9 popular CFD trading strategies every trader should know

A contract for difference, or CFD as it’s known, is a derivative product, meaning the prices of the financial instruments available are linked to the underlying asset.

This allows traders to speculate on the price movements of various financial instruments in a rising or falling market. When they believe an instrument’s price will rise or fall in value, they could either go long (buy) or short (sell) without taking ownership of the underlying asset.

CFD trading is essentially a contract between traders and a broker to open a position on a financial instrument and settle the difference in price between the opening and closing of the position.

This differs from traditional buy-and-hold investing, where traders and investors purchase a financial asset and profit only when its value increases, all while maintaining full ownership of the asset.

CFD trading allows traders to speculate on price movements across various financial instruments and markets, including:

• Forex: Also known as foreign exchange or FX, it is the world’s biggest financial market, with a daily trading volume of roughly $6.6 trillion. Traders can trade various currency pairs, such as majors (EUR/USD or GBP/USD), minors (EUR/GBP or EUR/AUD), or exotics (USD/SEK or EUR/TRY).
• Indices: This is classified as a group of stocks from various exchanges to track the overall performance of those stocks. This allows a trader to open one position on multiple stocks, for example, the FTSE 100, which tracks the 100 largest companies listed on the London Stock Exchange, or the S&P 500, which tracks the performance of the stocks of 500 large-cap companies in the US.
• Stocks: These are shares from publicly traded companies listed on various exchanges worldwide that traders can buy or sell, such as Apple, Nvidia Corp, Barclays, and Unilever.
• Commodities: These are raw materials or agricultural products collected and processed for everyday use, such as gold, crude oil, natural gas, and cotton, which form the basis of an active economy.

Other markets, such as options, bonds, and/or interest rates, are also available. Or you can download the complete list of instruments with their specifications.

Traders have a variety of strategies to choose from when it comes to CFD trading. However, it might be essential to keep in mind that no strategy is perfect, and each has its own pros and cons. Strategies act as guidelines to assist a trader in their decision-making process.

That said, several key factors must be considered when selecting a strategy. These include:

• Your chosen strategy should align with the financial market you want to trade in. For example, a strategy focusing on stocks might not work well for the forex market.
• Consider the amount of risk you want to take per trade before choosing a strategy. If you’re more conservative about risk, you could, for example, choose a strategy that uses smaller position sizes or lower leverage.
• It’s also important to consider how much time you can dedicate to monitoring the market and your open positions and choose a strategy that aligns with the time you have available for trading.
• Before implementing your strategy, you may want to backtest it to see how it would have performed with past trades. This data could help you evaluate whether any adjustments are necessary.
• Lastly, your chosen strategy should align with your overall trading goals and objectives.

Below are detailed descriptions of nine popular CFD trading strategies.

1. News trading

News trading is a fundamental analysis-focused strategy that involves monitoring any vital news and economic events that could increase the volatility of a financial instrument and using that data to make informed trading decisions while looking for potential opportunities.

Traders using this strategy might need strong and quick decision-making skills due to the speed at which an instrument’s price can move when news and economic data are released.

Various economic factors could influence market prices, such as changes in a country’s financial policy, changes in interest rates, earnings reports from publicly traded companies, GDP data releases, or political events, such as presidential elections.

When using this strategy, traders generally don’t focus on technical indicators; instead, they mainly focus on an economic calendar that provides them with all the necessary information about when certain important news and economic events will be released.

A trader could examine historical price data from past event releases to gain better insights and understanding. However, it might be essential to remember that doing so could be challenging. The market is generally most unpredictable around these events, and prices could go in either direction when announcements are made, sometimes more rapidly than expected.

This is considered a short-term trading strategy because of the quick price movements occurring when these events occur. However, traders using this strategy generally also have a broader outlook on the overall financial market in which they participate.

2. Trading with technical analysis indicators

Another popular strategy many traders use is trading with technical indicators.

This forms part of technical analysis, which involves analysing current market conditions and comparing them to historical price data to predict future price movements.

Traders using this form of analysis mainly focus on the charts because they believe all the information they need is available there.

That said, they might occasionally examine fundamental aspects, but their overall analysis is chart-focused.

They generally use various indicators, such as moving averages, the Relative Strength Index (RSI), the Stochastic oscillator, or Moving Average Convergence Divergence (MACD), to further confirm their analysis and trading decisions.

These indicators could be seen as mathematical calculations that traders use to identify whether the price of a financial instrument is likely to reverse or continue in its current trend.

Another aspect of technical indicators involves drawing tools that traders can use to mark support and resistance levels when a financial instrument is in a ranging market. These support and resistance levels indicate how supply and demand play out in the market. They could also be seen as exhaustion points where the price fails to break past these levels and instead reverses.

Resistance levels tend to form from swing highs, with price retesting those swing highs failing to break above them and instead reversing. Conversely, support levels form from swing lows, with price retesting those swing lows, failing to break below them and instead reversing.

Both long-term and short-term traders could use technical indicators due to the information they provide.

3. Price action trading

Price action trading also falls into the category of technical analysis. However, traders using this strategy generally don’t rely on any indicators when looking for opportunities in the market or when making trading decisions because they prefer having a “clean” chart without any distractions.

Some traders might add just one indicator to their charts, such as the Fibonacci retracement, for additional information and confirmation when looking for potential opportunities. 

For the most part, price action traders mainly focus on candlestick patterns and chart patterns, with occasional use of support and resistance levels, especially when the financial instrument is in a ranging market or trendlines when the market is trending.

Price action traders don’t necessarily believe the market is random and that certain candlestick and chart patterns are likely to repeat themselves, even though the actual visual shapes of these patterns might differ. This is also another reason why they prefer a “clean” chart, which could make spotting these patterns easier.

Even though many different candlestick patterns exist, they all fall into one of three categories: bullish, bearish, and continuation patterns. The same goes for chart patterns; there are only three categories of chart patterns: continuation, reversal, and bilateral patterns.

Traders who use price action trading generally have a short—to medium-term outlook on the market; however, that’s not to say those with a long-term outlook can’t use it.

4. Breakout trading

With a breakout trading strategy, traders generally still use support and resistance levels. However, instead of waiting for a reversal at one of these levels, traders will instead look for a breakout of one of these levels, which could indicate the start of a new trend.

When the price breaks out above resistance, it could indicate that the market is about to move into an uptrend. When this happens, and the price retests the resistance line before continuing the uptrend, that resistance line will become future support.

However, if the price breaks out below the support level, it could indicate that the market is about to move into a downtrend. If the price moves back up and the support level is retested before continuing the downtrend, that support level will become future resistance.

It might be essential for traders using this strategy to keep an eye out for false breakouts, which are essentially a false signal indicating the price is about to move into a new trend; however, soon afterwards, it reverses, catching those traders who opened positions at the breakout off guard.

Traders could incorporate certain candlestick patterns or technical indicators to further confirm the significance of the breakout.

5. Hedging

Hedging could be seen as a form of insurance to safeguard a trader’s or investor’s portfolio when a financial instrument’s price might be about to fall; however, they don’t want to sell their asset yet.

Instead, they could hedge against a specific instrument that is about to face a correction by opening a short (sell) position on it and closing the position once the price starts to rise again.

For example, let’s say a trader or investor has shares in Google stock. However, they believe the price of Google shares will fall due to fundamental aspects. They could then open a CFD short (sell) position on Google shares to counter the money they might lose on their portfolio if the price does fall.

Now, let’s say the price of Google shares fell by 5%. Even though the trader or investor lost 5% of the funds in their portfolio, they made a profit of 5% with the CFD short (sell) position they opened. They could then close the short (sell) position and potentially buy more Google shares with the profits they made at a lower price.

6. Scalping

Scalping is a popular short-term trading strategy that most often falls into the category of a trading style. This strategy involves having a trader look for opportunities from short-term price fluctuations and opening and closing multiple positions lasting anywhere from a few seconds to a few minutes.

Scalpers believe that minor price movements happen more frequently than larger price movements. This is also why the stock and forex markets are two of the most popular financial markets scalpers focus on.

These traders tend to focus solely on technical analysis, only reverting to fundamental analysis when major news or economic events occur.

The short-term and fast-paced nature of scalping might require traders to be highly focused and dedicated. They spend a vast amount of time in front of the charts, monitoring the markets and looking for potential opportunities. They must also be able to make quick decisions when entering and exiting a position.

Some traders might also adopt automated trading into their overall trading plan, which involves using trading bots (programmed algorithms) to look for specific trading opportunities and executing upon those opportunities based on certain aspects issued by the trader.

7. Day trading

Day trading, also known as intraday trading, is a popular short-term strategy which also falls into the category of a trading style. It involves having a trader open and close a position or multiple positions within a single trading day, looking to take advantage of the short-term price fluctuations in the market.

Traders using this strategy generally keep their positions open for a few minutes to a few hours, ensuring all their positions are closed by the end of the trading day.

They analyse the market using various time frames, ranging from 15 minutes to 1 hour, to look for entry and exit points.

Due to the fast-paced nature of day trading, much like scalping, traders might need a certain level of focus and dedication when monitoring the charts and making trading decisions. They also tend to focus on financial instruments with higher liquidity, volatility, and trading volume because they want to take advantage of short-term price fluctuations and enter and exit positions relatively quickly.

Day traders generally only focus on technical analysis, only implementing fundamental analysis when certain important news and economic events could have a short-term effect on the price changes of the financial instruments they might be trading.

8. Swing trading

Swing trading is another strategy that falls into the category of trading styles used by those with a medium-term outlook on the market. These traders try to take advantage of the market's short- to medium-term price fluctuations.

Traders utilising this strategy generally keep their position/s open for a few days to a couple of weeks, focusing on different timeframes to analyse the market and look for potential entry and exit points spanning from a 4-hour to a weekly timeframe.

Unlike day traders, these traders don’t necessarily have to constantly monitor the charts daily, seeing as they keep their positions open for a longer period.

Swing traders also typically use a combination of fundamental and technical analysis.

Technical analysis is used to determine future price movements and find entry and exit points on a financial instrument. At the same time, fundamental analysis is used to gain a broader perspective of a financial instrument’s financial health and keep up with important news and economic events.

9. Position trading

Position trading is the longest-term trading strategy apart from buy-and-hold investing and also forms part of trading styles. With this strategy, traders generally keep their positions open for a few weeks to a few months, with some traders keeping them open for up to a year, which is why, when using this strategy, traders might need a certain degree of patience.

Position traders generally ignore short-term price fluctuations as they focus more on long-term trends in the market. Because of this, their analysis of the financial instrument they’re trading is more fundamentals-based. 

However, some might use certain technical analysis aspects to provide additional information and confirmation for their potential trades.

These traders also tend to focus more on financial instruments with a strong trend direction and minimal price fluctuations.

CFD trading does carry a certain degree of risk. Apart from the market's unpredictability, another risk comes with the ability to trade on leverage with margin.

This essentially allows you to open a much bigger position with only a small amount of capital. Now, this does offer some benefits, such as magnifying any potential profits; however, the risk mentioned is that it also magnifies potential losses.

The reason behind this is that the result of a trade using leverage is calculated based on the entire value of the position, not just the initial margin capital used to open that position.

Before trading CFDs, you might want to decide how much risk you are willing to take before entering a trade. 

Generally, most traders won’t risk more than 1-2% of their capital per trade, which coincides with your risk-to-reward ratio. This ratio states how much you’re willing to risk compared to the potential profit you might want to make.

For example, if a trader has a $ 10,000 account with a risk-reward ratio of 2:1, it indicates that they are willing to lose $100 in order to potentially make $200.

Another main concept of risk management involves using a stop-loss order to protect your position when the market moves against you. Depending on your strategy and risk management plan, you could use three different types of stop-loss orders.

• Standard stop-loss: This type of order is placed at a predetermined level away from the current market price. When the market moves against a trader’s position and reaches the order, it will close automatically, limiting any further losses to a trader’s account. It might be essential to note that this stop order won’t be able to protect a trader’s open position against slippage.
• Trailing stop: This type of order is placed a certain number of pips or a certain percentage away from the current market price, which automatically adjusts as the market moves in favour of the trader’s position. The trailing stop order will stop moving once the market starts moving against a trader’s position. The position will automatically close if the price reaches this order, securing any potential profits earned. This order also won’t be able to necessarily protect a trader against slippage.
• Guaranteed stop-loss: This order type works the same as a normal stop-loss; however, this type of stop order eliminates the issue of market slippage. Once the price reaches the predetermined stop-loss level, the position will automatically close regardless of slippage. The only difference is that a broker might charge a small fee for executing this order.

Advantages

• You can open long (buy) and short (sell) positions on various financial instruments from various financial markets.
• You can trade on leverage, which allows you to open a much bigger position with only a small amount of investment capital. The amount of leverage available will depend on your specific regulatory jurisdiction.
• Trading with leverage can magnify potential profits.
• The cost of trading CFDs is relatively lower compared to traditional buy-and-hold investing.

Disadvantages

• Even though trading with leverage could magnify potential profits, it also magnifies any possible losses.
• Many traders risk letting emotions interfere with their trading, which could result in overtrading or revenge trading.
• Technical risk also exists, for example, when the CFD broker's platform experiences technical issues or when there is an internet outage.
• Paying the spread could be considered a risk, especially when the spread widens, which could influence any potential profits because they would need to pay more for the spread when opening a position.

CFD trading strategies are essential because they act as a set of rules and guidelines for analysing the market and looking for potential trading opportunities.

Now, it might be essential to remember that no strategy is perfect, and you might need to first get a good understanding of the financial market and instrument/s you’re looking to trade.

Strategies could also be adjusted as needed once you have a solid foundation from which to work.

Lastly, trading strategies could help you avoid the potential risk of making trading decisions based on emotions such as greed or fear, which could lead to overtrading or revenge trading.