There are a lot of things involved in trading stocks, and to be a pro, you need to learn as much as you can. In this ultimate guide, we shall look at one popular aspect of stock trading – day trading via CFD.
What is CFD? How does Leverage work?
CFD means Contract For Difference, which is a contract typically between the buyer and seller that implies that the value difference for an asset will be paid for by the buyer at the end of the contract time.
On the other hand, trading CFDs allows you to speculate on the price difference of stocks without actually buying or selling physical assets. The CFD trader is usually not the full owner of the trade as they often pay for part of the position value.
The reason why many traders use CFDs is that they’re leveraged. The leverage works by using borrowed money to achieve maximum profit. That way, the profit is expected to be higher than the borrowed amount, so the debt can be paid while the trader still gets a balance.
How CFDs on Stock Works in Europe?
In Europe, Asia, Africa, or Oceania, CFD trading is done with the help of leverage. When you open a trade on stocks, you do not have to pay the full price of the position. You only pay for a percentage, which is referred to as a margin.
Notably, you can trade with leverage 1:5. If the market reacts favorably, you stand the chance of making profits. On the contrary, you could make losses if the reaction is unfavorable. Hence, it is essential to be versatile in risk management when trading CFDs in stock. Likewise, there are no standard CFD trading contract terms in Europe. The terms and conditions differ across all providers.
How to Day Trade Stocks via CFD?
It is quite easy to day trade stocks via CFDs. Follow these steps to do so:
1. Know about the instrumental
Since you have decided to day trade stocks via CFDs, you need to familiarize yourself with how asset works. This mainly involves market analysis and reading reports to find out which stock markets are trending. Also, find out about the trading costs and leverage based on your location.
2. Know your position
Day trading involves opening and closing trade positions within a day. So, your trade open position is very vital. The standard rule is to open a long position if the stock price is likely to increase or open a short position if the stock price is expected to decrease.
To get this correctly, you have to consider factors like trading signals and indicators. Afterward, you can then decide on your trade position, which mainly relies on how much you are willing to part with.
3. Pick a trading platform
You’re set to trade after being familiar with the stock, deciding on an open position, and position size. There are different CFDs trading platforms offered by stockbrokers. The major ones, however, are the MetaTrader 4 (MT4) and MetaTrader 5 (MT5) platforms. Using mobile applications has its advantages too.
Stock Day Trading Vs. Traditional Stock Investing
Traders in the stock market carry out both day trading and stock investing. The two trading patterns have their pros and cons, but stock day trading seems to be the most preferred.
In stock day trading, trades last for a short time frame – could be seconds, minutes, or hours, but it never exceeds a day. All trading positions in stock day trading open and close within 24 hours. The profits you aim for are short-termed, and your primary focus is on the current share prices.
For traditional stock investing, you are considering profits on a long term scale. You can purchase stocks and hold them for a very long time before selling them. This could be months or years. The focus in stock investing is on the share price of stocks in the future. The trade is carried out with the assumption that the purchased stocks will gain more value in time to come and can then be sold for a higher amount.
Read More: Using Technology to Leverage Your Trading Efforts
Benefits of Day Trading Stocks Over Traditional Stock Investing
Day trading stocks provide some valuable benefits to traders. To start with, overnight trading risks that are common in traditional stock investing is eliminated. You can go to bed at night without worrying about the market changing unexpectedly. Your trading position is opened in and closed at the end of the day. So, your capital or profits cannot be affected as long as you’re on the watch.
Also, day traders are usually more successful when the market condition is poor. You can buy and sell within a short time range so you can always adjust to whatever direction the market goes. When you day trade stocks, you get hold of your profits quicker without having to wait for too long.
However, these benefits can only be enjoyed if the cards are played correctly. A wrong move could result in losses. As a day trader, you are expected to be very disciplined and also better manage your time.
Conclusion on Day Trading Stocks via CFD
Day trading stocks via CFDs can be simple and profitable if you trade with a good stockbroker. The experienced ones are always the best. Before beginning live day trading, you can do some practice with a demo account to get familiar with things. It does help a lot.
Read More: Everything You Need to Know About Trading and Timothy Sykes Millionaire Challenge!
