Best CFD Trading Strategies For Beginners
What do you think about CFD trading strategies? Without exaggeration, Contracts For Difference (CFD) are one of the most popular trading instruments. Are you interested in CFD trading strategies? It makes sense to learn more about various strategies.
CFD is a good option for both inexperienced as well as inexperienced traders. It is important to learn more about various strategies. Don’t worry; it isn’t as hard as it might appear at first glance to gather more information about CFD trading strategies.
Do you know what a CFD trading strategy is? Let’s find out!
What you need to know about a CFD is that it is a financial derivative product that enables traders to make a profit on price fluctuations of different assets. For example, stocks, shares, forex, commodities as well as cryptocurrencies. Interestingly, it isn’t mandatory to buy the asset itself, though.
What makes CFT trading strategies so attractive to traders?
It is worth mentioning that the key difference between CFDs and currency pairs is that CFDs resemble futures. As a reminder, trading contracts are also executed through leverage. In the case of currency pairs, traders have the opportunity to use the proportion of 1:200 and 1:500. It is possible to use even 1:1000.
The situation is totally different when it comes to CFDs, as in the case of CFDs, this difference will rarely surpass 1:50. This trading instrument requires an absolutely different money management approach and comes with another risk/profit ratio.
CFDs and other assets
We also need to mention that trading CFDs and currency pairs differ in the fundamental factors necessary for market analysis. In the case of fundamental analysis, only a certain layer of statistical information will influence the dynamics of the instrument.
It is also important to mention that volatility for CFDs and other assets is different. Interestingly CFDs are regarded to be more responsive to fundamental changes compared to other assets.
Last but not least, in most cases, CFD trading is dependent on the opening hours of exchanges, while forex trading is carried out around the clock.
Why do people trade CFDs?
Traders can use CFDs for speculative purposes. Moreover, they can use CFDs for hedging. It is worth mentioning that trading CFDs doesn’t require a lot of money. Moreover, it is possible to use the broker’s borrowed funds.
Since a conclusion of a Contracts For Difference doesn’t suggest the shares of ownership, there is no necessity to pay stamp duty. Furthermore, the conclusion of CFDs comes with minimum margin requirements as well as savings on numerous kinds of depository fees.
At the moment, it is possible to conclude CFD contact for the following main types of financial instruments:
- Stock indices
- Interest rates
- Currencies (forex)
Consequently, CFDs give traders enough flexibility and are present in many markets. We shouldn’t forget about the low entry threshold thanks to one important factor, leverage.
What you need to know about CFD trading
We need to mention the pros and cons of CFD trading. Let’s start with the advantages of CFD trading.
Hopefully, CFD trading is available to everyone.
Let’s not forget about a commission, more precisely, a low commission. In many cases, brokers limit themselves to only taking the spread for their services. There is no necessity to cover all the costs associated with the execution of the ownership right transfer.
As of October 2022, you have the opportunity to trade Contracts For Differences on almost any asset listed on the stock exchange, the forex currency market, as well a commodity exchange. It is worth noting that the vast majority of brokers are introducing cryptocurrency CFDs, as well.
Now, let’s focus on the disadvantages of CFD trading.
For example, leverage can be a blessing and a curse at the same time due to the fact that leverage significantly increases trading risks. Inexperienced traders aren’t recommended to trade with a leverage of 1:10 and higher.
Importantly, there is also a risk that the counterparty of the transaction won’t fulfill its obligations. Nevertheless, the above-mentioned risk factor is almost entirely eliminated when one works with CFDs on an official exchange market.
Most commonly used CFD trading strategies
Now, we can focus on the best CFD trading strategies. We can start with technical analysis trading.
Technical analysis is an integral part of any trading strategy. However, there are numerous options as well as combinations of indicators and graphic tools.
When it comes to technical analysis, you study price charts as well as historical data in order to make predictions for specific time frames. It makes sense to analyze past trends. Why? In order to make assessments regarding the future ones.
As a reminder, day traders study price charts. However, if you decide to select long-term investments, you must monitor monthly as well as yearly charts. While monitoring price charts utilize indicators. Importantly, indicators will help you locate patterns as well as trade reversals based on support levels, price highs as well as lows.
Trends and pair trading
We need to mention trends when it comes to the best CFD trading strategies. Don’t worry, trends lines are quite easy to distinguish and draw. You need to activate some indicators in order to see where the price is going and predict market trends (or the absence of market trends).
Now, let’s continue with pair trading. It is worth noting that pair trading is a popular strategy when it comes to stocks. However, the above-mentioned strategy can be exercised with commodities as well as currencies.
It is possible to use the above-mentioned strategy in the case of both low-volatile as well as high-volatile markets.
What about hedging and swing trading
Hedging is quite an interesting strategy. Why? Let’s find out!
Its purpose is to protect your funds. You need to keep in mind that the above-mentioned strategy should be exercised with a diversified portfolio of Contracts For Differences that you have been for an extended period of time. Notably, such capital saves them from losses triggered by price drops.
What about swing trading? In the case of swing trading, your goal is to locate trending markets. You need to find assets that are moving in a particular direction.
Swing trading is exercised in conjunction with technical analysis. It makes sense to take a look at different indicators, such as RSI, MACD, as well as oscillators. Moreover, it is important to analyze support and resistance levels. Don’t forget about stop-loss and take-profit settings as well.
Inexperienced traders and CFD trading strategies
As we already discussed the best CFD trading strategies, we can now discuss several tips for inexperienced traders.
Do you know how to craft your own strategy? Don’t worry; we are here to help you.
First of all, you need to create a trading account with a broker. The next step is to deposit funds and trade on live markets. If you have never traded before, it makes sense to use a demo account in order to learn more about various strategies.
You need to learn as much as possible about the market as well as CFD trading strategies. It is important to differentiate between various CFD trading strategies. As a reminder, it makes sense to compare trading strategies in order to select a suitable option.
Moreover, you need to select CFD instruments. You have the opportunity to select from shares, forex, indices, commodities, etc.
Also, you need to pick your strategy. It is noteworthy that you should understand what sort of positions you want to open.
Furthermore, it is important to select the preferable risk/profit ratio as well as risk management tools.
Trading tips for beginners
First of all, it is desirable not to change your CFD strategies. Moreover, it is important not to break your own rules.
Every trader must know their limits. It is crucial to put a certain percentage of your capital at stake. There is no need to put all your eggs in one basket. Also, it is desirable to create a well-diversified portfolio.
According to experienced traders, it isn’t a good idea to spend more than 2% of your funds on a single deal.
As stated earlier, it is vital to learn as much as possible about CFDs. Inexperienced traders must read articles and watch videos regarding CFD trading strategies.
Furthermore, it isn’t a good idea to copy someone’s strategy just because that trader is making money. You need to create your own strategy based on your trading psychology.
You need to use a stop-loss. Keep in mind that it is better to exit a losing deal and open a new deal during market turbulence. Another option is to take a break.
People who aren’t familiar with CFD might ask, “Is CFD good for trading?” To cut a long story short, yes, it is good for trading.
CFDs are available for various assets. So, every trader has the opportunity to select a suitable instrument as well as strategy. Without exaggeration, a CFD is a good option for traders who don’t have a large capital because the above-mentioned traders have the ability to use leverage.