Best CFD trading strategies for Day Traders.
Have you been trading for some time now, mostly during your free time, and are thinking about doing day trading instead? Here’s what you should be prepared for, and some trading strategies you can adopt with CFDs.
What is day trading?
Day trading is a trading practice where investment assets or instruments are purchased and sold within the same trading day, as opposed to holding overnight positions.
Day traders are active traders who typically use short term trading strategies and leverage to maximise their gains from small price movements.
While day trading carries a significant amount of risk, professional day traders are able to do so profitably by adopting some important rules.
- Staying up to date
Besides being well versed in technical analysis and charting, day traders are constantly staying up to date on market events, so they can be on top of any anticipated price movements.
- Using only risk capital
Day traders need to make quick decisions with every single trade and avoid allowing their emotions to get ahead of them. So they only use risk capital in their trading, in other words, capital that they can afford to lose.
- Trading instruments that offer high liquidity and flexibility
Day traders often make use of leveraged trading instruments like CFDs that offer high liquidity, high volatility, low transactional costs and greater flexibility of trading without the need to own underlying assets. These allow day traders to focus on price movements, without concerns of expiry dates or deliveries.
For instance, Phillip Futures offers zero commission trading to CFD traders who trade on the Phillip MetaTrader 5 (MT5) platform, starting from as low as 1 share CFD. They also offer zero platform fees and no minimum fees, which is ideal for day traders looking for low costs.
- Having a trading plan and sticking to it
This is probably the most important rule of all. Day traders have to put their trading strategies and plans in place even before their start their trades. That includes deciding on their order types, stops and limits ahead of time, and sticking to that plan during execution.
Popular CFD trading strategies used by day traders
Here are some of the most popular CFD strategies used by day traders.
A breakout occurs when prices move above a resistance level or below a support level with higher volumes. A breakout is often closely followed by increased volatility and a price trend in the direction of the breakout.
In anticipation of a breakout, CFD traders can enter a long position when prices move above the resistance level, or a short position when prices fall below the support level.
Scalping is another popular strategy used by day traders, which involves entering and exiting multiple trades in quick succession, to record gains from small price changes.
Scalpers never let their profits run. Instead, they follow a strict exit strategy. Scalpers will enter their positions very precisely, and close them as soon as the trade is profitable. This helps them to quickly realise small gains and accumulate them throughout the day. In order to do this effectively, scalpers rely on trading in large quantities, typically using leverage, to maximise their gains.
Pull back trading
In pull back trading, traders look out for established trends, and enter a trade position when there is a sudden and temporary reversal of the trend, or a pullback. If an asset is on the uptrend, then the trader will wait for a temporary decline in price to enter a long position. If the asset is on a downtrend, then the pullback will be a temporary hike in price, and the trader will enter a short position.
This trading strategy is one way for traders to try to get the best possible entry price, when trading on an established trend.
Momentum traders look out for assets with a strong price momentum, then enters a trade while the momentum remains strong, and exits when prices lose momentum.
This trading strategy flies against the typical investment advice of buying low and selling high, as momentum traders tend to buy high and sell higher, or buy low and sell lower as the situation arises.
Choosing the right platform for day traders
Before embarking on your day trading journey, it is also important to choose a good platform for your needs.
The Phillip MT5 platform is a multi-asset trading platform by MetaQuotes Software, which allows you to trade a variety of different asset classes on one platform.
Phillip Futures is currently offering a zero commission promotion for MT5 customers who wish to trade SGX and US Share CFDs. There will also be no platform fees and no minimum fees payable, and investors can start trading from as low as one share CFD.