It’s possible to use many of the same basic trading strategies with CFD trading that one uses with forex trading.
For example, CFD brokers offer many of the same order types as forex brokers. These include stops, limits and contingent orders such as "One Cancels the Other" and "If Done". Some brokers even offer guaranteed stops.
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CFD trading strategies, for the most part:
mirror those used by traditional stock investors or forex traders, but there are some subtle advantages that allow for additional flexibility and the potential for higher levels of profitability.
Because of the use of large amounts of leverage, traders can use a wide variety of strategies to increase trading gains in a relatively short period of time.
Because of this, it is easy (and preferable) for many traditional stock investors and forex traders who make the transition to trading CFDs to also take into consideration the greater risks involved, and to employ a regular strategy.
The first decision to be taken is whether to trade long-term versus short-term.
Short-term trading (sometimes referred to as intraday trading) allows traders to profit from price changes that occur from hour to hour or minute to minute. Most of the common CFD trading strategies can be used by short-term traders, with the advantage that short-term trading allows traders to limit financing costs (which can be more expensive for CFD traders). Conversely, some investors prefer long-term trading because of the higher level of forecasting ability created by the underlying trends governing the market.
A long-term CFD trading strategy also allows traders to capture larger price moves, as these trades typically last from a month to a year. It is also possible to take a fundamental trading analytical strategy to fruition with a long-term trading strategy.
Still another approach to CFD trading is Swing trading. This is the attempt to benefit from smaller reversals (or ‘swings’) within larger trends. For example, in bull markets, prices will inevitably experience periods of consolidation or retracement and fall below previous highs.
Since the underlying momentum continues to be positive, these periods of retreat could be viewed as buying opportunities on the assumption that prices are most likely to continue in an upward direction.
The reverse would be true in bear markets, where opportunities exist to initiate short positions.
The advantage of this trading strategy is that trades are easy to identify and forecast (as trends are easy to spot and tend to continue more often than they reverse).
The main disadvantage, however, is that it can be difficult to identify the exact reversal point (that is, when the swing has reached completion).
But CFDs are particularly useful in a hedging strategy.
When markets show substantive increases in volatility, many traders will look for ways to protect their assets from unpredictable (and sometimes extreme) movements in price.
One of the most common strategies used to achieve this is the hedging method, used to balance asset exposure and prevent future losses. Hedging is achieved either by taking opposing positions in correlated markets or, more directly, by buying and selling the same financial instrument on different markets, and profiting from the arbitrage.
This strategy is typically used when prices are fluctuating at higher than normal levels or when investing in assets with wide trading ranges (such as many commodities or currencies with low levels of liquidity).
The hedging method can also be used when a CFD has reached your profit target and you want to lock in gains without actually closing the position.
Hedging is essentially the lowest-risk trading strategy as it is, by design, meant to eliminate risk completely.