There are many diverse CFD trading strategies and styles and it is up to you the CFD trader to decide which style suits your personality and the time you have available in your day for CFD trading.
Intra Day
If you are looking to be an active CFD trader you would generally use an intra-day trading style. This is where you look to take advantage of the swings in the market during the opening and closing phases. You need to have a good CFD trading system that can react to quick moves during market swings.
One example of a good intra-day trading style could be the following. At the close of the Australian market, the FTSE and other European markets are about to open. You have the advantage of having longer time to study the support/resistance levels and the possible reactions to the previous night’s trading in the US and any moves that have occurred in the Far East markets. You should be looking to trade this market in the first two hours when there is high liquidity and close out your CFD position unless you wish to carry it overnight. But only do so if your system agrees, not because you do not want to close out a losing trade.
You can trade the last one to two hours of the US market during early Australian time. The US markets provide good liquidity and the opportunity to take overnight positions.
For first time CFD day-traders, this is a good way to gain exposure to new markets. The US and European markets offer good risk/reward returns in highly liquid CFDs over shares and indices.
End of Day
End-of-day trades are executed at or near the close when it becomes clear where the price is going to ‘settle’ or close. This enables you to study the price action relative to previous day’s movements and then decide how the price is going to move in the near future based on the price action and indicators you are using in your CFD trading system. You then create a set of orders: an entry level, a stop level and a potential exit level. You can then either put these orders into the market via your online trading platform or by phoning your broker.
This style of CFD trading frees you up to do other things. It should not need your constant checking of the market to see if things are going in your direction. It is tempting to keep checking how your trade is progressing, which could be a drawback as it could ‘spook’ you out of a CFD trade because you are watching it too closely and you get unnerved.
The idea is to do your research and be confident in your trade. You know you might lose, but your stop is there to protect any damage to your capital. Let the market do the work and let it determine if the CFD trade is a correct one.
Trend Trading
Trend trading is when you are attempting to define the trend and only enter into CFD trades in the direction of the trend, the line of least resistance. The “trend is your friend” is one of the truest sayings in the markets. Following the trend is different from being ‘bullish or bearish’ where you have a fixed view of where the market should go and in which direction. Following the trend means you have to have a good system to detect and follow the trend.
You have to be flexible because the trend can obviously change and you have to be aware of a potential reversal in the market.
There are a lot of trend following funds in the market that trade many different products including CFDs, equities, treasuries, currencies and commodities. You will need to exercise your patience as ‘riding the trend’ is easier said than done. You need to have confidence in your CFD trading system. You will also have to accept losses and getting ‘chopped’ occasionally in your CFD trading. Remember that no system works all the time, and patience is needed.
You need to be alert for signs that the trend is ending or about to change. You will also need to be aware that the last part of the trend can accelerate as traders with the wrong CFD positions look to exit their losses at the point of maximum pain.
You must decide what timeframe you are going to follow the trend on and stick to it. It will be of no use if you keep flicking between charts hunting for the trend or once your CFD trade is on to look for confirmation that the trade is correct by finding a chart that agrees with your position.
It is a good idea to scale in and out of your CFD positions as this gives a greater degree of control and will probably give you more confidence in the trade as you will not be fixed at one price.
Swing Trading
The term ‘swing trading’ refers to playing both sides of the markets moves - long and short - by taking advantage of the market’s oscillations during your chosen timeframe as the price ‘swings’ from overbought to oversold on your system.
The duration of your CFD trades can and will vary. You must check the price action and support and resistance levels as it is most likely the market will oscillate between these levels as it tries to find the next directional move. Intra-day CFD trades will last from half an hour in fast markets to two or three hours depending on the characteristics of your market.
If you are taking overnight positions then you could find these ‘swings’ can last from two to three days and more.
It is a relatively simple way to trade CFDs and offers good risk/reward as long as you stick to your numbers and follow your strategy through without breaking your rules. It will allow you to play long and short trades, but you must be flexible and realise when it is not working and again exit quickly because it is likely a new move or trend is starting.
News Trading
If you intend to trade CFDs on news announcements you must understand that this is a very specialised and tricky game.
Remember that news travels very fast these days via internet and TV. You need to assess the news very quickly to judge how to trade the CFD around it. Is the news already fully factored into the price or only partially or is it fresh news that the market was not expecting? These are some of the decisions you will need to face.
Try not to jump into the action straight away unless you have a pre-determined strategy on a given bit of news.
Try to gauge the market’s reaction to the news as this is far more important than the news itself. Most CFD traders will tell you this is how they like to react to news, but we cannot all act the same way.
News can also give you an exit to a current trade. Take the exit as a good trade and look for your next trade, don’t be greedy and think it is the start of a bigger move.
If you have seen some news hit the screen and you have taken a CFD position in the market on the back of it, watch out for a sudden reversal if the expected move does not arise. It is most likely you are in company with the rest of the market with your view, and when this happens try and be among the first to exit, not the last as these moves can be fast and expensive as you wonder why the market is going against the news.
Be aware of how markets operate, they need energy to move and this energy comes from information flow. The news you are expecting or reading had to originate from somewhere and be aware that frequently the news would already be in the price as the markets and traders try to pre-guess the announcement and the markets reaction to it. “Better to travel, than to arrive” is another market motto, meaning it is better to be on the price action before an announcement than to wait for the announcement.
Zone Trading
Zone trading requires good research to define zones of important support and resistance. It is in these areas that you are looking to enter your CFD trades. You will also need to know where your exit point is if the CFD trade is incorrect. Once you are confident in your ability and system to find these zones you can trade bigger positions at these levels as you are playing ‘pure’ price action and not relying on indicators.
This style can be used on all time frames and with total money management. It requires patience and discipline about other systems for the market to reach your chosen levels to trade. It has the advantage over ‘indicator’ trading in that it does not require you to be ‘attached’ to a screen as you have pre-determined levels to trade at.
It is essential that you have stops in place as you are adopting a ‘view’ in your market that the price of the CFD should react away from your level once reached and this can leave you without flexibility.
Expert Tips
You must have a ‘high probability’ system to make profits. You must also have a good idea and grasp of money management as this will save you when you have some losing CFD trades. You can either buy a system that has been designed and is used by professional CFD traders, but check it is real and not one being offered by ‘snake-oil’ salesmen. It is an easy arena to prey on people and do not believe all the ‘$500 into $5000 on one trade’ systems on the internet.
Another important factor to consider when you are choosing a CFD trading system: does it have back up and follow up tuition? It takes time to learn all the nuances of any system and if you can ask questions this will be a very big plus.
An alternative is to try and design one yourself. The advantage of this is it will be fully suitable to your needs and you will understand its workings.
The disadvantage of this is that you may spend far too long developing something. Forget looking for the ‘Holy Grail’. It can be fun to look for it, but again it is distracting and why would anyone be selling something that was in effect a guaranteed money making machine. It can also be costly as you purchase various systems in the hunt for the Grail. It would be much better to understand that is does not and cannot exist.
The best option is to buy a CFD trading system that suits you and your chosen strategy for trading, i.e. day trading or end of day positions.
Learn the CFD trading system by constantly putting it to the test and understand its strengths and more importantly its weaknesses. Make sure it does suit you and the time it allows you to study the prices.
To learn more about the many different CFD trading styles you can download our free CFD Guide.
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