CFD Trading Strategies

To have the chance of making long-term profits through CFDs (contracts for difference), you need a coherent investment strategy. An effective CFD investor does rely on live figures and news, but also their decisions are based on broader considerations. This measured approach is especially important due to the volatile nature of CFD trading.

In this article, Market10 looks at CFD trading methodology and strategies that can maximise the potential of trades while minimising your risk.

How to Start Trading CFDs?

Before you formulate a strategy to trade CFDs, please read our quick introduction to CFDs here. It will help you familiarise yourself with the basic concepts and common terms.

Step 1 – Choose your speciality

The first step is to choose the market in which you want to trade CFDs. Just because CFDs are available does not mean that you should invest in them. Select an area in which you have some knowledge, experience and/or expertise.

Therefore, if you have been trading the US stock market, look primarily at US stock CFDs; if you are familiar with forex, opt for currency-based CFDs. This approach eases the learning curve and gives you a better chance of understanding the trends and concepts that affect prices and, consequently, your chances of profit or loss.

Step 2 – Choose your position

With an ordinary trade, you simply buy an instrument; if it increases in value, you profit and if it drops, you lose. CFDs allow you to make or lose money either way because they are essentially trading on the direction in which the price will move.

With your understanding of CFDs developed in Step 1 above, form an educated opinion on whether the price of the underlying instrument will rise or fall. You can take either of two positions – long or short. Going long means buying and going short is selling.

Step 3 – Choose the size of your investment

Part of the reason that CFDs are so popular is that they are always traded on margin, that is, you do not have to outlay the full value of your trade to take a position. This minimum leverage that you have to deposit varies according to the underlying instrument. Volatile markets like cryptocurrencies can attract margins as high as 50% while normal forex can demand just 5%.

Remember that the margin is simply the upfront price to take a position – you are still liable to pay the entire amount if the price moves in the opposite direction. Only make a CFD investment if you can comfortably sustain the possible losses it entails.

Step 4 – Stops and Limits

CFDs have a reputation for causing huge losses for undisciplined traders, whether they are amateurs or experts. These nightmare scenarios can be avoided with a simple step: specifying a stop-loss. A stop-loss is the maximum loss that you are willing to endure on a particular CFD. When the price exceeds that limit, the CFD is automatically terminated.

There are some exceptions, though. A stop-loss may not work in unique situations such as a stock’s return to trading after suspension. Remember also that if your CFD is terminated by a stop-loss order but the price trend later reverses, you also lose the potential profits from it.

Step 5 – Monitoring and Closing

Markets can be volatile and the volatility may begin without warning, inspired by current events and/or financial data. As a CFD trader, it is in your best interest to keep a close eye on your investments, identify correlations and adjust your positions accordingly.

CFD Trading Tips

CFD trading requires more discipline than regular trading. You can develop this discipline by paying close attention to fundamental analysis and technical analysis of the underlying instruments in which you invest.

Briefly, fundamental analysis revolves around the fundamentals of a company or instrument. This includes factors like year-on-year earnings growth and dividends of a company, as well as the demand outlook for their products. Technical analysis focuses on historic price trends and how they align with current price movement patterns.

It is difficult to set a fixed criteria list because the relevant factors vary with the instrument. For example, a CFD related to crops would require some understanding of current weather patterns because it affects yields. To invest in forex CFDs, it is important to understand the state of the economy in both the countries who issue the currencies.

Identifying all the possible factors can be tedious and time-consuming. Contact Market10 and our account managers will help you identify the elements relevant to your preferences. Keep abreast of relevant news and developments through financial news channels and publications.

When you have collected enough data to build the confidence to invest, formulate a plan of action. This means that you have to decide how much you will invest, how you will monitor progress, and the red lines you will use to trade within acceptable limits. The lack of a cogent CFD investment plan virtually guarantees failure!

Market10 offers the convenience of practice accounts beforehand. Market10 acknowledges that this is an ideal way to understand the ins and outs of CFD trading by practising with no risk, while dealing with real-world scenarios.

The 2 Most Effective CFD Strategies

Many of the strategies that are used effectively in CFD trading are the same ones that work well for regular shares trading. Here are three especially effective ones.

Short-term CFDs

Also known as intraday trading, short-term CFDs can be contracts that mature in a short period of time This incomparable flexibility allows you to hit the stop button and take your profits out over and over again within a short space of time. As always, a good understanding of trends and trading psychology is essential.

Swing trading

Every price trend is marked by minor corrections, reversals in the value of the instrument within a generally consistent pattern. In such cases, trading against the trend and for these ‘swings’ can attract better returns. They can be used very effectively in conjunction with short-term CFDs.