Contracts for differences (CFDs) are highly useful tools. You can use them to learn how the market generally works or take them further as your main form of trading. This is because CFDs are highly flexible derivatives. As such, they can allow you to create a diverse array of different strategies. You can mix and match different contracts in different ways to bring you diverse results. In this article, therefore, we want to discuss the types of trading strategies you can employ for CFD trading. So, first of all, we have to discuss the parameters you have available to you when setting up a CFD contract.
Options for CFD contracts
First of all, when setting up a CFD contract, you can invest in basically any asset. Any market you find interesting and have some insight in is an opportunity. This is already something we have discussed in detail earlier, so we will not spend too much time on it.
You should also consider the time frame of your CFD investments. Maybe you do not want to take too much risk, in which case short time CFD trades may be for you. If you believe that you excel at acting quickly, it works as a good option. Longer time frames, on the other hand, give you more breathing room to properly consider your trades. The problem is that this also usually comes with far more risk for compensation. The type of strategy you choose depends on your character.
Finally, when choosing a CFD, you can either go long or go short. Going long on a contract implies you believe the asset will go up in price, so you buy an asset with the intention of selling it for profit. Going short implies the opposite, you believe the asset will go down in value. You intend to sell the asset and buy it back once the price plummets, ending your contract. Of course, since we are talking about CFD trades, you are not, in reality, buying or selling anything.
Possible CFD trading strategies
So, with all those prerequisite mentions out of the way, what types of common CFD trade strategies are available to you?
Range CFD trading
Here, you identify assets that may be either oversold or overbought. You will then buy them when they are oversold and sell them once they reach an overbought region. This is fairly by the numbers type of trading, where you simply buy low and sell high. There are two ways you can do this. You can set up a CFD contract to trade automatically at a certain price threshold. Then, you would follow the basic trends and trade without much thought. You will not necessarily make huge profits this way, but if you are diligent you can see healthy gains. Alternatively, you can actively try to look for emerging trends, not immediately obvious to people. This second type requires using a wider range of analytical tools, along with some fundamental analysis.
This is where the short time frames that we mentioned earlier are incredibly relevant. For this type of CFD trading, traders find each and every small opportunity that may result in a profit. The risks they take are small and are more likely to end in profit, but it can be quite intense. This type of trading means keeping an eye on the charts for every small movement that may happen.
Swing CFD trading
Swing trading is a bit more of a long term strategy, but usually only takes place overnight or a few days. The idea is to identify an asset that you believe will take a sudden swing in a given direction, jumping from a peak to a valley. This applies to both directions the market can go in. It involves a greater reliance on longer-term chart patterns.
Breakout CFD trading
This type of CFD trading involves identifying trends before they formulate. You want to figure out if an asset is going to move its current resistance and support levels and then take advantage of that opportunity. Find a certain key price point for an asset, and then trade at that point. As long as you remain fairly certain of where the market is going, this is a fairly reliable strategy, that many traders use.
Contrarian CFD trading
Contrarian CFD trading involves, well, acting contrary to the market. You try to trade against the prevailing market sentiment. For example, an asset such as gold may decline for a while. Your mission should be to identify when the trend is ending or at least nearing an end. You will then go long, believing the asset is going up in value. Basically, you need to act fast before people catch on to the fact that a trend may be reversing.
Rebate CFD trading
This type of strategy for CFD trading relies less on the trading itself for profit. The main objective of a trader using this strategy is relying on rebates. In case you are not aware, rebates are the dividends you receive from short selling a stock. This is since the broker has to ‘borrow’ the stock, instead of holding it. Again, this can be a bit abstract since we are talking about CFDs, after-all. Traders here plan to go for neutral trades or trades which are generally not risky.
Watching the newsfeed
This type of CFD trading, as the name implies, involves keeping a close eye on the news. Traders look to see any scandals that may affect a stock’s value, or they follow international news to follow relevant worldwide economic trends. There are all sorts of potential news that may be of relevance to an asset’s price. The most important thing to keep in mind is that you are interested in public opinion. You may interpret some news one way, but you should be interested in what the public and other traders are thinking. It is their opinions that affect asset prices. You should take all of this into account and act accordingly.
This involves quick trading between different markets. Prices between markets can differ, so you would have opportunities for making profits here. The problem is that in the modern-day and age market price differences tend to be very small. This is because everyone is connected digitally, so people can quickly view prices all over the world. This is why many arbitrage traders either automate the process or have to act very quickly themselves. As such, this is the type of strategy recommended for seasoned traders.
This is the most risk-free type of trading there is. Everything about hedging involves careful deliberate trades. As such, however, the profits made tend to be very low. They are always in the single digits, so it is usually done with large funds. Since CFDs allow you to trade when you please, they are a great tool for hedging that many traders use.