Effective CFD trading strategies: Hedging, Day Trading, Short & Long-Term 

Nowadays, CFDs (Contract for Difference) are among the most popular derivative instruments used by traders, allowing them to gain from the price movement of an underlying asset without actually owning it. Traders looking to be potentially profitable in the long run approach markets with an effective CFD trading strategy devised by performing technical analysis on a specific asset, fundamental analysis, or both.

Strategies aim to generate capital gains by setting out predefined rules for taking trading decisions, while being constantly updated to reflect the latest market conditions and developments. CFD trading strategies can be applied to a wide range of underlying assets, including currency pairs, commodities, indices, stocks, and more, and vary depending on each individual trader’s goals and risk appetite.

In this article, we will explain the following:

• CFD hedging strategies
• CFD short-term strategies
• CFD long-term strategies

Before diving deeper into each of them, it’s always a good idea to refresh our knowledge on how CFDs work from our article on CFD trading. But if you have already done that, let’s continue explaining the mechanics behind these strategies, and how they are used for effective CFD trading.

Hedging is a risk management strategy aimed at decreasing risk exposure when investing or trading financial assets. CFD hedging involves mitigating potential setbacks on a trade by opening a CFD transaction on the same asset, or a correlated one.

Simply put, if the market swings against your trade, the depreciation can be offset by gains in another CFD position. This technique resembles an insurance policy that one may take in adverse market conditions.

To better understand what this technique is and how it works, let’s think of a scenario where this strategy is applied in the Forex market. For example, a trader opens a buy order for 1 lot of EUR/USD, but soon the currency pair’s price goes down in value, biting off at the trader’s equity.

To counter the setback on their buy trade, the trader can hedge the buy CFD position by opening another position of 1 lot on EUR/USD, only this time it will be a sell order. If the currency pair continues to devalue, the profit made from the sell order will balance the buy order’s downturn.

Now that we understand how hedging works, we can use this technique to offset risks in our trading or investment portfolio.

For example, let’s say your portfolio is comprised of 100 Apple (AAPL) shares, 50 Nvidia (NDVA) shares, 20 Amazon (AMZN) shares and 50 Microsoft (MSFT) shares. While the first two stocks are performing well, Amazon and Microsoft are losing value due to poor results in their financial reports.

To balance losses in your AMZN and MSFT stocks, you can open CFD sell-orders as follows:

• AMZN: CFD sell order with a volume of 20 shares
• MSFT: CFD sell order with a volume of 50 shares

If the two companies continue to depreciate, your investment in them will be hedged by the CFD sell orders you have placed. Losses in the value of your stocks will be compensated for by CFD gains, effectively balancing your overall portfolio’s performance.

Short-term trades last anywhere from a few seconds to one day and focus on taking advantage of relatively small price movements. To capitalize on price fluctuations, traders adapt their strategies to the prevalent market and economic conditions, and some of the most popular market approaches are:

• Scalping: A strategy that aims at profiting from very short price movements, with CFD positions being open from a few seconds up to a few minutes. Traders usually get in and out of the market quickly, attempting to make successive small gains.
• Intra-day trading: A strategy that involves keeping trading positions open for up to one day. Traders look to capitalize on price movements on lower time frames in the trading chart, such as H1 (1-hour) or H4 (4-hours). Also,, they exit their positions before market close to not be charged overnight fees.
• News trading: Depending on their perceived economic impact, news have the potential to spike one or more assets’ price upon being released. Traders anticipate these price movements with CFD buy or sell limit orders on their trading charts, usually set before the release.

Short-term CFD trading strategies like scalping, intra-day trading, and news trading allow traders to quickly enter and exit a position, taking advantage of short-term price fluctuations without holding positions overnight. These strategies require quick decision-making and a good understanding of market dynamics.

As opposed to short-term trading, this approach involves holding a position open for more than one day, and up to several weeks, months or even years. Focusing on an asset’s long-term appreciation, they are costlier than short-term strategies, as holding a CFD position open for more than one day will incur overnight fees.

• Swing trading: In this CFD trading strategy, traders identify a possible trend reversal and enter markets when the new trend gets confirmed by price action. Positions are open for more than one day and up to several weeks, capitalizing on price movements over longer time frames.
• Break-out trading: This CFD strategy involves identifying resistance and support levels of an asset’s price, and opening trades when the price breaks out above or below certain levels. Following the breakout, traders expect a surge in the asset price, and hold their positions open for a longer period to capture a larger portion of the price’s movement.
• Position trading: A strategy in which trading positions are open for several months and even years. Similar to investing, this CFD trading strategy focuses on an asset’s long-term price movement and is backed up by thorough fundamental and technical analysis.

The long-term CFD trading strategies described above offer traders the potential to capitalize on significant price movements over extended periods. While these strategies may incur higher costs due to overnight fees, they allow traders to benefit from an asset’s long-term appreciation. By carefully analyzing market trends, support and resistance levels, and fundamental data, traders can make informed decisions and potentially achieve substantial returns.

Overall, CFD trading strategies require careful planning, risk management and a good understanding of market mechanics. Developing a well-defined strategy involves analyzing market trends, having clear entry and exit points for your trades, and closely monitoring the outcome of your positions. Furthermore, employing these strategies with a reputable broker is crucial for improving their effectiveness.

At FXGT.com, you will find excellent trading conditions that allow you to maximize the potential of your CFD strategies. Additionally, you benefit from extensive educational resources to help you devise and adjust your CFD strategies based on the latest market developments. So, why wait any longer?

Create an FXGT.com account today, and employ your CFD trading strategies with a broker tailored to your needs.