Effective CFD trading strategies can increase your chances of success in the financial markets. Without a good strategy, you are more prone to losing your capital quickly.
A trading strategy works exactly like a blueprint for building a house. Without an effective strategy in place, it is hard to ensure whether you’re making the right decisions or not.
Choosing the best trading strategies to employ is like the first step toward success in the financial markets.
However, there are several factors you should consider before searching for a trading strategy, including your appetite for risk, your trading goals, the impact of leverage on your positions, and available trading capital.
If you’re too planning to start trading CFDs and searching for a good strategy, continue reading this article. So, let’s begin with a short introduction to CFD Trading Strategies.
What Are CFD Trading Strategies?
As the Contract for Differences (CFDs) are financial derivative products that allow traders to speculate on asset price movements, it is important to know when to open or close a position.
This is where a CFD trading strategy comes in handy, as it provides all the guidance required to minimize the chances of loss.
For instance, Trading strategies work exactly like a team manager who instructs team members before a big game.
In short, CFD trading strategies can be defined as a trading plan that helps traders determine when to open or close the trade.
Additionally, there are two types of CFD trading Strategies: Long-term and Short-term Trading Strategies.
Risk Warning: As CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage, most new retail investor accounts lose money when trading Contracts for Differences (CFDs). So, we recommend you first practice CFD trade on a demo trading account.
Top 10 CFD Trading Strategies:
There are numerous trading strategies that work well with CFD trading. However, choosing the best one is always a challenging task.
But for your assistance, here we have come up with the top 10 CFD Trading Strategies:
Trend trading is one of the most convenient and effective CFD trading strategies. The strategy allows traders to identify and take advantage of asset price movement.
The strategy is based on a simple concept that a trader can speculate the future prices by analyzing the historical trends and past price movements.
It is often considered a medium-long-term strategy, depending on how long the trend will last.
It is the first choice of swing traders and position traders, who don’t get impacted by day-to-day price fluctuation; instead, they hold positions for a long time.
Following the news trends, one of the most popular CFD trading strategies involves simply keeping track of a full economic and financial calendar.
This will keep you informed about forthcoming major events that may have an influence on the underlying asset’s value.
News trading is divided into two basic CFD trading strategies: investing before or after a statistical release. The first option seeks to understand and forecast the release’s reactions.
This is the riskier of the two strategies since it is difficult to predict how the market will react, but investors will benefit more this way.
The second method is to trade after the statistic or news release and go with the flow. This way, you can get which direction the market moves in reaction to the release.
Pair trading is considered the best CFD trading strategy for stocks, but it can also be used in other financial markets, including the Forex market and commodities.
The direction of movement is unimportant in this strategy, which can be employed with high or low market volatility.
Pair trading is when you invest in two CFDs from the same industry, one with a long position and the other with a short position.
Correlation is crucial for determining the link between two assets’ price fluctuations. Therefore, the two assets must be those that are often strongly correlated but have begun to de-correlate.
Investors utilize pair-focused CFD trading strategies to profit from the asset’s value differential. The first step is to determine which underlying asset is the weaker.
Then opening a long position on a weaker asset and going short on a stronger asset. So now, you’ll be winning on one position while losing on the other.
Hedging is quite different from other CFD trading strategies. It is more like a risk management strategy that is employed to mitigate the chances of loss by taking the opposite position in a related security.
With the chances of loss getting reduced will simultaneously result in the reduction of higher profit chances.
The best way to understand this strategy is to take it as insurance. When you use a hedging strategy, you are typically insuring your funds against any negative event’s impact.
However, it doesn’t cover all the negative events. Overall, hedging is one of the most demanding and effective trading strategies for trading CFDs.
Short-to-medium term traders prefer the CFD Swing Trading strategy. In this strategy, a trader focus on a market trend that moves in a specific direction.
It helps traders in finding an asset that has the potential to make a big move in a short period of time. The strategy works well with technical analysis.
These indicators are used to predict strong trends. At the same time, resistance level helps you in determining the right time to exit the trade and make a profit.
Position trading is a long-term strategy focused on holding CFD trading positions for a few weeks, months, or even years.
In this strategy, the traders don’t get impacted by short-term price movements; instead, they focus on long-term trends.
When placing a trade, the CFD trader looks for past price behaviors and historical price movements.
Short-term traders, who only want to hold trade positions for one trading day, prefer the intraday or day trading strategy.
Day traders use this strategy to open one or more positions and close them before the end of the day in order to profit from modest price swings.
Before making trading decisions, traders monitor the asset’s price movements throughout the day and assess the asset’s trading volume, volatility, and frequency of price changes.
The process of purchasing and selling assets based on recent price patterns is known as momentum trading.
The concept of momentum trading is based on the assumption that if a price change has sufficient force, it will continue in the same direction.
When an asset achieves a greater price, traders and investors get more interested in it, increasing the market price.
The trend continues until a large number of sellers make entry into the market, such as when an unexpected incident forces them to reconsider the asset’s price.
As the sellers in the market increase, the momentum shifts and the price of an asset falls.
Trading within a price range is referred to as a range trading. Range traders speculate a trading range for the CFD over a period of time and place orders that are within that range.
The range is always between the support price (the point at which falling prices stop falling and begin to rise) and the resistance price (the point at which rising prices stop falling and begin to rise).
This strategy enables traders to profit from non-trending markets while also providing precise entry and exit indications.
Scalping is a trading strategy that focuses on minor price changes and making a fast profit by reselling the underlying asset.
The strategy involves opening multiple positions and closing them at the end of the day. Scalpers make quick profits through this strategy.
However, scalpers require a strict exit strategy as one large loss can overshadow all the minor gains.
So, these were the best CFD trading strategies every trader should consider. On the other hand, using these strategies can help traders in identify the entry and exit points in the CFD market.
So, after going through these trading strategies, if you’re planning to trade CFDs, then there is no better place to start than some brokers like InvestBy, InvestFW, Capitalix, and ABInvesting. So, open a trading account with them, today!
Risk Warning: As CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage, most new retail investor accounts lose money when trading CFDs. So, we recommend you first practice trading CFDs on a demo account with virtual funds.
What Are The Most Effective CFD Trading Strategies?
There is nothing like the most effective trading strategy. Each strategy has its own set of perks and is best suited to different traders’ trading styles; go through them all to see which one is best for you and try out a few with demo accounts.
Where Can I Find More Information about CFD Trading Strategies?
There are several guides, trading journals, trading courses, and books available to assist you in enhancing your financial knowledge and learning more about these strategies.
Alternatively, you can learn about them through the educational content available on InvestBy.
Is CFD Good For Trading?
Yes, CFDs are best for traders who want to use leverage to trade the most costlier assets to buy or sell.
Are CFDs Profitable?
CFD trading is quite profitable as it is a less capital-intensive type of trading. On the other hand, you can profit from both rising and falling markets.
Is CFD A Gamble?
CFD is quite similar to spread betting as it also involves speculating on the price movement of an asset without actually owning it.
On the other hand, the major difference between the two is that spread betting is a form of gambling, and CFD is a form of trading.