CFD Trading Strategies

Submitted by George Polizogo... on 15 February, 2006 - 08:35

Once you’ve opened up a CFD trading account, you’re left wondering – what should I do next?

There is a CFD trading revolution going on in the trading world. Business is booming for the CFD providers and many traders are signing up to the services. Once you’ve opened up a CFD trading account, you’re left wondering – what should I do next? Should I simply just buy into long positions just as I did when I traded shares? Here are some CFD trading strategies for you to peruse and perhaps implement.

The simplest tool in the CFD trading strategies tool chest is simply GOING LONG. Using the long strategy with CFDs would benefit you with any positive move of the underlying stock. If you roll a long position into the next trading day, the trader would need to pay the amount borrowed at the going interest rate plus a fee (usually an additional percentage) for the CFD provider.

Another tool in the CFD trading strategies war chest is GOING SHORT. Using CFDs allow the trader to easily benefit from the fall of the underlying share price without too many complications. Short positions usually pay out an interest daily on rolling positions minus the CFD provider fee (usually a percentage). Dividends incurred while holding the stock need to be paid to the CFD provider.

CFDs are also a part of HEDGING CFD trading strategies. This will enable the trader to change the risk profile of any holdings they may have. By use of HEDGING the trader essentially offsets an existing stock position to reduce the market risk. Doing this will reduce the trader’s exposure temporarily to a stock price movements without the full sale of the underlying stock.

Traders can take advantage of INDEX CONSTITUENT CHANGES. Traders can take advantage of this CFD trading strategy by either shorting or going long on the underlying index especially when the companies included in an index are shifting and being reweighted and profiting from anticipating index promotions and relegations.

To finish off, here are some more CFD trading strategies that are a little off the beaten track. They probably won’t be used often by traders but they form a part of the CFD trading strategies arsenal that is available to any CFD trader. CFD traders and trade on the NEWS or anticipation of the news of some event. Such news could be about the company’s dealings or any news of directors buying or selling stock. Because of the CFDs offer leverage as well as a low entry cost, traders are able to act upon NEWS stories. You can use ARBITRAGE to profit by taking advantage of a price discrepancy by simultaneously buying into a position while shorting another. Some traders may trade PAIRS of stocks where the trader would buy into one stock while selling another competitive stock. CFDs can be used as TAX MANAGEMENT as they don’t incur capital gains tax. If you own shares already and your capital is locked into the value of those shares you can then implement a CONVERSION and CAPITAL CASH RELEASE where the stock would be used as the underlying security and margined at the given margin rate so funds can be released for your trading other stocks. And of couse, CFDs are used for SHORT TERM TRADING and SPECULATION.

Good Luck with your trading!

George Polizogopoulos is a staff writer for MyShareTrading.com, an information hub for traders: forex, shares, derivatives, CFD's. MyShareTrading.com also provides free blogs for traders who wish to share their market experiences.

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