Intraday Trading with CFDs

Intraday trading refers to opening and exiting a trade position before the day ends. This means that one will not hold any trades overnight which has a few advantages. One will not be required to pay interest overnight to the broker. Also the fluctuations one faces while trading are easier to manage than trades that have a longer trading period.

Trading CFDs has the benefit of using leverage. The stockbroker will provide this leverage to enter the CFD market. Once the client has contributed a fraction of the required capital, the broker will top-up on the rest of the contribution. The market exposure will therefore increase with the increase in the ratio of leverage to margin.

While planning to do intraday trading, it is advisable to choose stocks with a daily volatility that is more than the Average Daily Volatility of all stocks traded in options and futures. This will ensure direction and momentum of the market is predictable. Intraday traders also choose stocks with high liquidity like large cap stocks.  Stocks with low bid-ask spreads are traded with the narrow margins, keeping costs low, and exiting from unfavorable trading conditions. In general, market fluctuations of more than 3% should be avoided with intraday trading to minimize losses in case of a market downturn.

Intraday trading may sound attractive promising high returns. This has a higher risk as compared to other forms of trading that have a longer trading period. The trader should have a good understanding of technical analysis and have the time to perform the analysis on daily charts to enable the making of right decisions. For an intraday trader to assume long or short positions while investing, a 52-week analysis should be done, taking note of the cyclical variations of the stock.

For an intraday trader, timing is crucial. There are 3 crucial conditions for a trader to make; when to buy, when to sell, and when to sit out (not trade). For example, trading experts suggest avoiding taking a position within the first hour of trading. The market tends to be quite volatile during this period. However, with proper research, entering a position as early as possible will allow a trader to capture the maximum movement and profit of the stock.

A trader, whether experienced or not, may struggle with intraday trading indicators. Staying well informed with the news and macro-economic factors, and evaluating the flow of corporate announcements and results, will enable an intraday trader to acquire important insights into the stocks being tracked. Corporate actions are particularly important to watch as their stocks experience good volatility before and after the record date.

Intraday Trading Strategies

[1] Momentum Trading Strategy. This involves tracking of the right stock before a significant change in the market materializes. Indicators include Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). The choice of the stock depends on the latest news, earnings, and other releases made by the company. These stocks are usually trading at higher volumes compared to the average volumes.

[2] Reversal Trading Strategy. This is a more difficult trading strategy since the investment decisions are made against the market trends. Chances of making losses are significant especially if stop losses are not in place. Strategies such as harmonic trading strategies use price patterns to precisely identify turning points.

[3] Moving Average Crossover Strategy. Moving averages are lagging indicators that follow the price with a delay. This is a trend indicator that is represented as a line on the charts showing behavior of a stock over a specified period of time. When stock prices move over the moving average, this is an uptrend. Long positions are recommended. When stock prices are lower than the moving average, then this is referred to as a downtrend where selling is recommended.