CFD Trading Strategies
CFD Trading Strategies
Here we consider some of the more frequently used CFD trading strategies.
The purchase of an asset is usually called a ‘long position’. The expectation is that the asset will gain in value during the life of the CFD.
On the other hand, a ‘short position’ occurs if an investor sells a CFD at a certain level, intending to buy it back at a later date. Doing so rests on the assumption that the asset will decrease in value after it is sold but will then increase in value at a later stage in the contract.
Either way, should the trader’s assumption be incorrect, the trade will incur losses equal to the difference between the opening and closing price.
CFD trading strategies also differ according to the time-frame involved.
This type of trading enables a trader to gain from price changes which occur from hour to hour or minute to minute. Traders are able to limit financing costs with short term trades. Most of the usual strategies can be used within short term trading.
Some traders prefer this method of trading. Long-term trading allows an investor to reflect on the underlying market trends in order to forecast movements accurately. These trades tend to last between a month and a year, hence traders can capture larger price moves.
Traders can try to profit from small reversals (swings) within larger market trends. So, in a bull market, prices will go through consolidation or retracement periods. As the overall momentum continues to be high, these periods can be seen as opportunities to buy stocks at lower prices, as the assumption is that prices will overall continue to rise. In bear markets, the reverse is true, where traders have the opportunity to initiate short positions.
A trader can use CFDs to protect his existing assets. For example, if a trader owns £15,000 shares in Nissan and believes that value of the shares to be about to fall, he can sell the equivalent of £15,000 worth of Nissan through a CFD trade. Should Nissan share prices then fall by 10%, the trader can then offset the gain in his short sell CFD trade against the loss in value of his share portfolio.
In conclusion, there are many different CFD trading strategies to choose from. Seek advice from your CFD broker in order to determine which strategies will best suit your needs.
Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.