CFD trading strategies you should know
Learn about common CFD trading strategies that can be used with leverage in economic markets, whether you are involved in day trading, an insurance deal, or maintaining long-term positions. This guide contains CFD trading strategies for beginners as well as for experts.
4 CFD trading strategies
Next, I will look at 4 different CFD trading strategies that can help you better understand the economic bazaars and the advantages of CFDs, as well as the dangers associated with them. All of the following strategies, without exception, involve the use of plastic leverage in our platform, which means that entering the exchange should bring only a specific share of the absolute price of the operation. This is associated with a significant degree of notch, which I will deal with later.
To get started, why not work out your own CFD trading strategies in our risk-free demo account with conditional instruments?
1. CFD day trading
Intraday trading is a popular short-term strategy that involves entering and exiting a trade to close the position by the end of the day. This is done to profit from small but frequent price movements. Because this strategy requires careful monitoring of price charts, day traders often focus on price action and technical analysis rather than the fundamentals that may affect a financial instrument.
Suppose a trader wants to speculate on a major currency pair such as EUR/USD because it is known for its high liquidity and narrow spread, qualities that are valued among short-term traders.
A day trader can study the support and resistance levels from the previous trading day to determine the possible price reaction when these levels are reached. He then opens a CFD position at a buy price of 1.1710 when the market opens. Successful day trading involves opening and closing several such positions throughout the day, and if the price rises slightly to the 1.1750 level, the trader can close all positions before the market closes. This would result in multiple profits for each position.
However, if the price continually falls below 1.1700, for example, and does not rise above the original buy price, the trader may decide to close the position with a small but acceptable loss. This is an example of a failed CFD trade.
2. CFD news trading
Novelty trading is another short-term policy that allows for operational notification of financial actions and trading expectations in the shortest possible time. To trade in novelties, you need powerful skills in making conclusions and the ability to instantly evaluate possible trading abilities. This policy can be particularly useful for volatile markets that react instantly to external conditions, such as black gold, indices, certain promotions, and currency units.
Let’s analyze a sample together with the referendum of 2016 according to the problem of England’s exit from the European Union (Brexit).
Given the dual kind of vote, the trader tries to utilize the staggered value in the pound sterling. Up to the emergence of the 1st vote results its CMC GBP Index is trading according to a buy/sell value of 1.007/1.006. The results of the sample poll appear, which show that a larger proportion of people voted for the withdrawal from Yes, which forces the trader to assume that the pound sterling is more likely to fall in value than to increase.
The trader decides to take a short CFD transaction and also to realize the mechanism according to the realization value of 1.006. His monitoring turned out to be devoted, and also because of the shock provoked by sudden novelties, the price of the pound sterling suddenly fell according to the relation to other monetary units. The more points of the mechanism will continue to move downward; the more income someone will acquire in the non-long side.
But it is necessary not to forget that after the release of new products, the cost does not constantly continue to go according to the initial road. For example, the pound sterling rapidly dropped in value after Brexit, but a number of months after this increased, indicating that the response of the trade can change and also go in a completely different direction. For this reason, the policy of trading in novelties is often used only in short-term opportunities.
3. CFD hedging
Economic insurance transaction is a policy that allows traders to compensate for dangers in their trading portfolio. Examples of effective hedging strategies are considered to be a trading room and the use of withdrawal devices, such as forward contracts. As a hedge, it is also possible to trade in haven assets such as precious metals, certain monetary units, municipal loan capital, and safety promotions, as these economic instruments can be considered less sensitive to negative market shocks than others.
Let’s look at a sample warm trade along with the application of CFDs.
Let’s assume that a depositor has 1,000 Tesla promotions in a single stock account and is also afraid that the value of the company’s promotions will drop after the latest bad report regarding the benefits. Someone decides to make a short sale of the same number of Tesla promotional shares, using the commercial result of CFD, in the belief that all possible losses according to the view of owning promotional shares have all chances to be compensated by an effective short transaction.
Let’s assume that the value of Tesla’s promotional shares drops by 10%. Even though the price of promotions in the trader’s account began less, the trader has acquired 10% of income from his own CFD deal and is also able to buy promotions back at the lowest cost. This is a sample of an effective hedging strategy.
4. CFD position trading
Position trading is similar to a buy-and-hold investment approach. Position traders can hold trades for months or even years, ignoring minor price changes and focusing on long-term trends and general movement. Such traders tend to rely on indicators of fundamental analysis such as macroeconomic trends and historical price patterns.
Let’s say a trader wants to hold PayPal stock for the long term because he sees value in this blue chip stock and believes it will steadily rise over time.
He buys a few units of PayPal CFDs at $275 per unit. The position trader does not need to frequently apply technical analysis or follow price charts; instead, he can periodically analyze the company to see if the stock continues to grow. To do this, he can calculate the P/E ratio, projected earnings, and analyze the dividends the company lists in its financial statements. Nine months have passed, and PayPal is now trading at $330. If the trader is happy with this figure, he can close his position with a profit of $55.
Keep in mind that if you carry CFD positions overnight, as position traders do, you will incur holding costs. There is also a holding fee if you hold the stock for a long period. We will go into more detail on this later in the article.
How to get started with a CFD trading strategy
- Open a CFD trading account. You can start with a live CFD account if you want to deposit funds and trade the real markets immediately, or open a risk-free CFD demo account to practice with virtual funds of £10,000 first.
- Increase your knowledge. Explore our library of CFD articles to find CFD trading tips, strategies, and best practices.
- Explore our product library. We offer CFDs on over 12,000 global instruments including equities, forex, commodities, indices, treasuries, ETFs, and our exclusive baskets of stocks.
- Decide on a strategy. Choose whether you want to take a long position to buy and hold your chosen asset, or a short position and sell.
- Assess your level of risk. CFD trading requires leverage, which can both magnify losses and generate profits. Use risk management tools such as stop-loss orders to maximize the protection of your capital.
When inventing an operation together with CFDs, specific dangers should be taken into account, as briefly mentioned in this post.
In particular, derivatives trading activity requires the use of margin/leverage, which makes it possible to disclose much larger views together with the use of loan money to gain the most extensive access to economic markets. In this case, you only have to pay a share of the absolute price of the transaction. Even though this is also considered a superiority of CFD trading, it can be considered as well as a threat, as it increases the possibility of losing money. Read more about margin in trading to find out how to use it effectively and reliably.
Almost all traders in the presence of placing an opinion in the acquisition or realization of CFDs choose to use risk management resources that can be used directly in the order. This has all chances to be classic, trailing, or guaranteed stop-loss orders, due to the degree of notch that you want to take in yourself. It is possible in addition to focusing interest in the volume view: instead of trying to take a CFD transaction together with an unrealistic number of units, think one or the other share of a single price of your immense you are at risk in the presence of any transaction.
What are the costs of trading CFDs with us?
Capital Gains Tax
Unlike spread betting, which is tax-free in the UK and Ireland*, you have to pay capital gains tax when trading contracts for difference. However, both products are exempt from stamp duty and you don’t have to pay foreign exchange fees when trading shares.
At the end of each trading day, CFD holding costs may be charged on open positions if the positions are carried overnight. This is common for medium to long-term traders, but day traders tend to avoid these costs. Holding costs can be positive or negative depending on whether your position is long or short. Note that forward contracts are not subject to holding costs.
Commissions only apply when trading individual stocks. Each time you enter or exit a trade in a stock, your account will be charged a commission, the amount of which depends on the country of origin of the stock.
Market Data Fee
To view our price data for certain instruments on the platform, you must activate a market data subscription. The subscription fee will be charged to your account every month and depends on the country from which you access the data (as well as applicable taxes).
What is the optimal CFD trading policy?
There is no specific “best strategy” for CFD trading, as it depends on the personal characteristics of any trader, as well as his willingness to manage risk. Read our guide to common trading strategies, which can be used in the presence of CFD trading.
Is it easy to trade CFDs?
No, CFD trading is not considered an easy activity even for high-end traders. CFDs are not simple food investments, showing a great risk of losing money, for this reason, in order to reduce this risk as much as possible, risk management abilities should be investigated. To get the most detailed data, please read our management “What is CFD?”.
How to trade CFDs safely?
There is virtually no obligation to succeed when trading CFDs in economic markets. But you can use our CFD trading library to find guidelines, recommendations, and samples that can help you get started with CFD trading.
Is it possible to trade CFDs in the long term?
CFD trading activity in a long-term opportunity is possible in the presence of the “buy and hold” layout. As a rule, traders are enrolled in this way, in case they believe that the price of the asset will increase over a long period, what is commonly known as position trading.