How to stop overthinking every CFD trade

Overthinking can be harmful when it comes to any aspect in life and trading. If there is no control over it, it can affect the way you think, the way you act and even who you are as a person or a trader.

Skilled traders try to focus on the present instead of worrying about each trade’s possible outcome. Unlike chess, where the more thinking you put in the better the outcome will be, spending more and more time doing research of looking at the charts for hours does not necessarily mean that a good result will come.

Success in trading may come from using proper tools to better familiarise yourself with the financial markets and from staying calm and focused. In other words, trading is usually about following your trading plan instead of overanalysing or overthinking.

What are CFDs and how do they work?

Contracts for Difference, or CFDs are used to speculate on the price movements of assets, including stocks, commodities or currencies without owning the actual asset. Instead of buying the underlying asset, you agree with your broker to pay the difference in the asset’s price from the time you open the position until the time you close it.

If you believe the price will rise, you go long (buy) but if you believe it will fall you can go short (sell). In both cases, if the price goes the direction you expected, you will generate revenue whereas if it goes the opposite direction you will lose.

If, for example, you go long on Apple shares and the price goes up by the time you exit the trade, you will generate revenue from the price difference but if the price goes down you will lose. CFDs are widely chosen by short-term traders who want to value from market movements in assets’ prices without actually owning them.

What is overthinking and how to avoid it?

Overthinking in trading is about spending too much time worrying, analysing and second-guessing your trading decisions. This often makes such traders hesitant, afraid and poor decision makers. You have likely been overthinking if you have ever felt stuck prior to placing a trade or if you have regretted your trading actions afterwards.

Obsessed over your last trade

A lot of traders think that their last trade predicts the following one. This is usually a trap though. For instance, these traders believe that if there a string of winning trades, this will continue in the long term. They might also think that a loss indicates that another loss will come. However, each trade should be treated independently. Basing your current decisions on previous trades shows you’re overthinking.

Fear of losing or being wrong

There are some traders that can’t afford to lose and worry too much about being proven wrong. This can be overwhelming specifically after a loss or when big amounts of money are at stake. In such cases, normal trading risk turns out to feel like a mental burden.

Having doubts over your strategy

When you overthink, you may question your own trading strategy. After some losses, you might start thinking that your strategy does not work anymore or that you need to adjust it entirely. This results from believing that perfection does exist, when in reality trading is naturally uncertain.

Overthinking before and after a trade

Some traders are caught in “what-ifs” and get stuck before opening a position because they overthink every possible outcome. They usually freeze and miss the chance. Some other traders can’t stop thinking about previous trades, thinking about what they could have done better to stay in longer. All of the above cause stress and may take your focus elsewhere, when it should have been on your next trade.

Too much information to handle

Following every news story, constantly adjusting your strategy or watching short-term charts can often lead to more confusion. Trying to know everything is not always good and can actually make trading more difficult as the market does not always make sense.

How to stop overthinking?

Having covered the main forms of overthinking and how it can impact your trading decisions, let’s look at some ways with which you can stop this habit and start developing more confidence.

Trade what you see

There are many traders miss good opportunities because they overthink what could have happened instead of just focus on what they currently see. If you see a trade setup that suits your strategy just follow it. Avoid creating a hundred possible scenarios and things that might not work. You will never actually know how a trade will end up so just trust the process and stick to your trading plan.

Stop chasing the news

Sometimes news can be confusing, causing unnecessary stress. Focus on the price movements on the chart instead of reacting to the news because the price is a reflection of what is happening in the markets. If you blindly follow every news story, you can easily get dragged into overthinking and second-guessing your trades.

Build a solid trading plan

A good trading plan is one of the first and most important steps to avoid overthinking. It helps you stay focused, consistent and disciplined. Your plan is your guide, and it should include when to open and close a trade, your risk tolerance and your trading routine. Stick to it as the more you follow it the more confident you’ll become.

Trust your gut

If you have gained enough experience over the years, then you might be confident to trust your gut feeling. This is a feeling that comes from analysing numerous charts over the years. In the end, you may start spotting patterns automatically without thinking. Therefore, gut can help if it is based on knowledge rather than emotions.

Use the set and forget approach

Plan your trades, set your entry and exit points and then “forget” about them. Watching the screen for too long leads to overthinking. Set a trading routine to check the charts every day. This will also guide you as to when to stop. It’s okay if you don’t catch every move. The market will be there the next day too.

Focus on what you can control

There is no control over the market. However, you can control your risk, trade size and the way you think. Stick to these and forget about the rest. Only risk what you can afford to lose. This way you’ll feel more confident and less stressed.

Final thoughts

Being a good trader is not always about skills but also about mindset and confidence. Even if you know how to read the charts, if you are overthinking you may negatively impact your trading performance. To potentially succeed in trading, you will need to stay calm, focused and confident. Having a solid trading plan in place always helps. With the right mindset and a structured approach, you can avoid overthinking and focus on trading.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication.