The Most Popular CFD Trading Strategies

Being leveraged instruments, CFDs call for a well-planned approach to trading. The first step to this is learning popular trading strategies. This is particularly useful as it helps keep emotions at bay and make objective decisions even when the financial markets turn highly volatile. The CFD trading strategies you adopt will depend on your personality as a trader and risk tolerance. 

Let’s take a look at some of the popular CFD trading strategies to get you started. 

Breakout Trading

Breakouts occur after an asset has been trading within the support and resistance levels for a while. An increase in the volume of bullish or bearish trades may push the price out of this range. This price movement indicates a shift in market sentiment and creates opportunities for CFD traders. A breakout marks the beginning of a new trend, making it a viable entry point to ride a trend.

Price breakouts usually occur from horizontal support and resistance levels. However, another common type of breakout is trendline breakouts. Here, the price breaks out of the trendlines that act as support and resistance. For instance, when using the Bollinger bands indicator.

What Makes Breakouts Popular

• Breakout trading is favoured by beginner CFD traders since it has well-defined entry and exit points.
• Breakouts happen during high volatility and may lead to significant price swings, offering the opportunity to garner higher profits with this CFD trading strategy.

Range Trading

While breakout CFD traders wait for bulls or bears to take over and propel the price in a specific direction, range traders take advantage of range-bound price movements. Trading an oscillating market is a straightforward CFD strategy. You can speculate on price movements in either direction, since they are more predictable within the support and resistance zones.

What Makes Range Trading Popular

• Range trading allows CFD traders to capitalise on sideways price movements.
• Traders can use support (stop loss) and resistance (take profits) levels to set exit points to manage risk.

Caution: There is always a risk of breakout. Therefore, CFD traders must keep an eye on news events and market data.

Scalp Trading

Also known as scalping, this is a short-term CFD strategy. Scalpers take positions for a few seconds to a few minutes with the aim of capturing profits from tiny movements in asset prices. With this high-frequency strategy, traders open and close multiple trades within a single trading session that may last from 30 minutes to an entire trading day. The key to exceptional scalping is access to real-time data feeds and quick decision-making. Experienced scalpers may use algorithmic trading to optimise high-frequency opportunities. Traders attempt to accumulate tiny profits over time so that their gains overshadow their losses.

What Makes Scalping Popular

• Scalping is suitable for traders who love speed trading and have a robust exit plan.
• Brief exposure to price fluctuations means lower chances of market risks affecting trader success. 

Retracement Trading

A retracement or pullback is a short price move against the ongoing trend. This means a short-lived decline in prices during an uptrend or a short-term spike in prices during a downtrend. However, traders must confirm that the reversal is temporary and take positions accordingly. Traders use technical indicators, such as Fibonacci retracements, and chart patterns, such as flags, to identify entry points for this CFD trading strategy. 

What Makes Retracements Popular

• While breakout trading allows traders to ride a trend from the onset, pullback trading allows them to enter an ongoing trend.
• The strategy requires CFD traders to confirm the signals before entering, which reduces the risks associated with taking positions in volatile markets. 

Did you know: A pullback lasts only for a short duration, such as a few hours or days. It is usually a 5% to 10% change in the price. However, a market correction is a change of more than 10% and may continue for longer periods. Understanding the difference between the two is crucial to effectively trade retracements.

CFD Hedging

Traders use contracts for difference (CFDs) to hedge against the risks associated with unexpected market moves. For instance, gold and USD are considered safe havens, and traders might want to hold these assets for the long-term. However, short-term price pullbacks may affect the overall portfolio value or performance. To hedge against such risks, a CFD trader holding physical gold may also trade gold CFDs in the opposite direction. Hedging is also quite popular among forex traders to minimise the risk of price fluctuations in their chosen currency pair.

What Makes Hedging with CFDs popular?

• Hedging with CFDs allows you to optimise the overall portfolio against market fluctuations.
• CFD trading allows you to offset losses if the price moves against your speculation. This can be done by taking a relatively small CFD position in the direction opposite to your speculated market move.

While these are popular CFD trading strategies, they only give you a starting point. As you get more comfortable with trading, you may try other strategies. There is no one-size-fits-all in trading. Experimenting with different strategies on the demo account is key to selecting the best strategy for you. 

To Sum Up

• Learn the popular CFD trading strategies and test them on a demo account before applying in live markets.
• Breakout traders take advantage of opportunities created by the onset of a trend.
• Range traders optimise the opportunities created by small price movements in sideways markets.
• Scalpers open many small positions through the trading session to earn from tiny price moves.
• Retracements allow CFD traders to enter an ongoing trend.
• Hedging is the most popular CFD trading strategy to mitigate risks associated with positions in a speculated direction.

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