What To Think About Before Day Trading CFDs
The gearing Contracts for Difference (CFDs) offer make day trading attractive, however, before commencing a day trading strategy you must asses the pro’s and con’s of using CFDs in your plan.
Below are some of the benefits of using CFDs in your day trading strategy :
Low Commission
The brokerage rates on share Contracts for Difference are much less than on traditional shares , this means that a trader can trade more actively for tighter price changes making CFDs very cost effective for day traders.
No interest costs
If you do not hold your CFD position open overnight you will not incur any interest charges.
Risk reduction
You are not exposing yourself to the risk of a stock or share CFD gapping up or down overnight as a result of global market movements.
Free equity
Because you are only holding your positions for a short time period you are not tying up you money, this means that when you find a trading opportunity you will have enough money in your account to take the trade.
Although there are many benefits of using Contracts for Difference in your day trading strategy there are also some downsides , these are listed below:
Time
As all of your trading will occur during market hours over short time periods you need to monitor your trading screen on a frequesnt basis, this process can be time consuming .
Decision making
As time is of the essence in day trading it is important to have a very good knowledge of your trading system as you will have to make fast decisions relating to your trades.
Capital outlay
Day traders focus on profiting from smaller price changes, therefore in order to make large amount of profit, it is important to start off with a larger float or use more gearing.
If you have the time, a good intraday trading plan and can afford to commence trading with a bigger 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 read the following tips:
1. Trading Contracts for Difference is allot like running your own business, however, as Contracts for Difference are geared, there is a chance of losing more than your initial deposit, using stop loss orders and having a tight money management plan will minimize this risk.
2. Before starting to trade, ensure that you understand and stick to your trading strategy . You should start by practicing your trading plan in a demo account.
3. All traders will have both winning and losing trades. Trading a profitable trading system is the most critical factor in making profits overall . It is likely that when you begin trading you will have some bad trades. However, despite the fact that the number of losing 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 consistent long term profits, you need to thoroughly back test and understand 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 deposit, the regularity of returns, and the profit-loss ratio combined with the win-loss ratio.
5. Select your Contract for Difference provider carefully. Each Contract for Difference provider offers a different amount of Contracts for Difference 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.
To find out more about day trading Contracts for Difference with IC Markets visit our CFD ^(http://www.icmarkets.com.au/cfds_ic_markets.html) page and download our CFD help guide.
What To Think About Before Day Trading CFDs By auto | July 20, 2010
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