Contracts for Differences (CFDs) has become highly popular on retail trading platforms in recent years, and it is not difficult to understand why. By using CFDs you can gain exposure to a wide range of assets without actually having to own the asset. You can profit from changes in share prise without having to buy and sell shares (and pay a commission to a stock broker), you can profit from cryptocurrency without setting up a crypto-wallet or crypto-account, and so on. CFDs are also great for profiting from speculation on things that aren´t exactly assets, such as the movements of an index.
Two examples of CFD trading strategies
Using trend strategy for CFD trading
This strategy is common among people who use technical analysis for their CFD trading. Use a price chart to identify patterns and try to find the levels for support and resistance. Trade with the trends, and know when to get out. A breakout happens when the price finally breaks through a support level or resistance level.
A common mistake is to trade using this strategy even when the market isn´t providing clear signals. Knowing when to refrain from trading (or refrain from using this strategy) is very important. Step away from the screen and do not attempt break-out strategy CFD trading on a confusing market.
Using contrarian strategy for CFD trading
Trends do not last forever, and the contrarian CFD trader is aware of this. The trick is to correctly identify when a trend is about to end. Contrarian strategy can be used on both rising and falling markets. An advantage with using CFDs is that you do not have to short-sell to profit from falling markets.
CFD trading tips for the beginner
Don´t spread yourself too thin
CFD:s are available for a wide range of underlyings and it can be tempting to jump into a multitude of markets. Yes, risk-spreading is very important, but you need to find the right balance because spreading yourself too thin and entering a bunch of markets you know very little of is also a bad idea. Placing all your eggs in the same basket is not smart, but randomly throwing yours eggs into a hundred different baskets is not advisable either.
Make sure you understand leverage before using it
Brokers who offer CFD trading typically also offer leverage. This means that they are willing to let the trader borrow money to trade with.
Using leverage for CFD trading has several advantages, but it is important to know what you are doing. Using leverage means risking borrowed money, and with the help of leverage it is absolutely possible for a trader to end up losing more money than they ever had in their trading account. You will have to pay this money back, so never risk money that you can not afford to lose.
Your gut feeling is probably wrong
We´ve all been there. We do a few trades based on a ”hunch”, we end up making a nice little profit, and we promptly decide that we are either super intelligent or blessed with a supernatural ability to accurately read and predict the market. Anyone can get a lucky a few times, but acting on hunches is typically not a functional way to attain long-term profitability in CFD trading.
Instead, we advice that you make a plan and learn how to stick to it. There are many tools that can be helpful, such as stop-loss orders and take-profit orders.
Your gut will be highly suspectible to emotional swings. A person following their gut in CFD trading is more likely to stay in too long (Just a bit more profit! I can feel the trend will continue!) or get scared and leave in a rush (Something is wrong! I need to cut my losses!).
Keep a trading journal
If you keep a detailed trading journal and analyze it regularly, it will be easier for you to identify your strenghts and weaknesses.