Trading Strategies

A trading strategy outlines the style of the trading tactics you intend to use, including a methodology for entering and exiting trades, as well as the tools and indicators that you might use to determine potential entry and exit points for your trade. Your strategy can depend various factors that accommodate your personal trading needs, financial goals, and risk tolerance levels. For example, in your trading strategy you need to consider how much time you can allocate to studying and trading the markets. There are a range of different trading styles that you can use depending on which strategy appeals to you.

Placing your first trade

Placing your first trade with CFDs may be technically as easy as choosing between Buy or Sell, but there are a great number of factors you need to consider before funding your account and trading with real funds. The first thing you need to consider is whether you have the knowledge necessary to understand market dynamics, fundamental and technical market trading principles, being able to navigate and make the most out of your trading platforms, and of course, understanding the risks involved with trading leveraged products.

While an increasingly popular investment vehicle, CFD trading is speculative and leveraged, so you before you actually start buying or selling forex, stocks, commodities, indices or cryptos, you first need to consider creating a trading strategy and perhaps testing it on a demo account.

Building a strategy

A trading strategy provides you with a clear path on how, what, when and why you should trade. It will help to shape your behaviour and avoid the pitfall of making decisions based on emotions. When it comes to trading strategies, complicated does not necessarily mean better. Each trading plan should be unique to the individual. Although your plan can be based on someone else’s strategy, you should always adapt it to your own aims and risk appetite.

Some of the most important aspects that should be covered in your trading plan include your time commitment, trading goals, risk tolerance levels, available capital, risk management strategies, the markets you will be trading, when and how you will enter or exit a trade, your faux pas, and of course record keeping!

Planning trade exit

When building your CFD trading strategy, you need to consider what type of analysis you will use to identify trade entry and exit points in a certain market. The two major types of analysis that traders use include technical and fundamental analysis. While fundamental analysis focuses on external events, major news, macroeconomic data such as the key interest rates, and big company announcements, technical analysis focuses on analysing the charts’ key levels and using different formulas or indicators to identify potential price trend reversals.

Your trading strategy should outline the style of trading you intend to use, including a methodology for entering and exiting trades, as well as the tools and indicators that you might use.

Reading the financial markets

There are different ways of reading the financial markets, namely using fundamental or technical analysis to determine possible future price direction. With most traders relying on a combination of both methods, one important aspect of reading the financial markets is timing. Trading on news announcements can require a skilled mind-set, as news can travel very quickly on digital media. Traders will need to assess the news immediately after it is released and make quick decisions on how to trade it.

There are also important considerations that you need to consider when analysing the latest market news or releases. For example, is the news already fully factored into the price of an instrument or only partially priced in? Does the news match market expectations and what kind of reversal trends may follow after the initial market reaction?

Managing risks

Your personal level of risk tolerance is a key factor in determining the best type of strategy to adopt. However, it is highly likely that depending on your personal and financial situation, your risk tolerance will change throughout your lifetime, so it’s crucial to reassess your appetite for risk regularly, especially when faced with financial or lifestyle changes.

A common method of managing risk involves assigning stops and limits to a position. These pre-define the exit levels for your trade and can help protect your capital. A stop-loss order is an instruction for your position to be closed automatically once the price reaches a certain level against you. It is the maximum loss you are willing to accept should a trade move against you. You can also place a Take Profit order, which will automatically close your trade after you have achieved a certain amount of profit. This is done with the intention of protecting your capital from adverse market movements that may occur while you are not monitoring your trades.