Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

CFD trading strategies you should know

Learn about popular CFD trading strategies that can be applied using leverage to the financial markets, whether you’re interested in day trading, hedging or holding long-term positions. This guide explores CFD trading strategies for beginners and professionals alike.

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4 CFD trading strategies

Below, we explore four different CFD trading strategies that will help your understanding of the financial markets and the benefits of contracts for difference, as well as the risks involved. All of the following strategies require the use of leverage on our platform, which means that you only have to deposit a percentage of your full trade value to gain exposure to the markets. This comes with a high level of risk, which we will explore further on.

To get started, why not practise your CFD trading strategies on our risk-free demo account with virtual funds?

1. CFD day trading

Intraday trading is a popular short-term strategy that involves entering and exiting a trade with the aim of closing out the position by the end of the day. This is with the intention to profit from small but frequent price movements. As you are required to monitor price charts meticulously for this strategy, day traders often focus on price action and technical analysis rather than fundamental factors that may be affecting a financial instrument.

Example:

Let’s assume that a trader wants to speculate on a major currency pair such as EUR/USD, as this is known for having high liquidity and a narrow spread, qualities that are valued among short-term traders.

A day trader may study the support and resistance levels from the previous trading day in order to decipher possible reactions that the price may take when it arrives at those identified levels. They then open a CFD position at the buy price of 1.1710 at the market open. A successful day trade would involve the trader opening and closing multiple similar positions like this one throughout the day, and if the price were to rise slightly to 1.1750, he could then close out all positions before the market shuts. This would result in multiple profits from each position.

However, if the price continually slips to below 1.1700, for example, and is not rising back above the initial buy price, the day trader may decide to close out the position for a small but fairly manageable loss. This is an example of an unsuccessful CFD trade.

2. CFD news trading

Trading the news is another short-term strategy that involves staying up to date with economic announcements and market expectations for the near future. News traders need strong decision-making skills and to be able to make quick judgements for potential trading opportunities. This is a particularly useful strategy for volatile markets that react quickly to external factors, such as oil, indices, certain stocks and currencies.

Example:

Let’s take an example of the 2016 referendum for the UK to leave the European Union (Brexit).

Given the controversial nature of the vote, a trader is looking to take advantage of fluctuating GBP prices. Before the first exit poll is released, our CMC GBP Index is trading at a buy/sell price of 1,007/1,006. The exit poll emerges, and it shows that a higher percentage of citizens are voting to leave, causing the trader to assume that the pound sterling will fall in value rather than rise.

The trader decides to take a short CFD position and sell the instrument at the sell price of 1,006. His prediction is correct and due to the shock of the unexpected news, GBP’s value suddenly drops against other currencies. The more points the instrument continues to move lower, the more profit he will make on the short side.

However, remember that prices don’t always continue the follow the path they originally take after a news release. For example, the pound sterling plummeted in value following the Brexit outcome but rallied a few months afterwards, showing that market reactions can reverse and head in an entirely different direction. Therefore, a news trading strategy is often relied on in the short-term only.

3. CFD hedging

Financial hedging is a strategy that helps traders to offset risk within their trading portfolio. Some examples of effective hedging strategies include pairs trading and the use of derivatives, such as forward contracts. You can also trade on safe haven assets as a hedge, such as gold, certain currencies, government bonds, and defensive stocks, as these financial instruments could be considered less vulnerable to negative market shocks than others.

Example:

Let’s take an example of a pairs trade using CFDs.

Assume that an investor owns 1,000 Tesla shares on a separate stockbroking account and is concerned that the company’s share price will drop after a recent poor earnings report. He decides to short sell an equal of 1,000 Tesla shares using a CFD trading account in the hope that any losses on the shareholding position may be offset by a successful short trade.

Assume that Tesla’s share price does indeed fall by 10%. Although the trader’s shareholding account is now worth less in value, the trader has made a 10% gain on his CFD trade, and is able to buy the stock back at a lower price if he wants to. This is an example of a successful hedging strategy.

4. CFD position trading

Position trading is similar to taking an investment-like buy and hold approach. Position traders can hold trades for months or even years, ignoring minor price action and focusing on long-term trends and overall movement. These types of traders tend to rely on fundamental analysis indicators, such as macroeconomic trends and historical price patterns.

Example:

Let’s say that a trader wants to hold PayPal stock for a long duration, as he sees the value in this blue-chip stock and thinks that it will increase steadily over time.

He buys a number of CFD units for PayPal at a price of $275. Position traders do not need to apply technical analysis or monitor price charts often; instead, he may choose to perform company analysis intermittently to make sure that the stock is still on track to increase. He could do this by calculating P/E ratios, forward earnings and analysing dividends that the company provides in its financial reports. Fast forward nine months and PayPal is now trading for $330. If the trader is happy with this figure, he can now close out his position with a $55 profit.

Remember that when carrying CFD positions overnight, as position traders do, you will incur holding costs. You will also be subject to commission fees if holding shares for a long period of time. We explain more about these further on in the article.

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How to get started with a CFD trading strategy

  1. Open a CFD trading account. You can either start with a live CFD account if you want to deposit funds and trade on the live markets straight away, or you can open a risk-free demo CFD account to practise first with £10,000 of virtual funds.
  2. Build your knowledge. Consult our library of CFD articles to find tips, strategies and best practises for CFD trading.
  3. Browse our product library. We offer CFDs on over 11,000 global instruments, including shares, forex, commodities, indices, treasuries, ETFs and our exclusive share baskets.
  4. Decide on a strategy. Choose whether you want to take a long position to buy and hold your chosen asset or take a short position and sell.
  5. Assess your level of risk. Leverage is required in order to trade CFDs, which can magnify losses as equally as it can bring profits. Apply risk-management tools such as stop-loss orders to protect your capital as much as possible.

CFD trading tips

An effective CFD trading strategy can be difficult to master, so here are some tips that may come in handy for your next trade:

  • Build a trading plan and stick to it.
  • Analyse the market that you are trading on or interested in before opening a position.
  • Ease yourself into trading and know your limits.
  • Build on your knowledge of CFDs and derivative products in general.
  • Assess how much capital you are willing to risk.
  • Monitor your open positions using both technical and fundamental analysis.

CFD risk-management

There are risks to consider when opening a CFD trade, as mentioned briefly throughout this article.

In particular, derivative trading requires the use of margin/leverage, which allows you to open a much larger position using borrowed funds in order to gain wider exposure to the financial markets. You are only required to deposit a fraction of the full trade value. While this is a benefit of CFD trading, it can also be seen as a risk, as it enhances the possibility of capital loss. Read more about margin in trading​ to learn how to utilise it effectively and safely.

Many traders choose to use risk-management controls when placing a buy or sell CFD position, which you can apply directly in the order ticket. These can include traditional, trailing or guaranteed stop-loss orders, depending on the level of risk you want to take. You could also look out for position sizing, rather than trying to take on a CFD position with an impractical number of units, consider what percentage of your total account value you are putting at risk with each trade.

Read more in our guide to trading risk-management​.

What are the costs of trading CFDs with us?

Capital gains tax

Unlike spread betting, which is tax-free in the UK and Ireland*, you must pay capital gains tax when trading contracts for difference. However, both products are exempt from stamp duty, and you also don’t have to pay foreign exchange fees when trading on shares.

Holding costs

At the end of each trading day, open positions may be subject to CFD holding costs​, if carrying positions overnight. This is common for medium and long-term traders, but day traders aim to avoid these. The holding cost can be positive or negative depending on whether you have a long or short position. Please note that forward contracts are not subject to holding costs.

Commissions

Commissions only apply to trading on individual shares. Each time you enter and exit a trade for a stock, your account will incur a commission charge​, which varies depending on the country where the share originates.

Market data fees

To view our price data for certain instruments on the platform, you will need to activate a market data subscription​. This will be charged to your account monthly, and the fees depend on the country that you are accessing the data from (as well as applicable tax).

Click for a more detailed summary of our CFD costs​.

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FAQS

What is the best strategy for CFD trading?

There isn’t a definitive “best strategy” when it comes to CFD trading, as this will depend on each individual trader’s personality and goals, as well as risk-management tolerance. Take a look at our guide to popular trading strategies that you can apply to contracts for difference.

Is CFD trading easy?

No, CFD trading isn’t easy, even for professional traders. CFDs are complex investment products that present a high risk of capital loss, and therefore, you should look into risk-management controls in order to minimise this risk as much as possible. Read our guide on “what are CFDs?” for more information.

How do you successfully trade CFDs?

When trading CFDs in the financial markets, there is no guarantee of success. However, you can use our CFD trading library to find out definitions, tips and examples that will help you to get started with the derivative product.

Can you trade CFDs in the long term?

It’s possible to trade CFDs in the long term by adopting a buy and hold approach. Traders will usually do this if they think that an asset’s value will increase over a long period of time, which is known as position trading.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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