Introduction
Many retail traders without huge capital find contracts for difference (CFDs) attractive. CFDs offer traders quick access to (and exit from) indices, stocks, and even forex without committing a huge amount of money. This is because your exposure is based on price movements, not wholesale ownership of the underlying assets.
CFDs allow for speculation on changes in asset prices without owning the asset to which the CFD is tied. Most retail traders are day traders, and many gravitate toward CFDs because of these instruments’ available leverage and simple architecture. This article explores the essentials of CFD trading and how to make profitable decisions.
Highlights and Key Takeaways
- Day trading CFDs presents an attractive option, especially for new traders. However, the instrument’s seemingly simple architecture and operation doesn’t mean it does not require a proper understanding.
- The initial grounding in the CFD markets allows for a slow buy-in approach. The approach can become more persistent whenever you can buy into dollar debt with little capital.
- Discipline and strategy are imperative with day trading CFDs. Changing positions and throwing good money away by chasing your losses is the greatest wealth killer in the CFD markets.
Understanding Day Trading with CFDs
What is Day Trading?
The term “day trading” describes the buying and selling of a security (or a bunch of them) within a single trading day. Day trading happens before the close of business on a specific day. Sometimes, day trades last only seconds, but the average day trader will move in and out of numerous trading positions in one day.
Likewise, day traders are entirely different from investors. Day traders exploit the small up-and-down movements in price that offer them profitable opportunities. Conversely, investors have a long-term approach to trading assets or securities. So, day trading aims to capitalize on price movements that long-term investors usually ignore.
Why Use CFDs for Day Trading?
- Leverage. That word likely sums up the attraction of CFDs for most day traders. Leverage means you get to buy into a bigger trade than you could fund outright by paying a percentage of the asset’s price (the margin). Traders can also go long or short with CFDs, making money from up and down price movements.
- CFD day traders also have a wide variety of markets to choose from. The extensive options make CFDs attractive to many new traders.
- Where there’s heaven, there’s hell. So, trading CFDs can be risky. Getting the underlying asset at a lower cost than buying it outright is great when things go as planned. However, your losses are determined by the total value of the underlying asset during the trading period.
- Also, your initial position immediately decreases once you buy into the contract because of the spread size after entering the CFD.
In comparison, trading forex currency pairs involves an upfront, visible, ‘already-paid’ position, and you can minimize losses with a stop-loss feature. While a stop loss can also be employed in CFD trading, the temptation to overextend yourself because of the ease of leverage makes trading CFDs more risky.
Best Practices for Successful Day Trading With CFDs
Adequate Research and Preparation
Everyone talks a big game about their analysis, but only some retail traders are legitimately informed when entering a CFD trade. Most will catch a headline or look at a few days’ trend to enter trades. The issue with this approach is that events may move against your position. So, a trader’s sole responsibility is to perform adequate research before entering a trade.
Start a ‘rinse and repeat’ cycle of observing CFD day trading in all manifestations, as there’s no such thing as too much ‘practice’. How CFDs pick up profit or loss needs to be known and understood before anyone hoping to make money with CFDs signs into a contract. Only thorough research narrows risk, although every trader will take some losses.
Setting Realistic Goals
If there’s one area where it’s consistently possible to aim low and keep picking small rewards, it’s CFD day trading. So, setting realistic profit targets (and stop-loss levels) no matter how deflating it seems, can be the difference for traders. Because entry is so easy and a loss so suddenly ugly with CFDs, going cautiously and conservatively into any trade, using available data, is the only decent way to trade CFDs.
Steel yourself because no matter how well you’ve analyzed the market or how cautiously you enter trading positions, you will still experience losses. The truth is that everyone takes losses in trading. Don’t believe the ads that suggest it’s all profit and wealth; they’re lying. If you’re gathering pennies, you’re succeeding.
Implementing a Consistent Trading Strategy
Good traders are boring. They develop a trading strategy that works for them and keep repeating it. That’s the pinnacle of CFD trading, so boring is just fine. Being involved in a market worth trillions daily can make your small wins seem insufficient, but if you build a trading plan aligned with the CFD market and your aims, stick with it at all costs. Remember to manage risks by implementing a stop loss/limit order on your trades.
Always keep your account funded, even if it means avoiding the markets for a day or two during tumultuous times. Never add to a losing trade! If the markets are dipping, rather close out your former position and go short to capitalize on things at that moment. You can reverse strategies as the markets dictate.
Risk Management
The necessity of managing risk in trading is paramount, above all other considerations. Otherwise, you might as well go down to the local casino if it’s a chance you’re after. Good traders eliminate chances as much as possible, and work on good information.
Profitable CFD trading is often extremely difficult, and every pro trader strategies when they see losses coming. This is because they understand that’s the only way to stay profitable. Be mercenary, be disciplined. Alongside daily market analysis, copious risk management research is a prerequisite for every trader. Despite their packaging, CFDs are complicated trading options with significant risks.
Keeping Emotions in Check
It may seem inappropriate to talk about emotions in trading, but emotions are one of the biggest enemies of retail day traders. Any emotional attachment to a trade is a liability. Automated trading might not have replaced human acumen yet, but it’s undoubtedly only competitive because it lacks emotional considerations around trading. Keep your emotions out of it.
Emotional mastery is essential, and it’s what separates the winners from the also-rans. Rather than pretend we can eliminate emotional bias, you’re better off recognizing it and putting it in its place, acknowledging it and moving beyond it back to the stark facts surrounding any trade. Self-control is the one asset every successful trader needs.
Common Mistakes To Avoid in Day Trading With CFDs
Following the points above, it is safe to say that emotional decision-making spells doom for traders.
- If you find yourself over-leveraged, correct it immediately! If you realize that your ability to trade tomorrow hinges on things going your way today, get out because you’re over-leveraged. It makes no sense to risk a future of trading for one score today. There is no future if today turns into a loss.
- Similarly, don’t overextend yourself by entering too many trades. Don’t kid yourself that a small, conservative position can’t kill your kitty when it’s surrounded by a dozen others. Avoid individual large trades (over-leverage) and numerous small trades that add up to the same exposure (over-extension).
- Remember always to institute a stop loss to curtail runaway losses. Also, use limit orders and take profit levels to your advantage. Automating these things should become second nature – don’t fantasize about letting a trade run for more significant gains.
Conclusion
The essentials for successful CFD day trading might seem complicated, and that’s because they are. The good part is that you can expect to successfully trade CFDs by applying strict emotional mastery and self-discipline.
Once you’ve done adequate preparation through thorough immersion in the day’s news, options, and market movements, you are more than halfway there. Remember to have a solid risk management plan as your cornerstone.
Indeed, the difference between the winners and the losers in day trading CFDs comes down to self-discipline. Those that win out over the long term maintain discipline, while the cowboys go big and fall far, never to return.
Having a good brokerage on your team is also a huge plus, and anyone with time under the belt in day trading can tell you the same. Being able to trust your broker and experience genuine customer service is not a given in day trading, so it’s essential to get that sorted before starting out.
FAQ
How To Start Day Trading CFD?
Find a reputable brokerage as they shall clarify the essentials you would ideally employ to set up well. A good brokerage will also freely share tips and tricks and not begrudge a few minutes on the phone to clarify things.
After that, begin serious research and watch the markets without participating for at least a few days or longer. Be prepared (with funds and emotions) to strike out the first few times you trade, but consistently make notes on developing a successful trading strategy. Soon your wins will outshine your losses.
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