Posts Tagged ‘CFDs online’
Short Term Direct Market Access CFD Trading
July 10th, 2010
DMA CFD day traders continually search for short term trades to take advantage of small market movements on the other hand investors try to find medium to long-term value. All traders and investors need a strategy even the best day traders and fund managers. Here we will study some of the principles adopted by the best of them.
A DMA CFD trade can last anything from half an hour for short term intra day scalping or even as long as four to seven days. You must never let a short term CFD trade to turn into a long term position if it goes against you. It’s essential to stick to your original trade parameters. If you do not, your losses will start to accumulate and you run the danger of wiping out your account. If you have chosen to open a DMA CFD position that you want to run for several days a similar rule applies. Don’t let it become an investment that sits on the back burner hoping it is going to come good.
It is advisable to only hold DMA CFD positions overnight if you’re confident in your view, not because you can’t bring yourself to take a loss. This is often one of the most common errors made by amateur traders. As the market close approaches and their positions start moving against them, a lot of traders refuse to accept that their trades were wrong. This results in unnecessary risk taking and generally ruins the next day’s trading.
When the market begins to turn or go into consolidation phase, skillful day traders might take long and short positions a number of times during the trading day. This is only possible when you are flexible and aren’t trying to find large price swings, you must also be ready to take small loses and move on to the next trade.
The essence of day trading is flexibility. You should be able to bend with the market. Do not take it on. The moment you have a strong predetermined expectation on where a given price of the CFD is heading it’s essential to put stops in place as this is where it’s possible suffer the largest losses because when the market moves against you all you want to do is increase the size of your position.
On the slightly longer term DMA CFD trades i.e. one to 7 day period, it’s essential to be seeking not less than a profit of 1% and ideally around 5% to justify your risk exposure. This doesn’t mean you should run a 5% stop loss. If at any point the trade looks wrong shut it out and search for more favorable conditions to re-enter.
Stop loss orders are absolutely vital to your capital survival and your ability to keep day trading. They must be viewed as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders in the past who were always concerned about being stopped only to find out their trades go the right direction later on. This will happen, but you must be able to deal with the frustration and move on to the next opportunity. If you don’t, you have adopted an incorrect trading style and will end up at the market’s whim.
Trading versus Investing
The difference between trading and investing is the time horizon and expectations. Investing is a long term game that entails committing your capital to the market in search of positive capital growth and/or earnings. Investors look to put their capital into the markets for a minimum of a minimum of 10 years. Investors should not look at their CFD portfolio on a everyday basis as this will likely only affect their overall view of the market as the inevitable large swings would scare them.
Warren Buffett said you should not buy a stock if you are concerned it might drop in price by 50 per cent. This is an extreme view, but Buffett is without doubt one of the world’s richest men and most successful investors.
One of the issues with long-term investing in CFDs is money management and where to put your stop losses. An intra day move could go below your perceived level of an appropriate draw down, but you need to understand that you are investing for the long term. It requires immense patience to be a long term investor and this style only suits certain people. This why there are many fund managers who look after the money of people who don’t have any time or the ability to become involved in the financial markets. Long-term investing needs to be used as part of an overall approach.
Risk management
Risk is always present in the markets. Your trading plan must address risk management. Just how much of your wealth do you want to risk at any given time?
You must always be trying to reduce risk and this can be done by using stop loss orders. This is particularly important if you are going to use DMA CFDs with low margin requirements where the leverage will be high. You must also ensure that your portfolio is well diversified and includes DMA CFDs from different industry sectors, this will ensure that you are not only subjected to the price movement of one CFD.
CFDs can be extremely rewarding if you use strict trading rules and are regimented. Before trading CFDs online you must ensure that you pick a CFD broker that is able to offer you DMA CFDs and stop loss orders, some provider only offer simple order types.