Short-term Trading - Frequently Asked Questions

We are frequently asked similar questions by our subscribers regarding some basic short-term trading basics that span the genre of shares, CFDs, Forex or Indices' futures trading.

Following are a selection of the more common questions;

Q. What rules do you think are the most important for day traders?

A. There are many important rules that day traders should adhere to but the most important of these are:

• Always trade with the trend;
• Cut losses short;
• Never get emotionally involved with your trades.

Q. What is the difference between a market order, a limit order, and a stop loss order?

A. Here are the key differences between each type of order:

• A market order instructs your stockbroker to buy or sell shares immediately at the current market price. This will usually take place at the "ask" price.
• A limit order instructs your stockbroker to buy or sell shares at certain price specified by you. When (and if) the price of the stock reaches the price you previously specified, your order will be executed at that price. An example of this is the 'Buy on stop' or 'sell on stop'
• A stop loss order instructs your stockbroker to liquidate your position if the share price drops by a certain amount specified by you. Further information on stop loss selling can be found here.

Q. What does it mean to "short" a stock?

A. To "short" a stock you simply borrow stock (that you do not own) from your broker and sell it immediately for cash. You will have the obligation to buy back the stock and return it at some point in time in order to "cover" your short sale. When you sell a stock short, you are hoping that the stock price will drop so that you can buy it back at a lower price than what you sold it for, thereby making a profit on the transaction.

Q. Is every stock suitable for day trading?

A. No. A day trader should never trade unlisted or thinly-traded (low volume) stocks as these stocks have poor market liquidity and hence a higher price volatility. This may make it hard for you to exit your position quickly at a fair price. Trade only high volume, well-known stocks.

Q. What is Contract for Difference (CFD)?

A. A Contract for Difference (CFD) is a contract between two parties to exchange the difference between the entry price and the exit price of a financial instrument or security. This transaction, also commonly referred to as a SWAP transaction, concludes with the parties settling the difference between the purchase price and the sale price.