CFDs and Spread Betting are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs and Spread Betting with this provider. You should consider whether you understand how CFDs and Spread Betting work and whether you can afford to take the high risk of losing your money.
The above charts illustrate the results of the trades executed in 2018 year-to-date. Traders were correct more than half of the time, with 63.4% of the total orders closed out at a gain. Yet, 79% of retail investor accounts have overall lost money when trading CFDs and Spread Betting.
This contrast may be explained via the Disposition effect which proposes that loss has a greater emotional impact to individuals when compared to an equivalent gain. For this reason, investors often base their decisions on the perceived gains as opposed to the perceived losses and are thus prone to hold on to investments that have depreciated in value for too long but yet sell investments that have appreciated in value too soon. Moreover, investors often engage in high risk behaviors in order to avoid the negative utility of a potential loss.
The Disposition effect consists of an anomaly discovered in Behavioral Finance, a field which attempts to understand the reasoning behind certain financial choices. In order to counteract this behavioral bias, it has been suggested that individuals should attempt to to maximize the psychological pleasure and minimize regret when faced with decisions relating to losses and gains. For instance, the concept of 'Hedonic Framing' suggests that investors may attempt to visualize a single major gain as several minor gains as this will increase the positive utility experienced. On the contrary, investors may attempt to visualize several minor losses as a major loss. Moreover, it is suggested that investors make informed trading decisions and are fast to realize and act upon their losses sooner.
Contracts for Difference (CFDs) are derivative instruments that allow traders to speculate on the changing values of an asset without taking ownership of that asset. Due to their complexity, trading CFDs carries a high level of risk, particularly for inexperienced traders or investors who are not well-educated about the markets.
Understanding the risks involved and learning about the markets does not entirely eliminate the risks inherent in CFDs trading, but it may help you make more informed decisions, manage your invested funds more effectively and employ adequate risk management. If you are new to trading, register for a demo account to learn the basics. Demo accounts are free and unlimited and are designed for you to practice trading and test your strategies in a risk-free environment.
Trading with the use of leverage enables traders to control positions that exceed the value of their initial investment. For example, if you deposited $1,000 into your account then trading with a 1:200 leverage would allow you to control a $200,000 position, which would maximize your profits in the case the market moves in your favour.
However, if the market moves in an unfavourable direction then the leverage would increase your losses. You may familiarise yourself with trading with the use of leverage by opening a free demo account to test what leverage suits your strategy best.
Proper risk management is essential in the world of trading. There are a number of things you can do to ensure that you manage risk effectively