A trading strategy is a set of rules that determines your actions in the trading process. This is a step-by-step plan that will not let you get confused in case of force majeure. It is a course of action, which will ultimately lead to your goal. The absence of a well-thought-out trading plan and chaos in actions is a direct path to loss.

The overview will introduce you to the main types of CFD trading strategies. You will also learn the main components of a successful strategy and learn how to open your first trading positions in the real market. This article is for beginner traders who want to gain basic knowledge and are ready to put it into practice.

The article covers the following subjects:

What can be traded using CFDs?

CFDs are Contracts for Differences. You buy or sell an asset, essentially placing a bet on which direction the price will go. You do not become the actual owner of the asset, you gain or lose the difference between its current price and the price at the time of closing the transaction.

The list of available trading assets depends on the conditions of the broker. For example, with LiteFinance, you can earn on the following CFD assets:

Currency pairs

You can trade major currency pairs, exotic ones, and cross-rates, and more than 50 currency pairs with different levels of liquidity, volatility, and price trends.

Stock assets

You can find stock indexes and individual shares traded on popular stock exchanges, such as NASDAQ, NYSE, LSE, XETRA, EURONEXT.

Commodities

This group includes Brent and Crude oil, natural gas, and metals, such as gold, silver, platinum, and palladium.

Cryptocurrencies

Traders have access to more than 70 most popular cryptocurrency pairs, including payments systems’ payments, DeFi, and GameFi, as well as decentralized application development platforms, NFT.

Best CFD Trading Strategies

A good trading strategy:

• Shows sustainable growth, without deep drawdowns or sharp changes in the deposit curve.

• Has an optimal risk/reward ratio. The strategy should not be totally conservative; such systems could be used as supplementary ones. You should not also break risk management rules to increase your deposit fast. 

• Is resilient to market changes. A trading system should show roughly the same performance in any timeframe. Otherwise, you will have to constantly monitor and optimize it. It must be stable in case of force majeure.

Any trading strategy should be, first of all, tested on the chart history.

CFD long term trading

CFD long-term trading is a strategy that refers to the investment category. The position is open for a long time and can be held from several weeks to several months, or even years. The advantage is that you don’t have to monitor the trading chart all the time. The main drawback is additional swap costs. 

Main features of a long-term CFD trading strategy

• The timeframe is D1 and longer.

• The amount of deposit should be enough to withstand a long drawdown. Local corrections are ignored. The holding cost should also be considered. 

• Assets for long-term investment are stocks, stock indices, and cryptocurrencies. Currency pairs are rarely used, as their range of movement is limited by the monetary policy of central banks. 

Explaining Examples of CFD long-term trading

You enter a long-term buy position at point 1. Add up to the position volume at point 3, as the trend is clearly up. Close a part of the position at point 2, and the rest of the position is closed at point 4.

CFD short term trading

Short-term trading is an intermediate option between intraday trading and long-term investing. It involves holding a position from several days to several weeks. Any assets are suitable for trading CFD, the timeframe for analysis is H4-D1.

Explaining Examples CFD short-term trading

Short-term CFD trading allows you to implement any type of strategy, filtering out price noise and short-term fluctuations caused by the actions of market makers. Examples of CFD trading strategies:

• The position is opened at the beginning of the new trend when the market exits a sideways trend or reverses. The major tools are trend indicators, the supplementary indicators are oscillators and reversal chart patterns. 

• Trading in a sideways trend. The pip value in longer timeframes allows making profits from short price moves. 

• Swing trading. Enter a trade at the end of temporary corrections in the trend. 

When there is a strong price movement, short-term trading could turn into a long-term strategy.

CFD day trading

CFD day trading strategies suggest executing trades within the same trading day without rolling the position over to the next day.

Features of intraday CFD trading strategies:

• Any assets with high volatility are suitable for trading. You can profit from both intraday trend movement and local corrections within a trading day.

• The timeframe is Н1-Н4. 

• The number of trades entered in a day is from 5-7 to 12-15.

Explaining Examples of CFD day trading

• Trading a contract for difference within a channel. The price forms a channel with a median, to which the market tends to return most of the time. During the day, the price of an asset can pass from one channel boundary to another several times, periodically breaking through them. Trades are entered at the moment of a strong breakout of the channel border and the subsequent price reversal.

• Trading CFDs based on support and resistance trading, supply and demand zones, and trend lines. The day trader opens a position at the moment the price reverses at the key levels or exits technical zones. 

• Trading CFDs on corrections based on the Fibonacci levels.

CFD news trading

Fundamental analysis trading is based on a sharp short-term increase in volatility after the news release. For example, it could be financial reporting, changes in central banks’ interest rates, or announcements of the regulators.

Features of the CFD news trading:

• This is a non-indicator trading strategy that involves making a decision based on a comparison of the forecast and the actual data in the report.

• A strong movement appears when there is a significant discrepancy between the published data and the forecast.

• On average, it takes several hours to trade the news.

The danger of the fundamental factor influence is that at these moments, there are strong slippages due to a sharp imbalance between buyers and sellers, accompanied by an increase in volumes.

Explaining Examples of news trading

Based on the rise in manufacturing data, investors expect the NFP data to show a 10,000 job gain in a week. If their forecast comes true in a week, the USD rate will remain unchanged, since this increase is priced in the quotes. If the number of jobs increases by 50,000, the USD rate will go up.

CFD hedging

Hedging against risks could become a money-making strategy. Hedging implies opening buy and sell positions, of equal volume, for the same asset simultaneously. If one position yields a loss, the second one will yield a profit of the same amount. One can also open opposite positions for positively correlated assets or two positions in the same direction for negatively correlated assets (pair trading strategy).

Explaining Examples of CFD hedging

The strategy suggests that a short position is matched with a long one. If the positions are closed at the right time, one can make profits both from a sell and a buy simultaneously:

• The oil price is 100 USD. A trader enters a buy trade.

• The price reaches 105 USD and falls to 95 USD. Instead of exiting the losing trade, the trader opens a short position of the same volume. 

• The price falls to 90 USD, and there appears a strong reversal pattern. At this level, the trader exits the short trade with a profit of 5 USD.

• The price goes up and the trader exits the long trade with a profit at a level above 100 USD.

CFD position trading

CFD position trading is a type of long-term investment that involves holding a trade in a trend-driven market for a long time, ignoring local corrections. Unlike long-term strategies, in position trading, the trader should pick up long trends in both directions. In a long-term strategy, a trader holds a trade in a chosen direction for a long time. However, in position trading, a trade can reverse several times over a period.

Features of CFD position trading

• Most often, position trading is used in the stock market. In more seldom cases, position strategies could be applied to trading currencies in long-term trends.

• The timeframe should be long-term, such as daily, weekly, or monthly. 

• The strategy is mostly built on trend lines, strong levels, and fundamental analysis.

The advantages of position trading include high profitability and the absence of the necessity to monitor the chart all the time. Drawbacks are swap costs and the need for a large deposit that should withstand a deep local drawdown.

Explaining on Examples

The USDCAD daily chart displays a long-term uptrend.

A long-term strategy involves opening a trade at the beginning of a trend and holding the position until it ends (red line). Position trading involves a position reversal on its individual waves (blue lines).

Scalping CFD

Scalping is a high-frequency trading CFDs based on the fast entering and exiting trades in any direction.

Main features of scalping.

• Trades are held in the market from a few seconds to several minutes. If there is a good trend, you can get the most out of it.

• Timeframes are M5-M15.

• The strategy is suitable for high-liquid assets with high volatility. Scalping can also be used when the market is trading flat.

The most common tools are channel indicators, chart patterns, key levels and trend lines, and fundamental trading.

Explaining on Examples

Some examples of entering trades:

Any visible price move could be traded. The strategy is rather complex, as it requires maximum attention and the ability to quickly analyze the market. Furthermore, scalping is associated with a rather high risk.

Advantages of trading CFDs

1. Low initial deposit. LiteFinance requires a minimum deposit of 50 USD. Taking into account the leverage, from 1:10 to 1:500 depending on the instrument, this amount is enough for some assets to enter trades without violation of risk management rules. 

2. No restrictions for users. Unlike the stock market, CFD trading does not require the status of a “qualified investor”. Any person living anywhere in the world can become a trader. The exception is staying in countries where trading is prohibited, as well as the age under 18 years.

3. Low commissions. There are two commissions: a spread, which already includes the broker’s markup, and a swap — a commission for transferring a transaction to the next day. There is a small fixed commission on ECN accounts with a minimum spread.

4. The freedom of action. There is no income limit, profit depends solely on you. There are over 150 trading assets, including cryptocurrencies. One can make money at any time using both a desktop platform and mobile devices.

5. Safety. At the legal requirement of regulators, traders’ money is kept in segregated accounts separate from the broker’s accounts. Unlike cryptocurrency exchanges, broker user accounts and broker servers are not targets for hacking.

CFD trading risks

Trading CFDs, like any other, carries certain risks.

1. Trading risks. Risk of loss due to a wrong forecast. Misapplied tools, misunderestimating the strength of market makers or fundamentals, miscalculated trade volume or ignoring the need to use a stop loss. In other words, the risk of losing money through your own fault.

2. Psychological risks. The risk of losing money due to psychological imbalance: the desire to win back losses, unreasonable increase in position volume, etc.

3. Technical risks. The risk of a platform failure or Internet disconnection.

4. Partnership risks. The risk is that the broker will block the account, refuse to withdraw funds, etc. Therefore, choosing a broker should be taken seriously. For example, LiteFinance has an impeccable reputation and over 15 years of experience in the financial markets.

For successful trading, a trader must strictly adhere to the rules of risk management.

Importance Of Using Strategies

A trading strategy serves the following purposes:

• To understand trading goals and how to achieve them. The strategy allows you to set a goal and evaluate the feasibility of achieving it within a specific timeframe. If the goal is unattainable, you save time by revising and setting new ones. Understanding the main and intermediate goals allows you to think through a step-by-step plan and choose appropriate tools.

• To analyze the performance and improve trading results. You follow a clear plan and get results. Analyze statistics, find weaknesses, correct them and get a better strategy.

• To manage your time efficiently. When you have a plan, you understand how much time each stage takes. You know how much time you have for preliminary analysis and searching for confirming signals. You know how often you should check the trading chart, and so on. 

• To set up automated trading. According to the developed algorithm, you can order the writing of an Expert Advisor that will save you time by automating actions. If the EA is effective and you can confirm this with statistics, you can put it up for sale.

• To be confident in yourself. If you understand the algorithm of actions, it makes you confident in your decisions, positively affecting your emotional state. 

If you have a particular trading system, it will attract other traders to trust you their money by using PAMM accounts or copy trading services. The more investors copy your trades, the more you earn from commissions.

10 CFD trading tips

Below, you will read some tips that will help you minimize risks and reach a stable income. Some of them are obvious. But just what is obvious, the majority mistakenly ignores. The main advice is to gain practical experience and you will understand many points yourself. It is important not so much to strictly follow the rules as to develop your own trading style, in which you can comfortably and effectively achieve your goals.

1. Read more about CFD

Before you start, you should know at least the basic theory of CFD trading:

• Trading terms. How the market works, what affects pricing, and so on. 

• Trading tools. The functionality of the trading platform, types of indicators, the influence of fundamental factors.

• Risk management. The rules of calculating the position volume, stop loss size, the rules of exiting a losing trade, take profit management, and so on.

After you master the basic theory, move on to practice. Discover new trading instruments, get acquainted with risk management, and immediately train each step on a demo account. Try to enter new trades. You must learn to understand the market intuitively. The more you learn and the more hands-on experience you gain, the more likely you are to succeed.

 2. Make up a trading strategy

Your CFD trading strategy should answer the following questions:

• What asset will you buy/sell? Your strategy should consider the liquidity, volatility, and best hours to trade your asset. 

• How long will you hold your trade? Will you use scalping, day trading, or short-term investment? Trade holding time will determine the choice of the timeframe.

• What tools will you use? Will you apply trend indicators, oscillators, support/resistance zone, trendlines, chart patterns, market sentiment, or CFD news trading? What conditions will determine the trade entry? Which signals will be primary, and which ones – supplementary? What setting will be applied to your tools? 

• What volume and in what direction (buy or sell) will you open a position? What are target profits and what is the stop loss level?

• What are the conditions to exit the trade? What will you do if your forecast is wrong?

• What will you do in case of unforeseen circumstances?

Any strategy should first be tested on the price history. Examples of strategy testers and the recommendations on using them are in the following articles: MT4 Strategy Tester, Forex Simulator for Trading Strategies, FX Blue trading simulator. Another useful article is Rules for evaluating trading system and its equity.

3. Follow you CFD trading strategy

Your trading strategy is a well-thought algorithm, which has actions for all cases, including force majeure. Do not deviate from your system, stay calm and cool-headed and act carefully.

4. Analyze the markets to determine the best time to trade

Each asset has its best time to trade. For example, the Japanese yen is more actively traded in the Asian session, the Swiss franc – in the European one. Before the weekend or public holidays, trading volumes fall, after the weekend, on the contrary, they grow. This can be taken into account in the strategy.

5. Understand your total position size

Observe risk management rules:

• Monitor the total volume of all open positions. Monitor the amount of funds necessary to hold the position open on the trading platform to avoid stopping out your positions. 

• Be careful with the leverage.

• Do not use Martingale or any other risky systems unless you have calculated all possible risks.

The position volume affects the pip value, and so it influences the potential profit as well as the potential loss.

6. Set Stop-loss

The market is unpredictable. At any moment, the Internet may be disconnected, the price may turn in the opposite direction at the moment when you are distracted from the chart. Fundamental volatility can cause slippage. While you are trying to manually close the position, the price will go far in the opposite direction and you will face a great loss. A stop loss limits your risk by automatically closing the trade at the specified level.

7. Start out small

Do not immediately seek to earn the amount that you could get at an alternative job. Your task is to understand the principles of trading, how the tools work, and learn how to enter profitable trades. Even if the income is small, but stable, this is already a big step forward. At the very least, the fact that you’re doing well will be emotionally satisfying and motivate you to keep going.

8. Monitor your open positions

Even if you have set protective orders, a stop loss and a take profit, it is often easier to exit the trade manually than to wait until your orders work out. By controlling the chart, you can increase the take profit in a good trend, close a losing trade early, reverse the position, etc. You do not need to follow the price movement 100% of the time, the control time depends on your decision and the selected timeframe. For example, in the hourly interval in intraday trading, it is enough to follow the chart and the news for 10-15 minutes per hour.

9. Exit losing trades

You should not exit the trade at the slightest loss. However, you must not hold a losing trade for too long in the hope that the price will turn in the needed direction. You should understand the maximum acceptable loss for a trade. It is calculated based on risk management rules.

10. Use demo account

A demo account is your free tool for:

• Gaining experience. On a demo account, you can test indicators with different settings, practice chart patterns and key levels. You can use the demo account to develop and test your own trading systems. You can open as many demo accounts as you want and choose the amount of deposit.

• Testing trading strategies. Use a demo account to analyze the performance of your trading strategy under different conditions, for different assets and timeframes. 

You can open a free demo account without registration on the LiteFinance website.

How to get started with a CFD trading strategy

Suppose you are already familiar with the theory of trading, understand basic terminology, fundamental and technical analysis tools, and have basic skills in risk management. Let’s move on to practice, try to enter the first trades.

1. On the website main page, click on “TRADE FOREX/ACCOUNT TYPES/DEMO.”

2. Choose the financial instrument in the TRADE tab on the left. For example, it could be the cryptocurrency pair BTC/USD.

3. Enter the asset card. You will see a trading terminal with the price chart. In the menu on the right, specify the transaction parameters: position volume in lots, stop loss and take profit levels. Click the “Sell” or “Buy” button, depending on the trade direction you want to enter.

The opened position will be visible at the bottom in the Portfolio section. You can close the Portfolio tab by clicking on the corresponding tab.

If you have already gone through all these stages, tried entering trades, and you see that your knowledge is not enough, but you want to earn money right now, try copy trading service (social trading).

Social trading works in the following way:

• Sign up with LiteFinance, get verified, and top up your deposit.

• In the Client Profile, click on the COPY tab on the left.

• In the rating that appears, select the trader whose account you want to connect to. Focus on the level of risk, the number of copies, and profitability.

• Click on the COPY button. Set the copying parameters.

After connecting your investor account, the trader’s transactions will be automatically copied instantly to your account.

Final words

• A CFD strategy is the basis to start with to achieve your goals in the financial market. If a trader has no strategy, they will randomly enter and exit trades and lose all the funds eventually.

• The strategy helps to think over the ways to achieve the goal, set deadlines, and select the best tools. The goal may be a fixed profit, a gradual increase in the deposit, the development of professional skills, gaining experience, attracting retail investor capital, etc.

• The best trading system is the one that is most comfortable for you. You choose the level of risk yourself, based on your goals. You can use several trading systems at the same time.

• You can learn hands-on trading by connecting your retail investor account to professionals and copying their trades. 

Improve knowledge every day and practice it in trading. Only experience will give you the opportunity to master CFD trading.