Trading Play In Your investment portfolio: Day trading is a trading style that has become increasingly popular in the last decade among retail traders, especially those looking to actively trade the markets through derivative products such as CFD or Contracts For Difference.
What is day trading exactly?
Day trading can be described as the method of buying and selling financial assets over the course of one trading day. This type of trading can be conducted in any market, and has become increasingly popular over the last couple of decades, as online trading has grown and more brokerage solutions have become available.
Often mentioned in the same breath as day trading is scalping – which is generally shorter-term, big leverage, and exploits minor price fluctuations – and swing trading, which is short to medium-term and often focuses more on trends.
Trading CFDs is often seen as a great way to use leverage and margin trading over the short-term through day trading to take advantage of all market conditions (bullish and bearish) with a relatively small amount of trading capital, which helps investors hedge their longer-term investment portfolios.
What are the main advantages and limits of day trading?
There are several advantages to day trading for those that are well prepared and have well-established strategies in place.
For one thing, you are your own boss. As a day trader, you have your independence and can work from anywhere. You also have the potential for generating returns, and nothing much matches the feeling of succeeding in such a high-stakes career.
There are risks though, and day trading is often equated to gaming for those that are ill-prepared. You’re betting on the short-term volatility of markets and things can move very quickly. It’s important to keep control of your emotions, follow a detailed trading plan, and know how and when to hedge against the risk of losing your capital.
Why are investors using day trading?
As we’ve covered, risk management is vitally important to any successful person who decides to invest his money in the financial markets, and using day trading can be part of a technique to protect your longer-term portfolio.
While the focus of growing your portfolio is likely at the forefront of your mind, knowing how to hedge against losses by opening opposite positions on your assets can help mitigate risk and help you diversify. Think of it as a type of insurance.
Different situations call for different strategies of hedging, but the overall purpose of the technique is the protection of your long-term positions, generally with a shorter-term strategy using certain tactics and financial derivatives such as CFDs, Futures, and Options.
CFDs, for example, are derivative products, which means you never own the actual underlying asset. You’re just buying and selling contracts relative to the asset, the price of which is determined by the asset in question in any marketplace.
So if you’re concerned that the value of an existing position is soon to decrease due to a change in market conditions, and you’re hoping to offset the risk of losses, you might look at opening a short-sell position on the CFD for protection. If the position does lose value, you’ve just covered some of your potential losses by betting on this negative outcome and exploiting a corrective movement.
The only downside is if the scenario of a market correction and lost value on your asset does not occur, as you’ve just reduced your overall profit with additional costs.