Top 3 CFD Trading Strategies

Top 3 CFD Trading Strategies

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Updated: Aug 24, 2022
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Intermediate
7 min read

CFDs (or contracts for difference ) are a derivative financial instrument that allows you to trade virtually any type of asset, ranging from currencies to commodities, indices and different classes of shares.

These instruments have gained enormous popularity due to their simplicity, great versatility and, above all, the possibility of trading with instruments that would not normally be possible. For example, trading directly with indices can be really complicated due to the long list of requirements to enter the market. Luckily, with CFDs you can take advantage of the price movements of different indices and thus earn money.

Without a doubt, CFDs are an instrument that every financial investor should take into account. But just like any other instrument, you cannot trade it without knowing them and having CFD trading strategies.

For this reason, in this article we will present the 3 best CFD trading strategies. By using these methods, you will be able to trade CFDs more efficiently and possibly improve your profits.

The strategies that we will analyze next are:

  1. news trading
  2. hedge trading
  3. Go long and short

I. 1. Trading news with CFDs

CFD news trading

It is no secret to anyone that economic, political, social and cultural events can have a great impact on the prices 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 news tend to be felt in the long term, you should never rule out the possibility that an event will have immediate consequences on the volatility of an asset.

Luckily, most important news for the financial markets is scheduled in advance, so you can be prepared for these events. Among the most important data that you should take into account are:

  • Interest rates
  • unemployment figures
  • Inflation
  • Balance of trade
  • manufacturing production
  • GDP

In order to take advantage of this news, you can use a Forex calendar. These calendars feature past, expected and actual values for the most important news. If, for example, the expected value varies considerably from the actual value, you can expect volatility in the market. And it is precisely in periods of high price fluctuations where you can make profits with CFDs.

Let us now look at an example of this CFD trading strategy. One of the most important reports is the non-farm payrolls of the United States, since it is considered one of the most reliable indicators of the economy of that country. To use this report to your advantage, use a Forex calendar to see expected values. Once the report comes to light, compare the actual value with the expected one. If it is very different, you can expect a lot of volatility in the market, so you should open positions.

The importance of news for CFD trading

The news does not only serve as a tool to open new positions. In fact, these events can have a great influence on the orders you already have open. If you have open CFDs on assets that are influenced by upcoming news, it’s a good idea to pay attention to them to avoid unpleasant surprises.

Fortunately, most news events are scheduled in advance, so you will usually know in advance the dates when there will likely be price fluctuations.

However, when applying this CFD strategy you should keep in mind that not all events are scheduled. It is possible that an unexpected piece of news, such as a political speech or a natural disaster, could significantly affect CFD prices. In these cases, it is best to act quickly to take advantage of opportunities or limit losses.

II. 2. CFD Hedging Strategy

This is a CFD trading strategy for beginners that aims to prevent losses or secure profits on other positions in the financial markets. Unlike many other strategies, hedging is not intended to make a profit, but to protect a loss or save a position from excessive market volatility.

To hedge, you basically need to open a position opposite the one you want to hedge. For example, if you want to protect profits from a long trade, it means that you open a short trade, usually with the same financial instrument.

One of the great advantages of financial hedges is that they allow you to operate without risk once you reach a certain profit. Imagine that you have a CFD with a profit of 5%. In this case, you could hedge another CFD and stay in the market while locking in that 5% profit.

CFD Hedging Strategy Example

Imagine that you bought a CFD on corn and the prices of this commodity increase. That way, you manage to get a profit of 10%. At this point you have three options:

  1. Exit the market and secure the 10% profit
  2. Leave the position open to see if it makes more profit
  3. Make a hedge

With the first option, you can secure a good profit, although there is a chance that you will lose money by exiting the market too early.

On the other hand, if you leave the position open, you can make more profit, although there is also the possibility that corn prices change and you end up losing money.

If you are a prudent trader, then it is a good idea to choose the third option: a hedge. That way, you would open a short position with a Corn CFD and lock in the 10% profit.

Importance of financial hedges

This CFD trading system is a tool that you should definitely know about and include in your arsenal as it allows you to protect your profits from volatile market conditions. You never know when an event will occur that causes strong fluctuations in the prices of financial assets.

This is where toppings come in. Thanks to this technique, you have a way to protect yourself from the market volatility that is sometimes so damaging to trading accounts.

CFD Hedging Strategy

III. 3. Go short and long with CFDs

The last of the CFD trading systems that we will talk about in this article has to do with the two basic positions in the market: long and short. Many people believe that with CFDs, just like with shares, it is only possible to make profits in rising markets. However, CFDs offer the possibility of making profits in both uptrends and downtrends.

CFDs are contracts, so all that is needed is two parties willing to trade. If you buy one of these contracts, at the time of selling it you have to find a counterparty willing to accept your selling price. Liquidity providers take care of this. The same applies to the case of purchase.

This means that you can go short assets that normally do not allow it, such as stocks. Such a feature of CFDs opens up a new world of possibilities in financial trading. For example, you can expand your investment portfolio and hedge different asset classes.

IV. conclusion

Although these CFD strategies are some of the easiest you can find, there is no denying that they are also some of the most effective. It is worth mentioning that the first two approaches (news trading and hedging) apply not only to CFDs, but to a large number of financial markets. Therefore, just by studying these theories, you are already becoming a better financial trader in general.


Sources & references
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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.

Course navigation

1. News Trading Strategy
2. FX Trading with CFDs
a. Top 3 CFD Trading Strategies
3. MACD Strategy
4. Countertrend Strategy
5. Martingale
6. Soldiers Strategy
8. Trendline Strategy
10. Roller Coaster
11. Stop Loss Strategy
12. Pisco Sour Strategy
13. European Open Strategy

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