The leverage Contracts for Difference (CFDs) offer make day trading attractive, however, before starting a day trading strategy you must asses the benefits and downside of using CFDs in your strategy .
Below are some of the benefits of using CFDs in your day trading plan:
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 smaller price changes making CFDs very cost effective for day traders.
No interest charges
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 as a result of world market movements.
Because you are only keeping your positions for a short time frame you are not tying up you cash , this means that when you find a trading opportunity you will have sufficient funds in your account to take the trade.
Although there are allot of advantages of using CFDs 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 frames you need to watch your trading terminal on a regular basis, this process can take up time.
As time is of the essence in day trading it is important 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 making money from smaller price changes, therefore in order to make good amount of money , it is necessary to start off with a bigger float or use more gearing.
If you have the time, a good intraday trading plan and can afford to commence trading with a larger float, then day trading may be the right trading style for you. Before heading out, opening a CFD account and becoming a day trader you should read the following tips:
1. Trading Contracts for Difference is very much like running your own business, however, as Contracts for Difference are leveraged , there is a chance of losing more than your initial 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 follow your trading plan. You should start by testing your trading plan in a trial account.
3. All traders will have both winning and losing trades. Trading a profitable trading system is the most important factor in making profits overall . It is likely that when you start out trading you will have some bad trades. However, despite the fact that the number of bad trades is often more than the number of winning trades, the size of the good trades are generally considerably larger than the loosing trades. In order to make regular long term profits, you need to thoroughly back test and know your trading system.
4. To measure the performance of your trading system, you need to look at its wins as a percentage of your initial cash deposit, the maximum historical drawdown as a percentage of your initial cash deposit, the steadiness of returns, and the profit-loss ratio along with the win-loss ratio.
5. Select your CFD provider carefully. Each Contract for Difference 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 effect when back testing your trading system.
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