CFD Trading Strategies to Improve your Profits
So you’ve got some money to play with, you’ve read up on the basics, and you have a CFD trading account. Time to get started, right with the right CFD Trading Strategies?
Not so fast.
Randomly making trades isn’t going to get you very far. What you need is a coherent trading strategy. Some basic paradigms you’ll follow when conducting your business, and that’s an important point. From day one, you want to treat this AS a business if you’re serious about consistently improving and making money. Otherwise, you’ll just be spinning your wheels. Sure, you’ll sometimes make money, but just as often, you’ll find yourself losing ground. Don’t do that to yourself.
Broadly speaking, the various trading strategies you employ will fall into two basic camps: Fundamental and Technical. Fundamental trades are exactly what they sound like. You’ll be closely examining a company’s fundamentals in any given industry. How are they positioned? What does their cash flow look like? What kind of return are they seeing on their corporate assets? What sort of track record and history do they have where retaining profits to fund future growth is concerned? Who’s on their management team, and what are they known for? Fundamental trading strategies are generally used when conducting long term “buy-and-hold” trades, as opposed to active trading conducted within the span of a single day or for a relatively short period of time. There’s no denying its effectiveness, but that’s not the sort of trading we tend to do at the Trading Lounge, so for our purposes, it is enough to make mention of it before moving on to the more active trading strategies you can employ.
In the other camp are the Technical trades, and that’s what we’re primarily engaged in. These strategies can be further broken into two distinct sub-types: Discretionary and Mechanical.
Rangebound (Range) Trading
One way or another, all Mechanical trades wind up being some flavor of Range Trading. They aren’t terribly interesting because they are, as their name suggests, entirely mechanical. They’re “set and forget” rules of trading that you program to happen automatically. If a company’s stock hits X, buy. When it hits Y, sell. You set up the rules and forget about them. The trades happen automatically from within the confines of the rules you write.
Discretionary trades, however – now these are interesting, dynamic, and most importantly, active.
They revolve around the idea that you, the trader, armed with a variety of analytic tools, are uniquely positioned to spot emerging trends and act on them intelligently to conduct the business of your business. There are dozens, perhaps even hundreds of different analytic tools at your disposal, and we’ve talked about many of them before, including such things as the Fibonacci Sequence and Wave Theory. Your goal in using these tools is to give you a better perspective about future price movements, and trade accordingly. Below, we’ll talk in brief about different ways you can accomplish that:
A fairly common trading strategy, this one sees you identifying a key price level for a given stock. When the price reaches your key level, you buy or sell (whichever is appropriate to the current, prevailing trend). The key to successful breakout trading is to AVOID such trades when the market isn’t sending clear signals about which direction the overall trend is moving in. You absolutely need a clear understanding of the trend and its direction in order to be successful here.
This is essentially a market timing strategy. The basic idea is that you’re playing on the fact that trends don’t last forever. If a stock has seen its price trending lower, then you pick a point you believe to be at or near the end of that trend, and buy in anticipation of a move in the opposite direction. You can do the same thing in reverse by short selling a stock that has been increasing in price, in anticipation of a sudden change in price direction. Wave Theory and similar analytic tools can help you identify when these shifts are most likely to occur.
Trend Trading is a longer term strategy that bears at least some traits in common with longer term “buy and hold” strategies, and often sees you holding a stock for a period of weeks, or even months as you ride a price trend to its conclusion. Here, Wave Theory can help you identify a trend, but in this case, you’re not interested in actively buying and selling during the inevitable retrenchments that will occur as the price moves higher, so you’ll ride these out (almost certainly buying more shares as the price falls before advancing further), then closing out your position when your analysis indicates that the wave has reached its ultimate peak.
Some trading networks (NASDAW, NYSE, CBSX, BATS, etc) offer rebates on certain types of trades. A rebate trader is less concerned with the actual amplitude of a price move than he is on cashing in on the offered rebates, and these will be where the majority of this strategy’s profits come from. It’s an interesting approach, though not one that sees terribly common use.
Scalping (aka Spread Trading)
Scalping is the most active of all the trading strategies. Here, you as the trader are identifying small profit opportunities in the difference between the bid and ask price of a given company’s stock. You’ll exploit these gaps as often as you find them, reaping a steady pile of small gains throughout the course of the day. This could see you making a dozen, twenty, or even more trades per day as you identify small windows of opportunity.
If you’ve read about Wave Theory, then you know something about the way all human progress occurs. Not as a steady, straight line, but in fits and starts, represented by a jagged, saw-toothed pattern. You also know that stock prices behave in exactly the same way, and that price moves in “Sets” of waves. Understanding this, and learning to identify where a given company’s stock price “is” in terms of Wave Theory, you can identify when a reversal in price is about to occur. Armed with this information, you can make money in both directions – buying at the bottom of a dip in price, and selling just before the price peaks and is set to drop again. If you want to excel at this type of trading, then Wave Theory will be your best friend. This type of trading is in no way long term, but it’s also not uncommon for trading positions not to be closed out in the course of a single trading day (although this can happen). Here, you may see your trading positions remaining open for a week, or perhaps ten days at the outside, as the trend plays out.
At least some mention should also be made of “opportunistic” trades. Here, the most common strategy is “News Playing.” Here’s an example: It doesn’t take much imagination to guess at which direction Exxon’s stock price was headed when the news broke about the Valdez spill. A trader following the News Playing approach to trading would have immediately shorted the stock. You sell before the price plummets, and when you have to buy those shares back to close out your position, the price has fallen markedly, and you reap the difference (less commissions and fees) in profit. This strategy is as simple as staying glued to the news, and understanding the implications on price of the headlines you see, and can be an extremely reliable way to cash in on current events.
This is by no means an exhaustive list, but should be more than sufficient to get you started. Experiment. Test. See which strategies are the best “fit” for you and your particular investment style, and which ones see you earning the best returns on your investments. The main point here is to have a coherent plan when trading, and stick with it. Hone and refine it, and never stop learning and analyzing. That’s how you become ever more successful.
So What CFD Trading Strategies do we use at TradingLounge?
Well, we use Mechancial Trading Strategies and Discretionary CFD Trading Strategies and a blend of both. We not only teach you our CFD Trading Strategies, but we use these trading strategies to place CFD Trades out to our members each day via our CFD Accounting Portfolio as we understand that traders also need to see their own trading from an accounting point of view, so our CFD Portfolio software gives you all the accounting infomation that a trader requires to improve their trading.
Our Discretionary CFD Trading Strategies
It’s all about the numbers, numbers, numbers, numbers and that’s trading.
TradingLevels concept is about the price, the past, present and future. Understanding this simple TradingLevels concept (watch TradingLevels Video Course HERE) will strengthen not only your technical analysis but you’re bottom line, your trading results, you will wonder how you ever traded without the TradingLevels, but only seeing is believing.
Traders talk about market psychology, but really, what does that mean exactly, I could never get my head around that, but from my perspective, I can see that every degree of trend has a beginning middle and end, this is quite easy to see, the middle is normally the strongest and travels the furthest, the beginning and end of a trend are much the same in structure and size. But all of this is created by buying and selling, i.e. the volume, the volume creates the price, so shouldn’t the volume be just as important as the price and how does volume actually work, what are the elements that I can actually work with?
This is where the TradingLevels comes into its own. The TradingLevels has a handful of good uses and the first thing to understand is that some price levels, i.e numbers carry more weight than others, some numbers are stronger psychologically, as an example; if a stock is trending upwards and is above 5.00 we naturally start to wonder how far can it can go and we start looking at higher prices, but what prices? Human nature would start us looking at whole numbers and even numbers first as price level targets and not so much at odd numbers, most people would start thinking of 8.00 or 10.00 and not so much at 9.00 or 7.73. My simple point is that people think towards certain price levels, yes the whole and even numbers first and this is where most of the volume gets turned over, these types of numbers are where corrections are likely to take place, so it’s best to trade to whole and even numbers and exit, missing the pending corrective pattern, because it is the correction that stops you out and takes your money, not the trend. So understanding that a correction is likely to occur at a certain price level you can exit and then re-enter after the correction completed and the market has gained tested support on the particular price level, welcome to the TradingLevels as your market timing is about to improve.