Articles of Interest

Day trading can be considered a made to order profession. To a large extent you can work when and where you want. You can dictate exactly how you want to spend your day, working from your office or home, or even when travelling.

You can live anywhere in the world and you can finally have a sense of having control over your financial affairs. You are solely in control. So what is the downside? The very fact that you have total control is sometimes a frightening prospect for many, especially those who find it difficult to create their own timetable.

Technically speaking the only difference between day trading and other forms of trading is the time frame used. Instead of taking positions for weeks or years, day traders typically hold positions throughout the day, often liquidating positions before the market close. Active day trading requires much more focus than other types of trading due to the shorter time frame and because the market moves quickly over the shorter term.

Consider the thoughts and motivations that are running through your mind and if your thoughts are a little off don’t hesitate to take a break. Day trading is hard work and it requires constant attention. You need to be motivated when you are day trading.

Discipline is by far one of the biggest attributes of successful traders. Keep a watchful eye on your bad habits. Know what they are and look to work on them as soon as possible. One way to check to see if you are trading in a disciplined way is to see if you are following your rules. There is a reason why you wrote your rules this was to ensure that you follow them to their completion.

From a day trading perspective you are best off evaluating your rules at the end of each month due to the shorter time frame of this style of trading. Keep in mind that you will break your rules occasionally and this is not a good habit to have.  Find ways to overcome breaking your rules and look to rectify the problem as soon as possible.

Money management is essential if you want to become a successful day trader. In fact money management is one of the essential elements of successful trading over any time frame.  Certainly if you want to be around for many years trading you are going to need to apply successful money management strategies. 

There are whole books dedicated to the area of money management. You need to find a method that you are comfortable with.

Always look to enter trades that have the potential to gain twice what you are risking on the trade. This is known as your risk versus reward. If you can maintain a risk reward in excess of 1 to 2 then you are well on your way to being a profitable trader.

Never forget to use stop losses when you are placing your orders into the market. This is your insurance policy. You need to be aware of exactly where your stops are prior to even entering the trade. This is a good discipline to have and will ensure you are constantly thinking of your downside protection.

Trading should be effortless and you must remain calm. This is especially true when you are faced with a loss. Maintain your calm and react in accordance with your rules. Mentally rehearse your worse case scenarios, so if they occur you can remain calm because you are mentally prepared.

Only ever discuss your trade with a technical analyst and do not discuss open positions with other traders. They will want to give you their view of the market with no consideration of your trading methodology. Remember no one has put as much effort into your trading system and style as what you have. You know your time frames and your stops so you need to stick to them. Other traders will have a bias whereas a technical analyst can appreciate your style of trading and give their thoughts accordingly.

Maintain your independence. If you find yourself reaching for the phone or looking to send an email to someone in order to back up that your view is correct then exit the trade. It is likely this trade is not correct and you should exit. 

Once you have conducted your analysis and you have done your numbers then do not doubt yourself. There is a reason why you have come up with your entry and exit signals at your key points so believe in those numbers and do not second guess yourself.

Again emphasis needs to be placed on the importance of being patient when trading. If there is nothing to trade then there is nothing to trade full stop. Do not force yourself to trade. Once you are in sync with the market you will find that trading becomes rather effortless.

If you are unsure at any stage then be prepared to walk away from the market and come back later. The market has a tendency to do this from time to time. Don’t be fooled and simply walk away.

Listen to your intuition as it usually knows something that your conscious mind may not. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. If you feel you’re getting stressed then get up and do some form of exercise or even get a massage. Day trading is a stressful exercise and one that requires constant attention and motivation so it’s easy to get stressed. Get some perspective about trading and life. There is more to life than just trading. Spend time with your family, friends and loved ones.  Schedule time for some relaxation and sporting activities to refresh and recharge your batteries. 

When you are trading it’s also necessary to be flexible with your positions.  Market conditions can change rapidly so you need to be flexible with your thoughts on the market.

Stick to your chosen market and your particular time frame and do not stray from those. When you trade like this then you are in control instead of the market being in control of you. Only look to trade in high volume periods.

Never be afraid of taking profit. You cannot go broke taking profits! If you find yourself getting out of a trade at a profit and the trend continues then let the other traders fight over the last part of the move. If you continue to worry that you are missing out on profits after you exit, then simply design and test a re-entry technique that you can build some confidence around.  If, as a short term trader, you find yourself making profits on a daily basis then it’s going to be very difficult to lose money long term.

When you are running a particular trade you should look to write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you increase your learning curve and success dramatically.  Take the extra time to do this and you will become a better trader.

You need to understand whether you are in front or behind for the day, week or month. Keep these numbers handy as you need to take responsibility for them. 

We all know that hindsight is a great educator, so after you have completed a month’s worth of trades take some time to evaluate what you have done and ask yourself the question: “If I could do this trade again what would I do differently?”  This will assist you in becoming a better trader and a more consistent and successful trader in the long term.

You can find out more about day trading CFDs by downloading our free CFD Guide.

CFD Margin requirements
An initial margin amount is required to open a CFD position, either long or short.  There are two types of margins that are applied to the total value of a CFD position. These are initial margin and variation margin.

Initial Margin
Initial Margin is the initial deposit required to open a position. Generally, for Australian equity CFDs, this ranges from between 5% to 50% of the total notional value of the trade. Hence, if you purchased 10,000 XYZ CFDs at $1.35, you would be required to have at least $1,350 in your account to cover the minimum margin requirement (10% of your total position size of $13,500). The margin requirement for index and foreign exchange CFDs can be as low as 1%.

Variation Margin
Variation Margin is the difference between the initial margin and the margin required to keep the position open as the position value changes. For example if you buy 2,000 XYZ CFDs, at $5.60 it would give you a position value of 2,000 x $5.60 = $11,200. Assuming XYZ is margined at 10% you would need at least $1,120 initial margin to open this position. If XYZ goes down to say, $5.40, you would now have a loss of $400 ($0.20 x 2,000). This loss (known as variation margin) is subtracted from the initial margin of $1,120, leaving a deposit of $720. Since you still hold 2,000 XYZ contracts at $5.40 you have a margin requirement of $1,080 (i.e. 2000 x 5.40 x 10%). There is now a paper loss of $400 and the initial margin has been reduced to $720. This is $360 less than the margin required to keep the position open, which means more margin is needed to top up the account. The shortfall in margin is known as a shortage in equity. If you cannot maintain your margin requirement you will not be able to extend your position however you will always be able to reduce or close a position.

Equity Balances
The equity (or balance) of your account will fluctuate according to the money you have deposited or withdrawn from your account, the profits or losses in your account and the size of the positions held.  During the trading day your account balance, including all open positions, are valued against the prevailing market rate. Therefore your equity balance is constantly calculated in-line or marked-to-market with market movements. Your end of day account balance is calculated using the mid-closing rates (or the last traded price). The equity balance is used to assess your available margin against current positions, and potential new positions you may wish to take. Your cash balance is used to establish if there is a requirement for additional margin deposits on your account. Once a CFD trade is opened, variation margin requirement must always be maintained for your open positions. It is your responsibility to ensure that your account is sufficiently margined at all times, especially during volatile trading periods.  You will only be allowed to trade and maintain open positions on the basis of cleared funds in your account, not on promised funds or funds in transit therefore you must allow sufficient time for funds to clear when depositing money into your account.

If a position goes into profit, the increase in the equity of your account allows for more positions to be opened. 

Shortage in Equity
A shortage in equity occurs when the account balance falls below the required initial margin. Accounts with a shortage in equity are generally only allowed to reduce open positions, until the equity balance is in excess of the required deposit. No new positions can be opened until this situation is rectified.

Margin Calls
If the market moves against you and your equity balance falls below your initial margin you generally have the option to:

i. close one or more of your open position(s), to reduce your initial margin to the required level; and/or

ii. add more money to your account to maintain the initial margin.

This is the first trigger level for margin, referred to as the 'Margin Call', which you must add additional funds to maintain your open positions.

Stop Out Level
You are at risk that your open positions will generally be closed when you have less than 40% of your required initial margin (i.e. 4% of your position size) however this may vary between CFD providers.

Margin, leverage and risk
Margin and the associated leverage can be very useful if you use it correctly. It can also be devastating to the inexperienced trader who has little understanding of the dangers of using leverage without a defined risk management strategy.  There are several ways of using the leverage available by trading CFDs, from the most conservative to the most aggressive. The way in which you use leverage will depend upon your personal circumstances.

Before trading CFDs you should read the Product Disclosure Statement (PDS) that your CFD provider issues as this will explain in detail how your CFD provider deals with margin. 

To understand more about the margin requirements of CFDs and using leverage you can download our free CFD Guide