Discover How to Day Trade the ASX Top 20 Stocks Using Contracts for Difference (CFDs)
Successful business people all over the world discovered very early on in life the importance of being able to leverage their time and efforts. You will always achieve more from 1% of the efforts of 100 people rather than 100% of your own effort.
Leveraging your effort when trading the ASX Top 20 stocks is no different and trading Contracts for Difference (CFDs) provides a brilliant platform with which to do that. The key point with focusing on the ASX top 20 stocks is the liquidity they provide, allowing even the biggest of traders to get in and out with good size positions.
Always work to make your CFD Trading Business Scalable
Your CFD Trading Business is unique in that it can be scaled up to incredible heights when things are running well. What this means is that what you are able to test and prove on $10,000 should work equally well on a $50,000 float, even taking into account additional leverage at those levels.
For example what you are able to achieve trading at 3 times leverage on $10,000 should be able to work just as well as trading at 3 times leverage on a $50,000 float.
Imagine operating a business whereby your upside potential is limited. You put in months and months of testing and paper trading only to realize down the track that your business cannot scale up along with the popularity of your product. Your CFD trading business is no different.
Trading a $2 million capital base
From day one you should be always thinking about how you will trade a $1-2 million capital base. As you have heard many times before, success is largely due to a positive mindset and you need to steer clear of thinking that your current capital is all you will have and broaden your horizon to contemplate what you’ll need to do when you have a $1 million plus portfolio.
Ideally this will steer you away from those stocks with low liquidity that you might look at from time to time and focus your efforts on the blue chip ASX top 20 hot stocks. You see on a big float, your biggest challenge is being able to enter and exit your positions and ensure you can get in and out easily.
Keeping an eye on market depth and the total number of buyers and seller sat each level of depth becomes critical when trading the small cap ASX Stocks. However, that problem all but disappears when you stick to the top 20 ASX stocks like Telstra.
With over 1 million shares on the buy or sell side at most levels of depth, even the biggest trader should be able to exit their positions quickly. Big players on small stocks always need to be on the lookout for slippage, which is the difference between where you want to get out and where you actually get out.
Safe quantities to buy and sell
On the ASX you will see in the depth the number of buyers and sellers. All the best CFD brokers offer pricing information on how many buyers and sellers are at each price level giving you insight into what the safe quantity of CFDs is to purchase. A good rule of thumb is to make sure you trade a quantity that can easily exit the position should the market turn nasty quickly. I like to see 4 times my quantity at each level of depth before feeling safe. That means if I have a 10,000 parcel of CFDs, I want to see a minimum of 40,000 at each level of depth.
Analysing the top 20 stocks to locate your trading opportunities
One of the key differences you’ll notice about the top 20 ASX shares is they aren’t as volatile and have smaller daily ranges compared to the more active low cap stocks. It goes without saying that a $70 stock has to do a lot more to move 10% than does a 20 cent stock. As a result your trading methodology for the top 20 will be slightly different and should look to take advantage of the fantastic liquidity presenting itself. This may mean you trade larger positions sizes for smaller daily to weekly moves.
Here is an example:
Trade Size: $5,000
CFD price: $0.50
1 day move: 5% or 2.5 cents
Potential Gross Profit: $250
Trade size: $25,000
CFD Price: $5.00
1 day move: 1% or 2.5 cents
Potential Gross Profit: $250
As you can see in the 2 scenarios above you can make the same amount of money on a low cap stock moving 2.5 cents with only $5,000 on it or if you trade a bigger position on a $5.00 stock you can make the same amount of money with only a one percent movement. The trouble with a low cap stock is you may not be able to get in and out easily. Typically the ASX top 20 stocks move around 1.5-2% per day so getting a 1% move is a regular occurrence (this doesn’t mean you will get the full move on your trade though).
By starting out at the big end of town you’ll find you can concentrate on fewer stocks, get to know them much better and develop a better intuition when it comes to trading them. By spending time here you’ll also get the mindset of the right position sizing methods to best achieve your trading goals.