12 strategies to improve your chances for CFD trading success
My newest article on this topic is here.
If you have been involved in Forex, stock, or commodities trading for a while, you are probably familiar with Contracts for Difference (CFD) trading. CFD trading is a form of online trading that allows traders to speculate on financial markets like cryptocurrencies, indices, and commodities without owning the underlying asset. The contracts allow payment for the difference in the settlement price between the opening and closing period. In this article we set out 12 CFD trading strategies and you can leverage them for your success.
But how do you succeed in CFD trading? It’s simple: You must know how to trade CFDs successfully by embracing the right trading strategies. That said, read on and take note of these 12 proven CFD trading strategies to try out.
For technical CFD trading strategies, check out my series here:
Trading Support and Resistance
1. Start by Learning About CFD Trading
You cannot venture into CFD unless you are clear on what it entails. CFD trading relies on predicting the movement of extremely tradable assets. It works as a trader-client contract with risks and benefits.
One thing you should understand is that anyone can trade in CFD. However, you can seek assistance from an experienced broker to assist in the trading. Most trading is online, meaning that you have the freedom with the kind of asset to deal with and the amount you prefer to trade with.
As a trader, you can generate a lot of revenue from CFD trading as long as you make the correct prediction on a particular asset, and of course, consider CFD strategies. The challenge with this market is that it relies heavily on speculations. But again, you cannot miss out on your financial goals unless you don’t select the right CFD broker.
Ideally, CFD trading allows you to sell an asset if you predict that its price will fall and buy if you predict a price rise. Of course, this requires a lot of analysis on the given asset’s potential. Therefore, it requires a lot of effort to analyse the market and know which suits you best.
2. Establish a Trading Plan
You need a trading plan to make logical decisions and define the parameters of your ideal trade. Establishing a good CFD trading plan eliminates the possibility of making your decisions out of emotions. Other benefits of setting up a trading plan include:
• Allows easier trading
• Your decisions will be more objective
• Guarantees trading discipline
• Allows room for improvement
With these benefits achieved by establishing a trading plan, how do you create one? Well, there are several easy steps that you can follow. These includes:
Outlining Your Motivation
Knowing your motivation for trading when you desire to commit is a crucial step in establishing a trading plan. Start by asking yourself why you intend to get involved in CFD trading and write down what you want to achieve. So what nest after motivation? Keep reading!
Decide on Trading Time
Knowing the best time to commit to your trading is a game-changer in your CFD trading success. Contemplate whether you can trade while working, manage to trade late at nights or early mornings, or commit to trading as a full-time job. If you want to get more from the trade, you’ll have to set aside more time. Note that trading on assets that take longer to mature may not need a lot of time.
Be Clear with Your Goals
Your CFD trading goals should be SMART (specific, measurable, attainable, relevant and time-bound). For instance, if you want to raise the value of your CFD trading portfolio by 10% in the next year, then you have a SMART goal. It’s because you have specific figures to achieve; it’s attainable, relevant, and bound by a one-year time frame.
Decide on a Risk-reward Ratio
Work on how much risk you’re prepared to take on individual traders and your entire CFD trading before deciding to trade. Knowing your risk limit is essential since market prices are continually shifting and even the safest financial instrument has some degree of risk.
Always Evaluate your Market Knowledge
The details of your trading plan are subject to the market you intend to trade. Since CFD trading is applicable in various markets, you should assess your knowledge of the asset and preffered market. Take note of factors like when the market opens and closes, market’s volatility, and when you stand to lose or gain before you venture into any market. If you’re unhappy with these factors, it’s recommendable that you choose a different market.
3. Be Well Versed with Common Terms Used in CFD Trading
You must be well-versed with the common terms used in CFD trading if you want to succeed. Make sure you are conversant with terms like:
• Going long: This means buying a CFD position to profit from a share price once it increases. Therefore, you will be expecting a rise in the share price and will use a sell order to close your position.
• Going short: Going short or short selling is a trading move that involves selling an underlying asset hoping that its price will go down, and buy it later at a profit.
• Margin: This is a money deposit on your CFD account that reflects a percentage of the full value of the position on your trading platform.
• Stop-loss: A stop loss allows traders to decide on a level that they believe that a trade will not go as per their plan and choose to close their position to avoid further losses.
• Slippage: This is a term used when the price used to execute an order does not match the requested price. It only occurs when the market moves contrary to your trade, during the time your broker processes your order, and when the original price is unavailable.
• Settlement date: A settlement date is a date on which traders settle their trade. On this day, stocks and other investments get transferred to the buyer’s account, and the cash transferred to the seller’s account.
4. Establish your Trading Style
Trading styles define how you intend to enter into CFD trading and the tools you will use. Trading style depends on your attitude to risk, personality, and the time you’re willing to spend trading. There are four main types of trading styles which include:
Position Trading
Position trading involves holding a position for weeks, months, or years expecting it to be profitable in the long term.
Swing Trading
Swing trading involves holding a position for a few days or weeks and taking advantage of the medium-term moves.
Day Trading
Day trading involves opening and closing a few trades on the same day and avoiding holding a position overnight to eliminate some risks or costs.
Scalping
Scalping involves placing several trades every day, for a few seconds or minutes, to make small profits that will add up to a large amount.
5. Identify the Best Trading Site
Among the best CFD trading strategy is to compare well-known broker sites before choosing your trading site. A good website has the information you need to know as a trader. Go for websites with up-to-date information to help you get started within the shortest time possible. Compare several sites before you decide on the best websites to rely on.
Please note that there is a difference between online CFD brokerage and ordinary investment and trading websites. A good website should be easy to navigate and must provide comprehensive information about CFD trading.
The website must have updated research from professional analysts, guarantee easy access to your trading platform, and provide all analyst and traders’ contact details. A chance to provide relevant information like testimonials, technical information, and FAQs to provide an excellent trading experience is a plus.
I’ve looked at the features Plus500, a large and well-known CFD broker here.
6. Understand How Leverage Works
Leverage is an essential part of CFD trading that you cannot ignore. It works by using your margin or deposit and exposes you to an underlying asset. Your full exposure, compared to the margin ratio, is referred to as a leverage ratio. Leverage allows you to capture more significant gains from small price movements and magnify your losses when the market doesn’t favour you.
Therefore, you have to choose your leverage wisely. A Conservative risk profile could be the best move to avoid losses.
7. Know Your Risks and How to Manage Them
CFD trading has several risks that you must be aware of. For instance, CFD is a leveraged product meaning that there are chances of making a significant loss whenever a trade doesn’t favour you. The best way to manage your leverage risk is by using a stop-loss order and a trailing stop.
There are also risks of account close-out, which might arise outside regular hours if you are trading in international markets. This can cause your balance account to change drastically. The best way to deal with this risk is by closely monitoring your account and depositing additional funds or deciding to close your positions to cover the total margin required.
8. Use Stops and Limits to Manage Your Leverage Risks
Once you have understood some CFD strategies and the risks that come with trading, you can adopt relevant tools to mitigate this risk. The best way to do this is by using a stop-loss order. A Stop Loss Order allows traders to choose the exact amount they are comfortable risking in their CFD trade.
You can use a Stop-loss and define the amount you have chosen once you open your trade by selecting your option. Your CFD broker will then close your trade when the market moves through your limit.
Stop-Loss Orders will only protect you against losses that might have been incurred before your predetermined price point but do not protect you against excess market gapping or volatility.
There are a few key ways to monitor your CFD trades:
- Use a trading platform or software that provides real-time price updates and alerts. This can help you stay on top of market movements and make informed trading decisions.
- As mentioned above, set up stop-loss orders to minimise potential losses. A stop-loss order is an instruction to close a trade when the market moves against you by a certain amount, limiting your potential losses.
- Monitor your trades regularly, at least once a day. This will allow you to keep track of your profits and losses, and make any necessary adjustments to your positions.
- Use risk management strategies, such as position sizing and diversification, to help mitigate potential losses.
- Consider seeking out the advice of a financial advisor or professional trader, who can provide guidance on how to monitor your trades effectively.
9. Start Small Grow Big
One of the most significant aspects that you must learn about CFD trading is taming your appetite for profits. The best thing to do is to choose what you are familiar with. Besides that, once a particular trading strategy works for you, you can start diversifying your exposure across several types of assets.
10. Use a Demo Account to Practice Your Trading
For those that feel that they aren’t ready to trade in a live market, the best way they can test their trading plan is through a demo account. It might sound obvious, but this is one of those best cfd trading tips. These accounts allow you to execute a trade and virtual funds. With this CFD trading strategy, you have a chance to experience live markets in a risk-free environment.
While exploring the demo account, familiarise yourself with the financial terms used and the markets you can access. In case you do not understand anything, you can rely on trading courses to build a strong foundational knowledge of CFDs. For further information on CFD Demo accounts check out the benefits here and my review of Plus500’s demo account here.
11. Take Note of Asset Correlations
Correlation is a measure of how two assets can move together or against each other. If you prefer to trade two CFDs in one industry, some might bring a negative correlation. However, pair trading allows you to capitalize on the difference between the two underlying assets. For instance, you can pick a strong and a weak asset, assume a long position for the weaker ones and vice versa.
In such a situation, the overall market will not affect your overall result. The difference between the two asset prices is the only thing that would count.
12. Choose a Regulated Broker
As much as you would have gained enough knowledge on CFD trading, the type of broker you pick determines whether your trading will be done with peace of mind. While looking for a trader, find someone with the following features:
- Has maintained a reputation of providing liquidity
- Utilizes a state-of-the-art trading platform
- Knowledgeable
- Use a range of financial instruments
Now, Embrace CFD Trading Like a Pro
CFD trading can be comparatively risky than other forms of trading. Several risks come along with this form of trading that can significantly disappoint your efforts. However, if you decide to utilize all the CFD trading strategies and tips provided above, you’re off to a good start.
