Important Principles Of DMA CFD Trading
July 8, 2010 by Forex Guide
Filed under Forex Tips
DMA CFD day traders continuously search for short term trades to benefit from small market movements on the other hand investors look for medium to long term value. All traders and investors need a strategy even the best day traders and fund managers. Here we are going to 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 much as four to seven days. You must never let a short term CFD trade to become a long term position if it goes against you. It’s essential to stick with 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 in case you have chosen to open a DMA CFD position you want to run for several days the same rule applies. Do not let it turn out to be an investment that sits on the back burner hoping it will come good.
It is advisable to only hold DMA CFD positions overnight if you’re confident in your view, not because you can’t bring yourself to take a loss. This is often among the most typical mistakes made by newbie 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 needless risk taking and usually ruins the next day’s trading.
When the market begins 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 when you are flexible and are not looking for large 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 flexibility. You should have the ability to bend with the market. Don’t take it on. The moment you have got a strong predetermined expectation on where a given price of the CFD is heading you need to put stops in place as this is where you may 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 slightly longer term DMA CFD trades i.e. one to seven day duration, you aim to be looking for no less than a return of 1% and ideally up to 5% to justify your risk exposure. This does not mean you need to run a 5% stop loss. If at any point the trade looks incorrect close it out and search for more favorable conditions to re-enter.
Stop loss orders are absolutely vital to your capital survival and your ability to keep day trading. They must be viewed as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders previously who were forever 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 have adopted an incorrect trading style and will find yourself at the market’s whim.
Trading v’s Investing
The difference between trading and investing is the time horizon and expectations. Investing is a long term game that entails committing your money to the market in search of positive capital growth and/or earnings. Investors look to put their money into the markets for no less than at least 10 years. Investors shouldn’t evaluate their CFD portfolio on a day to day basis as this will likely only affect their overall view of the market as the inevitable large swings would alarm them.
Warren Buffett said you shouldn’t buy a stock if you are concerned it might drop in value 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 issues with long-term investing in CFDs is money management and where to place your stop losses. An intra day move could go below your perceived level of an acceptable draw down, but it’s important to understand that you are investing for the long term. It calls for 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 that do not have any time or the ability to become involved in the financial markets. Long term investing needs to be used as part of an overall approach.
Risk
Risk is always present in the markets. Your trading strategy must address risk management. Just how much of your wealth do you wish to risk at any given time?
You must always be aiming to diminish risk and this can be done by using 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 must also make certain that your portfolio is well diversified and includes DMA CFDs from different industry sectors, this will ensure that you are not solely subjected to the price movement of one CFD.
Contracts for Difference can be tremendously rewarding if you use strict trading rules and are disciplined. 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 simple order types.
