trading.CFD’s (or contracts by difference) are a derivative financial instrument that allows you to operate with virtually any kind of asset, going from currencies to raw materials, and passing through indices and different kinds of actions.
These instruments have gained enormous popularity because of their simplicity, great versatility and, above all, the possibility of negotiating with instruments that would not normally be possible. For example, trading directly with indexes can be really complicated because of the long list of requirements to enter the market. Fortunately, with CFD you can take advantage of the price movements of different indices and earn money.
Without a doubt, CFD’s are an instrument that every financial investor should take into account. But, like any other instrument, you cannot negotiate without knowing them or having CFD trading strategies.
For this reason, in this article, we will present the 3 best CFD trading strategies. Through these methods, you will be able to operate more efficiently with CFD and possibly improve your earnings.
The strategies we will discuss below are:
- News Trading
- Coverage trading
- Go in long and short
1. Trading News with CFD
For no one is a secret that economic, political, social, and cultural events can have a big impact on the contributions of financial assets. For this reason, one of the most common CFD trading tips is to pay attention to the news in order to anticipate potential price changes. Although the effects of the news tend to feel in the long run, you should never rule out the possibility that an event will have immediate consequences in the volatility of an asset.
Fortunately, most important news for the financial markets are scheduled ahead of time, so you can be prepared for these events. Among the most important data you should take into account are:
- Interest rates
- Unemployment figures
- Trade balance
- Manufacturing production
In order to take advantage of this news, you can use a Forex calendar. These calendars have the previous, expected and real values for the most important news. If, for example, the expected value varies considerably from the real, you can expect market volatility. And it is precisely in the periods of high fluctuations in prices where you can get profits with CFDs.
Now let’s look at an example of this CFD trading strategy. One of the most important reports is the non-agricultural payroll of the United States, as it is considered one of the most reliable indicators of the economy of that country. To use this report in your favor, use a Forex calendar to see the expected values. Once the report comes out, it compares the actual value to the expected one. If it is very different, you can expect a great volatility in the market, so you must open positions.
The importance of news for CFD trading
The news not only serves as a tool to open new positions. In fact, these events can have a big influence on the orders you have already opened. If you have open CFD’s on assets that are influenced by next news, it is a good idea to pay attention to avoid unpleasant surprises.
Fortunately, most news events are scheduled in advance, so you’ll usually know in advance the dates in which prices may be fluctuating.
However, by applying this CFD strategy you should keep in mind that not all events are scheduled. Unexpected news, such as a political discourse or a natural disaster, may be given to considerably affect CFD prices. In these cases, it is most advisable to act quickly to take advantage of opportunities or limit losses.
2. CFD Coverage Strategy
This is a CFD trading strategy for beginners that aims to prevent losses or ensure gains in other positions in the financial markets. Unlike many other strategies, hedges are not intended to generate profit, but to protect a loss or to save a position of excessive market volatility.
To make a coverage, you basically have to open a position opposite to the one you want to protect. For example, if you want to protect the gains from a long operation, it means that you must open a short operation, usually with the same financial instrument.
One of the great advantages of financial hedges is that they allow you to operate without risks once you reach a certain utility. Imagine you have a CFD with a 5% utility. In this case, you could make a cover with another CFD and stay in the market while securing that 5% utility.
Example of the CFD coverage strategy
Imagine that you bought a CFD on corn and that the prices of this raw material increase. That way, you manage to get a 10% utility. At this point you have three options:
- Exit the market and ensure 10% gain
- Leave the position open to see if you can get more profit
- Make a coverage
With the first option, you can ensure a good profit, although there is the possibility that you will lose money when you leave the market too soon.
On the other hand, if you leave the position open, you can get more profits, but there is also the possibility that the prices of corn change and end up losing money.
If you are a prudent operator, then it is a good idea to choose the third option: a cover. That way, you’d open a short position with a corn CFD and make the 10% profit.
Importance of financial hedges
This CFD trading system is a tool that you must definitely know and include in your arsenal because it allows you to protect your earnings from the volatile conditions of the market. You never know when an event will occur that causes strong fluctuations in the prices of financial assets.
This is where the coverages come in. Thanks to this technique, you have a way of protecting yourself from the volatility of the market that is sometimes so damaging to trading accounts.
3. Go in short and long with CFD
The last of the CFD trading systems that we will talk about in this article has to do with the two basic positions on the market: long and short. Many people believe that with CFD’s, as with actions, it is only possible to generate gains in bull markets. However, CFD’s offer the opportunity to make gains in both bullish and bearish tendencies.
CFD’s are contracts, so all that is needed are two parties willing to negotiate. If you buy one of these contracts, at the time of selling it you have to find a counterpart willing to accept your selling price. Liquidity providers are responsible for this. The same applies to the purchase case.
This means that you can go short with assets that do not normally allow it, such as actions. Such a characteristic of CFD’s opens up a new world of possibilities in financial trading. For example, you can expand your portfolio of investments and make coverage with different kinds of assets.
Although these CFD strategies are some of the easiest you can find, there is no denying that they are also the most effective. It is worth mentioning that the first two approaches (trading of news and coverages) not only apply to the CFD, but to a large number of financial markets. So, just by studying these theories, you’re already becoming a better financial operator in general.