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What’s a good CFD strategy for beginners?


Jane Goodwin
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CFDs lend themselves to a variety of trading strategies. As a highly leveraged product, there is a great deal of potential risk involved, so it’s especially important to be disciplined in your approach. All CFD trading strategies should be based around a few key principles:
  • Preserve capital by avoiding unnecessary risk
  • Always use stops
  • Establish a profit target for every trade
  • Limit your leverage and control your exposure
When you apply those principles to your CFD trading strategy, you’ll be in a much better position to make winning trades. That said, there are some tried and true trading strategies that work especially well with CFDs. Most work best with intraday trading, simply because there are financing costs associated with keeping CFD positions open overnight. Some traders do keep open positions for days or even weeks, but if you take that approach, you need to factor in the additional trading costs.

Scalping

Scalping is simply profiting off the bid-ask spread. A scalper may make dozens of trades a day, taking a small profit with each and limiting the potential larger losses. Scalping has a few advantages, one of which is that the brief market exposure with each trade limits the possibility that you’ll experience an adverse event. You absolutely must have a rock-solid exit strategy if you plan to scalp CFDs.

Breakout trading

Traders who trade breakouts attempt to get in on the ground floor of a trend, in the hopes it is the start of a major price movement. When an asset’s price breaks beyond well-established levels of support or resistance, and is accompanied by a spike in volume, it often signals a trend in the direction of the breakout. As with other CFD trading strategies, you need well-defined exits to both lock in your profit and limit your losses.

News trading

The golden rule of CFD trading is to trade the markets you know. If you are plugged into a particular market and know how it tends to move in response to various events, you can profit off news trading. Of course, this isn’t a strategy you can use on a daily basis, but if you watch business and financial news, you can potentially jump in and profit off the resulting price movements.

Hedging

Hedging is a defensive strategy, but in a volatile market, CFDs as a way to hedge your portfolio shouldn’t be overlooked. As part of a larger strategy, you can use CFDs to protect open positions by taking an equal, but opposite, position with CFDs. Unlike stock options, which are sold in lots of 100 shares, you can get one-for-one coverage with CFDs.
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