XS Online Trading Courses

Popular CFD Trading Strategies

In order to build your first trading strategy, you should look at pre-existing successful ones. It’s recommended to see what’s working for other traders and then modify these trading strategies based on your personal preferences and trading style. 

Let's explore some of the most popular strategies used by traders worldwide.

1. Trend Following Strategy

The trend-following strategy involves identifying and trading in the direction of prevailing market trends. This strategy is based on the principle that trends tend to persist over time. 

Based on this strategy, you aim to capitalize on sustained price movements by entering long positions during uptrends and short positions during downtrends. 

For example, if an asset's price has been steadily increasing over a period of time, a trader following this strategy may open a long position to profit from the upward momentum.

This strategy typically relies on technical analysis indicators to confirm the existence and strength of trends.

Pros

• Can generate significant profits during strong and sustained trends

• Simplifies trading decisions by focusing on the direction of market momentum

• Provides clear entry and exit signals based on technical indicators

Cons

• May lead to losses during periods of market consolidation or trend reversals

• Requires discipline to adhere to the strategy and avoid premature exits

• Limited effectiveness in volatile markets

2. Breakout Strategy

A breakout strategy is a trading approach where traders aim to capitalize on significant price movements that break through established support or resistance levels. 

In simpler terms, it's like waiting for a price to burst through a barrier, signaling a potential shift in market direction. 

When the price breaks above resistance or below support with strong momentum, traders enter positions to ride the trend in the direction of the breakout. 

For example, you identify that a stock’s price has been at $50 for a prolonged period, known as the consolidation phase. 

Once the price breaks above $50.00 on high volume, you enter a long position as this indicates a “bullish momentum,” which means that the price will significantly increase. 

Usually, traders place a stop-loss order below the breakout level to manage risk.

How to Avoid False Breakouts

However, sometimes the price temporarily moves beyond a support or resistance level but fails to sustain the move. This is known as a false breakout.

To avoid false breakouts, wait for confirmation by ensuring the price holds above or below the breakout level before entering a trade. High trading volume increases the likelihood of a genuine breakout, while checking multiple timeframes helps validate its strength. 

Retests of the breakout level often signal a more reliable move, and combining technical indicators like RSI, MACD, or moving averages can further confirm trend direction.

Pros

• Can generate major profits during strong breakout movements

• Provides clear entry and exit signals based on breakouts of key price levels

• Offers high-profit potential with relatively low risk if stop-loss orders are effectively implemented

Cons

• False breakouts can lead to losses if the price quickly reverses after the breakout

• Requires timely execution to enter positions after breakouts occur

• Limited effectiveness in choppy or range-bound markets with frequent false signals

3. Scalping Strategy

The scalping strategy involves making multiple small trades with minimal holding periods, aiming to profit from small price movements. 

Scalpers typically enter and exit positions within seconds to minutes, relying on high-speed execution and tight spreads to capture small profits repeatedly throughout the trading session.

For example, a scalper observes short-term price fluctuations in a currency pair and enters multiple trades with small position sizes. By trading frequently throughout the day, they aim to capture small price movements of a few pips. 

Scalping requires quick decision-making, discipline, and access to real-time market data.

Pros

• Offers the potential for quick profits from small price movements

• Provides numerous trading opportunities throughout the day

• Capitalizes on high liquidity and tight spreads in liquid markets

Cons

• Requires advanced trading skills, discipline, and a high level of focus

• Susceptible to transaction costs, including spreads and commissions, which can erode profits

• Limited profit potential per trade, necessitating high trading frequency to achieve significant gains

4. Hedging Strategy

Hedging is a risk-management strategy that involves taking opposite positions to limit the risk of sudden and unfavorable price movements. 

It’s like betting for both teams in case your desired team doesn’t win.

For example, a trader holds a long position in a stock but is concerned about potential downside risk due to market uncertainty. 

To hedge against potential losses, they enter a short position in a related stock index futures contract in case their long position ends up not being profitable. 

If the stock price declines, the losses in the long position may be partially or fully offset by gains in the short futures position.

Pros

• Provides downside protection against adverse market movements

• Allows traders to maintain exposure to the market while limiting potential losses

• Can be used to manage risk in volatile or uncertain market conditions

Cons

• May involve additional costs, such as margin requirements or transaction fees

• Requires careful consideration and analysis to effectively hedge positions

• Over-hedging or incorrect timing can result in missed opportunities or increased losses

5. Position Trading Strategy

Position trading is a long-term strategy that involves holding positions for extended periods, ranging from weeks to months or even years. 

Traders employing this strategy aim to capture major price movements over weeks, months, or even years, capitalizing on significant market trends and economic cycles.

For example, a trader identifies a long-term uptrend in the price of crude oil based on supply-demand dynamics and geopolitical factors. 

They enter a long position in crude oil futures or energy-related stocks, expecting the trend to continue over several months. The trader holds onto the position until signs of a trend reversal or exhaustion emerge.

Pros

• Allows traders to capitalize on major market trends and economic cycles for significant profits

• Relies on fundamental analysis and macroeconomic trends to identify long-term investment opportunities

• Provides flexibility to hold positions for extended periods, reducing the need for frequent monitoring and trading

Cons

• Requires patience and discipline to withstand short-term price fluctuations 

• Vulnerable to unexpected market events or geopolitical developments that may disrupt long-term trends

• Limited trading frequency may result in slower portfolio growth compared to more active trading strategies

6. Swing Trading

The swing trading strategy involves holding positions for several days to weeks, aiming to profit from medium-term price movements. 

Swing traders analyze market trends, technical indicators, and chart patterns to identify entry and exit points.

For example, a swing trader identifies a stock forming a bullish pattern and enters a trade at a support level, holding it until it reaches a resistance level. 

By capturing price swings within a trend, they aim to maximize gains while minimizing risk.

Pros

• Allows for larger profit potential compared to scalping and day trading.

• Requires less screen time, making it suitable for part-time traders.

• Works well in trending markets with clear price swings.

Cons

• Exposed to overnight and weekend market risks.

• Requires patience, as trades take longer to reach targets.

• May involve holding through short-term volatility.

7. Gap Trading

The gap trading strategy capitalizes on price gaps that occur when an asset opens significantly higher or lower than its previous close, often due to news or earnings reports. 

Traders analyze gaps and use technical indicators to determine whether to trade in the direction of the gap or anticipate a reversal.

For example, if a stock opens with a strong upward gap after positive earnings, a gap trader may enter a long position, expecting further momentum. 

On the other hand, if a gap appears overextended, they might trade against it, anticipating a price correction.

Pros

• Provides high-profit opportunities from sudden price movements.

• Based on clear price patterns, making it easier to identify trades.

• Can be applied across various markets, including stocks and forex.

Cons

• Prone to false breakouts and reversals.

• Requires quick execution and strong risk management.

• Market gaps can lead to slippage and increased trading costs.

Lesson Summary 

• To build a trading strategy, study successful existing ones and adapt them to your preferences and style.

• Trend Following Strategy involves trading in the direction of market trends, aiming to capitalize on sustained price movements.

• Breakout Strategy entails capitalizing on significant price movements breaking through established support or resistance levels.

• Scalping Strategy involves making multiple small trades to profit from small price movements within short timeframes.

• Hedging Strategy mitigates risk by taking opposite positions to offset potential losses from adverse price movements.

• Position Trading Strategy involves holding positions for extended periods to capitalize on major market trends and economic cycles.

Mastering various CFD strategies allows flexibility to adapt to markets and meet financial goals. Whether scalping or position trading, combining technical, fundamental, and sentiment analysis helps maximize profits while minimizing risk.