When trading CFDs it is important to have defined your best trading strategy. Good CFD traders have clear entry and exit triggers defined. They also understand what determines a market ripe for picking. Here we list key points to consider when defining your strategy.
Short term or Long Term
CFD Trading is generally used as a short term strategy. However you should consider what short term means to you. It could be intra-day, therefore trading in and out of a position in 5 or 10 minute intervals. Or it could be trading over a few days known as swing trading. Which method is more suited to you is dependent on your trading access i.e are you free to trade throughout the day and your appetite to keep your trade (and hence your risk) open overnight. Some CFD traders are reluctant to keep trades open into the following day. If you are looking for trading that span months or years then share trading tends to be used for these longer term strategies.
Technicals or Fundamentals (or both!)
Technical traders use charts and trend indicators to determine trade entry and exit points. These can often be very short term triggers. Candlestick charts, Resistance points or trading bands are well known indicators and there are thousands of technical indicators out there for you to research. Fundamental CFD traders use company research to determine if a company share price is under or overvalued. Market Data for a listed company is publically available and research on company revenues, assets, productivity and strategy can indicate a potential buy or sell trigger. Often, a good trader will use a combination of both Technical and Fundamental data to assist trading strategies.
Single or multiple trades
Trading on a single market is how you may first come into online trading. i.e you believe that an index will either rise or fall and you place a trade on that principle. Once you develop a greater market understanding, you will appreciate correlation between two markets. You may find that one company seems overpriced in relation to another within the same industry. Therefore you place a sell trade on the overpriced company and a buy on the under-priced on the understanding that they will move together. Netting you an overall gain if this happens.
You may have a long term share investment in a company that starts to go through a downturn. But you believe it will be short lived and want to hold on to your shares rather than sell now and re-buy at a later period. You could therefore execute a sell CFD trade to leverage off the down turn in the market and make gains to net off a loss in your share value.
Whatever you decide your strategy should be, the key is to write is down and ensure that you are trading from it rather than using emotions. Monitor your success and determine if your strategy is working or if it needs tuning. Often market conditions change so you should always take the time to re-assess your strategy at periodic intervals.
Also see our other guides on how to be a successful CFD trader if you need more help on the topic.
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