What To Think About Before Day Trading CFDs
The leverage Contracts for Difference (CFDs) offer make day trading attractive, however, before commencing a day trading strategy you must asses the benefits and downside of using Contracts for Difference in your strategy .
Below are some of the benefits of using Contracts for Difference in your day trading plan:
The commission rates on share Contracts for Difference are much less than on traditional shares , this means that you can trade more actively for tighter price movements making CFDs very cost effective for day traders.
No interest costs
If you do not hold your Contract for Difference position open overnight you will not incur any interest charges.
You are not exposing yourself to the risk of a stock or share CFD gapping up or down overnight because of global market movements.
Free cash flow
As you are only holding your positions for a short time frame you are not locking up you money, this means that when you notice a trading opportunity you will have sufficient funds in your account to place the trade.
Although there are many advantages of using Contracts for Difference in your day trading plan there are also some negatives, these are listed below:
As all of your trading will occur during market hours over short time periods you need to watch your trading screen on a regular basis, this task can take up time.
As time is of the essence in day trading it is critical to have a very good knowledge of your trading plan as you will need to make fast decisions relating to your trades.
Day traders plan on profiting from smaller price movements , therefore in order to make large amount of money , it is necessary to start off with a larger float or use more leverage .
If you have the time, a good intraday trading plan and can afford to start trading with a larger float, then day trading may be a good trading style for you. Before rushing out, opening a Contract for Difference account and becoming a day trader you must consider the following tips:
1. Trading Contracts for Difference is very much like having your own business, however, as Contracts for Difference are leveraged , there is a possibility of losing more than your actual deposit, using stop loss orders and having a good money management strategy will reduce this risk.
2. Before starting to trade, ensure that you understand and stick to your trading strategy . You should start by practicing your trading system in a trial account.
3. All traders will have both winning and losing trades. Trading a profitable trading system is the most critical factor in making a profit. It is likely that when you begin trading you will have some bad trades. However, despite the fact that the number of bad trades is often more than the number of good trades, the size of the winners are generally considerably larger than the losers . In order to make regular long term profits, you need to properly back test and know your trading system.
4. To measure the performance of your trading system, you need to look at its profits as a percentage of your initial cash deposit, the maximum historical drawdown as a percentage of your initial cash float , the regularity of returns, and the profit-loss ratio along with the win-loss ratio.
5. Choose your Contract for Difference provider carefully. Each CFD provider offers a different number of CFDs some of which are short sellable and others not. The trading software each provider uses determines the type of orders that you can use in your trading strategy. You will need to asses all of these issues as they may have an impact when back testing your trading system.