The global CFD market is valued at over $5700 million as of 2020. CFD trading provides traders with ample opportunities to trade a variety of financial products with a smaller investment but greater market exposure.
Let’s take a look at the top eight CFD trading strategies for beginners that you can incorporate in your trading plan for a seamless trading experience.
What is CFD trading?
A Contract For Differences (CFD) is a contract between a buyer (trader) and a seller (broker) which states that the trader needs to pay the difference between the asset’s opening and the closing price at the time of contract settlement. CFDs allow traders to trade with leverage, which means that for a particular dollar in your trading account, you can trade positions that are in multiples of that amount.
Top CFD trading strategies for beginners
1. Pair trading
The pair trading strategy enables traders to take two opposing positions in different but correlated financial products, like two different currency pairs. Pair trading helps traders potentially benefit in both rising and falling markets by taking advantage of the divergence in the two assets, which in our case are currency pairs.
The trader chooses a weak currency pair and a strong currency pair in the market and opens a long position in one and a short position in the other. By doing this, the trader expands their opportunities to take advantage of the market trend irrespective of which direction it goes.
2. Hedge trading
Hedging is a type of risk management strategy that focuses on offsetting losses in CFD trading by opening opposite positions in the same asset. It protects traders from the adverse effects of short-term price volatility and changes in the market due to some particular financial news or event.
For example, suppose you are trading USD/EUR and have opened a long position in the same, and a financial crisis in the US depreciates the value of the USD. In this case, the hedging strategy will help you open a short position in USD/EUR to benefit from the falling USD prices and offset any losses incurred from the long position in the same currency pair.
3. Swing trading
The CFD swing trading strategy best suits traders who wish to hold trades for a few trading days. In this strategy, a trader identifies the strong market trend and accordingly places long or short orders.
If there is an uptrend, traders place long orders and hold them for a couple of trading days to benefit from the increasing prices. On the other hand, swing traders place short orders during a downtrend and wait for a few trading days to benefit from the falling market prices.
4. News trading
News trading strategy refers to trading on the basis of financial, business and economic news events along with the overall market expectation and how the financial market is going to react after the news announcement. In this strategy, traders keep a close eye on economic changes and major announcements that could affect the financial markets to place buy or sell CFD orders accordingly.
- A negative news or market expectation signals traders to either exit the CFD trade or short it.
- A positive news or market expectation signals traders to long the CFD trade due to the price increase expectation.
5. Position trading
The position trading strategy is a long-term trading strategy that traders with a long-term future perspective use to hold CFD trading positions for a few months or years. In this strategy, the short-term, minor or irrelevant price fluctuations do not matter as traders focus on the long-term trends and indicators to make any market decision.
When placing a long or short order, a prime focus is given to historical price movements, as traders expect the market movement to be related to the asset’s past price behaviour.
For example, if the 10-year chart of USD/EUR shows a constant incline, it signals traders to place a buy CFD order due to an expected market price rise in the future.
6. Intraday trading
Intraday or day trading strategy is best suited for short-term traders who only wish to hold trade positions for a single trading day. In this strategy, traders open one or more trading positions and close them by the end of the day with an intention to profit from small price movements.
Traders keep a close eye on the asset’s price movements throughout the day and analyze the asset’s trading volume, volatility and how frequently the price changes to make trading decisions accordingly.
7. Trend trading
Trend trading strategy enables traders to capture a financial market’s trend direction through its past price movements and trade along that particular direction.
This means, in a continued uptrend, traders receive a signal to place buy orders to benefit from the increasing prices and during a continued downtrend, traders receive a signal to short their trades due to an expected future price fall.
8. Range trading
Range trading strategy refers to trading within a specified price range. Traders predict a range in which the CFD has been trading over a period of time and place orders that are within the same range.
The range is always between the support price (a level at which the falling prices stop falling and start increasing) and the resistance price (a level at which the rising prices stop rising and start falling). This strategy helps traders make use of non-trending markets as well with specified entry and exit signals.
Include these CFD trading strategies in your trading plan today
Applying these CFD trading strategies help traders identify the ideal entry and exit price levels in the CFD market. You can combine two or more strategies together for them to work out more precisely.
You can trade CFDs on Blueberry Markets and enjoy competitive spread along with transparent trade environments. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.