CFD Trading Strategies: Short & Long Term Trading Guide

CFD trading strategies are a trader's direct route to harnessing the potential of market movements across a range of assets, from forex, indices and commodities to individual stocks.

With CFDs, you have the facility to speculate on price movements in various markets like stocks, commodities, and currencies, enabling participation without direct ownership of the underlying assets.

In this article, we’ll help you learn about CFD trading strategies. From the rapid-paced world of day trading, where positions open and close within a single trading day, to swing and position trading, which capitalizes on sustained price movements. And, to add to your arsenal, we'll explore strategies of market analysis and risk management for a complete CFD trading system.

Understanding CFD trading Strategies

CFD trading strategies are methodologies traders use to try and predict market direction with high accuracy. 

Think of them as tailored approaches that help traders learn how to make informed decisions about when and how to enter and exit CFD positions, with the ultimate goal of getting the most out of your money by maximizing profit while managing risk. These strategies involve a combination of market analysis, risk management techniques and emotional discipline.

Whether you are a scalper looking for quick profits, a swing trader interested in profiting from price patterns, or a position trader with a long-term outlook, this article will introduce, explain, and provide expert suggestions to Forex trading strategies that can be tailored according to your personality.

The Importance of a Trading Plan

One of the best-known trading idioms is ‘Plan the trade and trade the plan’. 
Having a trading plan helps you maintain discipline, encourages consistency, and allows for the objective analysis of your trading actions and outcomes.

Without such a plan, traders can easily be swayed by emotions, leading to impulsive decisions and inconsistent trading. This lack of direction not only increases the likelihood of unnecessary losses due to hasty or ill-considered trades but also hampers the ability to learn from past trades and improve over time. 

Essentially, trading forex, stocks or any other CFDs without a plan can turn what should be a strategic endeavor into a series of random bets or following tips with a hugely increased risk of loss.

Components of a Successful Trading Plan

Building a CFD Trading Plan

In order to build your own trading plan, you need to add in all the components mentioned above. Here are a series of questions you can pose to yourself to start writing down how your strategy should work.

Goal Setting:

What specific financial goals am I aiming to achieve through CFD trading?
How will I quantify success in my trading activities, and over what time frame?

For example, if you have money that you don’t need for living expenses or savings and open a $10,000 trading account, you might set a goal to achieve a 10% return over three months. This specific target provides a clear direction for your trading activities and helps measure your success.

Risk Assessment:
What level of financial risk am I comfortable taking on each trade?
How much of my total money in my account am I prepared to lose on a single trade?

For instance, if you decide you can risk 2% of your account on a single CFD trade, it means you're willing to accept a $200 loss on a $10,000 account.

Strategy Selection:
Which CFD trading strategy aligns with my financial goals and risk tolerance?
Am I looking for short-term profits or long-term gains, and which strategies cater to this?

For instance, if you aim for short-term gains, you might opt for day trading forex, where you open and close positions in the currency market within the same trading day.

Entry and Exit Rules:
What specific market conditions or technical indicators will signal me to enter a trade?
What criteria will I use to exit a trade, and how will I implement stop-loss orders to protect my positions?

For example, you may use technical indicators like moving averages and decide to enter a forex trade when a short-term moving average crosses above a long-term moving average (a "golden cross"). Your exit rule might be setting a trailing stop at a certain percentage below the current market price to capture profits.

Position Sizing:
How will I determine the size of each CFD position to ensure I stick to my risk management rules?
What method will I use to calculate the position size that corresponds to the predetermined risk per trade?

For instance, if you're comfortable with a 2% risk on your $10,000 trading account, and your chosen CFD trade has a stop-loss set at 50 points below your entry price, you'd adjust your position size so that if the stop-loss is hit, you'll only lose $200.

Trade Documentation and Review:
How will I record the details of each trade, including strategies used, entry and exit points, and trade outcomes?
What routine will I establish to regularly review my trades and overall trading plan for continuous improvement?

Regularly review your journal to evaluate your trading performance, how much spread you paid, identify patterns, and make adjustments to your CFD trading plan.

Short-Term CFD Strategies

1) Day Trading and Scalping

These are two popular short-term trading strategies in the world of CFDs as well as broader financial markets that tend to be the first choices for what to learn among beginners.

Day Trading

This involves opening and closing positions within the same trading day. The objective is to profit from intraday price movements and, by definition, means not holding positions overnight. Day traders rely on tips, news or data releases, technical analysis, price patterns, and chart indicators to make quick decisions. The same techniques can be employed in ‘swing trading’, with the only difference being that trades can be held for multiple days or weeks instead of being closed on the same trading day.



A day trader will usually focus on only a handful of CFDs because monitoring too many would be overwhelming and lead to missed opportunities. Another way to day trade is to compile a list of CFDs conforming to the trader’s chosen day trading setup and then monitor and edit the list over time.

Day traders tend to work only with a broker that offers tight spreads because the spread will be paid more frequently because of the greater number of trades placed.

Scalping

Scalping is an even more short-term approach, where traders aim to profit from tiny price movements within minutes or seconds. Scalpers take advantage of market inefficiencies and often make numerous trades in a single day.

A scalper will often focus on trading just one or two CFDs because a specialist knowledge of how the market tends to move and detailed knowledge of recent price action, including key price levels, is needed for the rapid trading that scalping requires. 

This narrower focus also simplifies their risk management, allowing for close monitoring of trades. Additionally, by selecting only a couple of CFDs, a scalper can ensure they are working with highly liquid assets with a tight spread, which is critical for the quick execution of trades at desired prices, minimizing slippage.

2) Range Trading

Range trading is a trading strategy that thrives on the predictable ebbs and flows of financial markets. It's based on the idea that markets often move within established price boundaries or trading ranges due to a variety of factors, such as investor sentiment, economic data, or geopolitical events. Markets tend to enter range-bound conditions when there's a balance between buying and selling pressure. 

Range Trading with Support and Resistance

During these phases, price levels tend to remain within a defined range, with a visible upper boundary known as resistance and a lower boundary called support, together known as support & resistance (S&R).



S&R are fundamental to range trading. Support represents a price level where demand is sufficient to prevent further decline, and resistance is a level where selling pressure slows down price appreciation. Traders look for these support and resistance levels to identify the trading range and possible entry and exit positions.

Range traders aim to profit from the repetitive nature of these price movements. They buy when prices approach support and sell when they near resistance. The strategy relies on the expectation that prices will remain within the established boundaries. Traders use technical indicators, chart patterns, and trend analysis to identify potential entry and exit points.

Range trading can be appealing for those who prefer less volatile markets and are comfortable with shorter-term trades. 

3) News Trading

News trading is a strategy that capitalizes on the volatility induced by significant news events in financial markets. This approach involves making swift trading decisions based on the immediate market reactions to unexpected economic data releases, geopolitical events, company earnings reports, or central bank tips and announcements.

News events are inherently volatile due to their potential to challenge or confirm prevailing market sentiments. Unanticipated news can trigger rapid and pronounced market reactions as traders scramble to adjust their positions. High-frequency trading algorithms further magnify these price fluctuations.

During news trading, traders employ various strategies to seize opportunities in the dynamic environment created by these news releases. A popular strategy is known as the straddle.



Markets will often move inside a tight trading range ahead of important news releases as traders await the result of the news before making their next move. Straddle traders place both buy and sell orders just before a news release near the top and bottom of this range, positioning themselves to profit from whichever direction the market ultimately moves.

News trading can yield substantial short-term rewards but also carries high risks because any trade incurring a loss can be hard to exit when the market is moving fast, and market spreads tend to widen when there is thin liquidity before a news event.

4) Hedging

Hedging is a risk management strategy employed in financial markets to protect investments from adverse price movements. It involves taking offsetting positions that are intended to counterbalance potential losses. Hedging can be applied to a wide range of assets, including stocks, bonds, commodities, and foreign exchange.

How Does Hedging Work?

Hedging typically involves two main positions: the primary position, which is the original investment that requires protection, and the hedging position, which is the secondary investment aimed at mitigating potential losses. These positions should have a negative correlation, meaning that when one gains, the other loses.

Because so many markets and indices can be traded as CFDs, they are a very versatile tool for hedging. Additionally, since CFDs are traded using leverage, less of your capital needs to be tied up in the hedge than trading underlying assets like stocks, reducing the opportunity cost of placing the hedge.

The following diagram shows the ideal use of a hedge, where the line in the chart represents the share price of what you are hedging and the dashed vertical lines represent where the hedge is added and removed. 

You can see the hedge was put in place as the share price dipped, meaning the gains from the hedge offset the loss from the shares. Then as the share price rebounded, the hedge was removed, meaning all gains from the share price were not offset with losses in the hedge.

Why Do People Hedge?

The primary purpose of hedging is to reduce or eliminate the risk associated with price fluctuations. By holding offsetting positions, investors can limit their exposure to market volatility. A variation on this idea is to use hedging to lock in existing gains. For example, an investor who has profited from a stock's rise may hedge to ensure those gains remain intact, even if the stock's price declines.

Hedging also allows investors to diversify their portfolios. By holding both long and short positions, they can benefit from a balanced approach that cushions the impact of adverse price movements in one asset class.

Hedging Strategies

Here are some tips on how to go about implementing a hedge:

Options: Buying put options or selling call options can protect against downside risk.

Pairs Trading: This strategy involves taking long and short positions in related securities to capture relative price movements.

Futures Contracts: Futures can be used to hedge against adverse price movements in the underlying asset.

Portfolio Hedging: Diversifying a portfolio with negatively correlated assets can help protect against market-wide downturns.

CFD hedging: The above strategies can also be implemented with the use of CFDs instead of the underlying instrument. For example, a Swiss investor with shares in Roche, Novartis and UBS might sell short an SMI index CFD instead of shorting SMI index futures or buying a put option on SMI futures. 

Long-Term CFD Strategies

1. Position Trading

Position trading is a long-term CFD trading strategy where traders maintain positions for an extended period, often from months to years. This approach focuses on identifying and riding major trends within financial markets. This approach is more akin to investing but usually does not consider things like dividends, focusing only on capital appreciation.

Imagine a trader who observes a long-term uptrend in Apple (AAPL) stock. They believe this uptrend will continue for the foreseeable future due to strong fundamentals and a positive industry outlook. The trader enters a long CFD position to benefit from the expected long-term price appreciation.

2. Breakout Trading

Breakout trading is a strategy that seeks to profit from significant price movements when an asset's price breaches a well-defined support or resistance level. Traders anticipate a surge in price momentum following the breakout.

Consider a stock that has been trading within a range of $50 to $60 for several months. A trader employing a breakout strategy might enter a long CFD position if the stock's price rises above the $60 resistance level, expecting the breakout to trigger a sustained uptrend.

3. Pullback and Retracement Trading

This strategy involves identifying trends and waiting for episodes when the price moves in the opposite direction the main trend known as pullbacks. Traders aim to enter positions during these temporary reversals to get a better entry point while anticipating that the broader trend will resume.

Market Analysis for CFD Trading

While many traders start off by following tips or trading on gut instinct, you really need a way to analyse the market. There are two main approaches to market analysis: technical analysis and fundamental analysis, both offering unique perspectives on market dynamics. Additionally, some traders opt to combine elements of both methods for a more comprehensive view.

1. Technical Analysis

Technical analysis involves the study of historical price charts and patterns to forecast future price movements. It is based on the idea that past market behavior can provide valuable insights into future trends. 

Traders using technical analysis examine price charts, technical indicators (e.g., moving averages, Relative Strength Index), and patterns (e.g., head and shoulders, double tops) to identify entry and exit points. 

2. Fundamental Analysis

Fundamental analysis delves into the underlying factors that influence the value of financial assets. This approach focuses on the examination of economic, financial, and political data that may impact asset prices. Brokers often include a news portal or an economic calendar to keep you abreast of fundamental updates.

For example, in forex trading, fundamental analysis considers factors such as interest rates, economic indicators, and political events. In stock trading, it may involve studying a company's financial reports, earnings, and overall health of the industry. The goal is to evaluate the intrinsic value of an asset and whether it is under or overvalued in the market.

3. Combining Technical and Fundamental Analysis

Some traders opt for a holistic approach by combining elements of both technical and fundamental analysis. The idea is that when both types of analysis align, the probability of success increases.

A simple way to employ both methods is to use technical analysis to identify potential entry and exit points based on price charts and patterns and then utilize fundamental analysis to consider whether broader economic conditions and events align with the technical signals.

Risk Management in CFD Trading

Efficient risk management not only protects your trading capital but also ensures a disciplined and systematic approach to your trading activities. Since CFD accounts involve leverage, which magnifies potential profits and losses, it is especially important to manage risk. There are several key elements to consider in risk management:

Understanding Position Size

Calculating the right position size is a crucial component of risk management in CFD trading. It is based on a careful assessment of your risk tolerance, account size, leverage ratio, and the distance between your entry point and stop-loss level. Position sizing ensures that you expose only a defined portion of your capital to risk on any given trade.

The following is a position sizing cheatsheet

Example
You have a $20,000 trading account
You are comfortable risking 1% of your capital on a single trade
You're eyeing a CFD position on a stock with an entry price of $50 
and a stop-loss at $45, which is 10% below your entry

To determine the appropriate position size, you would calculate the maximum allowable risk.

1. Maximum Risk = 1% of $20,000 = $200
2. Entry Price - Stop-Loss Price = $50 - $45 = $5

With a maximum allowable risk of $200 and a risk of $5 per share, you can calculate the position size:

Position Size    = Maximum Risk / Risk per Share
     = $200 / $5
     = 40 shares

Margin Requirement (100:1 leverage ratio) = (No. shares x Share price) / Leverage ratio
     = (40 x $50) / 100 
     = $20

In this example, you would enter a long CFD trade for 40 shares of the stock to ensure that if the stop-loss is triggered, you limit your potential loss to 1% of your trading account, or $200. This approach to position sizing helps safeguard your capital while allowing you to participate in the market's potential gains.

Managing Risk with Stops and Limits

Stop-loss and take-profit orders are vital tools for managing risk in CFD trading. Stop-loss orders specify the price at which you're willing to exit a trade to limit losses, while take-profit orders set a target price for realizing profits. By using these orders, you establish predefined risk and reward levels, ensuring that each trade adheres to your risk management strategy.

The Golden Rule: Never Add to a Losing Trade

This rule emphasizes the importance of not increasing your position size or making additional trades in an attempt to recover losses from an existing losing trade. This approach can lead to significant capital depletion and is generally considered an undisciplined and high-risk behavior.

Trade Monitoring and Review

Institutional traders have a whole back office and compliance department to monitor their trades, but retail traders don’t have that luxury. 

Effectively monitoring and reviewing your CFD trades is a fundamental aspect of maintaining a successful retail trading strategy. This involves keeping a watchful eye on open positions, as well as regularly reviewing and adapting your overall trading strategy. Brokers can sometimes make mistakes, too, so be mindful of when and at what price levels your positions open and close at.

Monitoring Open Positions

Regularly assess your positions for any signs of significant price movements (in your favor or against), news events, fees, or indicators that may require action. Keep an eye on your stop-loss and take-profit orders to make sure they are appropriately placed and up to date. Depending on your trading style, you may need to check positions hourly, daily, weekly, or any interval that aligns with your strategy.

Review and Adapt Your Strategy

Regularly reviewing your strategy allows you to assess its effectiveness and adapt to shifting market dynamics. Analyze your past trades to identify patterns, both successful and unsuccessful. Take note of your risk management practices and whether they need adjustment. 

Consider whether your entry and exit criteria remain relevant and whether you should explore new assets or markets. Continual self-assessment and learning are integral to improving your trading strategy.

CFD Trading Strategies Recap

CFD trading, while offering opportunities for profit, also involves inherent risks that require a concise strategy to bypass. 

The key is to make informed decisions routed in a well-defined CFD trading strategy, stick to your trading plan, and approach the markets with discipline and patience. 

FAQs on CFD Trading Strategies

1. How long can you hold a CFD position?

CFDs are designed for both short-term and long-term trading. There is no fixed time limit or expiry for holding a CFD position, as it depends on your trading strategy and objectives. Some brokers might have limits, but normally you can hold CFD positions for as long as you wish, provided you can meet any margin requirements and financing costs.

2. Is there a CFD time limit?

No, there is no specific time limit or expiry for holding CFD positions. The duration of your CFD trade is entirely up to you. You can choose to hold a position for minutes, hours, days, weeks, or even longer, depending on your trading strategy and market conditions.

3. What costs will I incur holding a CFD long term?

When holding CFD positions long-term with brokers, you may incur financing costs, swaps or overnight fees. These costs are associated with the leverage provided by the broker and are typically calculated daily based on the notional value of the position and the applicable interest rates. Be sure to check with your broker for their specific financing rate structure.

4. Is CFD trading taxed?

Taxation of CFD trading profits varies by country. In the UK, for example, profits from CFD trading may be subject to capital gains tax (CGT) if they exceed your annual tax-free allowance. However, CFD trading does not incur stamp duty in the UK. In the United States, CFDs are not legal for retail traders, and the tax treatment may differ for other countries. Brokers usually leave it to you to report taxable earnings so it's best to consult a tax professional or your local tax authority for specific guidance. 

5. What is the best strategy for CFD trading?

There is no one-size-fits-all "best" strategy for CFD trading, as it depends on your trading style, risk tolerance, and market conditions. Common strategies include day trading, swing trading, position trading, and various combinations of technical and fundamental analysis. The best strategy is one that aligns with your financial goals and suits your risk appetite and experience level.