CFD Strategies and Techniques

Whether you’re new to trading or an experienced trader, you can apply popular CFD trading strategies to trade the financial markets. In this article, we’ll discuss some of the most popular CFD trading strategies and techniques that beginners en professional traders can use.

CFD trading strategies

We’ll look at several popular CFD trading strategies that will help you understand the financial markets and the benefits of CFDs (Contracts for Difference) as well as the risks involved.

All of the following strategies require you to use leverage, which means that you only have to deposit a percentage of your full trade value to gain exposure to the markets. This comes with a high level of risk, which we will also explore.

Day trading

Intraday trading is a popular short-term strategy that involves entering and exiting a trade with the goal of closing all positions by the end of the day to profit from small but frequent price movements. This strategy requires close monitoring of price charts, so day traders often focus on price action and technical analysis rather than fundamental factors that may be affecting a financial instrument.

A day trading strategy aims to capitalise on short-term price movements of an instrument. Day traders use various techniques to execute multiple trades throughout the day, usually closing their positions before the end of the trading day. While technische analyse is the main type of analysis used, fundamental analysis may also be used if needed.

Day trading demands focus and time, and it is highly volatile. Although it offers the potential for large profits, there is also a significant risk of loss.

Swing trading

A swing trading strategy involves holding positions for a few hours to several days or more. They do this to profit from expected price movements by buying at ‘swing lows’ and selling at ‘swing highs’ (or vice versa). Swing traders rely mainly on technical analysis but may use fundamentele analyse if needed. They face risks from unexpected price movements or market fluctuations, sometimes resulting in significant losses.

Swing traders use larger stop losses than day traders, so there will be periods when trades go against them. As positions will be held overnight, they need to manage trades without constantly monitoring them. An advantage of swing trading is that greater profits are possible as positions have more time to gain momentum.

The swing trading strategy avoids choppy, non-trending markets, and targets those that are trending in a specific direction. Using CFDs for swing trading allows you to use leverage to control a much larger position with a small amount of capital. While you hold the CFDs and maintain the position, you are charged interest on the borrowed funds for that position, but the cost is small compared to potential profits.

Trends volgen

Trend following is a popular CFD trading strategy where traders identify market trends and enter trades in the direction of those trends. The goal is to detect trends quickly and exit positions before the trend reverses.

An uptrend is characterised by rising prices, forming higher swing highs and higher swing lows. Conversely, a downtrend sees declining prices with lower swing highs en lower swing lows. When prices move sideways without significant upward or downward price movement, it indicates a horizontal trend.

Traders using this strategy aim to buy low and sell high during an uptrend, or sell high and buy low during a downtrend, which can lead to profitable trading outcomes.

News trading

News trading is a common short-term CFD strategy where traders aim to profit from market fluctuations around major news events, such as wars, environmental disasters, new monetary policy announcements, etc.

Trading on the news is typically high risk due to increased market volatility during these periods. Additionally, spreads on certain trading instruments may widen significantly, and the opening and closing of trades can become more unpredictable due to sudden market spikes.

Trading the news involves keeping up to date with economic calendars and future market expectations. News traders need strong decision-making skills and the ability to quickly identify potential trading opportunities. This strategy is particularly useful for volatile markets that react quickly to external factors, such as oil, indices, certain stocks and currencies.

Hedging

Hedging is a popular CFD strategy which involves opening one or more positions that offset risk within a trader’s trading portfolio. Hedging with CFDs is popular because they allow traders to trade in both rising en falling markets. This means that investors can open a short position on a stock that they own to hedge against potential losses.

While hedging can be used over the long term, it’s more commonly used to minimise losses within shorter timeframes.

You can trade on safe haven assets, such as gold, certain currencies, government bonds, and defensive stocks, as these financial instruments are considered less vulnerable to negative market shocks than others.

Position trading

Position trading is a CFD strategy where traders hold on to a position for a longer period and close the position when the time is right. Position traders may hold trades for months or even years, ignoring minor price fluctuations and focusing on long-term trends and overall market movement. They tend to rely on fundamental analysis indicators, such as macroeconomic trends and historical price patterns.

A potential drawback of holding positions for long periods is incurring overnight fees. Position trading is considered more of a long-term strategy.

CFD trading tips

• An effective CFD trading strategy can be challenging to master, but here are some tips to help you with your next trade:
• Develop a trading plan and stick to it
• Start trading cautiously and know your limits
• Build on your understanding of CFDs and derivative products
• Determine your risk tolerance
• Monitor your open positions using a combination of technical and fundamental analysis.

CFD risk management

When opening a CFD trade, it’s important to consider the risks, particularly those involving margin and leverage. Leverage (Hefboom) allows you to open a much larger position using borrowed funds. You only need a small deposit compared to the full trade value. While leverage offers traders the opportunity to maximise profits, it also exposes them to huge losses if not managed effectively.

Therefore, many traders use risk-management strategies when placing a buy or sell CFD position. These often include stop-loss orders, which automatically close a trading position when it reaches a certain price level to limit losses. There are also take-profit orders which close your trading positions when a price reaches a certain profit level.

Expand your CFD trading knowledge

A successful CFD trading strategy is one that integrates the trader’s continuous learning knowledge and understanding of CFD trading. Regardless of your level of trading expertise, CFD learning never stops. This involves reading eBooks, articles, and guides related to CFDs.

Additionally, watching numerous videos and participating in webinars on CFD related topics can provide valuable insights and useful tips. Regularly analysing past and current charts is essential as well as staying updated with global economic en political news that can influence market movements. Studying technical and fundamental analysis enhances your trading knowledge and decision-making skills.

Open a demo account

Choose a reliable CFD broker like IronFX to open a demo account. This will give you the means to test your trading strategies and techniques and gain trading experience. It also allows you to put technical or fundamental analysis to use in a simulated trading environment, without putting real money at risk.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.