CFD trading is a relatively new concept to most traders and investors, which is understandable given the mechanics of CFDs are different to traditional share trading. Having an advisor or trading mentor who is able to explain the concept of CFDs and assist you to identify trading opportunities is often a relatively safe way for new CFD traders to gain exposure to financial markets.
There are many stockbrokers and financial advisors who are able to help traders and investors looking to enter the stock market, however very few have an in depth experience and understanding of CFDs and how they can be used not only as a hedging tool over a share portfolio but also as a great way to gain exposure to global stocks, commodities, indices and forex pairs.
Some CFD providers are able to provide you with basic CFD trading advice and education however many of them will not provide you with CFD trading recommendations. There are however some CFD providers who are able to provide you with advice and trading recommendations, and it is these providers that often also specialise in other aspects of money management including financial planning, corporate advisory and funds management.
Dealing with a CFD provider that does not solely specialise in CFD trading is often a good idea for novice traders looking for some assistance in managing their trading portfolio and understanding the risks and benefits CFDs. This is why I prefer to stick with established providers including cmc markets which I’ve been using for a while now.
Let's have a look Five Outrageous Ideas For Your CFDs
1. Mean Reversion Systems
These CFD strategies are based on the premise that stocks and shares that dip down, have a tendency to bounce back up. You should test these 'dip buy' or mean reversion systems on previous data of the market that you want to trade this strategy with. You should take note of the profit loss ratios, win loss ratios and the number of trades that the system triggers. Be careful during large dips in the market as many stocks may be triggered. Of course, always note the historical draw downs. These systems tend to have relatively higher win loss ratios which makes them easier to trade than other systems.
2. Swing Trading
This type of trading is based on avoiding choppy stocks that are not trending, and getting into ones that are trending up, then going short on down trending phases. The time frames of swing trading is typically shorter, such as a few days, than longer term trending strategies. It is of course virtually impossible to pick the top and bottom of each up and down swing in the market. But chart patterns and indicators are used to pick entries and exits. There are methods of determining entries and exits, however swing trading refers to this style of trading where smaller moves are exploited.
3. Longer Term Buy and Holds
These systems can be based on mechanical triggers, and even with fundamental. They have a longer time frame, such as weeks and even months, to allow the stock more room to breathe and ride the larger movements. Some systems and strategies are based on a strongly trending stock and based on the premise that this stock is likely to continue to increase. There are holding costs, that is interest costs, with long term positions, but the idea is that larger moves will compensate for these costs. There may be only a small handful of trades per month but this may suit some people.
4. Stops Are Essential
Stop orders can be used to provide protection when trading. The stop orders must be placed into the market to protect your capital.
By placing a stop in the market you will be exited from a trade if the market moves fast. This stop will limit the loss that occurs, by exiting you immediately, before that loss becomes larger.
With CFDs it is possible to lose more than you have in your account, so it is vitally important that you use stops to limit your risk
5. Win or Lose It Comes Down to Your Strategy
You can build your own profitable strategy or follow one that has already been developed. Which of these methods you choose is up to you, but do not underestimate the importance of following a profitable strategy.
As a start the strategy must be profitable in history. There are many programs available that allow you to test your trading ideas out to see whether they work or not. But just because a strategy works in history, does not mean it will work in real time.
Most CFD traders do not have a profitable strategy that they follow, as they have not done the work to develop this. Trading on market feedback is a recipe for disaster. If you are unclear on your strategy, you do not have a profitable strategy.