Getting started with CFD trading
While many other forms of trading have been popularised in recent years, one form that is steadily gaining traction is CFD trading. A Contract For Difference, commonly known as a CFD, is an agreement between a buyer and seller of an asset. Although, in such an agreement, the buyer does not assume ownership of the asset, thus limiting the risk for them. Despite this, the buyer still stands to profit from the future value of the asset. The profit in CFD trading is derived from the difference between the buy and sell price of the asset, less any expenditure incurred during the course of the agreement. On a CFD market, you will always see two prices listed, the first being the sell price and the second being the buy price. The difference between the two is then referred to as the spread.
While learning how CFD trades work can be somewhat daunting at first, through thorough research, a credible broker and an effective trading strategy, one can make a success of it. CFDs are widely viewed as a more speculative form of trading, based on anticipated price movements of your asset. If you are still new to CFD trading, it is advised that you practice and gain a better understanding of the market through a demo account. This will allow you to hone your skills using virtual currency, to avoid committing real capital before you are ready to do so on the financial markets.
Developing a trading strategy based on your research and market conditions is a good way to improve your chances of succeeding at CFD trading, especially given the advantages that this form of trading offers. Some of those advantages include limited risk due to not assuming full ownership of the asset, access to global financial markets, flexibility and no set expiry date for contracts, amongst others. That being said, below are some of the recommended CFD trading strategies:
1. Pair trading
This form of CFD trading requires one to invest in two CFDs within the same industry, doing so by opting for a long position on the weaker asset and a short position on the stronger asset. It then becomes important to be mindful of the correlation between them through measuring the relationship between the price movements of the two assets. The more the two assets diverge, the more you stand to profit.
For many, this CFD trading strategy is more of a form of insurance, as it protects traders against short-term drops in the value of the asset/s of interest. Moreover, hedging is often used alongside other CFD trading strategies and is recommended as you start to diversify your portfolio.
3. Swing trading
This trading strategy is concerned with current trends on the market, as well as your ability to determine in which direction the trend will continue. This will help you identify strong trends to capitalise on, whilst also indicating resistance levels which are recommended points to let go of your position and rather, take the profits you have accumulated at that time.