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Day Trading with CFDs

Day Trading
Written by Andy

Day trading in essence means that you rarely hold your CFD trading positions for longer than a day. Day traders tend to to place many CFDs trades during a trading session, focusing on the more liquid volatile markets.

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. Shorter-term traders tend to rely on technical analysis for spotting trading opportunities

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.

Day Trading Methods

After trading with my CFD day trading plan, I have by now a very strong feel for day trading, and am looking to formulate strategies to extract consistent profits from the market. I am attempting here to share my experiences with my fellow traders.

First of all, I must tell you what you need to be a successful day trader.

You need a good CFD broker with a good platform. You can email me for suggestions. Brokerage must be small; otherwise they will eat too much into your profit.

Personally, I like Ayondo. They have a very good platform.

A second consideration is of course that you have to be able to spend time on your computer.

Trading is a disciplined adventure

How would you describe day trading? Some people say it’s like swimming with the sharks, waiting to be mauled; others think of it as a ship in rough seas, waiting to be overturned by the next huge wave. I like to think of day trading as a walk in a fairy tale, hoping that a wizard appears with a sack full of coins – be content to consistently pick up small profits here and there, and avoid the temptation to go for a bag full of dollars, and in the process losing the lot.

My Definition of Day Trading

By the very nature of day trading, scalping is best defined by trades that are very short term in nature. This presupposes small consistent profits from trades that last from a few minutes to maybe one hour.

These methods presented here are high probability trades with extremely small risk stops and predefined profit objectives. It is all about doing a thousand trades to make a thousand dollars.

Risk Management

Whilst entry techniques here are self explanatory, the risk management aspect of these trades are such that they must be followed without question, or when the position doesn’t perform as expected. Being relatively tight stops, the trader must be very fast in exiting when the position doesn’t perform as expected. I suggest you place a stop loss order in the market straight after entry and trail it up as the price increases. The methods here depend very much on taking losses as and when they come – taking larger than normal losses when they should have been taken earlier will undermine week-to-week profits significantly.

The Ultimate Market for these Scalping Methods

As the ASX 20 is, in my opinion, one of the most liquid and most active accessible part of the Australian market, these methods represent the best known chances for picking consistent profits as a day trader-scalper when following the ASX 20. In the UK we have the FTSE 100. In today’s market, the same can be said about the bigger resource stocks. However, there are times when other stocks, often on news, provide a fertile ground for scalping, but these stocks are often more difficult to discover. Market activity and news may be of help there.

Moving Average Indicated Trades:

Here’s an example of a day trading system for the ASX. These are what I call trend following trades.

This use to be one of my favourite methods – it’s easy to do and is very reliable.

If you trade the ASX 20, only trade when the market trends up. If you can pick a trade after news or from market activity, you may ignore the general market trend.

Setup: Set your intraday chart to 2 minutes. Check that the 7EMA line is above the 15 EMA line and that the price is above both lines.

Entry: Enter to go long if you see 1 green candle above both EMAs. After you entered the trade you may switch to the 5 min chart to find your exit point. Once you are in profit, use a trailing stop loss.

Profit Exit: Take profit if 2 candles indicate that the trend has flattened out.

Stop Loss: Exit if price had dropped to 15EMA.

Re-entry: On being stopped out, look for a re-entry point as before. Same exit rules apply.

The Engulfing Candle Bar Pattern

These setups are much harder to find, but can produce good results.

Setup: On 10 minute candlestick bars, look out for bullish or bearish engulfment.

I reproduce the engulfment patterns as applicable for this purpose in Figure 1.

Engulfing Patterns

Entry: Timing window: only take trades within first hour and last hour of the trading day.

For bullish engulfment: buy at market price when the white body of the current bar exceeds the high of the last dark-bodied bar (see above).

For bearish engulfment: sell at market price when the current dark body of the current bar goes lower then low of the last white-bodied bar. (See above).

For exits, follow the statements for the moving average trades.

There you have a high probability scalping setup with tight risk rules. Be sure to take those losses when they invariably occur, and avoid the temptation to go for more profits by staying too long in a trade.

It’s easy to dismiss these patterns as too difficult for small profits, but be happy to move along with small consistent profits.

Trading is scalpable and very profitable if consistent. Try small positions for a start. It’s going to be real serious money if you know what you’re doing. Just remember to cut loss at the slightest discomfort. And remember: A thousand trades can be worth a thousand dollars.

Do You Have What It Takes To Become A Day Trader?

To become a day trader, you need to have certain qualities. In day trading, positions are opened and closed within the same day. This helps define the type of personality that tends to be drawn to day trading.

* you don’t mind being at your computer the whole day, or if you’re part time, for the time you have allocated to trade. If you have a demanding job, or a lot of family or other commitments, day trading may not be a good fit for you.

* you want/need to keep an eye on the trade and monitor it whilst it’s open. Because a day trader opens and closes positions in the same day, they aren’t going to be affected by things that are happening whilst the market is closed, or they are asleep, or involved in social activities.

* day traders are in many ways more impatient than other traders, though they do need to have some patience to be successful. A good day trader needs to be patient enough to wait for a trade to come along that fits their strategy. They need enough self-control that trades aren’t entered out of boredom, or the need to ‘do’ something – even if it means waiting for hours.

* day traders tend to feel the need to be doing something all the time, hence they don’t mind watching the stock market for a good trade whilst that session is open. Those that compulsively micro-manage things might be drawn to day trading.

A good day trader needs the ability to take decisive action when conditions are identified that meet their trading criteria. This is partly related to confidence in your own judgment, as well as how you handle a sense of risk psychologically. Leaving it too long to enter a trade by waiting until a stock moves into profit can mean the window of entry that would make it a good (profitable) trade, is missed. This is a mistake that beginners can make, and could be a function of needing to learn more, or simply a lack of experience leading to a lack of confidence. Certainly, if you prefer someone to take you by the hand, joining a service that recommends stocks might be a good idea.

The flip side to the above is about not making rash decisions. A good day trader does not approach trading like a gambler would. Day traders mostly use technical analysis, which follows price movements in the stock market, to determine whether to make a trade. Most people who become a day trader are risk averse, so this may not be a problem. Day traders tend to use small stop losses to limit the possible amount lost per trade.

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 as you need to pay close attention with market analysis, 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.

A Word of Caution

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.

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