Using DMA CFDs In Your Trading Strategy

Published July 9th, 2010

DMA CFD day traders regularly look for short term trades to take advantage of small market movements on the other hand investors try to find medium to long term value. All traders and investors need a strategy even the very best day traders and fund managers. Here we will 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 up to four to seven days. You mustn’t ever let a short term CFD trade to turn out to be 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 start 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. Don’t let it turn out to be an investment that sits on the back burner hoping it will come good.

Be certain to only hold DMA CFD positions overnight if you are convinced in your view, not because you can’t bring yourself to take a loss. This is certainly amongst the most typical errors made by amateur traders. As the market close approaches and their positions start moving against them, a lot of traders refuse to believe their trades were wrong. This causes unwarranted risk taking and generally ruins the following day’s trading.

When the market starts to turn or go into consolidation phase, proficient day traders might take long and short positions a number of times during the trading day. This is only achievable if you’re flexible and are not searching for big price swings, you must also be ready to take small loses and move on to the next trade.

The essence of day trading is flexibility. You have to have the ability to bend with the market. You should not take it on. The moment you’ve got a strong predetermined expectation on where a given price of the CFD is heading you should put stops in place as this is where you can suffer 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 7 day period, you aim to be looking for at least a return of 1% and ideally around 5% to justify your risk exposure. This does not mean you should run a 5% stop loss. If at any point the trade looks wrong shut it out and look for more favorable conditions to re-enter.

Stop loss orders are extremely vital to your capital survival and your ability to keep day trading. They ought to be seen as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders previously who were always worried about being stopped only to see their trades go the right direction later on. This will likely happen, but you have to be able to deal with the frustration and move on to the next opportunity. If you don’t, you might have adopted an incorrect trading style and will end up at the market’s whim.

Trading versus Investing
The difference between trading and investing is the time horizon and expectations. Investing is a long term game that entails committing your funds to the market in search of positive capital growth and/or returns. Investors look to place their money into the markets for no less than at least 10 years. Investors shouldn’t examine their CFD portfolio on a day to day basis as this will only affect their overall view of the market because the inevitable large swings would scare them.

Warren Buffett said you should not buy a stock if you’re worried it may 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 problems with long term investing in CFDs is money management and where to put your stop losses. An intra day shift could go below your perceived level of an acceptable draw down, but you need to keep in mind that you are investing for the long term. It calls for immense patience to be a long-term investor and this style only suits certain people. This why there are many fund managers who take care of the money of people who don’t have any time or the ability to become involved in the financial markets. Long-term investing ought to be used as part of an overall approach.

Risk management
Risk is always present in the markets. Your trading strategy must deal with risk management. How much of your capital do you intend to risk at any given time?

You should 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 can be high. You should also be sure that your portfolio is well diversified and contains DMA CFDs from different industry sectors, this will ensure that you are not only subjected to the price movement of one CFD.

CFDs can be tremendously rewarding if you adopt strict trading rules and are disciplined. Before trading CFDs online you must ensure that you decide on a CFD broker that is able to offer you DMA CFDs and stop loss orders, some provider only offer simple order types.

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