The list of CFD trading strategies is as long as it is wide. Therefore it is important to be able to cut through all the ‘noise’ and focus on one or two strategies for CFD trading that will really move the dials for you as CFD traders.
CFD trading is an increasingly popular way to speculate on financial markets. CFDs, or contracts for difference, are derivative products that allow traders to speculate on the price movements of underlying assets, and in either direction.
Putting together the right contract for difference trading strategies is going to be a vital part of your trading plan. There are a variety of different CFD trading strategies that can be used in order to profit from price action but you can built a successful trading plan with just one, if you know it well!
Some common CFD trading strategies include trend trading, contrarian trading, scalping, and range trading which we will delve into more with you below.
Almost All The Best CFD trading Strategies Fall In To One Of Two Boxes
CFD trading strategies can be broadly classified into two categories: directional and non-directional.
Directional CFD Trading Strategies Explained
Directional CFD trading strategies involve taking a position in the market with the expectation that prices will move in a particular direction.
The most common type of directional strategy is trend following, which involves taking a long position when prices are rising and a short position when prices are falling.
Another popular directional strategy is called contrarian trading, which involves taking a position against the prevailing trend in the market.
Contrarian traders believe that prices tend to move in cycles and that by taking a contrary position they will eventually profit from the reversal of the current trend.
Non-Directional CFD Trading Strategies Made Easy
Non-directional CFD trading strategies do not involve taking a view on the direction of prices, but instead seek to profit from changes in price volatility.
Range Trading CFDs
The most common type of non-directional strategy is called range trading, which involves taking positions at the top and bottom of a market price range in the expectation that prices will move back towards the middle of the range.
Scalping CFD Trading Strategy
Another popular non-directional strategy is called scalping, which involves taking small profits on a large number of trades. Scalpers generally take positions for only a short period of time and exit as soon as they have made a small profit.
Both directional and non-directional CFD trading strategies can be profitable, but it is important to remember that all trading involves risk and it is possible to lose money as well as make money.
Contract For Difference Trading Strategies Made Simple
Here is a list of 5 simple things to remember when putting together your CFD trading plan.
- The long and short of it
CFD trading strategies can be broadly classified into two categories: long strategies and short strategies. As the names suggest, in a long strategy, you take a position in the market expecting prices to rise, while in a short strategy, you sell expecting prices to fall.
- Going with the flow
One popular CFD trading strategy is to trade with the trend. That is, if prices are rising, you take a long position and if prices are falling, you take a short position. This strategy can be used in any time frame from intra-day to longer-term swing trading.
- Catching a falling knife
Another common strategy is to buy when prices are falling, in the hope of catching a bottom. This is a more aggressive strategy and is not for the faint-hearted as it carries higher than average levels of risk. Even for the risk happy CFD traders amongst you, this is one trading strategy for CFDs that might be out of your comfort zone.
- Fading the move
A contrarian strategy, fading involves taking a position against the prevailing trend. So, if prices are rising, you take a short position and if prices are falling, you take a long position. This strategy can be used in any time frame but is most commonly employed in intra-day trading.
- Support and resistance
Trading at levels of support and resistance is another popular CFD trading strategy. Support refers to a level where prices are expected to find buying interest and resistance refers to a level where prices are expected to find selling interest. These levels are commonly used in technical analysis trading CFDs, and many other instruments.
Technical Analysis trading CFDs
Technical analysis trading is a popular method used by many CFD traders and an even greater number of day trading professionals.
This type of trading involves using charts and technical indicators to identify potential market trends and make trading decisions. Technical analysis can be used to trade CFDs on a variety of financial instruments, including stocks, commodities, currencies, and more.
CFD trading using technical analysis can be a successful way to make profits in the market as it relies on trying to extract any alpha, or statistical advantage, over the markets as possible.
When you have seen day traders with multiple screens, displaying a variety of charts filled with crisscrossing lines and colored overlays; this is technical analysis. This relies not on the fundamentals of the underlying asset, but how it is behaving at certain points, and in specific predefined patterns.
The subject of technical analysis and trading indicators to use is quite broad, and as such we have broken down a dedicated area of our site for exactly this purpose. Feel free to check out our technical trading section for more on the subject.
Finding a Good Home To Execute Your CFD Trading Strategies Is An Important Step
When trading CFDs, and testing your CFD trading strategies, it is important to use a reliable and reputable broker or CFD trading platform.
There are many CFD brokers available online for trading these days, so it is important to do your research and choose a broker that offers good terms and conditions. CFD trading can be an inherently risky subject, so it is important to understand the risks involved before you start trading.
If you are new to CFD trading, it may be a good idea to use a demo account before you start trading with real money and to take some time to learn more about some of the advantages and disadvantages of CFDs.
When you are ready to take that next step, a free demo account will allow you to practice CFD trading and get a feel for how the market works before you move on with a real money account.