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20 Best CFD Trading Strategies

 

Overview

Randomly opening and closing trades on CFDs will not allow you to make a profit, it may lead to substantial losses. When trading CFDs, it is imperative to make use of a coherent strategy. There are some basic paradigms that traders will follow while trading and it is important to consider trading as a business, where the trader is consistent about improving and making profits.

 

 

There are numerous trading strategies that can be used when trading CFDs, but they can be broken down into two distinct categories namely fundamental strategies and technical strategies.

Fundamental traders are precisely what they sound like, they examine the fundamentals of the trade. These trading strategies are used when conducting long-term trades as opposed to active trading which is conducted within the span of a day, which is what technical trading strategies involved.

Technical trading strategies can also be further broken down into two distinct types namely discretionary and mechanical.

 

 

CFD trading is something that can be a financially rewarding experience, however, as high as the potential profits may be, so are the risks involved. It is vital for traders to ensure that they garner a keen understanding of online financial market trading methodologies and strategies.

When considering trading in global financial markets as a business, traders must ensure that it involves a proper plan along with determining the risk to reward ratios by calculating the profitability of their trades.

Should their profits not grow, traders need to reconsider their trading tactics to see where the fault lies, and how they can go about correcting it before encountering further loss. There is no point in trading when traders continuously lose money without analyzing what they may be doing wrong and improving on it.

However, it is also imperative to know that it is not possible to trade profitably all the time. There will be losing trades that traders place. The important thing which remains is that traders look at their overall profitability levels instead of concentrating on single investments or trades.

 

Rangebound (Range) Trading

There are numerous mechanical trades that end up being a kind of range trading. They may not be interesting as they are entirely mechanical. They involve rules that traders set and subsequently forget about as it is done automatically.

When the CFD hits a certain price, the rule is to buy and when it reaches another range, the rule is set to sell.

Where discretionary trades are concerned, however, there are more interesting, dynamic, active factors involved. They revolve around the idea that the trader is armed with a wide variety of analytical tools.

There are uniquely positioned to identify emerging trends and to act on them to open and close trades. There are hundreds of different analytical tools which can be used including the Fibonacci Sequence, Wave Theory, and numerous others.

The trader’s goal in using these tools is to provide them with a better perspective on future price movements, allowing them to trade accordingly.

 

Breakouts

This is a common trading strategy that is used by numerous traders and it allows the trader to identify a key price level for a certain financial instrument, CFDs in this case. As soon as the price reaches the key level that the trader has set, they either buy or sell, depending on which of the two is appropriate to the current and prevailing trend.

The key to success in using this strategy to buy CFDs is to avoid trades when there are no clear signals from the market regarding the direction of the overall trend. Traders must have a clear and concise understanding of the trend in the market along with its direction to employ this strategy successfully.

 

Contrarian Investing

This CFD trading strategy makes use of market timing. The basic principle is that the trader plays on the fact that trends will not last infinitely. At some point, they are set to end and as soon as the financial instrument has seen its price trending lower, the trader picks a point that they believe will be near the end of that trend.

The trader then buys in anticipation of a move in the opposite direction, with the same which can be done in reverse by short selling the financial instrument which shows a price increase, anticipating that the price direction will change.

Traders can use Wave Theory and other similar analytical tools to help them identify when such shifts are more likely to occur in the market.

 

Trend Following

This CFD strategy is one that is over a longer-term which bears at least a few traits in common with other long-term strategies concerned with buying and holding an instrument. Traders often hold a CFD for a period of weeks and even months, as they ride a price trend until it concludes.

Wave Theory will assist traders substantially as it helps them to identify a trend, however, in this case, traders are not interested in actively buying and selling during the retrenchments which inevitably occur as prices move higher.

Instead, traders will ride these out and close their position when their analysis indicates that the wave has reached its ultimate peak.

 

Rebate Trading

There are numerous traders that make use of the rebates which are offered by CFD brokers. These traders are less concerned with the actual amplitude of price movements than they are about cashing in on the rebates that brokers offer. This is where most of the trader’s profits come from.

Rebates offer traders a substantial amount of cashback after they complete a certain volume of trades over a provided period; the more trades are executed, the greater the rebates that the trader can earn.

 

Scalping

This is one of the most popular active trading strategies being used as a technical strategy. It employs the use of a technical analysis that focuses on the past price movements of instruments, using this historical information to predict the future movements of the CFDs, allowing traders to set up their trades.

Even though ‘Scalpers’ make use of technical analysis, they can still be either discretionary or mechanical traders. Scalpers can also choose whether they want to manually trade throughout the day, waiting for the signal to launch their trade, or they can use profitable Expert Advisors or Trading Robots.

Automated trading executes trades on behalf of the trader, based on previously predefined criteria and sets of rules. Scalping timeframes, as well as the amount of time that every trade is active, is the shortest of all the trading strategies.

Day traders, for instance, may use five-minute charts and make between four or five trades in a single trading day, with each trade remaining active for around thirty minutes. In contrast, scalpers may also use one-minute charts, where every price bar will represent five seconds of trading, with the trader making between 20 and 100 trades a day, with the trade active for mere seconds.

 

Swing Trading

Wave Theory provides a valuable insight into how human progress works. It is not a steady and straight line, but it features fits and starts which are represented by jagged, often saw-toothed patterns.

The same can be said for financial markets and their associated financial instruments. Prices behave in the same manner as the human progress model, with prices that move in ‘sets’ of waves.

Traders who can understand this concept will learn to identify a certain financial instrument’s prices in terms of Wave Theory, allowing them to identify when a reversal price is likely to occur, and when.

In having this knowledge, traders can make a profit in both directions by buying at the bottom dip of a price and selling just before the price has peaked and it is set to drop once more.

To excel in this type of trading involves maximum use of Wave Theory. Swing trading is not a long-term trading strategy, but it is common for positions not to be closed out in a single day, however, this can happen sometimes.

With Swing trading, traders will see their trading positions remain open for a week, or more, as they wait for the trend to play out.

 

News Playing

This is seen as an opportunistic type of trading. It is a common trading strategy in which a trader makes use of news sources to dictate the trades that they will place on a certain financial instrument.

One of the major driving forces that influence prices in the financial market is that of news sources, which are driven by economical and political events from around the world, especially from prominent economies, companies, and markets.

As soon as news emerges, the trader places their trade expecting the price to skyrocket and they close their position before the price decreases, pocketing the profit that they made while the price was on an upward trend.

However, before using this strategy, traders must ensure that they have a coherent trading plan in place and that they keep to it. The strategy must be honed and refined, and traders must continuously learn and analyze to become more successful.

 

Nicolas Darvas Trading System

This trading system for trading CFDs is a short-term strategy that is used on the 15-minute chart. However, due to the markets being fractal in nature, the same principles used in this specific strategy can also be used in higher timeframes as well.

Nicolas Darvas once found out that as soon as a defined bullish or bearish trend developed, the trend tends to continue its moves in ‘boxes’. A ‘box’, in this instance, can be defined by the oscillating of the price in a fairly consistent manner between both a low and a high point.

While this trading strategy relies on price action trading, it also makes use of one single technical indicator, which makes it a technical strategy.

The 20-day moving average is the indicator that is employed to determine what the general market trend is and to ensure that the trader’s trades are only open in the direction of the predominant trend present.

 

Fractal Strategy

Fractal trading is one of many evaluation methods which is effective during periods where there is a stable trend in the market. However, when there are periods of wide flat, this strategy is very unprofitable.

It is therefore necessary that traders understand the strategy and that it was initially developed for the stock market, which presented less volatility and more predictability.

The fractal trading strategy is extensively used by large market players and it is one of the best indicators of the reliability of fractals. Combinations of fractals have characteristics that are self-similarity, scaling, and memory of entry conditions.

It is for this reason that they can be used to make price forecasts successfully. When using this strategy, a fractal up or a signal to buy is the setting in which there are five consecutive bars that form a pattern, where the highest maximum will be shown by an average candle.

In reverse, a fractal down or a signal to sell is the reverse pattern, which is made up of five consecutive candles, the average from which will show the lowest minimum.

The aim of the analysis is to identify, in time, and correctly treat fractal designs in conjunction with other market data. This is despite whether they are either fundamental, technical, volume, or temporary.

The set of real fractals can be dynamic and can vary depending on both quantity and structure. The emergence of maximum/minimum for fractal, for instance, must be consecutive. The predominant consideration is that one of the central bars must show an obvious extreme and, therefore, non-standard combinations can also be used as fractals.

 

Fishing Strip Strategy

This type of CFD trading strategy involves turning points that indicate the possibility of change in the direction of the trend, enabling the trader to act accordingly. The Fishing Strip strategy is most suited for timeframes of 15-minutes and higher, revolving around the principle that the larger the timeframe is, the higher the level of precision will be.

This strategy can be used across a broad variety of financial markets and it makes use of indicators such as Bollinger Bands.

When setting up a long position, there is a preliminary signal received as soon as the first candlestick closes below the fishing strip, resulting in the following candlestick closing within the strip. Traders must enter this position at the start of the third candlestick.

Traders must set their stop-loss 5 pips below the lowest value which is reached by the first candlestick. This position must be exited as soon as 100 pips have been earned or as soon as the other end of the strip has been reached, whichever of the two occurs first.

To set up a short position, the preliminary signal will be received once the first candlestick closes above the fishing strip, with the second candlestick closing within the strip, with the trader entering the trade at the start of the third candlestick.

Traders must set their stop-loss 5 pips before the lowest value reached by the first candlestick and traders must exit the trade once 100 pips have been earned, or when the other end of the strip has been reached, whichever of the two occurs first.

 

Tunnel Trading Strategy

With this trading strategy, traders must consider three crucial factors with the first having a methodological approach. Secondly, traders must implement the method at the right time without having second thoughts, and thirdly, traders must stay within the trade until the market indicates that it is time to close the position.

Traders must create a 1-hour chart on the CFD that they wish to trade using any chart type that they prefer. On this chart, the trader must overlay a 169-period exponential moving average (EMA), a 144 period EMA, and a 12-period EMA.

The 144 period and the 169 periods will subsequently create a tunnel on the chart. The 12-period EMA is a volatile filter that traders must always have in that position.

The next step involves memorizing or writing down the specified Fibonacci number sequence 1, 1, 2, 3, 5, 8, 13, 21,34, 55, 89, 144, 233, and 377. For trading, the numbers the trader must take a keen interest in are 55, 89, 144, 233, and 377.

These levels must be inserted into the chart and the trader must wait for the market to move into the tunnel area. As soon as it breaks above the upper tunnel boundary, traders can go long, and should it break below the lower boundary, traders can go short.

Stops, as well as reverses, can be placed on the other side of the tunnel.

Should the market move in the trader’s direction, traders can take partial profits at the successive Fibonacci numbers respectively, with the final portion of the trader’s position left on until the market either hits the last Fibonacci number (377 pips) from the EMA’s, or the market comes back up to the tunnel, violating the other side.

 

ZigZag Strategy

With this strategy, traders have an unobstructed view of market price swings on alternating time frames. This pattern is compatible with a variety of other strategies and is used to try to find high percentage areas to ride trends in the market.

The strategy makes use of the Zigzag technical indicator which measures the swing highs and lows of a financial market. With this, traders can more accurately identify the swings in the market as it works to cancel out what is referred to as ‘market noise’.

With smaller price movements eliminated from the chart, traders can focus more on the bigger picture.

However, the indicator’s parameters are crucial to cover enough price data so that it can display zigzag waves on the chart. The parameters that the trader must find includes:

  • Depth – which refers to how far back in the chart bar series it must look, with enough depth providing defined highs and lows, and
  • Deviation – which refers to the percentage in price change it takes to change the trendline from positive to negative.

 

Traders must experiment with these parameters until they find the ones that suit their trading objectives better. When the parameters are set right, traders will notice the zigzag pattern.

When setting the parameters, traders must consider the following:

  • Price symmetry must provide the trader with a uniform match of wave harmonics, or the AB=CD pattern.
  • Wave depth must provide the trader with an adequate depth of waves between highs and lows, and
  • Stepping price level must be noticeable on a trend.

 

4-Hour RSI Bollinger Bands Strategy

This is a decent strategy for those who do not want to spend a lot of time in front of their trading terminals. It is a non-directional strategy that generates sell as well as buy signals for the 4-hour timeframe.

This strategy makes use of the Bollinger Bands indicator to determine when the price range is set to start narrowing, while the RSI indicator determines the direction that the market will break out of the range.

However, this strategy is known to produce explosive price movements as its strength is trying to anticipate the direction of the breakout, and most of the time, traders will be in the trade before the actual break occurs, increasing the trader’s profit margins.

 

RSI Stochastic Divergence Strategy

This is a trend following CFD trading strategy which makes use of multiple technical indicators to identify the best possible trading opportunities in the market. The Stochastic indicator is used to identify any hidden divergence and is a powerful tool when compared to classic divergence.

The trend direction will be determined by using the 20 and 50 moving average crossover system. For additional confirmation, the RSI indicator is employed, with the trade only being entered as soon as the RSI crosses either above or below the 50 lines.

 

5-minute Forex Scalping Strategy with Parabolic SAR and MACD

This strategy is a scalping strategy that can either be used by part-time traders or full-time traders. The Parabolic SAR indicator is not utilized as a momentum indicator but is used to determine trends, specifically short-term trends in the market.

The main objective of this strategy is to trade towards the direction of the 5-minute trend by entering on the first pullback. The moving average convergence divergence (MACD) is used only as a signal for confirmation.

 

Renko Charts Trading Strategy

This is based on Renko charts, an unorthodox type to plot the price action as it does not include the time element. One of the commonly used trading approaches of trading using Renko charts involves trend trading. The reason for this is as price trends which are visually easy to identify with Renko charts is why it fits into the trend trading category.

To time the market more accurately using Renko charts, it uses the Ichimoku indicator which can also offer traders superb setups.

 

Ichimoku and MACD Momentum Strategy

This is also a trend-following strategy that is best suited for swing traders. The strategy works extremely well in a trending environment while in a ranging market, it is likely to produce a substantial number of false entry signals.

This is one of the reasons why this strategy is only used when there is already a clear trend in place. The Ichimoku and MACD Momentum Strategy are therefore used to identify trends and potential support and/or resistance which could be an ideal level to enter the market.

However, to fine-tune the entry and reduce the number of false signals, the trader must make use of the MACD indicator as well.

 

Counter-Trend Strategy

This strategy relies on the fact that most breakouts do not always develop into long-term trends. For this reason, traders can use this strategy to seek to gain an edge in their trading from the tendency of prices to bounce off previously established highs as well as lows.

When using this strategy, traders must ensure that they can manage their risk management effectively. This strategy relies on both support and resistance levels and the fact that they will hold. However, there is substantial risk involved should these levels break down.

It is a clever idea for traders to constantly monitor the market as the market state which is best suited for this strategy is one that is stable yet volatile. This type of market environment offers healthy price swings which are constrained within a certain range.

 

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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