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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
The reason traders might consider using a demo trading account is:
Explanation
A demo trading account might benefit traders wherever they are in their trading journey. This could be learning how to trade from scratch using virtual funds (and therefore not risking any real financial loss), trialling new trading strategies, moving into new markets or looking to pinpoint persistent poor trading decisions to improve on them.
True or false: the best way to prepare for the live environment with a demo trading account is to try trading as many markets as possible with the highest possible amount of virtual currency.
Explanation
If you’re using the demo account as a learning tool to prepare you for the live trading environment, market analysts suggest treating the demo account as realistically as possible. They also recommend focusing on the key markets you’re interested in and setting your trading capital at the amount you’d plan to trade with on a live account. .
When it comes to trying out a trading strategy, which of the following should you avoid if you’re interested in short-term, fast trades?
Explanation
Position trading occurs when the trader holds a position for longer periods of time, disregarding small price fluctuations and aiming to profit from long-term trends.
True or false: hedging refers to making a trade with the intention of reducing the risk of adverse price movements in another asset.
Explanation
Hedging is when you make an investment or trade to reduce your existing exposure to risk. Most hedges involve taking a position that offsets one or more open positions, such as a futures contract that sells stock you’ve bought.
Which of the following are common mistakes that novice traders make?
Explanation
All of the above are common mistakes that beginner or intermediate traders tend to make. Intuition takes time and experience to hone, so for novice traders, it’s important to check feelings or tips against evidence and market research before committing to opening or closing a position. Failing to cut your losses early is another common error that can wipe out profits you might have made. The first step to avoid this pitfall is to stick to your trading plan. Finally, many traders have found themselves experiencing far bigger losses than they knew were possible because they don’t have a grasp of how leveraged products work, such as spread betting or CFD trading..
True or false: successful trading in the demo environment guarantees success with a live trading account.
Explanation
While demo trading provides valuable practise for live trading, there’s no guarantee of success in the live environment. The heightened emotional aspects of live trading, along with real market conditions, can affect performance.
True or false: the best way to develop a trading plan is to copy someone else’s exactly.
Explanation
While examining someone else’s trading plan can help in developing your own, yours needs to reflect your individual motivations, the time you plan to spend trading, the asset classes you want to trade, the strategies you intend to implement, your risk appetite, your available capital for trading and how you plan to keep records. The best way to develop a trading plan is to, therefore, tailor it to your own specific needs and parameters.
Most traders aim for a risk-reward ratio of:
Explanation
Many traders aim for a risk-reward ratio of 1:3 or higher. This means the potential profit you can make on a trade will be at least triple the potential loss.
Relative strength index (RSI) is considered:
Explanation
Traditionally, RSI is considered overbought when it’s above 70 and oversold when it’s below 30. This indicator is used in technical analysis to assess the momentum of assets to gauge whether they’re in overbought or oversold territory, and runs on a scale of zero to 100. .
Which of the following is a useful method to keep track of historical data not stored on the trading platform that includes important psychological aspects?
Explanation
While there are many useful metrics you can track to improve your trading performance, including win rate, profit/loss ratio and total return, none of them capture the emotional and psychological aspects of the trades you make. Discipline is one of the keys to trading success, which requires mastering your emotions. To keep track of what you were thinking and feeling as you made a trade, it’s advised you keep a detailed trading journal.
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