What are CFD Trading Strategies?

Before discussing the CFD trading strategies, it is important to first understand the CFD, or Contract for Differences. It is a high-risk derivatives financial instrument in which the two parties agree to pay the difference in the price of an underlying asset between the opening and closing of the position.

This contract between the trader and the CFD providers allows the trader to speculate on the price of the underlying asset. However, instead of actually buying or selling the asset, the CFD lets you only speculate on price movement.

The profit or loss in CFD depends on the price movement of the underlying asset. The CFD provider will pay you if the price moves in your favour; if it doesn’t move, then you pay the CFD provider. You expect the price of the underlying asset to rise if you are buying the CFD, however, you would expect the price to decrease if you are selling the CFD.

In some ways, the CFD is more like betting and less like traditional trading. It is banned in many countries, including in the US. There are no government regulations with regard to CFD in India, making it operate in unregulated spaces, which increases the risks associated with it.

The underlying assets in CFDs can range from stocks to commodities, indices, currencies, and cryptocurrencies. The contract here begins when the trader opens the position, and it ends when that position is closed.

Different Types of CFD Trading Strategies

Though CFDs offer potential for significant profit-making, the risks are also considerably high. It is for this reason that the trader should be careful about picking the right CFD trading strategy. There are various CFD trading strategies that a trader can utilise depending on the market conditions and the trader’s appetite for risk and investment objective.

News-Based CFD Strategy

This CFD trading strategy revolves around predicting the impact of a particular news on the price movement of an asset. In this case, a trader can anticipate the impact of news on the price movement of an asset and accordingly position themselves to make a profit. The news can be related to major economic activity, political events, global development, or a quarterly report. The shortcoming of this trading strategy is that it is more speculative and bets on the emotional responses to an event.

Scalping-Based CFD Strategy

It is a fast-paced trading strategy where a trader focuses on making small profits from small price movements. This trading strategy requires an in-depth understanding of the market and the ability to perform quick trades. The traders should be able to monitor the market without any hassle or disturbance.

Know More About The Scalping Trading Strategy

Day Trading-Based CFD Strategy

It is a broader version of scalping where a trader can wait out for a longer period and close the position within a trading session. It gives the trader a window that ranges from minutes to the entire day to decide when to exit. This strategy requires an understanding of charts, patterns, and indicators, as the trader has to rely on technical analysis to avoid missing an opportunity to secure profit.

Position Trading Based CFD Strategy

This strategy focuses on long-term positions, which may extend to weeks or even months. The traders here rely on the fundamentals of the asset to make long-term assessments, ignoring short and immediate fluctuations. The traders opting for position trading prefer those assets that have strong trends and minimal price fluctuations, providing them a stable base to make an insightful assessment.

Swing Trading

This trading strategy is based on indicators that point to an upward or downward trend in the future. Technical indicators are used to determine whether or not an underlying stock will change its price movement and the direction of its momentum. It can be a quick trade happening over minutes or a medium-range trade over a few days or weeks.

Read More About What is Swing Trading?

Advantages and Disadvantages of CFD Trading 

Like with other instruments and strategies, CFDs have their own sets of pros and cons. You must understand these advantages and disadvantages before setting out on the path of CFD trading.

Advantages

1. You can open and close positions on different financial instruments in various financial markets, thus offering a wide range of assets.
2. You can trade on leverage.
3. The capital required for CFD trading is less than traditional trading of buying and selling securities.

Disadvantages

1. It involves a higher degree of risk.
2. The possibility of overtrading is high.
3. Leveraging can cause magnified losses.
4. There is no regulatory insurance in India.

Important Tips for CFD Trading

Some important tips for CFD trading that every trader must know are the following:

1. You must properly understand the working concept of CFD trading.
2. You must build a proper trading plan that aligns with your investment goals.
3. You must stick to your trading strategy and not get tempted by possibilities that come midway.
4. You must use technical analyses and indicators to enter and exit the trade.
5. You must manage your risks with stops and limits, which will prevent your losses.
6. Avoid making emotional decisions and try to stick to objective decision-making.

Conclusion

CFD trading is a high-risk derivative instrument that lets a trader speculate on price movement instead of actually buying or selling the asset. The CFD lets you only speculate on price movement. The traders must be extremely careful when doing CFD trades, as they involve high risk. There are various CFD trading strategies which are suited for different market conditions, and traders can adopt them based on their viability and the trader’s capital availability, risk appetite and trading goal.

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