CFDs can be valuable financial instruments to assist you in achieving your trading goals in a user-centric manner. Yet, CFDs come with high risks, which is why experienced traders mostly enter this investing field. If you’re a newbie, it’s good that you stay away. If you’re on that scale, we have outlined 10 CFD trading strategies or tips for you that will help you survive the highly volatile market to a great extent.
CFD trading, in a nutshell, is making a bet on whether a specific financial asset, like a commodity, stock index, or a currency pair, will fall or rise in value.
For instance, if you want to bet on the euro powered against the pound, you can go up to the EUR/GBP CFD. If the euro is almost above 1% concerning the pound, the CFD price will rise by 1%. Hence the name: Contract for Difference.
Part 1: Golden Rules of CFD Trading Strategies
CFDs have become highly famous in recent years due to their merits to different kinds of traders. But CFD trading has certain risks too. So we’ve compiled ten golden rules of CFD trading strategies taken as CFD trading strategies for beginners.
1 – Mend your CFD knowledge
Before you start trading, you must understand what CFDs are and how they work.
CFD refers to contracts for difference – a derivative product that allows you to speculate on a wide variety of global markets such as commodities, forex, indices, and shares, without having to own the underlying asset. This means that you can take falling and rising market positions – if the price will fall, you would go short (sell, or go long (buy) if you predict the price will increase.
CFDs are a leveraged product. Thus, your loss and profit get calculated on the total position size. So it’s essential to remember that while leverage can multiply profits, it also results in multiplied losses, consisting of losses
that exceed deposits for individual positions.
2 – Consider All Factors to Make a Trading Plan
It would help if you considered all factors to make CFD trading strategies. Your trading objectives, trading capital, risk appetite, financial knowledge, and timeframe are some of the crucial points to consider before executing a plan. It is wise to acknowledge their limitations too.
Even if you are an experienced trader in other markets, CFDs may need quite a different approach.
3 – Stick to your CFD trading strategy
The next best thing to remember is to stick to your CFD strategies and techniques.
A CFD trading strategy highlights the trading style you desire to use, consisting of a methodology for exiting and entering a trade market or position, plus the indicators and tools you might use.
Your CFD strategies will depend on how much time you want to spend analyzing the markets. You can use various trading styles, including day trading, scalping, hedging, and swing trading.
It is essential to stick to your CFD trading strategies for beginners, as parameter-based trading will reduce the impulse to trade out of greed or fear. However, it is equally crucial to know when your CFD trading strategy is not working. You can accomplish this by keeping a record of your loss and winning trades and back-testing your CFD strategies.
4 – Choose the Right Leverage
Leverage could assist you with capturing higher profits from the underlying asset’s price movements. However, if the market moves in the opposite direction, it can multiply your losses, too, as discussed above. So, choose the leverage ratio wisely.
For beginners, a conservative risk profile could be more relevant and apt. This means choosing ratios like 100:1 or 50:1. You can check these specifically for shares and indices with lower liquidity than the forex market with higher volatility.
5 – Make sure you understand your total position size
Your position size is the total trade’s market exposure. While opening a new position, you must consider your available amount of the risk and the capital you wish to account.
Every CFD trader should determine their exact capital requirements and the risk they are willing to take on each trade in their trading plan.
Remember, CFD is leverage trading, so your total size of the position will always be significantly greater than your original deposits, and you could lose more than you commit to a single trade. Consequently, a standard path is to only risk a small percentage of your capital on each transaction and risk management with limits and stops.
6 – Choose a Regulated Broker
It would help if you executed Trading with full peace of mind. A regulated broker will ensure your funds’ safety and also offer educational resources and guidance for Trading. Thus, consider a regulated broker with the following key specialties while learning CFD strategies and techniques:
- State-of-the-art trading platforms
- ECN pricing
- Range of financial instruments
- License from a coveted financial regulatory body, like the ASIC, FCA or ESMA
- Multiple trading tools
- Reputed liquidity providers
- Knowledge resources
Finally, practice your CFD trading strategies with a demo account. With patience and discipline, your well-thought-out CFD trading strategies can indeed become result-oriented ones.
7 – Analyse the markets to time your trades
While designing your CFD trading strategy, decide on the kind of analysis to identify entry and exit points in the market.
The traders mainly use two types of analysis: Technical and Fundamental. Fundamental analysis aims at external influences and events such as macroeconomic data, breaking news, and company announcements.
Technical analysis is more on the side of predicting the future direction by studying historical price charts.
Although you can use each analysis individually, it is common to use a combination of the two.
8 – Handle your risks with limits and stops
A standard way of handling risk is attaching limits and stops to a position; these pre-define the trade level’s exits and can assist guard your capital. A stop-loss order is a broker’s instruction to close your trade at a certainly less favorable price than the current market price.
Thus, question yourself: ‘how much money am I prepared to lose before I close my trade?’ and accordingly set your stop-loss. It is excellent to consider CFD day trading strategies as well.
A close limit order is placed, and closes at a more favorable price than the current market price. This closes your trade after you gain a specific profit limit, with the desire to guard your capital against severe market movements.
9 – Consider Asset Correlations
CFDs trading strategies can help hedge risk exposure. But for that, you are required to look for the asset correlation as an essential factor. Correlation is the anticipation of assets’ price movements against or in tandem with each other. Most of the traders trade two different CFDs in one industry, one short and one long.
Some might consider two markets showing negative correlation, such as crude oil and the US dollar.
Pair trading can assist you in capitalizing on the divergence between the two underlying assets. You can select a weak and a vital asset based on the market trend and assume a short position for the stronger one and a long one for the more fragile asset. The overall market direction generally does not impact the overall results. It is the variation between the two asset prices.
10 – Practise trading with a demo account
If you are not yet set to trade on live markets, a simplistic way of trading plan testing is to open a demo account and practice implementing the trades with virtual funds. A demo account is a great chance to experience live markets in a risk-free environment without any risk.
During your demo account exploration, ensure to understand the financial terms used and the accessible markets.
Then, once your confidence builds, you can open a live account and put your knowledge into action.
Part 2: Why use CFD Trading strategies?
The importance of CFD trading strategies is tough to overstate, and without a defined and coherent action plan, it is tough. Trading anything without CFD strategies is like playing blindfolded golf. Where you might hit the ball once or twice, it’s relevant to consider and open trade of the broader picture with an idealistic approach to your CFD trading strategy.
Selecting which CFD trading strategies to employ for the best effect is a balancing act. It needs you to consider various factors while decision making, consisting of your risk appetite, trading goals, and leverage impact on your available capital and positions.
Nevertheless, finding a suitable CFD trading strategy is the first step towards more consistent CFD trading. It could make your way up for building a profitable and long-term trading career.
Two Types of Strategies
Some of them are based on going long, while others depend on selling short, weak markets.
Others focus on the market turning points while they trade within the boundaries of the last price performance. Despite the particulars of the nature of an individual strategy will be an underlying concept – it will either aim the long-term investment strategy or a shorter-term investment strategy.
However, both are equally famous in Trading as a whole. CFDs tend to fall into the short-term period, for the fundamental factors that financing costs can make long-term leverage difficult.
Conventional CFD trading wisdom suggests that short-term transacting is the best policy, placing open positions for a day or two. Long-term CFD trading strategies have long been considered the preserve of less highly leveraged trading styles and tend to go arm in arm with less volatile markets.
Some CFD trading strategies are crafted for those with a longer-term view. While financing costs are undoubtedly an issue that must be borne in mind while dealing with margined investments, they don’t necessarily cancel out the profit potential from a given CFD position.
Part 3: Some FAQs
1 – Can you get rich trading CFDs?
Yes, it’s possible to make money with CFD trading. The long and more practical answer is that you first need to mend your trading skills and practice, discipline, and patience to excel in the market.
2 – Why do people lose money in CFD trading?
CFDs are complicated instruments that come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money.
3 – How do you calculate CFD profit?
To calculate your profit, you multiply the difference between the closing price and the opening price of your position by its size. $29.60 – $27.60 = $2, which you multiply by 2000 CFDs to get a profit of $4000.
While risks are associated with CFD trading strategies, committing time to excel your CFD knowledge can give you relevant merits and reduce your risk.
As we have discovered, finding your ideal trading strategy is an ongoing procedure that should be tailor-made to fit your trading and personality goals. There is no development’s end, as even the professional traders can learn all the more. But if you follow these golden points and stick to your CFD strategies, you will be well on your track to become a successful CFD trader.