Updated February 2021
Do you want to trade without actually owning the asset directly? If yes, we have a perfect solution for you. Day trade in CFDs. Day trading in CFDs has become very popular these days. You can enjoy the leverage while day trading, and in this post, we are going to show you how to start trading in CFDs. However before that , we must understand what CFD is.
CFD: What is it?
CFD = Contract for Difference
It is a type of derivative trading. With this method , you don’t have to purchase the asset. You can simply speculate on the price. For this reason, you may approach a CFD broker. You can trade simply on the price difference. For example you have to consider two prices, first the opening price of the asset and second the closing price of the asset. If you think the price is going to increase, you can trade on the opening price. And when the price increases, the difference will be your profit or loss if it goes the wrong way. You can trade on various assets and markets. To help you understand in a better way, let’s see an example.
Let’s assume you want to start trading. Now you can select various assets and markets. Let’s say you want to make a contract on stocks. The asking price of the stock is $50. Now you open a CFD. Let the value be 100 shares. You don’t have to pay the actual price or own the stock. If you are stock trading, you will have to pay $5,000. However here you just have to pay the margin. The margin is paid to the CFD broker. The Margin is mostly 5%. So instead of spending $5,000, you can make the same trade at just $250. Because of this, many day traders are starting to trade in CFDs. There are more risks and rewards here. So if you want to make a profit, the closing price should increase more than the spread. If it increases up to the spread, you will reach breakeven.
Day trading in CFDs vs. Day trading in Stocks
We can use the above example to help you understand the basic difference between the two. In this example we will ignore commission and costs.
- Ownership: In stock trading, you have to purchase the stocks in order to trade. In CFD trading, you don’t have to purchase the stock because you can simply speculate on its price.
- Rewards:We can relate it with this example. If the price of the stock increases to $55 from $50. The value of your shares will increase to $5,500 and so you will make a profit of $500. And in CFD you will still make $500 profit by spending only $250.
- Risk: Now if the value of the stock decreases to $45. The total value of your stock will be $4,500. You will incur a loss of $500 in stock trading. And in CFD, if the value of stock decreases to $45, you will incur the loss of $500 by spending $250.
This is how risk and rewards work in stocks trading and CFD trading. It’s certainly more lucrative and risky compared to stock trading and there are other differences as well.
Being a day trader, you can’t hold CFDs for long. So it’s important that you trade daily and have multiple trades in a single day. Besides that you need to select the assets and markets smartly. Choose markets with more liquidity. For example the Forex market is perfect for CFD trading although you can also choose bitcoin because of its volatile nature.
What are the Benefits of day trading in CFDs
If you are a day trader, there are many benefits for you. Here we will discuss all the benefits of CFD trading.
- Leverage: CFD offers higher leverage compared to other types of trading. The margin requirements can be as low as 2%. The rate is fixed as per the asset. If the asset is volatile, the rate may increase. In cryptocurrency the rate may go up to 20%, so you can enjoy more trading with less capital, but the loss may be great too.
- Accessibility: Many brokers provide the facility to trade in most of the markets and with so many accessible markets you can easily trade every day. The trading hours will increase for you, but first you need to check with your broker, Because some brokers are having specific working hours.
- Cost: You don’t have to incur various costs in CFD. You don’t have to pay high enter or exit fees. Sometimes the broker won’t even charge you. You only have to pay the spread. The spread mostly depends on volatility.
- Minimum shorting rules: There is no shorting cost. You don’t have to follow any shorting rule in CFD trading, Because you are not purchasing the asset you are free from shorting costs.
- Less requirement: You don’t need to have more capital to start CFD trading. You can simply start with $1000. You can easily trade any number of times with little capital. This is not the case with other markets.
- Diversity: You have many assets and market options to trade in CFD. You can trade in forex, crypto, commodities, etc. You can choose whatever you want.
What are the risks of day trading in CFDs
With greater benefits comes greater risks. There are several risks in CFD trading you might want to know.
CFD trading is not regulated, because of this you may find many fraud brokers and they will fool you for money. So you should make sure you choose a good broker. A broker who is genuine, trusted and credible for instance.
Day trading in CFDs on margin
The margins can be good as well as bad, however while trading with margin, you might become greedy and lose focus. With greater margin, you might incur, greater losses. By using $2000 with 5% margin, you might get $40,000. Your broker will give you $38,000. But if the market changes and the rate falls, you might lose money and you will be liable to your broker, so don’t lose focus while trading on margin.
Day trading in CFDs: How to start?
Choose a market
You have various markets to choose from. For example you can easily trade in crypto, foreign currency, stocks, commodities, bonds, etc. Choose a market you have knowledge about, so you can easily make strategies and learn trends. Make sure you can use this information to your advantage.
Buy or sell
For instance you can either buy or sell CFDs. The bid price is the selling price and the offer price is the buying price. When trading you can easily see the current price on the market platform. If you speculate a rise in price, buy, but If you speculate decline, then sell. Your CFD price will depend on the asset price.
The plus point in CFDs is that you can easily control the size of your trade. The price of the asset will change but you will have the liberty to decide how much money you want to invest, so you don’t need to have a high margin. CFD brokers don’t always need high margins. The margin depends upon the volatility of assets. But some assets will have more margin requirements, like cryptocurrency. Example, for trading $3000 worth Bitcoin you might need a $1500 margin. This is not the case with stocks. You can trade in stocks using a minimum 5% margin.
Add stops & limits
You can easily stop losses by limiting order. This will help to earn profit but limit losses, furthermore CGD strategies will help you in this. Risk management strategy helps you to put a stop on your order. Once the market reaches a level, your order will stop automatically to minimize the risk. It will also help you to know your risk tolerance level.You can use a lit order. It will help you to stop trade at a point. With this you will get a price that is higher than market price, therefore many traders use bots for this and they program the bot in such a way that there is no chance of losses. So the bot will open and close trade for you. So you don’t always have to monitor the positions in the market.
Monitor and close
You can easily place your trade and besides that you can also stop your losses by limiting order. Now you can easily monitor the price. The market price keeps on changing. But you can decide if you want to add new trade or close one. You can do this via applications. To close your position you can select the close position option. Now your account balance will highlight the profit and loss.
Without strategies, you won’t last in CFD trading. There are many strategies and therefore you have to choose the right strategy for you. In other words the strategy should be in line with your trading style, risk tolerance, budget, etc. There are two main types of strategies in CFD trading.
This strategy is very simple. All you need to do is read the trends and determine a key level. If the price moves to that level, you need to close the trade. You can do it for buying and selling, both. The market is not clear or if the trend is not clear, don’t take any decision. First Read charts and patterns to understand the trend and then make your move, and If the situation is unclear to you, don’t take any risk.
This strategy is very useful. It’s all about timing. For instance trends don’t last for a long time. For this reason You need to take advantage of this knowledge. When you know that the trend is going to stop and take a turn, make your move. However if the declining trend is going to end, then buy position. If it’s the opposite then sell.All you need to do is use analytical tools to read the trend.
Day trading in CFDs Tips
Experienced traders know the secrets of trading. You can use the tips given by them to ace your performance. Here are some tips for you to follow.
Control your leverage
Leverage can be dangerous sometimes. Therefore you need to know how to control your leverage. If you are in the winning position, there is nothing wrong with leverage, But not every trade will be the same, for example don’t use leverage on every position. Use it only if you are sure. Even if you are making huge profits, learn to control it or else you can make a big loss as well. A tremendous loss can easily wipe away your earnings. You have to focus on protecting your earnings.And if you are a beginner, don’t use leverage more than your account balance.Start small and then go for big returns. Once you have the necessary knowledge, make strategies. With these strategies, you can understand how to control your leverage and start doing some great trades.
If you are day trading in CFDs you should always make a journal. Day traders trade on a daily basis. Therefore you should note down all the important information in the journal. For example you can write entry points, exit points and positions in the journal. You can check all this information later to know your mistakes. Again it’s important to learn from your errors to evolve as a trader. Don’t underestimate the power of a trading journal. Here is a list of things you should note down.
- Entry time
- Exit time
- Reason behind trade (technical analysis, news)
- The instrument
- Trade performance
- What did you learn?
You need to write all this information in the journal. It is time consuming. But it will benefit you in the long run. And next time when you face a similar situation, you will know what to do and what not to do.
It is very important to use stops at the right time. This technique will keep you in the game for a long time. To keep losses at bay, you need to use stops. Every CFD trade needs a stop point. The opportunity may be good, however you should know when to close it. Additionally you need to decide a stop point. Use it religiously for your trade. You can easily close the trade at a right time to plan your next trade. So you don’t have to sit anticipating the next price movement. Instead you can plan your next CFD trade.
Once you know how to day trade CFDs, you can start. But it is wise to use a demo account first. A smart day trader will always practice with a demo account. It will help you to get practical knowledge. Of course you will make mistakes, but you can learn from them. Many brokers provide this option. And you can use this to your advantage. In the end it will teach you more about day trading in CFDs. In addition you can learn how to make strategies, follow trends, read charts, etc. So it will also help you to check the trading platform. You can see what options they are providing. And you can practice until you become confident. So once you are confident in your trading skills, you can use the real platform.
Education never stops. You are never too old to learn. There are many things from which you can trade education. You need to make the most of these education services. Here are some options for you.
- Blogs: You can read CFD trading blogs to know how to use the information to your advantage.
- Courses: There are many online and offline courses available for day traders. You can take this course to get familiar with CFD trading.
- Forums: You can participate in various trading forums to get advice from experts. Many experts share their techniques and tips on forums.
- Videos: You can watch videos about CFD trading. In addition you can also watch videos to learn how to use the mobile applications and software.
- Books and EBooks: Books can have tremendous information about trading. You can learn how to analyze the market and trends.
- Others: other education sources include PDFs, Podcasts and online guides. All these education tools are important for research in CFD trading. Make sure you use them before you start trading.
You can easily trade CFDs anywhere in the world. But your region and market can have a huge impact on taxes. Trading differs as per region. CFD trading will be different in different regions. UK, US, India, Australia, face differences in CFD trading.
One major point of difference is taxes. Some countries treat it like gambling. Some treat it like trading. For gambling, there are no taxes. For trading, you have to pay taxes.
In the UK, you have to pay capital gain tax for this. You get an exemption. But if your earnings from CFD trading surpasses the exemption, you have to pay tax.
You need to know which category CFD trading falls into your country. It will help you to manage your money and save taxes.
Take advantage of these factors you need to make strategies. You also need to educate yourself. Follow all the tips and techniques. Once you are good, you can try using a demo account. It will help you to understand and excel in the CFD market. As a day trader you need to use the opportunity at the right time. Open and close you positions as per market trends. This guide is for all the beginners who are planning to trade in CFDs.