DMA CFD day traders continuously look for short term trades to exploit 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 top day traders and fund managers. Here we will examine a few 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 not ever let a short term CFD trade to turn out to be a long-term position if it goes against you. You must stick to your original trade parameters. If you don’t, your losses will begin to accumulate and you run the chance of wiping out your account. If you have chosen to open a DMA CFD position you want to run for a number of days a similar rule applies. Do not let it become an investment that sits on the back burner hoping it will come good.
You should only hold DMA CFD positions overnight if you’re certain in your view, not because you can’t bring yourself to take a loss. This is often amongst the most typical mistakes made by novice traders. As the market close approaches and their positions start moving against them, many traders refuse to accept that their trades were wrong. This causes unnecessary risk taking and generally ruins the following day’s trading.
When the market begins to turn or go into consolidation phase, good day traders can take long and short positions several times throughout the trading day. This is only possible when you are flexible and are not 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 versatility. It’s essential to be ready to bend with the market. Don’t take it on. As soon as you have a strong fixed view on where a given price of the CFD is heading it’s essential to put stops in place as this is where you can experience the biggest losses because when the market moves against you all you want to do is increase the size of your position.
On the somewhat longer term DMA CFD trades i.e. one to seven day duration, you ought to be looking for not less than a return of 1% and ideally around 5% to justify your risk exposure. This does not mean you should run a 5% stop loss. If at any point the trade looks wrong shut it out and try to find more favorable conditions to re-enter.
Stop loss orders are extremely vital to your capital survival and your ability to keep day trading. They ought to be viewed as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders in the past who were forever concerned about being stopped only to see their trades go the correct direction later on. This will happen, but you have to be able to deal with the frustration and move on to the next opportunity. If you don’t, you could have adopted an incorrect trading style and will find yourself 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 requires committing your money to the market in search of positive capital growth and/or returns. Investors look to put their money into the markets for no less than at least 10 years. Investors shouldn’t look at their CFD portfolio on a everyday basis as this will likely only affect their overall view of the market because the inevitable large swings would unnerve them.
Warren Buffett said you shouldn’t buy a stock if you’re worried it may decline in value by 50 per cent. This is an extreme view, but Buffett is 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 place your stop losses. An intra day shift could go below your perceived level of an appropriate draw down, but you need to keep in mind that you are investing for the long term. It requires immense patience to be a long-term investor and this approach only suits certain people. This why there are many fund managers who look after the money of people that do not have the time or the ability to get involved in the financial markets. Long term investing needs to be used as part of an overall approach.
Risk is always present in the markets. Your trading plan must address risk management. Just how much of your money do you wish to risk at any given time?
You must always be trying to diminish risk and this can be done through the use of stop loss orders. This is particularly important if you are going to use DMA CFDs with low margin requirements where the leverage is often high. You should also make certain that your portfolio is well diversified and includes DMA CFDs from different industry sectors, this will ensure that you’re not solely exposed to the price movement of one CFD.
DMA CFDs can be enormously rewarding if you adopt strict trading rules and are regimented. Before trading CFDs online you must ensure that you select a CFD broker that is able to offer you DMA CFDs and stop loss orders, some provider only offer basic order types.