Contracts for difference have emerged as the trading tool of choice for short-term speculative traders today since it offers the trader the possibility of making a profit on small moves in a stock, currency or index.
Discussion ranges over what is the best time period to use for trading profitably with CFDs. Some traders argue that the only effective way to trade is to be a professional trader sitting at your computer all day long looking for trading opportunities. Other investors prefer to spend just five minutes a night reviewing their trading portfolio, while many want to buy and just forget about their investments, and once a week might be too frequent for them. CFDs are definitely not for investors who are disinterested in their money, but they can definitely be used over many different time frames.
A timeframe that suits people who want to take an active interest in their financial affairs is that which involves holding financial securities for a few days. With a full-time job, many people cannot follow the markets during the day, but unless you are prepared to review your trading selections on a regular basis, you might as well put your money in a savings account. So the type of trading that many people opt to do involves looking at their holdings once or twice a day, and making any decisions to make changes at that time.
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The time you spend analyzing and following the markets will depend on the stock market trading system that you choose to implement. Day trading and scalping requires continuous monitoring of the market as day traders aim to gain from small price changes, whilst swing trading requires that trades be held open for a number of days (or even weeks), meaning that you don't have to spend as much time in front of the computer.
If day trading appeals to you, then you should know that contracts for difference are well suited to this timescale. The leverage that you obtain with CFDs means that you can profit substantially from a reasonably small amount of trading capital. Compared to stocks, where the most that you can expect is a 50% margin from your broker, the usual levels of margin that CFDs require allow you to control several times that amount of shares and gain from their moves. In addition, the commision rates on stock CFDs are typically considerably less than on traditional shares dealing, which means that you can trade more actively for smaller price movements making contracts for difference extremely cost effective for day traders. Moreover, since you are only holding your positions for a few days, this makes away with the need to tie in trading capital which means that you are able to take advantage of trading opportunities as soon as you notice them.
While CFDs can be used for fast action trading, taking and selling many positions during the day, this requires that you commit your time to the computer, and many people just cannot do that. Even if you do not work fulltime, there are many other things that need to be done, and sitting at the computer all day is not high on most people's lists of what they want to do.
On the other end of the scale, for the long term most investors would prefer to own the actual stocks, rather than a leveraged derivative based on the underlying asset, and this would avoid an ongoing maintenance requirement for interest and any margin calls with varying prices. Once you own stocks, they are reasonably maintenance free, and you have the opportunity of attending annual meetings to see how the company is being managed.
As timing is critiical in day trading it is especially important to have a very good idea about your trading system as you will have to take quick decisions. With such short timeframes, what really matters is which way the price of an asset is moving and how quickly you spot the prevailing trend. For trading over a few days, you should apply technical analysis to the charts to identify overbought or oversold securities, and look for confirming factors in the pricing chart, such as patterns or support and resistance levels. This sort of stock review is ideal for finding equities that are ready to move, and the advantage of CFDs is that you can go short just as easily as taking a long position, allowing you to profit from movement up or down.
Do keep in mind that even though day trading from home permits you to choose your own working hours, it is still important to keep abreast of key times throughout the trading day such as the opening and closing phases of the market, any economic releases falling in-between and specific company announcements related to the company you're trading. You should also be aware of the movements of overseas markets and how these can effect the local market and the company you are dealing in.
Day trading CFDs, shares or indexes, has increased in popularity in recent times. The attractiveness of day trading has been boosted by many adverts for money making trading systems, seminars and educational programs that promise overnight success and instant riches... Many of these programs also claim to be low risk and require only a modest capital outlay. However, what seminars and brokers don't tell you is that day trading is hard work, the more time you devote to building a successful trading plan, the better your chances of succeeding, however be warned that that success won't come overnight or without losses nor is it guaranteed. Do not believe the promises of surefire returns, develop and backtest your own trading systems that suit your life style and the time you spend on your trading. You will inevitably make errors but this is okay as long as you recognise what went wrong and refine your trading plan. You should also have sufficient funds to trade - in fact it is recommended that you start with no less than 20 to 30k (i.e. $20,000 to $30,000); this will allow you to open multiple positions and enable you to recover from errors. Day trading has many lifestyle advantages, not least being able to work from home, being your own boss and choosing your own working hours and if you persist and succeed you'll be amply rewarded with the advantages that being a day trader has.
