CFD Strategy
First Published date: 21. November, 2022Last Updated: 31. January, 2023Fact-checked by Adrian Müller
With the undeniable trading benefits of CFDs, traders are always looking for solid strategies. A good and effective strategy can take time, especially for beginners. So, this guide will be all about using the right CFD strategy to increase profits.
In CFD trading, traders don’t own the underlying asset. They purchase a position in the market through a broker. Traders speculate the position for a relatively small amount of capital. But they still have a good chance of profits.
Since CFDs are a leveraged market that increases the chances of profits, they can also wipe out their bank account faster than anything else. That’s why using effective strategies is crucial. Let’s take a deep look into how to create effective CFD strategies for higher profits.
Table of Content
Understanding CFD Trading
CFD stands for contract for difference. It’s an advanced form of trading strategy. When you’re trading CFDs, traders essentially buy and sell CFDs. With CFDs, traders can speculate on the prices of financial markets.
There are many markets as well. Traders can choose between forex, shares, commodities, and even indices. The main characteristic of a CFD is that traders don’t own the assets themselves.
CFD traders open positions in the market. Since CFDs are a contract, the trader will agree to exchange the price difference from when a position is opened to the point it is closed. Price movements can be speculated in both directions.
How much profit traders make or lose depends on how much they can make correct forecasts.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Key Terms in CFD Trading
CFD trading has key terms like short trading, long trading, margin, and leverage. Knowing these terms is essential in formulating an effective strategy.
They allow traders to understand how the whole thing works. Let’s dive into the terms briefly before we dive into the strategies.
Short Trading
Since CFD trading allows for speculation in both directions, they can go for short or long trading. Short trading is when someone opens a position for a profit when the price decreases. Another term for it is going short.
Long Trading
Long trading is the opposite of short trading. When traders long trade, they profit when there’s an increase in the price. Going long is another term for long trading.
Margin
Traders need funds to open and maintain positions. The margin is the fraction of the total size of the position. There are two types of margins. Traders need a deposit margin when opening a position. On the other hand, there’s also a maintenance margin.
Traders don’t always require a maintenance margin. It’s necessary when a trade incurs losses or goes close to making losses that the deposit margin won’t cover.
Leverage
This is a very crucial concept in CFD trading. CFDs are leveraged. What does that mean? A trader can get exposure to a large position. Still, they don’t need to always commit to the full cost initially.
Traders make the most out of their capital through leverage. It can be used to spread the capital even further. However, it can also be quite a blow when it isn’t favorable.
That’s because profits and losses will be calculated according to the full size of positions. You can check out this guide to learn about CFDs and specific terms.
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79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
9 Effective CFD Strategies
If traders want to enjoy the benefit of CFD trading, they need to know the right strategies. Having the right trading strategy will put you ahead of the curve.
That’s why having a solid strategy is very important. It ensures that you have a framework on which to base all your decisions. Apart from a strategy, traders need to be disciplined as well. They should be able to control emotions and not get too tied up on a single trade.
CFDs are often for advanced traders. But the rewards and profits can be pretty high. In contrast, so can the losses. Naturally, this means competing with veterans. So, any old strategy won’t do. Traders need to apply ones that’ll give results. Here are 9 effective ones.
Trading the News
An informed trader is an intelligent trader. Follow the news about your traders to stay informed. You’ll need to keep up with the financial and economic calendar. You can be aware of upcoming events when you’re on top of the news. It won’t catch you by surprise, at least.
When you’re trading the news, you have two ways you can use it – investing before or after the statistics are released. If you’re confident, you can try investing before the statistics are released. This is the riskier option of the two.
In this approach, you’re trying to understand or predict how the market will react to the statistics. But as with all risks, the payoff can be considerable.
For a lesser risky option, invest after the release. This is going with the flow. However, there’s still some risk involved in this approach.
The prices can change direction. Regardless, you’re just seeing which way the market goes after the statistical release. To mitigate risks, you should always have stop losses in place and take profit orders.
Know More About CFDs
Knowing more about the fundamentals and advanced nuances of CFD trading will help you understand the market better. Eventually, you’ll also be able to develop your unique strategies.
Honestly, increasing your CFD knowledge is very important. Even before you start trading. CFDs allow you to trade commodities, shares, forex, and indices. The unique thing is it will enable you to do it without actually having to own any assets.
You’ll predict whether the price will rise or fall. Based on that, you’ll go long or short. Going long means you buy, and short means you sell. The leverage you have can give you tons of profit. But there’s also the chance of high losses – knowing how CFDs work will help you understand the nuances and the market itself.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Practice with a Demo Account
There’s no substitute for practicing. Fortunately, you don’t need to spend real money when practicing. There are accounts called dummy accounts. This is an excellent way for beginners to hone their craft.
You can start small with a practice demo account. There won’t be any consequences since you aren’t putting any money on the line – you’ll have demo funds. The exciting part is you’ll be able to experience live markets.
That makes demo accounts a popular way of understanding how the market works. You’ll need to keep something in mind, though; don’t just trade mindlessly. Although there aren’t any risks, you still need to focus.
Understand what’s happening with your trades and assets. Learn the terms of the markets, then go ahead and build a real account. Also called a live account. You can even take courses for trading to get better at it.
Plan it Out
Here’s something a bit meta. Having a strategy is itself a strategy. The one thing you shouldn’t do is go in blind. Always have a solid trading plan. This acts as a framework for CFD trading.
A trading plan coupled with a winning CFD strategy will be quite potent. The goal of this plan is to show you a path.
Don’t ignore a very piece of the puzzle – you. What are your trading goals? What are you like as a trader? What’s the motivation? All these important things are important to consider. An ideal trading plan should address the following points:
- Trading goals
- Available Capital
- Markets to trade
- Trading strategy
- Record keeping
- Risk tolerance
- Risk management
- Time commitment
- Motivation
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Managing Your Risk Stops and Limits
Smart traders always manage their risks. A common way to do this is to put stops and limits. You’ll be in charge of making the call here.
Stops
How much money will you lose if something doesn’t go as planned? As with any trading, there are some risks involved with CFDs. Stops and limits are exit points pre-defined for your broker.
As the trader, you’ll need to set these limits. Your broker will close the trade when the price reaches a less favorable position. This way, you’ll be able to protect and save your capital, which is an integral part of trading.
Some traders have more risk tolerance. If someone is particularly well-versed in CFD trading, they might be willing to take more risks. But the call is yours. That’s why knowing yourself is essential when trading CFDs.
Limits
There are also limits to closing orders. This tells your broker when to close a trade. It’s going to be closed at a point that’s the most favorable compared to the market price. Limits are also a tool to protect your capital. But it “activates” after you’ve made a certain profit.
Start Small initially
This strategy will be handy when you’re just starting to trade CFDs. Start small. Sometimes it can be easy to get carried away. There are thousands of markets you can trade.
Be methodical here, and it’ll pay dividends. At first, you should start small, which will save your capital. Of course, when you’re trading, you aren’t looking to preserve capital.
The goal is to get the highest return on your capital. You might have heard the phrase making your money work for you. But starting small and taking things slowly can sometimes be a perfectly valid CFD strategy.
Give yourself some time to get various market exposure. Then you can go ahead and diversify. You can get access to rising and declining markets.
Avoid Adding to a Losing Trade
One thing traders need to avoid is adding to a losing trade. If you already have some trading experience, this might come off as no surprise to you.
You might get carried away or want to be optimistic about a particular trade. Even when the signs say you shouldn’t. You need to trust your experiences here.
Learn to pull the trigger if a trade isn’t going your way. Some self-discipline is required. A good trader knows when to call it quits.
Losses are a part of CFD trading. Stick with a trading strategy and avoid getting attached to any particular trade. This will be a very important and helpful trait that traders will carry throughout their entire CFD trading career. Stop when you should.
Understand Your Position Size
Two things are crucial to consider when opening a new trade. How much risk can traders take, and how much capital is available? You need to understand your total position size in this case.
Since CFD trades are leveraged, your total position size will differ from your deposit. It’ll be much larger than the initial deposit.
So, to counter this, traders outline how much they are willing to lose in a trade. Risking a small percentage of your capital is a good way of mitigating the risk. Understanding your position size will help you make favorable trades and know when something is too risky.
The biggest killer is overleveraging. High leverage, like 100 to 1, can be very detrimental to your capital. Put down $100 to get exposure to $10,000. That sounds risky, doesn’t it? It’s a considerable risk.
Award-Winning Trading Brokers:
Rating:
Regulated By:
FCA, CySEC, ASIC, FMA, FSA, FSCA
CySEC (EU), FCA (UK), ASIC (Australia)
BaFin, FCA
Demo Account:
✔ Free
✔ Free
✔ Free
Live Account:
$100
$200
0
Spreads From:
Variable from 0.5 bps
Variable from 1.0 bps in EUR/USD
Variable from 0.4 bps
Selection Of Instruments:
2000+
1000+
17.000+ (FX, Stocks, CFDs, Commodities and more)
Support:
24/7
24/7
24/7
Payout:
1 – 3 Days
1 – 3 Days
1 – 3 Days
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Analyze Markets
Another effective strategy is to analyze the markets. That’ll help to time your trades better. Analyzing gives you a more in-depth understanding of the market. It can be used to identify when to enter and exit a specific market – the best point to enter or exit a market, especially.
There are two main methods for analyzing markets. You can choose to conduct fundamental analysis or technical analysis.
Fundamental Analysis
You can use fundamental analysis to identify markets that are underpriced or overpriced. It’s done by factors that can sway the value of a particular asset.
Common factors that are looked at are financial and economic. Let’s look at a company’s share prices to understand fundamental analysis better.
Traders benefit when trading across different asset classes through fundamental analysis. This is because not all asset classes behave the same. When something in the market changes, it might affect other assets differently.
So, fundamental analysis gives you a tool to measure intrinsic value. Essentially, that’s what fundamental analysis is. Market conditions effectively drive market prices. There are a lot of other things that go into determining the price.
More importantly, rational factors play a role too. Things like how profitable the company can be in the future. This can impact share prices.
But a company’s share prices are only sometimes an indication of its intrinsic value.
Technical Analysis
Technical analysis is very different from fundamental analysis. It studies the historical price data of an asset. This can predict future price movements.
Studying past formations and chart patterns will give you a lot of insightful data. All these are used for effective analysis. There can be a whole piece of technical analysis alone.
But let’s focus on one technical analysis method – using historical prices. Past prices are laid on technical oscillators and other indicators.
With this data, traders can find price points and price movements. This’ll unearth key points about the price of an asset class. The data helps identify patterns and determine the right time to enter and exit a market. It can also determine the right price point.
The movements are color-coded as candlesticks. Red denotes the price has gone down, and green represents a price rise.
Traders can also check the bars to determine opening and closing prices. The “wicks” show the lowest and highest price. Technical analysis has different indicators, like moving strategies, Bollinger bands, and Fibonacci retracements.
These can be used to identify the correct entry points. However, every trader must remember that these indicators can be used in many different ways and depends on the employed trading style.
Backtesting and Technical Analysis
Successful traders don’t solely rely on the analysis itself. They constantly test how their analysis would perform in the market by backtesting.
Backtesting is done by analyzing previous prices and seeing how it performs. Traders take real data from a selection of markets. After running a strategy against it, they can determine whether it works.
If it works, that’s a good sign. This analysis is then used to enter live positions. With an excellent strategy, traders can even automate the whole process. Remember that this is only done when confidence in the strategy is very high.
Algorithms perform trades without any practical human intervention. Backtesting with technical analysis can be a good way to save and protect capital since traders aren’t risking any actual capital with live trades and are just testing their strategy.
Short-Term CFD Trading Strategies
CFDs trading is a long game. Successful traders are in it for the long haul. All strategies and trading plans should be tailored for long-term success. Traders shouldn’t look for a short-term payout.
Some short-term strategies can be used too. But these strategies aren’t meant to be money-making shortcuts. These complement the long-term strategies and work in tandem with them.
A viable strategy many traders use is day trading. Any trader with a skill level can use CFD day trading or intraday trading.
It’s a strategy where traders enter and exit a market and close it within a day. Traders only hold onto a position for a maximum of a day.
Day trading can be a suitable strategy for traders looking to profit from frequent small price movements. But this is only a strategy for some. Traders that day trade need to be meticulous. More on this a bit later.
They need to keep up to date with the news at all times and monitor price charts religiously. Technical analysis and price action are a focus for day trading strategies.
The Right Day Trading Method With Plus500
To formulate the right day trading, you’ll need a good CFD broker and a platform. These are very important. The more you know about CFD trading, the more it will help you in day trading. Although brokers like Plus500 are vital, there’s a caveat.
You must ensure they only eat a little into your profits. That might leave you with fewer profits than you potentially could have had.
As we mentioned, traders must be meticulous in implementing day trading strategies. That means hours spent in front of the computer. Gather information about the market and closely monitor the price movements.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Risk Management in Day Trading Strategy
Since day trading is a suitable short-term strategy, a good risk management process must also be in place. Traders should be confident about exiting a particular market the moment it isn’t returning a satisfactory profit.
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Wrapping Up
Any CFD strategy must be based on a fundamental understanding of CFD markets. That’s how traders can ensure a viable return whether they use day trading or fundamental/technical analysis.
Fortunately, there are many ways a trader can learn the basics of CFD trading. Beginners should take online training courses. Top brokers like Plus500 are the perfect place to start, thanks to the vast number of markets and high-quality training for traders.
Remember, there’ll always be some inherent risk with CFD trading. But nothing beats knowledge and staying on top of the news and markets. When traders have ample expertise, they can work to mitigate risks by putting in the right stops and limits.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
