a limit order to sell would be placed at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level underneath current market prices.

You must always understand that as Contracts for difference are leveraged and that buying and selling them can be risky. However if used correctly Contracts for difference will become a valuable tool within your trading arsenal.

To find out more about CFDs you can download our complimentary 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.

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.