CFD Trading Strategies

CFD Strategy -Contracts for Difference (CFDs) and Trading Strategies

The best trading strategy is the one that suits you individual risk tolerance and your available time.

What are CFDs?

CFDs offer a simple and efficient way of trading the global financial markets. That includes Forex, equity, cryptocurrency, and commodity assets. A CFD contract mirrors the price movements of an underlying asset and allows investors to trade in both directions. 

Categories of CFD Trading Strategies

Most people anticipate that there is a single best trading strategy that can lead everyone to success. That is certainly not true, the best trading strategy is the one that suits your own risk profile. There are tens of different CFD trading strategies covering all risk profiles.

Main categories of CFD Trading Strategies:

• Scalping Strategies

• Intraday Strategies

• Automated-Trade Strategies » More about automated Forex trading

• News-Trading Strategies

• Hedging Strategies

• Zone-Trading Strategies

•  Pairs-Trading Strategies

• Swing-Trading Strategies

• Position-Trading Strategies

• Carry-Trading Strategies » Dedicated website to Carry Trading

• Long-Term Trading Strategies

• Dividend-Stripping Trading Strategies

 

Basic Steps for Succesful Trading

Formulating Successful Strategies -The Concept of Successful Trading

These are some key factors determining the suitability of a trading strategy for a particular investor profile.

(i) Years of experience, especially as concerns trading on margin

(ii) Specialization in a particular asset class (currencies, equities, metals, crypto, etc.)

(ii) Time available for the full implementation of a trading strategy (very important)

(iv) Risk profile (how much can a particular trader afford to lose)

(v) Ability to make difficult decisions during choppy market conditions

These are some basic steps:

(1) Define your trading profile according to the above five variables {from (i) to (v)}

(2) Test different trade strategies and focus on those that suit your risk profile

(3) Find a broker offering the best trading terms for implementing that particular strategy (check below for more on that issue)

(4) Start with a Demo Account to test the performance of various trade strategies

(5) If you are satisfied with the results, open a Real Account, and start trading on micro-lots (1 lot =$1,000)

(6) If you are satisfied with the results, start trading on standard lots (1 lot =$100,000)

 

Selecting a CFD broker according to the implemented trading strategy

Focus on the trading spreads and the overnight financing cost (SWAP rates) that you are going to pay.

(i) If you select to implement a scalping or another type of intraday strategy, you need the tightest spreads

(ii) If you select to implement a Long-Term or Carry Trading strategy, you need the best SWAP rates for that particular asset. The overnight financing for holding a certain trade position may be positive to a certain broker, and negative to another broker.

Compare Brokers: https://forexexperts.net/index.php/compare-zone/compare-forex-brokers

Trading promotions

Usually, CFD brokers offer good promotions when someone is opening a new account. These promotions may facilitate the implementation of a trading strategy. If your trading strategy is expected to generate high volumes (scalping, intraday, or similar trading strategy) then you need to join a rebate plan. A rebate plan can reduce significantly your trading cost. Joining a rebate plan is free of charge and it can really make a difference in the long run.

 

 

 

Three Popular CFD Trading Strategies

 

(1) Scalping CFD Trading Strategy

Scalping is the most active trading style, and it is suitable only to very experienced traders.

□ Timeframe: One to a Few Minutes

□ Risk Level: Very High

□ Asset Classes: Forex Majors (highly liquid/tight spreads), Major Indices

□ Trading Leverage: 30:1

□ Charts: M1, M5

□ Technical Analysis: RSI, ATR, Bollinger Bands, Chart Patterns, Candlestick Formations

□ Trading Orders: Stop-Loss, Trailing-Stops

Introduction to the Scalping Strategy

Scalping is mostly based on technical analysis and aims to take advantage of key price breakouts and significant price retracements. Scalpers aim to make small consistent profits by cutting their losses short. This practice is highly risky and it is not suitable for all traders. Scalping can prove profitable only for very advanced and professional traders, and definitely not for beginners. Most scalpers trade the Foreign Exchange market where liquidity is huge and the spreads between ask/bid are very tight.

Requirements:

These are some basic requirements for implementing a scalping strategy:

• Trade only assets offered in very tight spreads in order to limit your trading cost (i.e. EURUSD, GBPUSD, and USDJPY)
• Use a tight money management system by limiting leverage
• Trade only high Reward/Risk positions (3:1 or even higher)
• Apply some basic rules for limiting the extent of intraday losses (i.e. stop trading if you lose 3 trades in a row)
• Take advantage of a rebate plan (if it is available at your broker)

Scalping requires signing a trading account with a very competitive online broker, offering:

• Very tight spreads
• Fast order execution
• No Re-Quotes / Low Slippage
• Allowance for placing Stop-Loss Orders close to the Opening Price of the trades

Technical Analysis

The technical analysis when scalping the global financial markets mainly includes Support and Resistance. Moreover, you can use indicators such as the Bollinger Bands, ATR, RSI, and lastly any divergence between the RSI chart and the price chart.

But let’s see an example of an easy Forex scalping strategy.

The RSI(21) Scalping Strategy (Example of simple Scalping Strategy)

For this scalping strategy, we are going to use:

-RSI (21) on the M5 chart

-Chart Patterns, Japanese Candlestick Formations

First of all, we need to open a lot of different pairs in the MT4 platform so we have a lot of choices

1. RSI(21) is applied on the M5 chart
2. Our first Condition is to trade LONG if RSI(21) has reached -70 and now it corrects above -70 (chart below)
3. Our second Condition is to trade SHORT if RSI(21) has reached +70 and now it corrects below +70
4. Chart Patterns and Japanese Candlestick Formations confirm entries
5. Recent Highs/Lows are used for placing stop-loss orders
6. A trailing take-profit order is used to maximize the potential profits

Chart: Examples of Long Trades when Applying the RSI(21) Scalping Strategy on the M5 timeframe

Creating an Automatic Alert System to Scalp Forex

Scalping Forex requires a lot of spare time each and every day to monitor and take advantage of market opportunities. By using an Automatic Alert System on MT4 you can save tens of hours each week. You don’t need any programming skills to create an alert system, there are free builders on the web. The best web app you can use is called EA Builder and it is free for creating indicators:

1. Free for Indicators / Paid for building EAs
2. Create Indicators for MT4, MT5, and Tradestation
3. Easy to create even complicated indicators (via a Graphical Interface)
4. Receive alerts via email, SMS, and On-Screen

» Visit the EA-Builder (Free for Creating MT4 Indicators)

Scalping Strategy Pros and Cons

These are the basic advantages and disadvantages when implementing a scalping strategy:

(↑) Scalping Strategy Advantages

√ You can achieve high returns (requires discipline and money management)

√ No Interest Charges (SWAP rates)

√ Limited loss potential per individual position (tight stop-loss)

√ You can convert your manual strategy to an automated strategy

(↓) Scalping Strategy Disadvantages

x You can trade only highly liquid assets

x Extremely risky

x Not suitable for beginners and semi-advanced traders

x Paying a very high trading cost

  » More about scalping the global markets on ForexExperts

(2) Intraday CFDs Trading Strategy

Intraday trading means taking advantage of strong intraday trends, and closing all positions before the market close.

□ Timeframe: a few minutes to a few Hours

□ Risk Level: High

□ Asset Classes: All asset classes (tight spreads required)

□ Trading Leverage: 5:1 to 30:1

□ Charts: M5, M30, H1

□ Technical Analysis: Wave Theory (Highs & Lows), RSI (14), ATR, Chart Patterns, Japanese Candlesticks, Support & Resistance, Daily Pivots

□ Trading Orders: Pending Orders, Stop-Loss, Take-Profit, Trailing Stop

Intraday trading is a risky process and it is not suitable for all types of traders, especially not suitable for beginners. Trading intraday requires a very competitive broker and a good understanding of position sizing. CFD trading can be a useful tool for trading intraday.

Basic Requirements for Applying an Intraday Strategy

These are the basic requirements for applying successfully any intraday strategy:

-1- Tight Spreads / No Re-Quotes

-2- Fast Execution / No Delays

-3- Trading Discipline

-4- Very good Understanding of Position Sizing

-5- Effective Money Management

Four (4) Main Categories of Intraday Strategies

There are four main intraday strategies:

(1) Trend Riding

Riding the trend using highs & lows and maintaining positions until the take-profit target or stop-loss level is hit. The tools to identify trend continuation may include the Wave Theory (Highs & Lows), chart patterns, and candlestick formations. Many other technical analysis tools can be used as well.

(2) Price Breakouts

According to the breakout strategy, when the price reaches a key level, you buy or sell the market immediately. Several technical analysis tools can be used such as Support & Resistance, Trendlines, Chart Patterns, etc. The keys to applying successfully the breakout strategy are:

(i) Avoid trading when you don't have clear signals about the direction of the market

(ii) Use pending orders where it is possible (you will optimize your entrance, and save a lot of time)

(iii) Use volume analysis to confirm the importance of a breakout (Wyckoff says that volume should confirm any price movement)

Chart: Going Long on NZDUSD as an important resistance (trendline) has been breached

(3) Price Reversals

Trading the price reversals isn't as easy as it may seem. Most of the time, the market continues to trend in the same direction, and it doesn't reverse. Therefore, your trades need to have an excellent Reward/Risk ratio, in order to be successful in the long run. The minimum Reward/Risk ratio should be 3:1, but we suggest 6:1, using trailing stops.

(4) News-Trading

News-Trading involves trading key news releases using an economic calendar. It requires a pure and very fast ECN broker and extremely advanced PC technology. Be aware that many brokers apply stop-hunting techniques during news releases, and that means your stop-loss needs a lot of space.

Technical Analysis

• Trend Riding

The wave theory (Highs & Lows), Chart Patterns, Candlestick Formations, Daily Pivots, and several more tools

• Price Breakouts

Breaking a key Support or Resistance level, breaking a key Trendlines (see chart), MACD signals on M30 and H1 charts. Also, divergences between the slope of the MACD Histogram and the slope of the Price Chart. Keep an eye on RSI (14) on the M5 chart.

• Price Reversals

MACD signals on M30 and H1 charts. Divergences between the slope of the MACD Histogram and the slope of the Price Chart. In addition, keep an eye on potential divergences between the RSI slope and the price chart slope. Chart Patterns and Candlestick Formations are also important. More advanced traders may use the Fibonacci Retracement tool and Harmonic Patterns to confirm potential price reversals.

Intraday Strategies Pros & Cons

These are the main advantages and disadvantages when trading intraday:

(↑) Intraday Strategy Advantages

√ High-volume trading (taking advantage of Rebate Plans)

√ No overnight financing (Swap charges)

√ Great variety of intraday strategies

√ Can avoid news releases

(↓) Intraday Strategy Disadvantages

x High-risk trading

x Paying high trading costs

x Requires a lot of spare time

» More on ForexExperts

 

(3) Swing Trading CFDs Strategy

 Swing trading attempts to take advantage of strong mid-term trends and small swings during those trends

□ Timeframe: a few days to a couple of weeks

□ Risk Level: Medium

□ Asset Classes: All asset classes

□ Trading Leverage: 3:1 to 10:1

□ Charts: H4, D1

□ Technical Analysis: MACD, RSI (21), Highs & Lows, Weekly Pivots, Chart Patterns, Fibonacci Retracement, Harmonic Patterns

□ Trading Orders: Profit Target Zones / Trailing Stop-Loss

Swing Trading Strategy

Swing trading is one of the most effective strategies in trading. The goal is to buy the dips of mid-term uptrends or to sell the highs of mid-term downtrends. You need to run your profits and cut your losses short.

Chart: Trading the EURGBP Swings on H4

Swing trading attempts to take advantage of small price reversals (or else ‘price swings’) that occur in mid-term trends. Any mid-term trend includes short periods of correction that may be expressed either by price consolidations or by price retracements. Swing trading is based on the assumption that an existing trend, after a small correction, is more likely to be continued than to suddenly end. The trading orders of swing traders combine profit target zones or trailing stop orders.

Technical Analysis

The technical analysis of swing trading includes a little bit of everything. MACD signals on H1 and H4 charts and divergences between the MACD Histogram slope and the Price Chart Slope. Of course Highs & Lows on H1 and H4 charts. Keep an eye also on RSI on the D1 chart, and potential divergences between RSI and the price chart slope. Chart Patterns are always very useful in all timeframes. You can use also Weekly Pivots. More advanced swing traders use also the Fibonacci Retracement tool and the Harmonic Patterns to optimize their entrance and exit in the market.

» The free indicator RSI Precision for Swing Trading

The main advantage of the swing trading strategy is that most of the time, mid-term trends can be easily identified. The main disadvantage of swing trading is that you need to leave a lot of space for your stop-loss and that may disturb the Reward / Risk ratio.

Swing Trading Pros and Cons

These are the pros and cons of the swing trading strategy:

(↑) Swing Trading Advantages

√ One of the most effective trading strategies

√ It can be used in any Financial Market (Forex, Indices, Shares, and Commodities)

√ Doesn't require a lot of time, for monitoring your trades

√ It is easy to identify mid-term trends

√ Can help traders to find and take advantage of high Reward/Risk trades

√ Avoid the annoying intraday market noise

(↓) Swing Trading Disadvantages

x It is often difficult to identify the right time to enter the market

x You are exposed to several news releases (avoid them if you can)

x You are exposed to overnight financing (Tip: use CFDs on Futures to avoid paying overnight fees)

 » More on ForexExperts

 

■ CFD Strategy -Trading Strategies using Contracts for Difference (CFDs)

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