September 20, 2021

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CFD Trading Strategy in 2018 for Traders – Guidance & Practical Analysis

8 min read

CFD Trading is not a new trend, especially in England, these “contracts” have been established since the 90s. Meanwhile, many CFD brokers are also active in many other countries, so CFDs can be traded on virtually all important underlyings such as stocks, indices, commodities, and currencies.

The trading of CFDs offers interesting yield opportunities due to the high leverage. In order to be able to use these instruments, a discussion of the CFD basics is necessary. We offer a compact 4-step CFD introduction to give traders and interested investors an overview of the key aspects of CFD trading. Our CFD strategy takes into account the areas of entry, exit, and risk management so that you are thoroughly prepared for entry into CFD trading.

CFD basics
Trading Tips
Software and Trading Platforms
Broker selection
Everything you need to know about trading strategies
Money management

CFD basics
This CFD introduction provides a detailed definition of CFDs and helps you to understand how these financial instruments work
Explanation of CFD margin with an example
CFD margin requirement explained by an example
CFD leverage explained by a trade example

A very important aspect, which is pointed out in the context of CFD basics brokerage, is that traders do not acquire real assets. In the case of financial derivatives, traders therefore do not acquire an asset, as in the case of commodities or securities, which they tangibly store in the custody account with the bank as a “tangible asset.”

“Traders do not acquire real assets”
Rather, contracts for difference are bought or traders bet on the development of the prices of certain products. This saves fees for the deposit or opening any bank accounts. Other CFD benefits include allowing traders to benefit from falling prices when using Contracts for Difference. It can be a fixed theme money bag component of a CFD strategy to use the financial instruments for low-cost hedging, such as a stock portfolio.

Move large sums of money with little effort
The fact that brokers sometimes work with very high leverage in their offerings proves to be positive for the investors that large volumes can be traded with very little collateral. If the providers of the trading platforms renounce the so-called margin-obligation, dealers do not have to worry about whether they have to invest in the case of a negative outcome, even beyond their actual invested money/balance.
In the end, it’s all about putting together the right mix of CFD offerings in conjunction with the appropriate individual use and also, using the appropriate strategies. We will provide you with some valuable CFD tips.

CFD Software and Trading Platforms
To translate the theoretical foundations into practice, a CFD trading platform is required. Many brokers use similar trading platforms, but there are also proprietary developments. We have already shown in precious articles the differences between the major CFD platforms, as they can also play a crucial role in broker selection.

CFD broker selection
With contributions to CFD basics, trading strategies and risk management, you can learn CFD trading. However, successful CFD trading also requires choosing the right broker. Our CFD Broker comparison also helps you with that. The comprehensive broker experience article we published before informs about spreads, bonus, account opening as well as the opinions and experiences of our experts. So you make the right decision when choosing the broker.

Trading Strategies
Once the basics have been laid and, in the best case, a few trades have already been executed in the demo account, it is important to find a suitable CFD strategy.

Only Good strategies ensure success
Many people do not understand how important it is to trade using a strategy with CFDs. On the contrary, they begin without any knowledge of money management, do not know how to control their emotions in trading, nor are they able to trade in a purposeful and successful way to subsequently find and avoid mistakes.

As a result, newcomers tend to be undercapitalized, reacting to higher-stakes losses, and usually lose their entire stakes or even more in the shortest possible time.
That is why it is essential to trade with strategies.
But, what is a strategy?
A CFD strategy can consist of few details. Essential are:
Entry rule: This rule decides when to buy CFDs and whether to take long or short positions
Exit rule: The properly timed exit is made possible by them.
Re-entry: This rule allows you to enter after a closed trade with changed conditions, but often this is also the entry-level rule.
Money: Traders decide which part of their capital they want to risk.
Leverage: The leverage effect decides on the possible return, but also on the risk.
Maximum Loss: Traders need to determine the size of the risk they want to take on each trade. In general, strategies also include setting up a stop loss.

What tips are there for finding a good strategy?
Most traders who can trade successfully with CFDs and have a good long-term return if they use the following two rules:
Limit losses
Take profits

At the same time, these principles points are one of the most common mistakes private investors make in stock trading i.e. they close rising positions too fast and hold down falling securities too long. Responsible for this is that the human psyche in both cases does not necessarily contribute to rational behavior.

Humans usually do not want to accept that they have made a wrong decision and hopes too long that the tide will still turn in his/her favor. Conversely, when it comes to winnings, it feels too fast that it has to be secured to avoid unnecessary risk.

Basically, this can also be explained by “reward and loss.” A trader usually rewards himself too soon with a profit, because this ensures the release of feelings of happiness. He does not let the winnings go because he is afraid that he will then make less profit – which in turn negatively affects his feelings, because it would feel like a loss of not timely realized profit. Conversely, he wants to avoid negative feelings that result from the exit from a loss position.

However, most private investors do not act in such a way that they risk as little loss as possible and do not exercise sufficient risk management. However, one of the main risks of trading in CFDs is the sinking liquidity, which can become a major problem after a few shortfalls in a row.

Here, many strategies of beginners come together. They often calculate with the full capital and assume that they make profits and thus do not slide into the minus. However, for their strategy to work, it is usually necessary for them to always be able to use the same capital.

However, avoiding missing wheels is impossible and every strategy has to calculate with longer periods of losses. That’s why it’s important not to risk too much in a trade. In addition, traders should not forget that CFDs can offer an extremely high return, but this is associated with a high risk. Your first goal is to limit his losses, therefore you can deal with the second step much more relaxed and take profit and do not have to compensate for high losses.

Is there a working DOW/Stocks trading strategy for CFDs?
There is no consistent strategy that defines how the DOW can be traded successfully with CFDs. Some parties still find the asset very interesting; this is because among US investors, a strategy for the DOW is of course particularly sought after. The well-known US stock index is usually the first point of contact for traders from USA and probably every CFD provider has this index in the program.

However, the offered CFD strategies are generally quite simple for the DOW, as a successful trader has no reason to publish/reveal his working strategy.
Traders should always be wary of strategies when there are no clear instructions.

Whenever a trader is not sure to the point, when, how long, and with what stop-loss, the strategy is useless and needs to be reworked. The market conditions should also be part of the rules of conduct. The strategy is not bad if it does not work sideways, as a trend order or in a crisis – but what is important is that the trader knows the conditions where losses are unlikely.

Even if a strategy advertises with a very concrete number or the “inventor” expects a continuous increase, caution is advised. Even beginners should check their own trading strategy for CFDs. Use calculations such as “I open the position after three points and close the position after one-point minus, so I have a multiplication of my stake capital to sum Y within period X,” it is clearly a beginner or someone who Beginner wants to fool. Such strategies are based on unrealistic calculations.

It also makes more sense to look for CFD strategies that work under certain conditions than for a particular index. Thus, volatility and the general market movement are much more meaningful factors than the origin of the index, even though the DAX is a well-suited index for CFD trading.
Always try strategies without risk

Beginners in particular should never try strategies with any amount of real capital. Anyone who just starts trading CFDs cannot estimates whether a strategy can work, and must first get some sense of the market. He has to get to know days when he’s wrong on several occasions because of his initial predictions, to see how risk appetite grows after a loss, and to find what does not work to extrapolate the total profit based on the points earned.

Only when he has enough experience to know his own weaknesses and to know how to handle them, he is ready for the real-money trading.

The same is true of a new strategy. Here, too, the trader has to find under which conditions it works and under which it leads to losses, paying attention to both its own psyche and market movements. He has to learn when the entry rules work well and when they are too risky and gain confidence in the exit rules.

All of this is possible only within the framework of a CFD demo account that allows extensive testing over a long term period.
Most strategies offered or discussed freely on the Internet or in textbooks neglect money management. Even beginners, who want to develop their own strategy, usually pay insufficient attention to their risk management.

A fundamental recommendation is that each trade should not risk more than one percent of the total capital. It is therefore necessary to calculate the leverage and the stop-loss accordingly when leverage products are used. Beginners should not forget that more than the invested capital is (usually) at risk.

However, a too tight stop-loss is often not recommended, because then the position can be closed by the usual volatility, which can lead to unnecessary losses. So traders have to risk a tightrope walk and find when they risk too much and too little with their strategy. Often it makes more sense to trade with less leverage instead of closing the position too early.

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