What To Think About Prior To Day Trading CFDs

The gearing Contracts for Difference (CFDs) offer make day trading attractive, however, before starting a day trading strategy you should asses the pro’s and con’s of using CFDs in your plan.

Below are some of the advantages of using CFDs in your day trading plan:

Low Commission
The brokerage rates on share CFDs are much less than on traditional shares , this means that a trader can trade more frequently for smaller price movements making CFDs very cost effective for frequent traders.

No financing costs
If you do not hold your CFD position open overnight you will not incur any interest charges.

Risk minimization
You are not exposing yourself to the risk of a stock or share CFD gapping up or down overnight because of world market movements.

Free cash flow
As you are only holding your positions for a short time period you are not tying up you funds, this means that when you see a trading opportunity you will have enough money in your account to place the trade.

Although there are allot of benefits of using CFDs in your day trading strategy there are also some negatives, these are listed below:

Time
As all of your trading will be during market hours over short time periods you need to monitor your trading terminal on a regular basis, this task can take up time.

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 about your trades.

Capital outlay
Day traders plan 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 leverage .

If you have the time, a good intraday trading strategy and can afford to commence trading with a larger float, then day trading may be the right trading style for you. Before rushing out, opening a CFD account and becoming a day trader you should consider the following tips:

1. Trading Contracts for Difference is very much like having your own business, however, as CFDs 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 minimize this risk.

2. Before starting to trade, ensure that you understand and stick to your trading plan. You should start by practicing your trading system in a demo account.

3. All traders will have both winning and losing trades. Trading a profitable trading system is the most important factor in making a profit. It is likely that when you start out trading you will have some loosing trades. However, despite the fact that the number of losing trades is often more than the number of winning trades, the size of the good trades are generally considerably larger than the losers . In order to make regular 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 wins as a percentage of your initial cash float , 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 CFD 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 consider all of these issues as they may have an impact when back testing your trading system.

To discover more about day trading CFDs with International Capital Markets visit our CFD page and download our Contract for Difference educational guide.

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