CFDs can be great for beginners, because you can effectively turn a profit regardless of the direction of the market. Your ability to profit in a falling market is governed by your understanding of short selling, so before we look at some basic CFD trading strategies, we’ve outlined the basics of short selling in a nutshell:
Short Selling
If you sell a CFD for a higher price with the intention of buying it back at a later stage for a lower price, you’re short selling that CFD. This is where the contract for difference plays into your strategy; you’re rewarded based on the difference between your entry and exit price, regardless of the direction of the market.
Breakout Strategy
Before launching into the world of CFD trading, it’s worth getting a grasp on the concept of trend following. This is because trend following serves as the basis for the breakout strategy, because you will be trading based on the direction of current trends. Using clues in their analysis during the upward movement of a CFD instrument, traders can predict the next movement of a trend following a pause. Having made a prediction on the next movements of the market, traders can choose to buy the CFD instrument before it rises again.
Scalping
This strategy may seem like a baptism of fire for trading beginners, but few trading strategies will better help you acclimatise to the fast pace of the markets than scalping.
Scalping sees traders focusing on the quantity of bets they place, rather than the wins. By trading short-term moves in the price of a chosen CFD instrument, you can capitalise on short-term changes in price, which can be a very profitable strategy for CFD trading. By focusing on the number of trades you make rather than the number of wins, you’re actually increasing your chances of overall profit. Do bear in mind however, that scalping takes time, vigilance and strong analysis and feel for the market tendencies.
Swing Trading
At the opposite end of the spectrum is swing trading, which uses long-term trades in an effort to profit from the highs and lows of the market. This strategy is informed by wave theory, and requires a lot of learning before getting started. However, if you’re not a full-time trader, perhaps work a day-job and have an appetite for gaining knowledge of the markets, this might just be the strategy for you. It works well when used in conjunction with CFD trading because, as we mentioned previously, you can effectively benefit from both the peaks and the troughs that inevitably hit the market.
News Trading
Another one for quick-thinkers; this strategy sees traders buying and selling based on the news. Whether it be geopolitical, economic or any other universally-impacting anomaly, news trading on CFD instruments can be lucrative, with traders able to benefit from the difference at the entry to their respective trade, to the exit point. Remember, news trading is less about the news itself than it is about trader reactions to the news, so try and get a feel for trader psychology by following the markets on a demo account before committing to any trades on a live account.
Conclusion
CFD trading strategies are just like any other with regards to personal preference being the only real way of deciding what’s going to work for you. If you enjoy the fast-pace of short-term trades, scalping and news trading on your CFD instruments could be your best option. Otherwise, take some time to read up on the breakout and swing trading strategies and try to pare down what you want to take away from your trading.
