Learn the Essential CFD Trading Strategies
Much of the popularity of CFDs comes down to leverage. It’s the fact that they can make money from share movements with only a small amount in their trading account that has drawn in speculators.
Traders who migrate to CFDs from the world of stocks need to be aware that although their CFD trading strategies may be similar, there are certain differences to be mindful of too. One of them is the need to pay for overnight financing charges on long positions.
When you trade shares normally you can keep a position open pretty much forever if you want to without incurring overnight charges, but your CFD trading strategies will need to factor in this additional cost. It may only be a small amount, but any amount that reduces your trading profits is one that you need to take into account.
Conversely, short positions pay you interest on a daily basis, so there is an upside! Check your broker’s rules on CFD financing so that you fully understand them.
These are some of the most commonly used CFD trading strategies:
This one of our CFD trading strategies is about buying cheap and selling expensive! Let’s say that you realize that FMG is on a strong upwards trend: that means you’ll want to trade in the same direction. FMG begins to get sold down in the middle of this trend, so you peg your limit order at $5.50. You set your stop loss 3 ATR away and trail a stop that’s just behind your position. Your aim with this is to ride the FMG position while it keeps moving in the way that you want it to. If you’re trading trending stocks, you could run a larger ATR trailing stop. Perhaps a 3 to 4 ATR trailing stop would be effective. It’s hard to be sure which is why it’s always good to test your CFD trading strategies first. This approach is well suited to all timeframes. How long the trade runs for depends on the strength of the trend and the distance of your trailing stop. This is one of the simplest of all CFD trading strategies. You can’t get much simpler than buying cheap and selling once the price has gone up. But it can turn around and bite you If your position declines. This is the time to bail out. When your long position drops under your entry price and hits your stop loss— that’s when you lose.
The next one of our CFD trading strategies is about selling at the top of the market and buying back when the price drops. To do this you’d identify stock that was being sold down heavily by investors. Let’s say it had previously doubled in value, but investors were now turning their back on it. But you’d hop on board because you would be favouring stock with a very strong downtrend. So, you’d wait for overbought conditions and open a short position by selling 900 shares. You’d then trail a stop loss and wait for an exit. In this imagined scenario, you might short sell 900 CFDs at $7.29 and buy them back at $6.41, with a nice profit between the two. This is another one of those CFD trading strategies that’s suited to every timeframe, and the duration of the trade is going to depend on how strong the trend is and the distance of your trailing stop. If you understand short selling CFDs then this CFD trading strategy will suit you. But be aware that if your position starts to go higher then you should exit the trade quickly. If your long position exceeds your entry price and hits your stop loss then you will take a hit.
Do you like reading the news? Great! Keep an eye on the business or financial pages in newspapers and around the web. What you’re looking for is volatile stocks that you can trade that same day. Sometimes when a stock appears in the news it can shoot up between 5 and 20% in 24 hours. If people are suddenly interested and pushing a trend, then you need to be ready to jump on it.
Short-term changes in the CFD market can be quite lucrative, with trades varying from days to months. This approach will suit all traders, but you need to bear in mind the cost of overnight financing with CFDs, because they will eat into your profits. Still, that cost may be worth it in the long term. CFD trading strategies like this one require you to look for short to medium term trends, and you can use moving averages to help you work out how strong a trend is. If you want to find more long-term trends, use a moving average that’s above 50.
Swing trading is about making money from tiny changes (or swings) in the market and it’s a phrase you’ll hear a lot. To swing trade CFDs you want to trade whichever way the most dominant trend is going and you go in on a pullback. You buy in the dips when the uptrend is confirmed. Use profit targets or trailing stop losses. For your CFD Trading Strategy, let’s say you notice that a particular stock is in on a consistent uptrend. The uptrend hits a turning point and begins tracking back to new highs. Your approach is to use an indicator so you can identify the turning point and be ready for when it arrives. Wait until the uptrend is confirmed and go long in anticipation of more highs. The majority of swing traders prefer to confirm which way the movie is going before they enter. You’re not looking to get in at the low, your waiting until it breaks a short-lived high. Place your trade, run a trailing stop loss and exit as your stop indicates. You will let it run for between one and 20 days. It’s best suited to medium term traders who have confidence using stop losses and stop to enter orders. You’ll have to be ready to get out if your position turns lower, if your long position dips under your entry price and hits your stop loss.
Intraday trading is about opening and closing the position before close of market on the same day. You do this to take advantage of price movements, so that means you need to identify shares that have a good daily range. This is sometimes called the Average True Range, or ATR. At open, a share price might start heading down. It might then start heading back up again towards its opening price. When it breaks through its opening price on the day, this is the starting point where some traders like to go long. The idea is to ride the trend with intraday pricing until you hit your stop loss, or until you hit your profit target. So, this is single day trading, which means that you have to focus on stocks that are fast-moving. You can’t use this with a stock that barely moves, at least not profitably. If you understand position sizing strategies, then this could be one of the best CFD trading strategies for you. That said, it carries a high level of risk. Intraday moves are limited which leads traders to take larger sized positions to squeeze the most out of the smaller moves. Naturally, the loss potential from doing this is magnified by leverage. You can also lose out if you choose trades that don’t move very much. You could take small losses on a succession of them because you keep on getting out at the break-even point and you still pay brokerage, and in the end all these small losses add up!
With this approach you take a position using intraday information with the aim of holding it for anywhere from days to weeks. You’re waiting for the intraday alert to go off so that you can position yourself in the trade. So, for instance, you could set your FMG alert to tell you if the price breaks resistance at $6.25, and when it does you go long on 450 CFDs with a stop at $6.89. It’s a CFD trading strategy that will suit traders who are happy to check market depth so they can time their entry, and also those with specific entry orders.
Your aim with this strategy is to strip the dividends of a stock. You purchase your shares before they go ex-dividend and you sell them ahead of the ex-dividend date, receiving a capital appreciation when investors buy in to receive the dividend. A lot of stocks that are expecting a dividend attract investors at least 45 days earlier because they want to pick up full franking credits. This interest pushes the share price higher just before the dividend comes. You will ride the increase leading up to the dividend and close your position just before the stock goes ex-dividend. This could take days to weeks and it will suit anyone who likes to track dividend stocks that pay well.
This strategy runs from days to a couple of weeks and suits the kind of trader who thinks that the market has a memory and roves between support and resistance levels. So, the tactic is to buy on support and sell at (or close to) resistance levels. As an example, if a stock was ranging between $72.40 and $78.50 your approach would be to buy at around the $75.00 level and tighten stops up as it approaches resistance at $78.50. It’s a popular approach that all types of traders can employ.
Pairs traders try to profit from highly-correlated pairs slipping out of sync with each other. So, if for instance you notice a pair move into closer union, and you also notice that one is considerably outperforming the other take a pairs trade by shorting the over performer and going long on the underperformer and then being patient until both stocks move back into a highly correlated state. This can last from weeks to months, and it’s best used by traders who understand charting software. This technology can track two stocks at the same time, and more importantly it can produce formulas that track the way the two positions are correlated. Keeping a close eye on daily reports will help you to seek out these opportunities. When you see an “R” beside a stock ticker on your trading platform then that means that it has a report out. If you see one for your stock, then you need to check it out very quickly so you can respond.
This is one of those CFD trading strategies that sees you taking an opposite CFD trade to protect a current one. This can help you cut down on the volatility of your portfolio when markets are fluctuating wildly. If you think that your stock has come to the end of its run, then rather than selling it (the physical stock), you can short sell a CFD for an amount equivalent to the value of the shares. This position could be open for days or even years if your stock never beats that downward trend, but it’s still your best way of protecting the trade, assuming that you have the experience as a trader to manage it.