A lot of discussion surrounds the topic of different CFD trading strategies and it is true that, perhaps more than any other financial instrument, there is plenty of choice when it comes to contract for difference methodologies. However, what sets all successful CFD traders apart is not so much the particular strategy or strategies they choose, but rather the unique way that they make them work coherently to produce results.
As with any money-making venture, CFD trading is essentially a business vehicle more than a ‘sit back and wait’ investment. That means anyone looking to have successful trades must be willing to put the required work in, and that involves learning about the various strategies that can be put to good use.
A so-called fundamental approach to strategy in terms of CFD trading means coming to grips with sometimes complex data sets. Closely examining the fundamental nature of a company for the behavior of an asset in any given market means first of all finding reliable sources of information and then knowing how to interpret it.
Fundamental trading strategies are sometimes seen as the preserve of investors who follow a ‘buy and forget’ pattern due to the long-term nature of the data and charts that are produced. More active short-term investments aren’t always suited to this style and that’s why many question its validity for CFD trades. However, using a form of fundamental analysis is a tried and tested way of producing results and its effectiveness cannot be denied.
So-called technical strategies are generally based on short term data sets that have more relevance to the price fluctuation time frames applicable to most CFD trading positions. Two distinct subtypes exist in this area, namely discretionary and mechanical, and the latter usually falls under the umbrella of Range Trading.
This is a form of trading that relies on building ‘mechanical’ rules that can be programmed and acted on automatically. Acting very much like a ‘stop-loss’ order but with the ability to take positive positions as opposed to just ending a trade, this strategy has appeal for some, but by no means all, CFD traders.
Many people are drawn to CFDs as a tool for trading because they offer a hands-on element that many other instruments lack. Together with markets that offer many underlying assets that operate in a fast-paced trading environment, the appeal is of an active, fluid and dynamic form of investment far removed from long-term alternatives.
A trader who is armed with any number of analytic tools can then act decisively and swiftly to take a position and make a CFD trade. Future price movements can be indicated by many different factors and part of the attraction of CFDs is the fact that many different sources of information can be filtered through any number of strategy methods to get workable and actionable results.
Timing can be a strategy in and of itself, as the basic idea is assuming that trends always turn around at some point. Although similar to using resistance levels, this ‘contrarian’ approach has to have a great deal of personal input as anticipating a sudden change in price direction is often more akin to being an art than a science.
Using data properly can help identify a key price level for any given asset or market but a successful breakout trading strategy means knowing when to avoid making a move as much as knowing when to take action. When a market isn’t producing clear indicators that point towards obvious trend behaviors the breakout method can be utilized to great effect. However, it is something of a ‘learn by experience’ method and perhaps not for a novice DIY CFD trader to try at an early stage.
The opposite end of the scale to breakouts is trend following, whereby a longer-term strategy methodology is put to use in a CFD trading environment. Knowing that ‘buy and hold’ isn’t a good route to CFD success is something that everyone will quickly work out for themselves, but a big advantage that contract for difference trades have over other forms of derivative trading does come into play here.
Futures and options have in-built time scales that mean a trader is locked into a position, but the flexibility offered by CFDs means that a trade can be opened or closed at any point. Although this means in general that a ‘hold’ position doesn’t come into play very often, a trend-based strategy can help a trader know if it really is the right time to opt out or to perhaps stay put for a little longer.
As many CFD traders enjoy the way that fast-moving markets can be accessed on a global basis and on a much more flexible time scale that other types of trades, it’s no wonder that the so-called ‘news strategy’ is such a popular tool for many.
Opportunistic trading is often seen as the way to make a quick killing on any given market, and one way to find such openings is to simply be aware of what’s going on in the world. With rolling 24-hour news channels and real-time data feeds widely available online, there has never been a time to rival how informed anyone can be today. A strategy that involves simply listening to and reading news headlines might be too good to be true, but current events can, in fact, prove to be an extremely reliable indicator for how certain assets and markets are going to move on an ultra short-term basis.
Although these are just a few of the many strategies available to CFD traders, the depth and sheer number of methodologies available to help in this fast-moving trading environment are plain to see. With contract for difference being something of a revolutionary trading tool in itself, the way that cutting edge 21st-century methods can be mixed with tried and tested analysis systems makes the whole sector a uniquely modern way of trading successfully.