For anyone looking to make quick money in the stock market, CFDs offer traders a wide range of advantages over ownership of stock. You can use ideal strategies to magnify your gains with CFDs. With contracts for difference, you only require having 10% of the trading value. The other 90% id effectively borrowed ‘on margin’.
Short term trading with CFDs
CFD trading is best suited as a short term trading option. This means holding trades for a few hours to a few days maximum, preferably not longer than a day. The stock market is volatile, and changes overnight can greatly affect the cost of the trade by the next day. To protect your capital, it is best to day trade CFDs.
Common CFD trading strategies
Regardless of the trading platform you prefer trading on, as an investor, you have a few strategies they can implement in their trade.
Long vs. short strategy
For any active investor, purchasing an asset can be considered to be a ‘long position.’ Going with the long position strategy mans that the investor expects that the asset will increase in value over the investment contract period. On the other hand, a ‘short position’ refers to the act of selling an asset at a predetermined level with intentions to buy it later.
As a short position trader, you expect that the value of the asset will drop during the contract period. If this prediction is wrong, the investor loses money which is an amount equal to the opening and closing price difference.
Swing trading
Swing AU CFD trading is an attempt made by the trader to benefit from smaller swings in larger trends. For instance, in bull markets, market prices experience consolidation periods or retracement periods. This will cause the rates to fall below previous highs. A CFD trader can see these retreat periods as opportunities to buy, assuming that the prices will continue to rise. The reverse is true for bear markets that present opportunities to initiate short positions.
The benefit of the swing strategy is that traders can easily identify and forecast trades. However, it can be difficult to forecast the perfect reverse point (when swing reaches completion).
Long term vs. short term
The timeframe is the second important strategy to work with when trading CFDs. Short term trading, also referred to as intraday trading, makes it possible for traders to invest in assets over a short period, either hours or minutes. The ability to limit financing costs is the main benefit of short term trading.
Some CFD traders prefer the long term trading strategy as it gives them a higher forecasting ability. Long terms trading allows the trader to take advantage of large price moves since the trades last for a month and longer. The best trading platform will offer the traders both undated trading contracts and futures to allow long term or short terms CFD trading.
Hedging strategy
This is a protective strategy, as opposed to the other strategies that are meant to achieve gain. When a trader hedges, it is done to protect their open positions from value loss. Hedging is done by assuming an opposing position. Because the trades will move inversely, when one makes a loss, the other will make a profit. This balance nullifies the position bias.
A trader benefits from hedging since their total position is protected, and there are no new losses possibilities. However, the removal of risk takes away the possibility of reward as additional gains cannot be seen. This strategy is best used when the market is extremely volatile, and price activity is unpredictable.
Conclusion
These are the most common CFD trading strategies that have been tried and tested. There are numerous new strategies created by traders every day. Joining online trading discussing forums is one of the best ways to learn of new strategies and also learn from seasoned traders.
It is important to completely understand each strategy and learn when best to make use of it. This is the only way to guarantee success when trading CFDs.