Different CFD trading styles – which is best?

Anyone new to the world of contract for difference might be surprised at the range of different strategies, processes and methodologies that are available to be used.

  • By AdminFund

  • March 26, 2019
  • 9:37 pm BST

Anyone new to the world of contract for difference might be surprised at the range of different strategies, processes and methodologies that are available to be used. Trading with CFDs is fairly straightforward compared to using many other financial instruments, which is one of the reasons they have proved so popular with DIY investors. However, the number of strategies and the way that technical analysis plays a big part in short-term trading can seem a bit daunting to anyone who is unfamiliar with them.

In reality, using technical indicators to better your chances of getting short-term stock price movements right isn’t that hard, it simply needs some research, learning and dedication to putting the results into practice. However, no trading strategy will work all of the time, so knowing how to utilize different ones can be the decisive factor between success and failure in real trading.

Having a trading plan is ultimately a very personal thing that will differ from trader to trader, covering every aspect from choosing entry and exit points, risk management and overall long-term aims. By understanding the way that different strategies work, an individual trading style will emerge, and as with most things, the only way to make sure it works well is to allow it to evolve continually as lessons are learned and experience is gained.

What is a good CFD trading style?

The answer to the question: ‘what is a good CFD trading style?’ is both simple and complex. At its most basic, the response is surely one that results in the creation of steady profit. However, to achieve this, aspects such as boosting returns while reducing risk need to come into action, as does knowing which markets suit a particular forecasting strategy and which might benefit from taking a particular approach to time frames when opening and closing a position.

So, a good trading style will naturally lead to developing a trading system that works systematically no matter which assets or markets are the focus of the trade itself. Even a successful trader who claims not to adhere to any particular style will have, in fact, developed one but simply hasn’t come around to formalizing it in some way. This could indicate that it isn’t really a rigid system, but the choices are made for deciding upon which trades to enter into and when to exit them are made, there will always be a set of rules which govern these in some way.

Rules

A good trading style will involve creating a set of rules to cover all eventualities and these will, by definition, be unique to each trader as they must reflect the aims and targets that are being set on a case by case basis. Whether that means identifying trades based on a particular risk to reward ratio or simply choosing how to size a win against a loss in terms of what is acceptable over a particular time frame, each set of parameters will result in a distinct mix in the outcome.

Using features such as a stop-loss in a CFD trade is one of the elements that can be crucial to success, and when ’emotionless trading’ is being used correctly, the only way to set the levels is by making sure the rules of the trading system are being applied. When using a leveraged product such as contracts for difference, losses can quickly mount if there is a margin call, and the stop-loss facility is an essential bulwark against this situation that must be used well. Therefore, a good trading style will provide the direction needed to make decisions ‘on the go’ without having to take time out to reflect on changing circumstances. This can make all the difference in choosing the right move at the right time, especially in the fast-paced trading environment usually favored by CFD users.

Exit points

The amount of work, thought and process that goes into choosing a market or underlying asset and then deciding upon the right entry point sometimes obscures the importance of getting the other end of the deal right, namely knowing when to exit. A good trading style will always have this covered, and it goes far further than knowing at which level a stop-loss order should be placed.

Exiting a trade that is in profit is, of course, the name of the game when it comes to making a successful CFD trade but knowing when to do this is difficult unless a trading system is allowed to dictate the terms. Whether that means using Fibonacci ratios or detailed technical analysisthe result is always the same – a profitable exit will always come down to having a good trading style that takes many different factors into account.

Continuing evolution

CFDs are still evolving in the way that they are used and in the sense that the traders who are taking advantage of their unique offerings are also changing. Initially a tool for large financial institutions, the way that CFDs have been adopted by DIY investors is a kind of snapshot for the way in which trading on the markets has evolved in recent years. Real-time data being readily available over high speed internet connections means that someone working from home has the same kind of opportunities as a market trader on an exchange floor had not too long ago.

The less restrictive environment that CFDs provide also means that opportunities are constantly changing and moving into different areas, although the attention of various regulatory bodies is also changing circumstances from time to time. This all comes together in the sense that different CFD trading styles offer everyone a chance to fit their aims and investing ambitions into a system that can be tweaked to achieve their individual targets. In this sense, there can never really be a CFD trading style that is ‘the best’, but there will certainly be one that is the best for each individual.