Which approach is necessary for CFD trading success?

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Updated: 28 August 2020

Contract for difference (CFD) trading is now so popular that many people wonder if it could be a good investment strategy for them to try. As with traditional forms of stock market and other types of asset-based investments, CFD trading can accommodate different aims, plans and risk/reward ratios. However, as it is a “derivative” trading system, it never actually entails buying or selling anything. CFD trading is simply based on the price fluctuations of the underlying asset or market.

This means that fast-moving financial environments such as some stocks, forex markets, indices and commodities are all common areas for taking CFD positions. Furthermore, because the asset pool is so large and the choices are so vast, specialised knowledge of one particular industry or sector is not necessary and, in some cases, can even be something of a burden.

If there is a certain approach for CFD trading success, then it arises from the ways in which the relativity new form of going long, short or holding a position differs from more traditional and “mature” products.

Leverage

CFD is a form of leveraged trading, and it is popular in the UK, Australia and several other countries, although it is not legal in the US. As a leveraged product, it offers many advantages for an investor wanting to make trades. Essentially, the entire sum involved in taking a position is not necessary as capital in the initial instance. This is known as “margin trading.” However, the downside is that using any form of leverage-based financial instrument can also lead to large losses.

The good news is that CFD trading has in-built risk management strategy tools such as stop and limit orders, which can come into play automatically at pre-set levels to minimise risk. This means that a successful CFD trader needs to be aware of the dangers of a margin call and know how to ensure that their risk management strategy carries out on a solid basis.

Insider knowledge

All CFD traders have successful investments as their primary aim. Gaining knowledge about how a particular market works can be useful, but one important factor of CFD trading with underlying assets is to take an “emotionless” approach.

This boils down to thinking only about the price moves of the asset or market and not having any desire for movement one way or the other for any reason other than the success of the CFD position. For instance, many stock market investors choose a company that they believe in, support or have an attachment to in terms of wishing it success.

Taking a short position means that a trader believes that a price will fall, and this can be very difficult for anyone who has some form of emotional connection to the trade, no matter what its basis. Although insider knowledge might come in handy when deciding which position to take and when to make a move, hoping that a market moves in a certain way for any other reason than the positive outcome of the CFD trade tempers it.

Personal knowledge

The emotionless style of trading does not necessarily invalidate the old stock market advice of investing in what you know about, as the situations surrounding any market will obviously influence which way that prices and values move. Therefore, skills and knowledge originating from any earlier input can help traders choose both markets and CFD positions, but most importantly, they can help in the analysis of data.

Charts, technical analysis and fundamental analysis are all important aspects of successful CFD trading for many investors. Knowing how to use data and interpret it in ways that can meaningfully give indications as to which way that prices might move is an invaluable skill. It also entails attention to detail and a willingness to learn about the various methods of analysis that have proven track records.

Deciding to take a trading position eventually comes down to a personal choice taken from a range of available options, and this dictates that a certain mindset is necessary if an investor wants to maximise his or her chances of success.

Positive approach

Successful traders of any type will always say that they have some personal secret or trick that lies at the heart of their achievements. The fact is that there is usually a common denominator, and that is having a positive approach. Setbacks and losses will always occur in CFD trades, and the difference between successful traders and those who fail is clear in how they deal with these negative aspects.

Being able to go beyond short-term woes and move forward is a learnable personality trait, which means that positivity can be a tool for anyone’s trading success. Of course, this does become slightly more complex in the world of CFDs. In simple stock markets, making trades when prices fall presents opportunities to “buy cheap” and sit back and wait for values to rise again. In a CFD trade, the successful position might take the form of the asset price falling in the first place, so the definitions of negativity and positivity can take on a slightly skewed twist.

Success

There is no doubt that successful CFD traders have a certain state of mind in their approach, although it might not be common to all of them. Making decisions and taking positions for trades eventually comes down to an individualised and personalised series of choices, so there simply cannot be a “one-size-fits-all” solution. It is only by trial and inevitable error that traders can build up a successful CFD trading strategy, and it will be the result of following a learning curve and having knowledge that is unique to the individual.