CFD trading has become very popular over the years. The advancements in technology and online trading platforms have made all CFD instruments easily accessible and tradable for everyone.
You can explore multiple markets with CFD trading, one of which is the dynamic forex market. Forex CFDs have become one of the most traded instruments on a global level, and today, you will learn about the top 4 CFD trading strategies you should master to make profits in the forex market.
Basics of CFD trading
Understanding the basics of CFD trading is important to mark a successful beginning to your trading journey.
CFD is the abbreviation for Contracts For Difference, which is a financial derivative where the traders get to make profits from price differences of an underlying asset by getting into a contract to open a trade position but without actually owning the asset. It is an arrangement between the trader and broker.
So, let’s start by looking at some technical terms that are associated with CFD trading with a focus on Forex CFDs.
Pips – Pips state and measure the smallest price fluctuation that can happen in a trading instrument, particularly forex currency pairs. In the past, keeping track of currency price movements was a tedious and complex task as different currencies have different values.
However, the concept of pips added a lot more clarity to the calculations. But, as far as calculating pips is concerned, then you can rely on a pip calculator, which quickly converts pips into currency you want to trade in.
Long Position – A long position is opened by a trader when a price rise is anticipated for the CFD instrument.
For instance, if you see the currency pair going through an uptrend, you will decide to go long on that pair. You will encounter losses if the trend is reversed during the trade.
Short Position – When a trader opens a position or places an order to sell a CFD instrument with the expectation of a price fall, it is said to be a short position. This allows you to make profits from a bearish trend, but there is a risk of loss if the prices rise contrary to your expectations.
Leverage – The high amount of leverage that you can avail for trading CFDs makes it very appealing to small retail traders. Leverage is the usage of borrowed funds in trading, and CFD traders always use leverage to amplify their gains.
If you avail of 1:100 leverage, you can open a position worth $100 for every $1 in your account. But you need to use leverage in limits as it can also multiply your losses, adding to the risk.
Margin– The initial deposit required to open and maintain a CFD position. It is a percentage of the total position size and acts as collateral to cover potential losses.
The amount of margin needed for a trade depends on the currency pair chosen, lot size, and leverage available. You can use a margin calculator to find the margin requirement per your capital. When you know the right amount of margin to use per trade, you can manage risk better and amplify your profits.
Stop-Loss Order – Just as the name suggests, a stop-loss order is placed to automatically close a CFD trade position at a predetermined price level to limit potential losses. This is a part of risk management in CFD trading.
Take-Profit Order – Take profit order is placed to automatically exit a CFD trade position at a predetermined price level to secure profits. It is done to take profits of a winning trade, removing the risk of losing it in case of a trend reversal later on.
In order to get started with CFD trading, you just need to open a trading account with a broker and login to the CFD trading platform that they offer.
A trading software or platform is a key prerequisite for accessing the markets and trading CFD instruments.
The classic MetaTrader 4 platform and modern MT5 platform are perfect for CFD trading. They are loaded with all the tools and features you will need to execute your strategy easily.
Now, let’s move on to the top CFD trading strategies that a Trader needs to master
1) Breakout Trading
Breakout trading is one of the most popular strategies followed for CFD trading. It is purely based on technical analysis and focused on Support and Resistance levels on a chart.
Whenever the price of a currency pair or CFD instrument breaches the support or resistance levels, it is said to be a breakout.
The breakout must be confirmed by checking the trade volume and a significant price rise or fall that follows the breakout.
False breakouts are quite common, and you may end up losing a trade. Hence, you need to identify the difference between an actual breakout and a fake one.
After confirming a breakout, the trader can open a position in the direction of the breakout. A breakout below the support level is a signal to short the pair, and a breakout above the support level is a signal to go long on that pair.
Placing a stop loss is very important in breakout trading, as you may see the market going against you if the price does not sustain the breakout.
Sometimes, the breakout can lead to a strong trend; in this case, you will have to adjust your Take Profit to maximise profits.
Pros of breakout trading
- You don’t need to conduct any fundamental analysis and can solely rely on the price charts and make decisions based on technical analysis.
- Breakout trading allows you to enter trends as early as possible, maximising your profits
Cons of Breakout Trading
You might end up trading a false breakout if you don’t have enough knowledge.
2) Pair Trading
Pair trading is done by choosing 2 CFD instruments that are highly correlated, moving in the same direction.
Here, you wait for a divergence in their price movements and will open a position to make profits during their convergence.
In forex CFD trading, you will find 2 positively correlated currency pairs, EUR/USD and AUD/USD, then you will check which of these are underperforming at the moment.
After identifying the underperforming asset, you will go long on that pair while shorting the overperforming pair. This actually allows you to hedge the risk and secure profits in the end.
Pros of pair trading
- This strategy allows you to minimise the risk as you can make a profit if the assets converge.
- You don’t need to anticipate which asset will rise or fall.
Cons of pair trading
- The correlation can break at times, leading to losses.
- It is harder to set Stop Loss and Take profit in pair trading.
3) Position trading
Position trading is a long-term strategy that can be followed for CFD trading. Position trading requires a lot of patience as you will be keeping a trade position open for an extended period of time, which can range from several weeks to years.
Position traders ignore the short-term volatility and fluctuations as they want to make more profits from the long-term trend.
They do make use of technical analysis, but fundamental analysis is more crucial. A position trader aims to make the highest amount of profit from a trend as they wait for the price to reach its peak in case of an uptrend and long position.
On the other hand, if they are going short, they will only close the trade once the price hits the lowest.
Position trading has the longest time frame out of all CFD trading strategies, which makes it ideal for those who want to engage in passive trading without looking for trading opportunities on a daily basis. They just have to monitor and manage their positions once in a while.
Pros of Position Trading
- Less stressful and suitable for part-time traders.
- Higher profit potential.
Cons of Position Trading
- Your Stop Loss in position trading needs to be wider, making it riskier.
- Overnight risk is higher as you hold on to a position for longer.
4) News Trading
Just as the name implies, News trading is done by entering trades based on the volatility that can happen after a news event or key economic data release.
It is purely based on fundamental analysis and requires in-depth market knowledge to anticipate the potential price movements based on the impact of the news on your CFD instrument.
You need to pay a lot of attention to the news and make use of an economic calendar to keep yourself updated about the major events affecting your pair.
Pros of News Trading
- You will find a lot of trading opportunities.
- Takes less time as there is not much technical analysis to be done.
Cons of News trading
- Not suitable for beginners as it requires a deeper level of knowledge about the market.
Wrap Up
So, these are the top 4 CFD trading strategies to boost your profit potential. Ultimately, not all strategies work for all traders, and one needs to research, set rules, and backtest one’s trading systems before going live with any strategy.
