CFDs being a highly geared trading instrument opens the window for traders to explore a multitude of new trading styles that were simply not possible with traditional trading products. The simplest style of trading most commonly used is scalping and this really illustrates the power of CFDs.
CFDs have very low transaction costs and so much flexibility scalping is ideal. When we refer to flexibility I am talking about the fact that CFDs are cash settled, highly geared and give you the ability to trade on unrealised profits.
Scalping involves placing multiple trades throughout a trading session with an extremely short term focus. Using very small price movements coupled with leverage the idea of scalping is to keep taking small profits a multitude of times. Trades are often exited shortly after becoming profitable. Generally speaking Scalping trades are intraday rather than long term holds as to eliminate overnight risk from adverse market movements. Overnight many announcements can come out of markets in Europe and the US which can have a very positive or negative effect on your position and hence they are avoided.
Scalping will also allow the trader to operate regardless of market conditions although it is market harder to turn a profit if the markets are completely stagnant throughout a trading day. In an instance where an investor has $5,000 to trade with CFDs prove much more effective because this $5,000 can be turned into an exposure in excess of $100,000 and in this case a 10c movement in a $10 stock will mean a $1,000 profit for the CFD trader with a $100,000 position over $50 profit for the share trader with only a $5,000 position.
Many factors must be considered when scalping;
- Leverage is needed to make sure profits exceed trading costs.
- Liquidity is a must to enable you to jump in and out of a position with ease and without moving the prices. Blue chip equities, indices and FX are ideal.
- Shorting is necessary as not all positions always rise. Especially with scalping as we know positions generally fall 10 times faster than they rise especially on the back of bad announcements.
- Tight risk management systems are recommended to eliminate large losses. Hence I always recommend placing stop losses as soon as positions are entered. Good traders will already know where their stop will be before they even enter the trade.