CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Being leveraged instruments, CFDs call for a well-planned approach to trading. The first step to this is learning popular trading strategies. This is particularly useful as it helps keep emotions at bay and make objective decisions even when the financial markets turn highly volatile. The CFD trading strategies you adopt will depend on your personality as a trader and risk tolerance.
Let’s take a look at some of the popular CFD trading strategies to get you started.
Breakouts occur after an asset has been trading within the support and resistance levels for a while. An increase in the volume of bullish or bearish trades may push the price out of this range. This price movement indicates a shift in market sentiment and creates opportunities for CFD traders. A breakout marks the beginning of a new trend, making it a viable entry point to ride a trend.
Price breakouts usually occur from horizontal support and resistance levels. However, another common type of breakout is trendline breakouts. Here, the price breaks out of the trendlines that act as support and resistance. For instance, when using the Bollinger bands indicator.
While breakout CFD traders wait for bulls or bears to take over and propel the price in a specific direction, range traders take advantage of range-bound price movements. Trading an oscillating market is a straightforward CFD strategy. You can speculate on price movements in either direction, since they are more predictable within the support and resistance zones.
Caution: There is always a risk of breakout. Therefore, CFD traders must keep an eye on news events and market data.
Also known as scalping, this is a short-term CFD strategy. Scalpers take positions for a few seconds to a few minutes with the aim of capturing profits from tiny movements in asset prices. With this high-frequency strategy, traders open and close multiple trades within a single trading session that may last from 30 minutes to an entire trading day. The key to exceptional scalping is access to real-time data feeds and quick decision-making. Experienced scalpers may use algorithmic trading to optimise high-frequency opportunities. Traders attempt to accumulate tiny profits over time so that their gains overshadow their losses.
A retracement or pullback is a short price move against the ongoing trend. This means a short-lived decline in prices during an uptrend or a short-term spike in prices during a downtrend. However, traders must confirm that the reversal is temporary and take positions accordingly. Traders use technical indicators, such as Fibonacci retracements, and chart patterns, such as flags, to identify entry points for this CFD trading strategy.
Did you know: A pullback lasts only for a short duration, such as a few hours or days. It is usually a 5% to 10% change in the price. However, a market correction is a change of more than 10% and may continue for longer periods. Understanding the difference between the two is crucial to effectively trade retracements.
Traders use contracts for difference (CFDs) to hedge against the risks associated with unexpected market moves. For instance, gold and USD are considered safe havens, and traders might want to hold these assets for the long-term. However, short-term price pullbacks may affect the overall portfolio value or performance. To hedge against such risks, a CFD trader holding physical gold may also trade gold CFDs in the opposite direction. Hedging is also quite popular among forex traders to minimise the risk of price fluctuations in their chosen currency pair.
While these are popular CFD trading strategies, they only give you a starting point. As you get more comfortable with trading, you may try other strategies. There is no one-size-fits-all in trading. Experimenting with different strategies on the demo account is key to selecting the best strategy for you.
Disclaimer
All data, information and materials are published and provided “as is” solely for informational purposes only, and is not intended nor should be considered, in any way, as investment advice, recommendations, and/or suggestions for performing any actions with financial instruments. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation or needs, and hence does not constitute as an advice or a recommendation with respect to any investment product. All investors should seek advice from certified financial advisors based on their unique situation before making any investment decisions in accordance to their personal risk appetite. Blackwell Global endeavours to ensure that the information provided is complete and correct, but make no representation as to the actuality, accuracy or completeness of the information. Information, data and opinions may change without notice and Blackwell Global is not obliged to update on the changes. The opinions and views expressed are solely those of the authors and analysts and do not necessarily represent that of Blackwell Global or its management, shareholders, and affiliates. Any projections or views of the market provided may not prove to be accurate. Past performance is not necessarily an indicative of future performance. Blackwell Global assumes no liability for any loss arising directly or indirectly from use of or reliance on such information here in contained. Reproduction of this information, in whole or in part, is not permitted.
