CFD Trading Strategies

CFD traders can employ several tactics to gain an edge in their trading endeavors, which can help them identify the right assets to trade while also highlighting the right entry and exit points, and the proper strategy to use. Traders know that CFDs aren’t predominantly used to hold long-term positions, so technical analysis is especially useful. Fundamental analysis shouldn’t be ignored, however, as many CFD traders invest in shares (stocks) of public companies and must know the fundamental health of the industry and company that they’re trading.

Technical Analysis and CFDs

Technical analysis is a powerful tool for CFD trading. With it, you’re using historical asset prices and chart movements to predict what will happen in the future. Technical analysts assume that price movements are never random, and that a catalyst can be identified for every incline or decline, no matter how small. The statistical analysis tools that are used for this strategy help to map trends onto an asset’s price chart, so that changes in trends can be visualized easily.

Here are some examples of popular technical analysis methods:

  • Moving Averages: Moving averages are constantly-updating averages of an asset’s price over time. They’re measured over any span of time, short or long, which can illustrate narrow and broad trends and how rapidly they are changing. Watch for MA lines crossing in either direction for potential buy and sell signals.
  • Relative Strength Index: The Relative Strength Index, or RSI for short, is a momentum oscillator that moves between 0 and 100. The current reading of the RSI for any asset indicates its price momentum, regardless of direction. If RSI is above 80, it typically means that an asset is overbought, while an RSI under 20 means it’s oversold.
  • Fibonacci Retracements: Fibonacci retracements are technical signals that show traders where major support and resistance levels might appear. They can be an accurate indicator of where a trend might slow down or reverse before continuing onward.

Fundamental Analysis and CFDs

Fundamental analysis is a suitable complement to technical analysis, because it doesn’t concern itself with numerical or statistical trends, but instead with the health and sustainability of an asset. With great applications, especially for long-term investors and those who prefer the stock market and commodities, fundamental analysts look at industry reports, quarterly financial disclosures and other important statistics like revenue, outstanding debt, price-to-earnings ratio, and more.

Tips for CFD Traders

  1. Use Leverage Responsibly

Leverage and margin trading are tempting, as they can help you magnify your returns. However, they also inject more risk into any position, as price movement in the wrong direction may mean accumulating losses. Be sure to use leverage only in controlled amounts, and when you can afford to.

  1. Use Stop-Loss and Take-Profit Tools

Stop-losses can help you automatically minimize your trading losses by closing your position when certain conditions are met to ensure that they don’t move further against the investor. They allow you to properly adjust your risk level and gain greater control over open positions. Take-profit tools follow the same concept but in the opposite direction. When you’re generating returns, set take-profit levels to close your position automatically and realize your gains.

  1. Stick to Your Goals

It’s crucial to set realistic trading goals and maintain the discipline to keep to them intact. Avoid being the trader that holds a losing position with the belief that it will reverse. Equally bad is the trader who has a good position and refuses to close his or her trade due to the desire for more. If you’ve met your goal, whether short or long-term, realizing your gains and readjusting your strategy help to form a sensible approach.

  1. Mix Technical and Fundamental Analysis

Without a fundamental understanding of the health of an asset and its market, technical analysis can be powerless. The same goes for fundamental analysis without understanding price and chart trends and their impact. Incorporate both into your strategy and you might become a savvier trader.

  1. Filter the Noise

At the end of the day, markets are sensitive to sentiment. Those trying to influence the collective sentiment of markets, such as news outlets, financial pundits, and other traders all have a stake in themselves. Ignore most of them and focus on the facts, and your own expertise exclusively.

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Risk warning: Contracts for difference (‘CFDs’) is a complex financial product, with speculative character, the trading of which involves significant risks of loss of capital. Trading CFDs, which is a marginal product, may result in the loss of your entire balance. Remember that leverage in CFDs can work both to your advantage and disadvantage. CFDs traders do not own, or have any rights to, the underlying assets. Trading CFDs is not appropriate for all investors. Past performance does not constitute a reliable indicator of future results. Future forecasts do not constitute a reliable indicator of future performance. Before deciding to trade, you should carefully consider your investment objectives, level of experience and risk tolerance. You should not deposit more than you are prepared to lose. Please ensure you fully understand the risk associated with the product envisaged and seek independent advice, if necessary. Please read our Risk Disclosure document.

 

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