Day trading is a type of trading where an investor buys and sells commodities numerous times in a single day to take advantage of small fluctuations in a commodity’s price. CFDs are an excellent option for day trading because you never take ownership of the underlying asset, which means you can make numerous trades in a single day.
As with other types of day trading, CFD day trading also comes with a negative account balance risk. It is easy to lose control of the CFDs you have in your portfolio or for the price of an underlying commodity to fall so much that you end up making a significant loss. To ensure this doesn’t happen, we will look at some tips that will help you protect your account balance.
Understanding CFDs
CFDs stands for contract for difference. It is a derivative product that allows investors to speculate by predicting the future price of an underlying commodity. The underlying commodity can be any investment option in the market, but it is typically stocks. Also, investors can trade on a whole investment portfolio with more than one trading instrument.
Before you start CFT day trading, it is important to understand how to trade CFDs first so you can be profitable whether you have a short- or long-term investment horizon.
Start with a Demo Account
If you are new to CFD day trading or want to test some new strategies, using a demo account is an excellent option. Using one allows you to learn the platform or test your strategies without risking the money in your account.
Almost all CFD trading platforms have demo accounts, with the differences between them being the amount of demo money you get and the features you can access. There likely will also be some limitations, but most platforms give you everything so you can have the best experience possible.
Use Robust Risk Management Strategies
As with all other types of investments and trades, CFD day traders must have robust risk management strategies to protect their accounts and balances. There are several options, the first one being using stop-loss orders.
A stop-loss order allows you to set a predetermined acceptable loss level so that trades can halt if you reach this point. Limiting losses to a specific point allows traders to avoid losses and running trades that could ruin your balance and account.
The second is using take-profit orders. These are similar to stop-loss orders but stop trades at predetermined profit levels instead. Take-profit orders ensure you have a profit in your account before the market reverses and the potential for losses occurs.
The third is position sizing, where you set the size of a position depending on your risk tolerance and account balance. Proper position sizing helps you avoid putting too much into a single CFD order which minimizes the loss you can make on a single one.
Develop a Trading Plan
You are much more likely to make a loss and thus turn your account if you do not have a plan. A well-defined trading plan should outline your goals, strategies, risk tolerance, and entry/exit rules. It is very important that you stick to your plan once you have it in place. Doing so will stop you from impulse buying or making rushed decisions, both of which typically lead to losses.
Diversify Your Trades
Just like you should when investing generally, you should diversify your trades. Start by avoiding putting all your money in a single trade or the same types of trades. Because there are many underlying assets for CFDs, trade CFDs with different underlying assets to diversify.
You can also diversify trades across sectors and markets to hedge against risk.
Educate Yourself and Stay Informed
Every trader should continuously learn and improve their knowledge about CFDs and day trading. When doing so, expand your knowledge about underlying assets, market trends, technical analysis, and the numerous factors that can impact your profits. This knowledge will help you make informed trading decisions that help you avoid losses.
In addition to continuously learning, traders should keep up with relevant news, economic indicators, and market events that can impact the prices of the underlying assets supporting the CFDs they are trading. Remember that if these prices move against you, you will make a loss, so stay informed.
Review, Analyze, and Iterate
Every trader should continuously analyze their trading performance and identify their strengths, weaknesses, and areas of improvement. You should also be open to learning from both profitable and losing trades so you have data you can use to refine your strategies so you become a better trader over time.
Even though no strategy will eliminate the risk of a loss, you can still protect yourself and your account balance as best as you can. Understanding the underlying risks and your risk tolerance, making smart and informed decisions, and diversifying are all great places to start to minimize losses.
