CFD Trading Strategies Are Exactly Like Trading Shares But With A Few Subtle Differences
CFDs are exactly like share trading strategies, the main difference being you only need a small amount of money up front in order to control your total position.
So it goes without saying that the CFD strategies you look to employ shouldn’t differ too much from your current share trading strategies that you have been successful with.
There is one exception to that rule and that relates specifically to overnight financing charges. With share trading strategies you can hold a position for as long as you like and you only pay brokerage to get in and get out.
With CFD trading strategies you need to be aware of the overnight financing for holding positions long term as the CFD financing costs do eat into your trading profits. One great benefit of short selling is you get paid interest every day you are short.
Common CFD Trading Strategies
- Going long CFDs
- Going short CFDs – Short Selling
- Short term trading CFDs
- Swing trading CFDs
- Intra day trading CFDs
- Position trading CFDs
- Zone trading CFDs
- Pairs trading CFDs
- News trading CFDs
- Dividend stripping
- Hedging CFDs
Lets cover a brief description of each strategy.
Going Long CFDs
Goal: Profit from buying low and selling high
CFD Trading strategy: Buy FMG at $10.00 and close position at $11. Profit in between.
Timeframe: All time frames
Suited to: Traders at all experience levels.
Risk Level: Low
Going short CFDs
Goal: Profit from selling high and buying low
CFD Trading strategy: Sell FMG at $10.00 and close position at $9. Profit in between
Timeframe: All times frames
Suited to: Traders familiar with short selling CFDs
Risk Level: Medium
Short term trading CFDs
Goal: Take advantage of short term movements in the CFD market. Short term trading CFDs can be from days to several months. It does encompass all timeframes of which most are discussed below.
Given the financing rate of CFDs, short term trading is the preferred choice.
CFD Trading strategy: Identify short to medium term trends CFDs enabling you to profit from days to months.
Timeframe: Days to months
Suited to: All traders
Risk Level: Medium
Swing trading CFDs
Goal: Take advantage of small swings in the market. One of the most widely used terms in trading. Buy the dips on confirmation of uptrend. Use profit targets or trailing stop losses.
CFD Trading strategy: FMG comes off its uptrend, hits a turning point and starts to track back to new highs. The CFD strategy would be to use a indicator to identify the turning point, wait for confirmation of uptrend and jump on the new move up.
Timeframe: 1 day – 20 days
Suited to: All short to medium term traders confident with stop losses and stop to enter orders.
Risk Level: Medium
Intra day trading CFDs
Goal: Take advantage of intraday (within the one trading day) moves and close the position before the market close.
CFD Trading strategy: Identify stocks with a good daily range. Sometimes referred to as the ATR (Average True Range). On open a stock may open and track down, then head back up through its opening price. Some traders like to go long when it breaks through its opening price on the day. Ride trend using intraday pricing until stop loss or profit target is hit.
Timeframe: Open and close your position within the same trading day.
Suited to: Experienced traders who are fast on the computer and understand position sizing well.
Risk Level: High due to small moves requiring large amounts of capital to take advantage of.
Position trading CFDs
Goal: Position yourself based on intraday information with the goal to hold for days to weeks. You work on computers during the day, have your trading platform open with your trading alerts set and when a intraday alert goes off, you position yourself into the trade.
CFD Trading strategy: Set FMG alert if price breaks resistance at $9.75. When alert gets triggered go long 500 CFDs with stop at 9.59.
Timeframe: Intraday (if stop gets hit) to several weeks.
Suited to: Experienced traders with specific entry orders and those who like to check market depth to help time their entry.
Risk Level: Medium to high.
Zone trading CFDs
Goal: You believe the market has a memory and ranges between support and resistance levels. You attempt to buy on support and sell on or near resistance levels.
CFD Trading strategy: QAN was ranging between $5.65 and $6.05 in November 2007. Your CFD strategy would be to buy around the $5.65 level and tighten stops up as QAN approaches $6.00 – $6.05.
Timeframe: Days to 2 weeks usually.
Suited to: All levels of traders. Support and resistance levels are some of the most commonly used CFD strategies.
Risk Level: Medium.
Pairs trading CFDs
Goal: To take advantage of highly correlated shares that slip out of correlation.
CFD Trading strategy: NAB and CBA CFDs move in close unison but you notice that NAB starts outperforming CBA considerably. You take a pairs trade by Shorting NAB & going long CBA and wait for both stocks to move back into a highly correlated state.
Timeframe: Weeks to months
Suited to: Sophisticated traders who have access to charting software that can track 2 stocks simultaneously and most importantly are able to create formula’s to track the correlation between the 2 positions.
Risk Level: Low to medium
News trading CFDs
Goal: Monitor news items in the AFR or business section in your local paper plus websites in order to find volatile stocks to trade that day. Many stocks that make announcements can jump 5-20% in a day and your goal is to jump on the right side of a fast moving, emotion driven stock.
CFD Trading strategy: MMX offers $1.5 Billion for Midwest Corporation on the 26th May 2008. Shares of both Midwest and MMX jump considerably during the day. You watch the highest percentage gainers and notice Midewest ranks highly with an R beside its ticker. Report out. You investigate and swiftly move to buy both stocks on confirmation of rise in price.
Timeframe: Minutes to days.
Suited to: Experienced traders with excellent and reliable DMA price feed with reports streaming intraday.
Risk Level: High
Goal: ‘Strip’ the dividend of a stock by buying prior to the stock going ex-dividend and sell before it goes ex-dividend enjoying a capital appreciation as investors jump on board for the dividend.
CFD Trading strategy: Many stocks looking to pay a dividend have investors getting in prior to the dividend (45 days earlier to receive full franking credits) and so this has the effect of pushing the share price higher just prior to the dividend itself. Your goal is to ride the increase leading up to the dividend and close your position just prior to the stock going ex-dividend.
Timeframe: days to weeks
Suited to: Anyone keeping an eye on high paying dividend stocks
Risk Level: Medium
Goal: Protect current share trades by taking an opposite CFD trade. This also helps to reduce portfolio volatility during wildly fluctuating markets.
CFD Trading strategy: If you believe the stock you are on (FMG as an example) has finished its run, then instead of selling your physical stock you short sell the CFD for the exact quantity of shares you have.
Timeframe: days to years potentially if your stock doesn’t come out of a downtrend.
Suited to: Owners of shares with moderate to high level of experience.
Risk Level: Low – The strategy is designed to reduce risk.