The majority of commonly used CFD Trading Strategies have similarities to the time tested methods used by traditional shares traders, with the main difference being that smaller amount of capital are required to open positions of the same size. Because of this, there is not much difficulty for those with shares trading experience to “cross over” into the world of CFD trading.
One interesting factor to note, however, is that there are a wide variety of different CFD Trading Strategies that can be used to achieve profitability in the markets. One trader is likely to choose one strategy over another because of differences in risk tolerance or time horizon. With some traders looking to be more aggressive than others and some strategies looking to employ techniques that are favorable for shorter term time frames, there is a well-researched knowledge base available. The same is true for more conservative traders with longer time horizons, though some strategies are viewed as being more appropriate (and profitable) than others. Here we look at some of the more popular techniques used today.
Hedging is typically thought of as a defensive strategy that is often employed during times of excessive market volatility. During these times, price activity tends to be more difficult to forecast. When these times occur, traders tend to look to protect profits and to do this, traders can “hedge” their open positions either by opening another position in the opposing direction or buy buying an asset that historically has shown an inverse correlation to the assets that are currently owned. The effect of this is that losses are prevented as long as these opposing positions are open, but at the same time, the downside is that additional losses are also prevented. Because of this, hedging is thought of as a purely defensive strategy.
Intra Day Trading
Intra day trading refers to the practice of opening and closing a position in the same day (or same trading session). Many of the commonly used intra day strategies are technical in nature, which means that they are based on historical price formations and trend patterns. These strategies tend to be used by traders with a higher level of risk tolerance, as larger amounts of capital are usually required in order to make any type of significant gain.
Swing trading CFD trading strategies are often used by traders with a longer term time horizon because these strategies require an identification of significant highs and lows within a larger trend. For buy positions, traders will be looking for any price weakness on the assumption that the larger trend will eventually re-assert itself and prices will eventually move higher. For sell positions, the opposite is true, as traders will be looking for any price strength within a downtrend on the assumption that the larger trend will return and prices will eventually move lower after the highs run out of steam. Swing trading is generally thought of as being lower risk than what is seen with intra day strategies, and as such will likely be more attractive to more conservative traders.
Trading after News Events
Another common strategy used by CFD traders is to look at the significant news events that are scheduled for release on a specific day and to base their trades on the directional bias that is created by those releases. Some markets tend to respond more to news events than others (with the currency markets being a primary example), so traders using this strategy will be best served to watch different asset classes before committing to a long term trading style. Generally, news trading is employed by traders that are less interested in learning and using technical chart analysis, as this gives their trades a basis that is more clearly founded in economics rather than mathematics.