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1.   Determine CFD position size based on CFD risk % 2.   Determine your CFD leverage value
3.   CFD calculator for stop loss risk and ATR value 4.   Return required to cover CFD loss
5.   Overnight CFD Finance cost calculator 6.   CFD Commission calculator
7.   CFD Position size for fx 8.   CFD Risk % and CFD risk $ calculator
9.   Actual prices paid taking into account the CFD spread 10.  How many CFDs can I buy with my margin and risk
11.  Useful CFD links and CFDs Explained 12.  CFD World Clock - Key international markets

CFD Trading Strategies

Just as with stock picking, there are many strategies that can be adopted in order to make a profit out of trading CFDs. In fact, exactly the same criteria apply to selecting the company, index, or sector to trade in, and whether to go long or short. If you already trade stocks and have a winning strategy that suits your style, then you can apply it directly to trading CFDs. The great thing about CFDs is that they multiply the power of your money way beyond what you can do if you trade with the stocks themselves.

The simplest strategies are usually the best. Too often people become bogged down in trying to find a "perfect" system that never loses, and while some may claim that they had glimpsed such a beast, it is very unlikely that such a system will ever be invented. The market will do what it wants, regardless of what it "should" do.

The important point to realize is that you don't have to have a strategy that wins all the time, all you need is a strategy that makes more money than it loses. And you should not forget that if you win twice as much on each winning trade as you lose on each losing trade, you can even lose more often than you win and still make money.

So one principle for a winning strategy is that you look at the expected loss if the trade turns against you, and compare that to the possible gain for a winning trade. It is good to have a ratio of 2 to 1, anticipating winning twice as much as the risk.

Technical analysis plays a big part in finding a consistently effective strategy. Fundamental analysis does not. When you are trading CFDs you are more interested in short term gains than in long-term rewards, as you are charged interest each day that you hold the CFDs. This means that fundamental analysis is not effective, relying as it does on shares ultimately returning to their underlying value, with no sense of the time that it may take. The only extent to which you are interested in fundamental analysis is to know that a company can be expected to operate in a sound and rational manner, and not suddenly produce surprises and scandal to shake the price.

On the other hand, technical analysis is all about timing, using indicators to show whether a stock is overbought or oversold, candlestick charting to indicate indecision in the market, and support and resistance, long term moving averages or other banding systems such as the Bollinger bands to set price targets and reversal points. That is why it is the ideal way to choose your trades when you are considering moves that are going to happen soon.

There are many good books on technical analysis, and a number are reviewed on this website. The basic principle of technical analysis is to look at past performance and use it to project expected future performance. In the simplest sort of example, if a stock is steadily increasing in price then it might be reasonable to assume it will continue to do so.

Technical analysis goes much further than this, however, and includes calculated values, called indicators. As past history is only an imperfect indication of what will come, many different indicators have been invented or derived in an endeavor to provide better anticipation of the market, and specifically of the particular stock price. Inevitably, an indicator must be based on old information. There is always a struggle to improve their predictive effect.

The basic function of most indicators is to give a feeling of whether a stock has been bought so heavily that it might be time for adjustment, or if a stock has been sold into a price area where many people are likely to turn around and start buying, driving up the price again.

Whilst many traders look to indicators to give them a feeling for the market sympathy, other traders concentrate on the actual price action, and seek to interpret that in a way that is predictive. For instance, it is often possible to draw lines on a price chart which connect lowest price points and highest price points experienced recently, and this is the principle for defining what are called support and resistance lines.

The theory is that if a price has risen to a certain level and come back down several times, then it is likely that the next time it goes to that level it will come down again. This is called a resistance level, and indicates that the market sympathy, as expressed by individual traders, does not want to pay more than that limit price for the stock.

The support line is viewed in a similar way. This line which is drawn on a chart indicates a level of price below which it is not expected the price will fall. Rather, it is anticipated that the price will bounce off the support value and start rising again. In other words, unless the owners of the shares can receive a certain amount, they are not going to sell.

While the support and resistance lines can be quite revealing in themselves, there is a further use for them which has been discovered. It seems when the price does clearly go through either of them, which is called a breakout, the line provides a barrier to the price going back into the previous range. For example, if the price goes up through a resistance line to a new level, when it comes back down it is quite likely to find support at that previous resistance level. In fact, this observation was used by Nicolas Darvas, a well-known trader and dancer, in his system with which he became a millionaire in the early part of the 20th century.

Another way in which expected limits to the price fluctuations of a stock are sometimes charted is by drawing moving average lines on the chart. Moving average lines simply reflects the average price for the past number of time periods. For instance, a long-term moving average might be based on the last 200 time periods. As technical analysis principles can be applied on many different time scales, I use the term "time period" here. This method is often applied to the daily chart, which means the moving average covers 200 days. The prices on each of the previous 200 days are added together and divided by 200 to get the value for today, and this process is repeated on a daily basis.

Fortunately, this is a basic calculation which is provided by any charting package, including those which your broker will supply, so you do not have to be involved in mathematics. A long-term moving average such as this is generally used to determine the prevailing trend, whether up or down. It can also provide a support line in an uptrend, as although it lags the current price, it may be observed to be a line that the price does not fluctuate below.

Moving averages based on shorter time periods can be used in other ways and provide trading signals. For instance, a five day moving average crossing a six-day moving average is a significant in some trading strategies, and may provide a signal to buy the stock or the CFD.

A particular form of technical analysis which has spawned many text books is that represented by candlestick charting. This technique was brought to the West by Steve Nison just a couple of decades ago, and it was previously only used in Japan. This is a way of viewing the prices so that you get further insight into the emotion of the traders in the market, and can anticipate price reversals or surges. Nison himself urges that trading should not take place solely on the basis of a candlestick pattern but be supported by other indications, such as those given by technical indicators. However, candlestick charting has a clear place in providing timing signals for traders.

Beyond the general application of technical analysis to provide trading opportunities, there are some tricks which you may look to for additional CFD profits. These involve trying to time the market for various external events. The most obvious of these would be watching CNN or another financial network and trading on the news that you observe.

This can be a treacherous path. Often, you will observe that prices react in the opposite direction to that which you would expect when you hear the news. This is because the markets will sometimes take a view of the situation before the news is released, so the news is already priced in to what you can buy the shares for. If the news is bad, but not as bad as the market expected, you may often find that the share price increases, in sharp contrast to your initial feeling.

That said, the news will often give you an understanding of the underlying trend, and many people advocate trading only in the direction of the general trend, as that gives you the best percentage chance of winning trades. This means that if the market is in an uptrend then you would only place long trades. On the other hand, if the market is declining, you will want to place short trades at the appropriate times.

Particular events that may indicate a trading opportunity include insider dealings. Lists of directors buying and selling shares in their own company are published, as these transactions are watched and regulated by the authorities. While directors selling shares may not be significant, as people can sell at any time for their own personal reasons, when directors buy lots of shares in their company it is usually because they have a strong suspicion that the value will increase.

A similar event is when companies use their funds to buy back some of their own shares. This indicates that the company is over capitalized and is also a sign of strength for the company.

Other significant factors that you should watch for include stock splits. This is often viewed as a bullish signal, but examination of previous history shows that it is more likely to exaggerate whatever the current price trend is. Stocks are usually split because the price of the individual share has risen to large levels, which is why it is associated with a bullish or increasing price move.

One of the strategies which is commonly used by hedge funds is called dividend stripping. This arises because on the date that the stock goes ex dividend, that is the date at which you have to hold a stock in order to receive the dividend due in a few weeks, usually the price of the stock falls to a similar extent as the amount of the dividend.

What happens in practice is that, with a well performing stock, the price may not fall by the full amount of the dividend, and the trader who holds the stock on that day will receive a dividend and be able to sell before the share price settles down. The problem when dealing in shares is that the returns from this strategy may only be 0.5%.

However when you apply this strategy to CFDs the results of your trading are amplified, so 0.5% gain becomes 5% with a 10 to 1 leverage. Bearing in mind that this result may be achieved in just a few days, this is a powerful method to profit from CFD trading.

One other strategy that should be mentioned because of its popularity is pair trading. Originally applied to stock trading, again this works with CFDs which benefit from the increased leverage. Sometimes also referred to as spread trading, this involves trading two financial instruments at the same time, and can be implemented in various ways.

One technique is to go long on one company in a certain sector, and short on another. This means that if the sector as a whole goes up or down in value, you are not worried as the trades will balance out. However, if the company that you go long on performs, as you expect, better than the other one, then you are certain to make a profit.

There are other variations on this technique. For instance, you may go long on a company that you expect to do well in its sector, and short on the sector index. Again, this means you profit if the company rises in value compared with its overall sector. The short position means that you are protected, or hedged, against the sector falling in value, and you are only concerned to find a company that will do well amongst its peers.

Whatever way you choose to approach the trading of CFDs, you should test your selection strategies thoroughly on historic data. Many financial charting packages will allow you to do this automatically by just entering your selection criteria and setting the software running. Back testing your strategy to prove its value will allow you to have more confidence when faced with the live situation.



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