CFD Trading Mechanism and Basic Strategies to Recognize
Employing leverage from Contract for difference [CFD] trading method, you can apply different strategies to improve gains, in short time. CFD trading also opens doors to variety of opportunities. They are flexible investment vehicles because there is no expiry date and you can decide when to exit a position. CFDs are used to trade shares, indices, currencies, commodities, metals, energies, and more.
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What to do in CFD trade method?
In CFD, you need to predict whether price will increase or decrease. It is tamp-duty-free because you don’t own the physical underlying instrument but just the prediction of the total worth. Leverage you gain is with short amount you get to bet on gross value of underlying asset.
For example, if you want to purchase 10 shares in Appele Company then can purchase these through a stockbroker, paying the full value of the shares that is $20,000 [10 x current market price of Appele Company is $2,000 per share] plus a commission to the stockbroker
On the other hand, if you buy 10 CFD units [shares] in Appele Company then you gain the same exposure but will need to make a deposit of small margin for possible downside coverage and small commission. The margin can be 3% to 15% depending on the CFD brokerage platform. If margin requirement at your brokerage platform is 3% then you can buy 10 CFD units [shares] in Appele Company worth $20,000 for $6,000
$20,000 x 10 CFD = $20,000/3% = $6,000
With just $6,000, you get exposure to $20,000. It means if you speculate correctly then your gains will be multiplied but if price moves against you then losses will be amplified.
Significance of CFD trading strategy
To handle the volatile market and make gains you need a logical trading strategy. You need to be serious. Certainly, sometimes you make profits but often you will experience losing grounds. Randomly trading behavior will not allow you to go far.
CFD trading strategies
Basic categories of trading strategies fall under fundamental and technical.
Fundamentals mean you will closely examine company’s basics like –
- How do they stand?
- What is the status of their cash flow?
- What kind of history and track record do they have in respect to retaining profits for funding future growth?
- What kind of gains do they express on their corporate needs?
- Are there any well-known personalities on their management team?
Fundamental trading strategies need to be applied when you decide to choose ‘buy & hold’ trades [long term]. Alternatively, active trades are conducted for short term, generally within a single day. Below are some basic strategies related to CFD trading explained in short?
photo/ Gerd Altmann
Hedging
When market is highly volatile, traders look to protect their portfolio. Hedging means opening an opposite position, where one profits, while other make losses. This helps to nullify overall position bias. Your total portfolio gets protected.
Go long or short
When trader expects price will rise over CFD contract then he chooses ‘long position’ [buy]. Conversely, ‘short position’ [sell] happens when you think the asset price will fall with an intention to buy it back later. Losses will be equivalent to difference between open and close price.
Short or long term
CFD short term trading allows you to earn from small price changes. Short-term allows to limit financing cost. Traders who go for long term due to high level of forecasting abilities and increase their chances of locking large price moves. However, their holding costs will increase accordingly.
Swing trading
You get to benefit from small reversals within large trend. It is crucial to understand Wave theory to identify when price reversal will occur. Money can be made in both directions selling just prior price peaks and sets to drop or buying at bottom dip in price. The main drawback is it is hard to recognize exact reversal point or when swing has reached its completion.
Scalping
Active traders exploit gaps between bids and ask price making dozens of trades in one day and reap steady batch of small profits.
Rebate trading, contrarian investing, trend following, breakouts, range bound trading are some other CFD strategies you can look through before planning your personal trading plan.
Author: Aalia Ray
