By: Ic Markets
Submitted: 2010-07-04 04:13:55 | Word Count: 952
DMA CFD day traders frequently look for short term trades to exploit small market movements on the other hand investors search for medium to long term value. All traders and investors need a strategy even the top 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 mustn't 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 start to accumulate and you run the risk of wiping out your account. If in case you have chosen to open a DMA CFD position you want to run for a number of days the same rule applies. Do not let it become an investment that sits on the back burner hoping it will come good.
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You should only hold DMA CFD positions overnight if you are certain in your view, not because you can’t bring yourself to take a loss. This is certainly one of the most common mistakes made by novice traders. As the market close approaches and their positions start moving against them, a lot of traders refuse to accept that their trades were incorrect. This results in unwarranted risk taking and generally ruins the next day’s trading.
When the market starts to turn or go into consolidation phase, skillful day traders can take long and short positions several times in the course of the trading day. This is only possible if you're flexible and are not trying to find big price swings, it's essential to also be prepared to take small loses and move on to the next trade.
The essence of day trading is versatility. You should be ready to change with the market. You should not take it on. As soon as you have got a strong predetermined expectation on where a given price of the CFD is heading you should put stops in place as this is where you may suffer 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 7 day period, you aim to be seeking not less than a return of 1% and ideally up to 5% to justify your risk exposure. This does not mean you should run a 5% stop loss. If at any point the trade looks incorrect close 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 should be seen as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders previously who were always worried about being stopped only to see their trades go the correct direction later on. This will likely happen, but you need 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 end up at the market’s whim.
Trading compared to Investing
The difference between trading and investing is the time horizon and expectations. Investing is a long-term game that entails committing your funds to the market looking for positive capital growth and/or income. Investors look to put their funds into the markets for no less than a minimum of 10 years. Investors should not evaluate their CFD portfolio on a everyday basis as this will only affect their overall view of the market as the inevitable large swings would alarm them.
Warren Buffett said you should not buy a stock if you are concerned it may 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 problems 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 have to understand 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 lots of fund managers who look after the money of people who do not have any 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 management
Risk is always present in the markets. Your trading strategy must deal with risk management. How much of your money do you want to risk at any given time?
You must always be looking to diminish risk and this can be done by using stop loss orders. This is especially important if you are going to use DMA CFDs with low margin requirements where the leverage is often high. You must also make certain that your portfolio is well diversified and contains DMA CFDs from different industry sectors, this will ensure that you're not solely subjected to the price movement of one CFD.
Author Resource:-
John Masterton is a professional CFD trader trading with Australia's largest and most popular CFD provider, IC Markets. John has published a number of articles on CFD education including guides and ebooks which you can download for free.
