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CFD Trading Strategies |
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For those of you who are not familiar with the term CFD, it stands for Contract for Difference.
This is a derivative, which means that you are not trading the actual share, commodity, index or currency. The price of the CFD is, however, based on the price of the actual underlying instrument. You buy or sell CFDs through brokers or market makers.
CFD trading is sometimes referred to as the professional’s choice, with spread trading termed by some as being good only for beginners. There is little ground for such a view. Some professional traders in fact prefer spread trading, because the profits are not subject to capital gains tax* in the UK or Ireland.
With CFDs you do have to pay capital gains on your profits, however profits/losses can be offset against other trading profits/losses which are also subject to capital gains tax. For example, if you make a profit with your share trading but make a loss on your CFD trading then you can offset the losses against the profit in order to reduce your tax bill.
If you are used to traditional share trading through a broker then, for many investors, there is little reason why you should change your trading style when you switch to CFD trading. Since the price of the CFD is based on the market price for that share, your CFD trading strategies should be much the same as when you trade physical shares.
Of course CFD trading, like spread trading, is leveraged and carries a high level of risk. With a leveraged product, losses can exceed the initial funds that you invested.
So whilst you might stick with the same trading strategy, before making any trades ensure you understand the risk. And like all trading, only invest using capital you can afford to lose.
As with traditional share trading, the important thing here is to actually have a strategy and to follow it, even if your gut feeling tells you differently.
Your strategy should include when to enter a trade, the size of your position, the percentage of your trading fund to risk on an individual trade and when to exit the trade.
CFD Trading Strategies - Entering a Trade
Your strategy here could be as simple as using the 14-period moving average to time your entry. You could also use a combination of indicators, such as a moving average and a momentum indicator. Some traders advise against using more than three indicators to time market entry, this is because you are more likely to get conflicting signals from the various indicators.
CFD Trading Strategies - Position Size
One of the advantages of CFD trading is that with CFD brokers like CMC Markets you can trade in very small quantities of a trading instrument.
CFD Trading Strategies - Trading Risk
The old saying ‘never put all your eggs in one basket’ is especially true when it comes to trading. Diversification is imperative if you want to minimise risk. Many experienced traders will never risk more than 2% of their trading funds on a single position.
CFD Trading Strategies - Exiting a Trade
Knowing when to exit a trade is as much an art as it is a science. Hanging on to losing trades is probably the reason for more losses than any other trading ‘strategy’.
This is why you need to have a rule stating exactly when you should exit a trade. This could be as simple as ‘when the price drops by more than X%’ or ‘when the price increases by X% percent’.
CFDs and spread trading might not always be suitable for all investors so seek impartial advice where appropriate.
* As per current UK and Irish tax law. This might differ/change subject to your circumstances.
Where to Trade CFDs
You can trade CFDs online with:
Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
CFD Trading Strategies, last edited by F. Lawson , 09-Dec-11.
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Warning: Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
The contents of this website are for information purposes only and not intended as a recommendation to trade nor does the content constitute investment advice. All reasonable efforts have been made to present accurate information. Neither CFDs-Online.com nor any contributing company or individual accepts any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
* Tax law is subject to change. It can also differ if you pay tax in a jurisdiction other than the UK.
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