Insights on CFD Trading Strategies
Contracts for Difference (CFDs) are contracts for difference, i.e. between two parties, usually defined as “seller” and “buyer”, whereby the seller will pay the buyer the difference in the value of the asset at contract closing and/or the date of valuation.
If you are speculating on the movement of share prices in the stock market, CFDs make perfect sense. However, when you are trading real assets like property or shares/stocks, there are many different strategies available for cfd trading South Africa. These strategies depend on the individual risk profile of the traders.
One of the simplest strategies to use with CFDs is the technique of speculating on trends. This works particularly well when you do not know much about the global markets and when you are prepared to take big risks to make some money. The idea is that if you can predict a trend in one area, then you stand to make some profit on shares that are rising.
For example, you may have heard of “flip charting”. Here, by taking the top three or top five points of a chart and applying varying methods of overlaying them on a baseline, you can predict the rise of that sector. The problem with this strategy is that it only works well when you are watching the sector in question, and not when you are trying to speculate on other aspects of the market.
Another type of strategy that you can use when you speculate on the movement of shares with CFDs is called momentum trading. This is especially effective in financial markets and is sometimes referred to as ‘bartering on the forex.’The basic idea is that you exchange differences for differences – in this case, CFDs for shares. This can be used as a means of speculation on price movements in the long term.
However, many investors choose to invest in smaller companies. In these instances, the strategy of speculation does not involve an exchange of shares for shares, but rather involves an increased level of risk per share. For instance, when a small percentage of a company’s shares are bought at an initial purchase price, and this small percentage grows over time, then a small percentage of that company’s stock is going to be wiped out as a profit.
There is a way of investing in which you don’t have to exchange your underlying shares for CFDs, and this is called the ‘hedge’ strategy. A hedging strategy is when you trade CFDs to hedge your underlying shares, and the most common form of hedge is what is known as a ‘leverage play’.
Essentially, when you trade these types of shares, you assume that they will increase in value, and the only thing you have to do is a hedge to lock in the profit. Of course, there are many different strategies you can apply, and the most important thing is to ensure that your hedging strategy provides you with the best chance of locking in a profit. You may also use leverage, which essentially means you take large profits and then spread them out amongst the various underlying shares and reduce your potential risk.