Why You Need a Trading Strategy to trade CFDs
First off, all trading requires good strategies. Seeing as you need some luck, it is self-defeating to depend on winging it in any form of trading. You need to cultivate some skills to trade successfully.
Therefore, a trader should create an excellent trading strategy that works for them. A good strategy is comprehensible and well defined. Consider learning the basics as well as doing your research to build such a strategy. Also, consider factors such as the following:
- The amount of risk you are willing to take
- Capital at hand
- Your trading goals
Ultimately, you want to create a trading strategy that is tailor-made for you. This way, you will build a trading career that will stand the test of time. Remember the cardinal rule of the CFD market: avoid taking unnecessary risks.
Types of CFD Trading Strategies
CFD trading strategies can be broken down into two broad categories. These are:
- Short-term strategies
- Long-term strategies
When you trade short-term, you consider your trades in terms of hours; Not days or weeks. One major concern you may have is financing costs. Since the trade is not held overnight, It will not consume your margin and earn additional charges.
You may find that a position is not going to be profitable. In this case, you can close the position and take your profit before the trading day ends.
Short-term strategies also come with high leverage that makes them ideal for day traders. They are excellent for a quick trade that allows maximum profits to be made in a short time. Also, they are great for novice CFD traders who want to learn the ropes.
On the flipside, commission and transaction fees can add up to a significant amount. This may not be evident when you spend the occasional small amount. However, if you add it up in one sitting, the amount your broker takes home may astound you.
Short-term trading strategies include the following:
- Day trading
- Swing trading
If you only have a short window during the day to indulge in some trading, scalping is your best option. You can place your trades in 1-2 hours and follow the action before you have to get back to work.
However, if you prefer to hold your trades overnight, choose swing trading. You will have more time to monitor your trades.
Short-term strategies may seem to be ideal for many traders. After all, they quickly open and close positions, make their profits, and leave. Moreover, they are associated with less buoyant markets.
However, there are several CFD trading strategies better designed for investors that want to trade long term. A long term investment is expected to accrue profits over the period of investment.
One merit of this strategy is not the trader can exploit larger price movements. Short term investors do not have this option. Price movements in the longer term are not restricted. Long time traders can exploit the potential of large price movements that can take place in weeks or months.
Additionally, transaction costs are fewer with long-term trading than with day trading. A day trader, for instance, makes several short-term trades. These run up costs in terms of broker fees as well as commissions.
One downside of long term positions is that they can expose your account to greater risk. However, you can counter this with lower transaction costs. Also, with proper research, long term CFD trading can be quite profitable. It may even bring in more profits than the short term option.
This is a popular strategy for long-term traders. The trader holds a position for a long period of time. The aim is to profit from large price movements. Hence, the trader may hold a position for at least a year or more, hoping to make a tidy profit.
A trading strategy is necessary to trade CFD effectively. It gives you the discipline needed to be consistent and prevents trading on emotion. To make profits in CFD trading, create a strategy that is tailor-made for you.