Instrument Understanding

Instrument Understanding

Not Understanding the Instrument Being Traded


Being over-the-counter products, there are a great many differences in the specifications of contracts available as CFDs. If you are trading these products, it is your responsibility to know what these specifications are.

For example, what exactly does 1-CFD of this underlying security represent? Is there a physical underlying security? Is there an expiry?
What if you still hold an open position at expiry? Is there a financing fee? Can it be sold short? What are the trading hours? Which currency is it priced in?

Speaking of currency, have you considered the impact that movements in the AUS could have on your holdings? Do you have a currency overlay strategy in place to dilute the impact of adverse currency movements? If the AUS gains against the currency of the country that you have invested in, any gains you might achieve in that foreign position will be eroded.

Even worse than that, if you have incurred a loss on your foreign  position, a weakening AUS will amplify this loss.

By far, the majority of traders invest in CFDs where the underlying equities are listed in their own country. This is known as ‘home country bias’. The simple reason for the existence of this phenomenon is that traders are more comfortable trading CFDs on underlying securities that they are familiar with. How well do you really know the market conditions in the USA or Asia? How well do you know the local conditions and regulations of those foreign markets? Is it really convenient or practical for you to sit up for half the night to trade a CFD where the underlying security trades on an exchange on the other side of the world?

Sometimes, it might be better to stick to CFDs based on markets that you are familiar with rather than venturing off into markets you don’t fully understand.


Source link   Presented by FP Markets

Psychological and Emotional Mistakes

Making money requires a trader to place trades that are ultimately 'correct' and deliver a profit. Because of this, many traders develop the mindset...

Trading for the Wrong Reasons

Most people undertake trading with the goal of making a profit. However, there are some people that participate for entertainment, either consciously...

Responsibility Taking for Trades

While most traders keep a keen eye on their open positions, there are those that make the mistake of not doing so. By frequently checking on your...


Not Learning How to Use Trading Platform

It is hard to imagine that a builder would get far without learning how to use his tools, or that a surgeon would have happy patients without learning how...

Using an Inappropriate Strategy

A common mistake among traders involves using an inappropriate strategy, or worse still, having no strategy at all. Using some type of strategy...

Using the Wrong Order Type

Trading with real money should be viewed as a serious business. As such, you should take the time to ensure that you thoroughly understand the most basic...


Poor trade management

While traders frequently commit an inordinate amount of time to selecting, planning and executing new positions, they often make the mistake of exiting..

Not Understanding Impact on P&L

Closely related to the misuse of leverage is the mistake of not understanding how a particular trade will impact your profit and loss. Because of the...

CFD mistakes: Misuse of leverage

Even the most seasoned professionals have been known to accidentally buy instead of sell or trade the wrong quantity or even the wrong security...

  


Share: