May 30, 2023
Contracts for difference, or CFDs, have become increasingly popular among traders in recent years thanks to their flexibility, accessibility and potentially profitable returns. However, having a sound CFD trading strategy is crucial to measurable success. A CFD trading strategy helps traders manage risk exposure and optimise potential returns.
As CFD brokers, we understand how important it is to have access to simple and digestible information when developing your trading strategy. In this blog, you’ll learn what CFD trading involves, the types of assets you can trade with and the common CFD trading strategies practised by seasoned traders worldwide.
What is CFD trading?
CFD stands for “contracts for difference”, a contract between a trader and broker that tracks spot market movements. Unlike regular stock trading, where a trader must purchase an asset, CFD trading involves speculating on an asset’s underlying value without having to take ownership of it — traders only pay the difference from when they open a trading position to when it is closed.
What are the benefits of CFD trading?
CFD trading can provide traders with greater market exposure and increase their profit potential without holding an asset. Aside from this, there are other benefits traders can expect from this style of trading, including:
- Stretch your capital further — CFD trading utilises leverage, where traders can increase their position size, even if they don’t have the upfront capital to do so. For instance, if you wanted to buy 100 shares, you would not need to front the full cost immediately. This opens up a trader’s profit potential but can also bring on great losses.
- Low-cost — CFD trades have a significantly lower cost than traditional shares. For instance, CFDs often have tighter spreads — the difference between the buy and sell price — allowing traders to get more value from their trades.
- Ability to go long or short — The freedom to easily go long or short can drastically increase the number of trading opportunities for traders who would otherwise only be able to go long with other assets.
What kind of assets can you trade with CFDs?
Now that we understand how CFD trading works, you can move on to researching asset classes. When developing your CFD strategies, one of the things you will need to consider is the kind of asset you will be trading in. CFDs track many asset classes, giving you greater flexibility in choice. Some of the assets you can trade with via CFDs include:
- Forex — CFDs can track currency pairs to trade forex. These involve two different currencies, with the value of one currency quoted against the other. For instance, EUR/USD is a currency pair involving the Euro and the US dollar.
- Metals — Trading precious metals via CFDs refers to spot markets involving metals, such as gold and silver. Gold is often viewed as a ‘safe haven’ asset, as the price of gold is not impacted by movements experienced in other assets and, therefore, is not as volatile.
- Energies — Trading energies via CFDs involves tracking the price of energy from organisations focused on producing and supplying energy products — such as oil — to the rest of the economy.
- Shares — Share CFDs track major stocks, such as Tesla, Apple, Meta, Microsoft and more. These CFDs give traders greater exposure to various stocks, improving profit prospects.
- Cryptocurrency — Many traders are interested in the unusual nature of cryptocurrency but are often hesitant to invest due to its unpredictable nature. Cryptocurrency CFDs allow traders to dip their toes in the crypto market without having to hold the digital currency.
- Indices — Index CFDs refer to major global indices, such as the S&P/ASX 200 in Australia or the S&P 500 in the US.
CFD trading strategies
Once you’ve determined the type of assets you want to trade via CFDs, the next step is to find your CFD trading strategy. There are many CFD trading strategies, which means traders must research to determine which trading method is right for them and aligns with their trading goals and skill level. CFD trading strategies can be short-term or long-term — let’s explore some common tactics below.
Short-term CFD trading strategies
Traders use short-term CFD trading strategies to make quick profits from the price movements of financial instruments such as stocks, currencies and commodities. Short-term CFD trading strategies offer more flexibility as traders can quickly react to market events and adjust their positions accordingly.
CFD day trading
As the name suggests, the day trading CFD strategy involves buying and selling assets within the same trading day to profit from intraday price movements. Day traders can use technical indicators such as the Average Directional Index (ADX) or the Stochastic Oscillator to identify short-term trends and momentum.
Due to its demanding nature, CFD day trading strategies may be better suited to traders who can make and manage multiple trades.
Scalping
Scalping is another short-term CFD strategy that involves making multiple trades quickly, usually within a day or even a few minutes. This strategy requires a high level of discipline and quick decision-making skills, ideal for experienced traders with a deep understanding of the market.
Scalp trading positions don’t generate much profit individually. However, as scalpers try to engage in many daily trades, the high volume of trades is anticipated to increase profits during a trading session. Scalping is best used for assets with high volatility and tight spreads, so it may be worth learning more about forex trading.
Traders can use the Relative Strength Index (RSI) or stochastic indicator to identify scalping opportunities.
Swing trading
Similar to scalping, swing trading involves holding positions for a few days or even a few weeks. This strategy is based on identifying swings in the market and taking advantage of them. Swing traders can use technical indicators such as the Moving Average Convergence Divergence (MACD) or the Bollinger Bands to identify trends and swings.
Long-term CFD trading strategies
There are many reasons why a trader may choose to engage with a long-term CFD trading strategy. From reduced time commitments to improved stability and lower transaction costs, with long-term trading strategies, traders can potentially generate greater profits by holding positions for longer periods.
Buy and hold
Simply put, the buy and hold strategy, or position trading, involves purchasing an asset to hold it for an extended period, like a few months or years. It’s believed that the asset will steadily increase in value. While the buy and hold method is a popular long-term strategy in traditional trading, the tactic can be adapted to CFD trading.
To implement the buy and hold strategy in CFD trading, a trader can look for assets with a strong fundamental outlook and potential for long-term growth using technical and fundamental analysis tools.
Diversification
As the name suggests, diversification involves spreading investments across multiple asset classes and markets to manage risk. These can include stocks of companies with strong financials, commodities with increasing demand, currencies of countries with improving economic indicators or trading in different markets, such as Asia, Europe and the United States.
Incorporating fundamental and technical analysis into your CFD trading strategy
No matter how long they’ve been trading, every trader will tell you that technical and fundamental analysis is integral to developing their trading strategy. Both can be useful in CFD trading, as they provide traders with valuable insights into market conditions and help them make more informed trading decisions.
Fundamental analysis
Fundamental analysis involves analysing economic and financial data and company reports to determine the value of an asset. This can include company financial statements and economic indicators, among others.
Economic data can refer to statistics that provide insight into the health of an economy. Meanwhile, company reports offer insight into a company’s financial performance, such as financial statements, earning reports and annual reports.
Technical analysis
Technical analysis uses charts and technical indicators to reference past price movements and trading volume to predict future movements.
Technical indicators are mathematical calculations based on price and volume data. Popular technical indicators include Moving Averages, Relative Strength Index (RSI) and Fibonacci retracements. Meanwhile, chart patterns are visual representations of price movement that indicate future trends, such as bar or line charts.
CFD trading tip — risk management
As part of your CFD trading strategy, you will also need to ensure you have appropriate risk management in place to minimise losses and protect profits. Depending on your preferred trading method, this may involve implementing stop-loss orders, limiting leverage and diversifying your trading portfolio.
Stop-loss orders
As the market moves rapidly, sudden and unexpected movements can cost you if you don’t have corrective measures already in place. Market gaps, either trending upward or downward, can occur overnight or due to an unforeseen economic event. To prevent significant losses, stop-loss orders can be placed to automatically close a position when the market price hits a certain level.
Start small with leverage trading
If you are new to leveraged CFD trading, it’s recommended that you start small and gradually increase your position over time until you fully understand the mechanics of this style of trading.
VT Markets — trading made easy
Whether you’re new to trading or a seasoned professional, having a reliable and dedicated platform that works for you is essential. VT Markets is a leading global multi-asset CFD broker, providing a superior trading environment for traders worldwide.
We give you all the tools, resources and information you need to help you along your training journey, including the favoured trading platforms MetaTrader 4 and MetaTrader 5. With lightning-speed trade executions and spreads from 0.0 pips, VT Markets can support your trading goals.
New to trading? Get comfortable with your CFD day trading strategies, test long-term methods by opening a VT Markets demo account to start trading with zero risk or kickstart your trading journey by opening a forex trading account. If you would like more information about our CFD brokerage service, contact us today.
FAQs
What are some of the common strategies when trading CFDs?
Common CFD strategies are either short or long-term, suitable for a wide range of traders. If you are interested in faster, more frequent trades, scalping and swing trading are popular strategies you can try. On the other hand, if you prefer to hold positions for a long period to maximise an asset’s value, the buy and hold technique may suit your trading needs.
Are some CFD trading strategies better than others?
There is no easy way to determine whether certain CFD strategies are ‘better’ than others, as no two traders have the same needs and goals. It will also come down to skill level, as beginner trades may be better suited to strategies that aren’t as intensive or require as much time commitment, compared to traders with more experience.
How do I start trading CFDs?
You can start trading CFDs by opening an account with VT Markets. We are a licensed and professional CFD broker with over 10 years of experience. We give traders access to free trading tools, analysis and top-tier market research, and have exposure to over 1,000 trading instruments.
