What is CFD trading? CFD trading involves investing in CFDs; these are tradable instruments that follow the movements of the base asset. When one trades CFDs you can make profits and losses in relation to the base asset movements.
The base currency is never owned by the CFD trader, this is simply a contract between the broker and the client or trader. CFD stands for (contract for difference) many beginner traders would want to get into trading this instrument because of it advantages.
These advantages are low margin requirements; there are numerous CFD instruments to trade, from stocks, to commodities, forex, indices and metals. The listed have CFD based instruments and this gives the trader a wide range of options which is always good while trading.
There are no commissions and fees for trading CFDs, this makes it a cheaper choice although the trader pays up with the spread, which is the difference between the bid and ask price. CFD trading can be done form a single platform, one can access the global market from the trading platform offered by the broker.
CFD trading also has its’ negative aspects, they’re; the CFD industry is not as highly regulated as the stock market industry so there is some sense of risk surrounding it.
The broker charges the trader the spread from the entry and a spread for the exit; this could potentially eat away at profits from the small moves. So to be able to trade it profitably one should have a good strategy to back his or her trades.
To be able to trade CFDs, one will have to choose if they will base their strategy on fundamental analysis or technical analysis or a mixture of both.
Being a fundamental trader one focuses on the instruments economic outlook; its performance over the last quarter, seasonal tendencies, and the sentiment, what other people feel about it, are they buying it or are they selling.
Being a fundamental trader means that you will have to read through the information to know what will be the most profitable action to take.
One of the most widely used techniques is technical analysis; this involves studying the price charts of the CFD instrument and from it using its past price behavior to decide whether it will offer good buying opportunities or good selling opportunities.
All the above analysis types have different strategies that be utilized with them to trade successfully with.
CFD Trading Strategies
The following are some of the CFD trading strategies that beginners may find useful as they start out into the world of trading.
They are: breakout strategies, trend following strategies, news trading, scalping, swing trading, and lastly contrarian trading.
Trend Following Strategy
Trend following strategy involves trading in the major direction of that particular CFD instrument.
This I could say it is the easiest strategy to follow, if a particular instrument let’s say a CFD stock has strong numbers good quarterly earnings and has declared a new product to be unveiled or a partnership to boost performance, this will obviously propel the stock price higher for a long while.
Using this kind of fundamental analysis to determine the start of a trend is very profitable. This type of trading is more lucrative to long term traders, those who can buy and hold on to their positions for a few months, until the end of the next quarter or until the fundamentals underlying the decision change.
CFD beginner traders who would want to utilize this strategy the trader should have an understanding of the trend following strategy first.
This is because the breakout strategy is dependent on the continuation of the current trend. This strategy can be well utilized by traders who would use technical analysis to get to their trading decisions.
The CFD instrument may have been on the rise for a while and it paused from the movement up and starts to consolidate, using technical analysis the trader can look for clues in price behavior that will guide them to buying the CFD instrument before it breaks out and surges higher.
This strategy involves trading the very short term moves in the price of a given CFD instrument. Capitalizing on short term changes in price can be very profitable. This strategy will have to be conducted by a beginner who is nimble and can decipher what price is doing at that particular moment.
The trader should not focus on the wins but rather the number of trades taken; this is because the more trades taken will increase the chances of profitability.
Swing Trading Strategy
This strategy is for traders who can hold on to trades long term, the strategy utilizes wave theory. Price moves in a particular manner in a wave like formation. There are a number of waves that signify that price has reached its peak and a turn can be expected.
This strategy is mostly technical and a lot of learning has to be done on wave theory before trying the swing trading strategy. This will work well with CFD instrument traders who have a day job or other responsibilities that may hinder them from trading during the day.
This strategy as suggested by its name involves trading news events. This news events should impact a given CFD instrument positively or negatively to get a good reaction in price movement from it. This type of CFD trading strategy requires the trader to be constantly listening and watching out for news that may cause a price reaction.
This strategy requires a person who is keen and can process the information fast and in a correct manner. Since there are not that many impactful news events, the trader can always be improving on other strategies.
This strategy is centered on the fact everything that moves in either direction will come to a halt and turn to the other direction. CFD instruments are not different, an instrument might have had a poor performance for a few quarters but at some point in time it will turn.
The trader who utilizes this strategy should be able to spot points of exhaustion of instruments that have moved steadily upwards and strength in instruments that have moved lower over time. This strategy can be used alongside the breakout and trend following strategies.