Monday August 08, 2022

10 Factors to consider when choosing a CFD trading strategy

In the world of CFD trading, there are several vital factors you should consider before choosing your trading strategy. These include:

1.  Market Conditions

Markets go through periods of strong bullish sentiment and other periods where markets show bearish trends. It would be best to choose a CFD trading strategy that can adapt to these fluctuations in market conditions and offer benefits in bullish and bearish markets.

2.  Cost to Trade

Many factors influence the cost to trade, such as brokerage fees, spread costs, overnight financing rates and commissions charged by dealing desks or liquidity providers. Before choosing your CFD trading strategy, you need to be aware of what each of these changes will mean for your overall profit/loss.

3.  Leverage

If you are using leverage for your CFD trades, it can be helpful to understand how different degrees of risk exposure will affect the size of the trade you need to make to profit from price movements. If you are less experienced, lower risk exposure levels should be considered part of your CFD trading strategy.

4.  Leverage works both ways.

Leverage is a double-edged sword. On one side, it can allow you to invest more than what’s in your account; however, on the other hand, this also means that if something goes wrong, then there will be no limits for losses because they are entirely dependent upon how much leverage was utilized throughout trading transactions. This feature might seem attractive at first, but before deciding whether or not it’s right for yourself, take into consideration just how high risk these positions could become depending entirely upon which strategy/ratio scheme decision has been made by choosing either too low ($1 ratio)or

5.  Liquidity Premiums

There is a liquidity premium attached for certain assets, which means that traders are more willing to pay higher prices for smaller volumes on these assets if they are expected to take place at specific times during market hours. This can give rise to valuable opportunities and more significant risks, and therefore, you must choose a CFD trading strategy that can take advantage of these opportunities.

6.  The ability to close

The ability to close out your trade at a set point before expiry is a vital characteristic of a successful CFD trading strategy, and we will delve deeper into this topic in our next article.

7.  Devise a trading strategy

Make sure you set up a strategy for each trade before you open it. For example, you should consider in advance where to close your position, in both best-case and worst-case scenarios. Think about potential scenarios of how your investment may perform. What happens when the underlying price goes up by 5%? What if it falls by 5%? 10%? 50%? It would help if you thought through how significant a loss you can tolerate or how big a profit you’d be happy within that particular position.

8.  Prepare for rainy days.

There will always be days when your trading positions go against you, so always keep enough equity/cash in your account if you need to put up additional margin. Some brokers don’t issue margin calls at all; they will liquidate some of your positions if you fall below margin requirements. This can happen precisely at the worst moments – so do your best to prevent it.

9.  Don’t put all of your eggs in one basket.

CFD trading can give you access to a wide variety of markets and assets, so there’s ample opportunity to diversify. And you totally should. However, it’s not wise to rely on CFD trading alone for a living. CFD trading can result in really volatile returns (or even significant losses), so make sure this is not your only source of income.

10. Choose a reliable CFD broker.

Having a good CFD broker can make a difference in your trading results. For one thing, fees are significant. When you trade frequently, trading fees can carve out a big chunk of your profits. The highest cost is the spread cost when trading CFDs: the difference between the bid price and the asking price.

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