Developing a great trading strategy with CFDs

great trading strategy

A CFD is a contract between two parties to exchange the difference in the price of an underlying asset at the maturity date. You can use CFDs for leverage if you have enough money, just like with futures. Your capital is not at risk, but your losses are magnified by leverage. You cannot lose more than you invest, though, making it considerably safer than trading on margin directly. There are many ways that you might be able to turn the average stock into something interesting in terms of your trading strategy. One very effective way for great trading strategy  would be to take out a leveraged position in that stock using CFDs.

How to develop a trading strategy

Developing a successful trading strategy can be one of the most daunting obstacles for new traders. It is critical to have a chosen instrument, asset class, and timeframe suitable for your personality and risk-tolerance profile. 

In addition to this, you also need an appropriate level of time that you are willing to devote to developing a good strategy. This will help reduce the amount of frustration when market conditions end up not matching what you were expecting or hoping for.

How to use CFDs in your trading strategy

One of the biggest challenges for new traders, which is often extremely difficult to overcome, is knowing how to use CFDs in your trading strategy. CFDs are contracts for difference that allow you to gain exposure to an underlying asset without actually owning it. For example, if you believe that gold will increase in price and want exposure to this possibility, you could buy a gold CFD to sell the contract later at a higher price than what you paid initially.

The first part of using CFDs successfully in your trading strategy is understanding why they are called ‘contracts for difference’. A contract is an agreement between two parties, in this case, yourself and the CFD provider. The difference, in this case, refers to the fact that you don’t own the assets but are entering into a contract that is going to enable you to benefit from any subsequent increase in their price. When do CFDs make sense?  

Contracts for difference can be beneficial if you know when they make sense and when they don’t. In essence, when markets are trending upwards, they tend to offer the most profitable trading opportunities. This means that engaging with them when markets are trending downwards is not necessarily sensible and may result in trading losses. 

If something has dropped significantly in price over a short period, selling than buying or entering into a CFD agreement makes more sense. You will ensure that you are in profit if the market then recovers without worrying about any possible losses. 

When it comes to your choice of market direction, it matters how much risk-aversion you have compared to an appetite for reward. If you are quite conservative, then I would suggest investing in market conditions that are trending in nature, as this will give rise to smaller but more consistent profits. Other traders may be happy to take on more risk by investing when price action is choppy or consolidating in nature. This will allow higher returns at the cost of increased drawdowns due to whipsaws and false breakouts.

Advantages of using CFDs

CFDs provide many advantages over other instruments, including forex, shares and futures markets. One great advantage with CFDs is their high leverage capabilities, allowing even small amounts of initial capital to be turned into larger positions. Whilst you can undoubtedly find situations where high leverage is not suitable, most of the time, CFDs are perfect for developing an excellent trading strategy with their reasonable margin requirements, tight spreads and excellent liquidity.

Summary

If you are unsure when CFDs are favourable or not, we recommend contacting a reputable online broker from Saxo Bank before engaging in any trading.For more information, visit the website here.

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