Lesson: Why Do Most CFD Traders Lose?
It is a well known fact that the majority of retail CFD traders ultimately lose money, it has been estimated that around only 10-20% of retail traders turn a profit in the long run.
These figures seem to be borne out by the profitability data released by retail CFD brokerages each month, which normally shows that only 20-30% of retail traders are profitable on a month to month basis.
But why do the majority of retail traders end up losing money? There have been a number of attempts to answer this question, and today we examine the major reasons why the majority of retail CFD traders lose money.
If you have browsed CFD or trading websites, you will have likely seen adverts from brokerages advertising huge amounts of leverage. For instance there are a number of European regulated brokerages which offer leverage in excess of 500:1. This means traders could take on a position worth $2,500 with as little as $5, making such brokerages attractive to those with limited funds at their disposal. While leverage allows you to increase your profits when things are going well, it will also lead to greater loses when the market moves against you. If a trader was using leverage of 100:1, it would only take a 1% move against the trader to wipe out their entire account. The majority of retail traders are undercapitalized and therefore use leverage excessive leverage to trade huge positions. It is widely believed that excessive use of leverage is the number one reason why traders ultimately fail.
Lack of Education and Trading Experience
Many people are attracted to trading CFD after they have heard about the impressive returns that can be made from trading, with some people marketing CFD as a way to get rich quick. Many people begin trading before they have appropriate experience and knowledge of CFD and financial markets in general. Don’t rush into trading straight away instead take your time to learn about CFD and try your hand at demo trading for a while. Thanks to the internet there are huge range of resources which provide traders with a full introduction to CFD, for complete beginners and those looking to learn more I recommend the course from CFD Spy. In addition to taking your time to read up on CFD, those interested in trading for real should try their hand at demo trading. It is generally recommended that traders stick to demo trading for at least six months.
Financial Trading is Tough
Many people believe that CFD is a particularly tough instrument to trade and have suggested that retail traders stick to trading less exotic instruments. The available statistics however suggest that CFD trading no tougher than other forms of trading, with research from CASS Business School showing that only 20% of retail stock traders end up turning a profit. This would suggest that trading is just particularly tough and that many people may simply not be cut out to trade the financial markets. Trading certainly isn’t for everyone and if you are unsure whether trading is suitable for you, it is strongly recommended that you seek independent advice.
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