CFD trading could become a new lucrative passive source of income for you if you will follow the guidelines mentioned herein for your benefit. CFDs—or contract for difference—is a sub-industry in the investment markets where currencies, stocks and commodities are traded in a different style altogether.
In the CFD market, a trader can come into a contract with the concerned broker without physically purchasing or owning the underlying assets. Retail traders define their point of entry and exit in the CFD market, on an underlying asset, for a given period of time and the broker delivers a payout based on the difference observed in the movement of price action in that time for that particular asset. Presented below are five of the most important strategies that will make you a confident CFD trader.
(1) Dedicate Thyself to Technical Analysis
The right decisions on trading CFDs sprout from developing a good insight on the technical analysis of any given instrument. One must dedicate ample time everyday in studying the price action of the selected instrument(s). By keeping track of the calculated values of indicators like Bollinger Bands, EMA crossovers, PSAR, and then comparing them with the values of oscillators such as MACD, Williams %R, Stochastic, RSI, etc will help one come to an informed decision of placing a valid CFD trade with confidence.
(2) Push Your Profit Levels Using Leverage
Let us suppose for the sake of an argument that you want to trade Gold with a CFD broker with a provision of 500:1 on leverage. The current price of Gold is $1,000/oz and your speculation confirms the price rising to $1,200/oz in the next month. To place a CFD order for 10 oz. of Gold would require an upfront capital investment of ($1,000×10) $10,000 but you have a CFD trading account with a balance of only $1,000. By using leverage from your broker you can place a CFD trade for 10 oz. of Gold at only ($10,000/500) $200.
If the price of Gold matches your analysis and reaches $1,200/oz in a month then your placed trade will be valued at ($1,200×10) $12,000 and your total CFD payout will be ($12,000–$10,000) $2,000. Your equity just doubled with a 100% ROI in a month. Without leverage you would have had to stake your entire account balance, which is not a recommendation in the industry.
(3) Trailing Stop Loss with ATR Indicator
Trailing Stop Loss is not supposed to be used but exploited. It has the potential to hold your profits once the trade starts moving in your desired direction. When you’re absolutely sure that the trend is going to last for a long time, make use of the trailing stop loss at 3-5% for a week, 5-10% for a month and 10-15% for trends growing on a monthly basis.
The best guidance for setting the percentage value of the trailing stop loss is taken from the Average True Range (ATR) indicator. The ATR shows a range of price action in a trend derived by calculating the high and low prices (including gaps) over a specific period of time like 10 days, 20 days etc. Use this indicator in your strategy to set a profit-locking trailing stop loss percentage.
(4) Fundamental Analysis
No matter how good you are with technical analysis, you would still require the aid of a fundamental announcement to reap larger profits in a very short span of time. When your technical analysis for Gold shows an upward trend, make sure to check the fundamental news announcements for Gold. Any news from the Government on Gold prices persuades millions of retail traders to change their buying/selling decision in an instant which results in a sharp rise or fall in prices. Sometimes, news of drought might affect various commodities like soybean, corn, sugar etc. at the same time. Stay updated with news and you’ll never attract whiplashes in the market.
(5) Take Help from Professional Advisers
This is the most important tip. There are specialized analysts whose regular 9-5 job entails studying both the technical and fundamental analysis of currencies, stocks or commodities on an ongoing basis. They are loaded with precise speculative information which can only be accessed at an annual or a monthly subscription fee. However, most companies through promotional campaigns give this data for free for a week if you sign up with them. After a week you need to pay subscription fees to access the data further. Investing in this professional service would keep you away from anxiety, sudden trend reversals and whiplashes in the market at all times during your trading experience.
Profiting from CFD trading requires desire, self-discipline, organized planning and persistence. However, to reap the largest profits in the shortest time possible, please apply all the aforementioned five strategies consistently on all decisions you make at all times. This article was written keeping in mind only one thing—your success. If you’ve never traded CFDs before then choose a safe and trusted CFD broker like CMC Markets to start with.