The short answer to this question is yes, they do. CFDs can be used in a variety of trading strategies, depending on your expertise and experience. For the purposes of this blog however, we’ll explore the use of CFDs in day trading.
What is day trading?
A day trader essentially seeks to make a profit from small price movements of varied assets. They typically enter and exit many trades throughout a trading day in order to achieve this objective. The trader will also usually close all open positions at the end of the trading session. This is either because anticipated gains have been achieved, due to changes in market conditions, or to avoid overnight risk.
Day trading challenges
Day trading can be incredibly challenging, particularly for novice traders or those without a well-planned strategy. In fact, it is notorious for being a difficult strategy to implement, and often leads to traders losing most if not all of their money. It is also fiercely competitive and incredibly risky, particularly when you factor in leverage. Moreso, day trading requires a significant commitment of one’s time for executing trades in the event of rapid price fluctuations.
This in itself comes with considerable stress and anxiety, particularly when having to make trading decisions in minutes, or even seconds. Consequently, a day trader must work on their trading psychology to be able to mitigate the adverse impact of emotive trading. Day trading also requires a strong understanding of technical analysis, and the ability to read price charts. Not knowing how to properly analyse the markets or speculate the direction that prices may move will inevitably lead to poor trading outcomes.
Despite its obvious hurdles, day trading continues to appeal to a diverse array of global traders. Notably, there are day traders that have gone on to make extraordinary sums of money, reaching billions of dollars in fact. This includes the likes of George Soros, Jim Simmons, Ken Griffin, Ray Dalio, Steve Cohen, and others.
Interesting day trading stats
- Jim Simmons is reportedly the wealthiest day trader, with a net worth of $28.6 billion (as at January 2023). Did you know however that he started off his career as a math teacher?!
- About 5% of day traders achieve consistent gains long-term using this trading strategy.
- The majority of professional day traders tend to work 8-12 hours a day. Their day is usually split 3 ways, researching markets, formulating strategies, and entering/exiting positions.
- US day traders are said to earn an average annual salary of approximately $117k (roughly 10% of total number of traders earn $200k).
- 18-to-34 year olds account for all online traders in the UK, and that that the % of women identifying as active traders as increased from 27% to 41%. [Medium]
- It’s said that 90.5% of day traders are men, though women, who make up 9.5%, tend to be better traders due to more cautious strategies. [Quantified Strategies]
CFDs and day trading
A CFD trader that adopts a day trading strategy will commonly place a number of CFD trades during a trading session. But why choose CFDs in the first place? What about Contracts for Difference trading appeals to short-term, speculative day traders?
Leverage in CFD
Having the ability to manage positions with a limited sum of capital (smaller deposit) available is an obvious attraction. Aside from offering larger market exposure, leverage also amplifies profits. Saying that, the use of leverage comes with substantial risk. A lot of risk in fact. Because in the same way that it can magnify your wins, it can amplify your losses too. So much so that a trader can see themselves lose all of their capital and more if not managing leverage effectively.
Access to a diverse range of markets
This is another massive appeal of CFD trading. A CFD trader is typically able to speculate on a variety of financial markets. The choice of asset classes varies from broker to broker but usually includes stocks, currency pairs, commodities, metals, indices, futures, etc. Interestingly, cryptocurrencies are also increasing in popularity but not surprising really if one considers the number of crypto enthusiasts worldwide.
Profiting from rising and falling markets
Is another unique aspect of CFD trading. It’s also one that attracts day traders. Having the ability to speculate on the markets, regardless of the direction they move, increases the potential for trading twofold.
Going long or short in CFD
Trading CFDs enables the trader to go long (buy) or short (sell) on a variety of instruments (e.g. stocks, metals, commodities, etc). In other words, the trader can attempt to make gains from both rising and falling prices.
Hedging
Day traders may make use of CFDs to hedge against other open trades in their portfolio. Hedging is used to reduce risk in a market position by opening an opposing position in the market.
Flexible trading hours
Trading CFDs is possible whenever the relevant underlying markets are in session. This provides an attractive level of flexibility to the trader in terms of time commitment.
Ownership obligations
A CFD trader is not obligated to physically own the underlying asset. Instead, they merely speculate on the asset’s price movement and execute trades accordingly. This simplifies the trading experience, and to reduces costs to some degree.
Building CFD knowledge
It’s pretty clear that trading CFDs as a day trader offers a unique way to make a profit. There’s a particular thrill that comes with trading CFDs that’s certainly tempting to global traders, regardless of the risks. However, working towards limiting potential losses is a process characterising by ongoing learning, discipline, and focus.
As a day trader, this requires building your knowledge about CFDs, and the implications pertinent to using them as a trading tool. Expanding your knowledge can take on many forms. The most popular include consuming CFD trading related content to widen your scope of information. This may look like physical books, online blogs or articles, videos, podcasts, webinars, and even seminars.
Do some research on the world’s most successful day traders. We’ve mentioned a few of who these are in this article. Read up on their trading strategies. Listen to what tips and insights they’re offering and determine if there’s a way you can implement something similar. Many of these traders, and others, like Timothy Sykes, Ross Cameron, Tony Oz, Mark Minervini, etc, share their knowledge, tips, and strategies via books, websites, blogs, and social media platforms.
Alternatively, a day trader with little to no CFD trading experience could consider making use of a demo trading account to boost their skills. A demo account is a great way to learn the ins and outs of trading CFDs without putting your own money at risk. Using virtual funds, you are able to execute CFD trades in a simulated trading environment, but which mimics actual market conditions. In this way, you can get the practice you need to perform these types of trades before moving to a live trading platform. Another advantage of signing up for a demo trading account is getting to know the broker with whom you register. Choosing a CFD broker that best aligns with your needs, goals, and level of expertise is of vital importance to achieving success.
Are you pumped?
Ready to jump in on the day trading action using CFDs? T4Trade is a powerful broker through whom you can buy and sell your favourite assets via CFDs. You can also explore a wide range of trading opportunities with flexible or fixed spreads. Whether you’re looking to get into the action of metals trading, participating in the trillions dollar day forex market, or jumping into the commodities game, T4Trade is your go to broker for trading via CFDs. And with a dynamic, multilingual customer support team available 24/5, flexible leverage, and multiple accounts to choose from, you’re looking at a top-tier trading experience.
Khước từ trách nhiệm: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
