CFD Swing Trading
Contract for difference or simply CFD is among the world’s fastest developing trading assets. As its name suggests, CFD involves creating a contract between multiple parties (usually 2) and speculating an asset’s price movement. CFD swing trading consists of a contract agreement to exchange the value difference of a specific index, commodity share, or currency between when the deal is opened and closed. The payout amounts to the price difference between when the trader opened the contract and when it was closed.
Therefore, CFD swing trading involves holding the contract agreement for several days, weeks, or months. If the asset’s price increases, the buyer receives payment from the seller. On the other hand, if the asset’s price falls during the agreement period, the seller gets cash from the buyer. This article will bring you extensive details regarding CFD swing trading, including best strategies and how to swing trade.
CFD Brokers for United States
Let’s start by introducing some CFD trading basics.
How Does CFD Trading Work?
Since it’s an agreement between buyer and seller, traders aim to benefit from price differences when a contract opens and ends. For instance, if a trader purchases a CFD at $20 and sells it at $24, they will receive a $4 difference. Similarly, if a trader buys a CFD at $15 and sells it at $12, they will pay the seller the $3 difference.
CFD is a modern trading strategy used by expert traders only. It doesn’t involve any delivery of securities or physical goods. In fact, even the CFD investor does not own the asset in trade. Instead, they receive gains based on the asset’s price change. For instance, a CFD swing trader speculates whether the gold’s price will fall or rise rather than buying it.
You can think of CFD as a bet, where if your speculation is correct, the other party pays you, and if it’s wrong, you pay them. CFD swing traders bet on downward or upward price movement. The net disparity between the buying price and the selling price is netted together. This difference represents the gains from your trade and is paid through the brokerage account of the investor.
To close a trading position, the CFD trader purchases an offsetting trade. Afterward, the negative net difference (loss) is settled in cash through the seller’s brokerage account.
What is Swing Trading CFD?
Swing trading CFD is a trading style whereby a trader retains a position for several days, weeks, or months. The contract remains open overnight as the trader targets a more significant and favorable net difference.
Swing trading CFD is all about avoiding turbulent markets that are rarely trending. Instead, CFD swing traders focus on markets with stable trends and attempt to exploit the opportunities in asset price changes. Therefore, swing trading CFD is about identifying stocks with potentially predictable moves within a short period.
Essentially, CFD swing traders rely on technical analysis to dig out financial securities likely to experience price movement. Also, they depend on this type of analysis to determine when to open and exit a contract. They will hold their position for a medium-term (days, weeks, or months).
As you hold your CFD trade(s), the platform you’re using charges interest based on the borrowing needed to make that holding. However, it shouldn’t bother or discourage you from swing trading CFDs. These charges are comparatively smaller than the profit you expect to make from your CFD trade.
How to Trade CFDs
Swing trading CFDs is highly profitable but equivalently risky. Therefore, before deciding to invest your resources in CFD trading, you must be careful to avoid making significant losses. If you’re new to, or slightly experienced in CFD trading, the following steps can help you learn how to trade CFDs successfully.
1. Learn about CFDs, Including How They Work
Swing trading CFDs can be complicated, especially for novice traders. The basic step to take before deciding to invest in CFDs is learning about them. Besides, CFD trading differs from the other trading assets. Therefore, understanding its basics and nuances can help you get started and trade better. It would be best if you begin by taking an online CFD trading course.
What’s best about it is that most of these courses are free of charge on various platforms such as IG Academy. You only need to register with those platforms and learn more about CFDs and their associated concepts.
2. Create an Account and Fund It.
Traders must have an account before swing trading CFDs. There are many reputable brokerage platforms available, including MetaTrader 4, IG, and MetaTrader 5. The process of applying for an account is straightforward and only takes several minutes to finish.
Upon account details verification, you can add funds to your account through various payment methods, including debit and credit cards. Suppose you’re nervous about trading CFDs immediately. In that case, you can boost your market competence and confidence by starting with a demo account.
Here, you’ll be operating in a 100% risk-free environment until you feel comfortable enough to trade using real money. Some trading platforms offer up to $20,000 in virtual funds, allowing you to train yourself how to trade CFDs for free as you build your market and industry expertise.
Because of the risks involved in CFD trading and lack of adequate regulation, CFDs were banned in the U.S. Therefore, you must be watchful when opening such accounts.
3. Create a CFD Trading Plan
After successfully creating, funding, and probably using the demo account and mastered how to swing trade CFDs successfully, create a comprehensive blueprint of how you’ll go about your trading activities. This plan should include factors like your goals, time commitment, motivation, available capital, preferred strategies, markets to trade, and risk attitude, just to name a few.
Building a CFD trading plan helps you make better swing trading decisions despite being under pressure. The case is so because it defines several factors like your desired profit, risk management plan, ideal trade, and acceptable loss. This way, you can manage your CFD trades better. Also, it helps you craft the desired swing trading strategy that works best for you.
4. Identify an Opportunity
Upon funding your account and creating your swing trading CFD plan, it’s time to give your first trade a shot. Depending on your preferences, you can decide to target short-term swings (several days) or medium-term swings (several weeks). Some platforms offer a broad range of markets to select from. For instance, IG trading provides you with more than 17,000 markets, including forex, shares, cryptocurrencies, commodities, and indices.
With many such markets to select from, identifying the market to first trade on can seem daunting. The following are some quick tips to help you decide what markets best suit your CFD trading needs.
- Spot market trends at a glance using various charts and interpret their meaning using several technical analysis tools like stochastic oscillators.
- Respond immediately to crucial market moves using alerts. These alerts can be automatically set to activate when the selected CFD market hits a specific level or changes by a particular set amount.
- Access instant news feeds and filter them based on recency, article type, and other filters. Such reports provide insight into how your CFD market is performing and what to anticipate in the coming days
- Stay alert about potential opportunities and key trends by exploring actionable, concise assessments with third-party signals.
- You should review a wide range of information available, including reliable market information to identify trader sentiment breakdown, instant streaming prices, and recent company figures.
- Find CFD markets you wish to swing trade using market screeners as per the company’s sector, fundamentals, and location, among other categories.
5. Select Your Swing Trading CFD Platform
You can swing trade CFD from several trading platforms. It all depends on the selected brokerage platform. Some brokerage systems are available in various forms, such as mobile trading apps, web-based platforms, advanced platforms, and MetaTrader 4. A CFD trader can tailor these CFD trading platforms to suit their preferences and trading style. The case is so because they come with several features such as interactive charts, risk management tools, and personalized alerts.
6. Enter, Monitor, and Exit your First Position.
Upon deciding the market you’re going to swing trade CFD, it’s time to place your first deal. At this stage, you’ll need to decide whether to go short (sell) or long (buy). This decision is based on how you anticipate the prices to move. If you think the CFD value will rise, you should consider going long (buying). On the contrary, if you think the prices will fall, then go short or sell. Having the two choices is one of the key advantages of swing trading CFD.
Once you take your position, your loss or profit depends on the underlying CFD market price. Monitor your open deals on the trading system and close them when they meet your criteria. Close your position manually by putting the same CFD swing trade you initially placed in the other direction. Therefore, if you opened the deal by selling, you should close it by buying a similar number of CFDs at the buy price.
Things You Should Know Before Swing Trading CFD
The following are few things that a CFD swing trader should have in mind before placing their trades.
Sell and Buy Prices
There are always two prices depending on the underlying instrument’s value: the offer or sell price and the bid or buy price. Typically, the buy price is higher than the selling price. The variation between the two prices is known as the spread.
Number of Contracts
CFD swing traders must determine the number of contracts they will trade depending on their trading budget and the market. The case is so because each CFD market has a different lowest number of contracts that one can trade.
Stops and Limits
CFD swing traders use various risk management strategies and tools such as stops to minimize potential losses. Stops are designed to automatically close the trader’s position when the CFD market shifts against them by a specified margin or amount. There are several types of stops, such as:
- Guaranteed – This type of stop closes your position at the requested level regardless of market gaps. If this stop is triggered, you’ll incur small charges.
- Basic – this stop closes your position once the price level hits as close as possible to the selected amount. Basic stops are generally affected by overnight market gaps and volatility.
- Trailing – This stop shifts with your swing trading CFD position once the market trends on your side. However, trailing stops lock in immediately when the market begins to move against your position.
On the other hand, limits are the exact opposite of stops. They close your CFD trading position once the market moves to a certain degree in your favor. CFD swing traders often use limits when trading in highly volatile CFD markets.
Can You Day Trade CFDs?
Yes. You can day trade CFDs. Day trading CFDs mean that you do not hold your trading positions for more than one day. CFD day traders often place multiple CFD trades within a single trading session, targeting more volatile markets. Therefore, day trading CFDs requires more time commitment to ensure that you trade several times in a day.
What’s Better Between Day Trading and Swing Trading CFDs?
CFD traders often ask which trading style is more profitable and better between day trading and swing trading CFDs. Some CFD traders may argue that you can only trade CFDs effectively if you become a trader by profession. Therefore, you need to watch, analyze, and trade all day long. However, other traders prefer spending several minutes a day only to review their portfolios.
Therefore, defining which trading style is better between the two is primarily up to the trader. For instance, suppose you have a full-time job. In that case, swing trading CFDs would be more favorable than day trading. That said, determining the best trading style depends on the trader’s preferences and goals.
What are the Advantages of Swing Trading CFDs?
No Borrowing Stock or Shorting Rules
Several markets have regulations that forbid shorting. Therefore, traders must borrow the asset before going short. Also, such markets have varied margin requirements for long and short positions. CFDs traders enjoy unlimited shorting because they don’t need to own the principal asset.
Higher Leverage
Unlike traditional trading, CFDs offer higher leverage. CFDs’ standard leverage is regulated by responsible agencies. It was once at 50:1 but currently ranges around 30:1 and can go up to 2:1. The minimal margin requirements imply lower capital expenditure for a trader and significant possible returns. However, this leverage level magnifies a CFD trader’s potential losses.
Access to Global Markets from a Single Platform
Most CFD brokers provide products from all of the world’s leading markets, enabling 24/7 access. Therefore, CFD traders can trade on a broad range of global markets within a single platform.
Multiple Trading Opportunities
CFD brokers currently provide multiple trading opportunities, including index, commodity, treasury, stock, and currency CFDs. Such options enable traders interested in various financial drivers to swing trade CFDs as a substitute to exchanges.
What are the Disadvantages of Swing Trading CFDs?
Weak Regulation
In CFD trading, the broker’s credibility depends on their financial position, longevity, and reputation because the government barely regulates the industry. Therefore, you may lose your money if you invest it in fake brokers. That said, always perform background research on the broker you’re about to sign up with to determine their authenticity. You can find reviews on brokers here on SwingTrading.com.
Risks
Trading CFDs is risky due to the high leverage compared to traditional trading. Since CFD trading is swift-moving, you need to monitor your trades closely. These risks may lead to significant losses, especially if the price moves against your position. Although many CFD brokers provide risk management tools such as limits and stops, they do not guarantee that you won’t incur losses.
CFD Traders Pay for the Spread
Traders must pay for the spread on opening and closing trades. These payments affect swing trading CFDs’ profitability, as they reduce the winnings by a specific amount. Therefore, despite proving profitable, these charges require traders to trade more to make significant profits.
The Bottom Line
Although CFD trading presents many benefits, including low margin requirements, quick access to world markets, and no shorting, they are complicated trading instruments. Kindly ensure that you entirely understand how the product operates and assess whether or not you can afford the risk they present. Therefore, you can incur significant losses rapidly because of their high leverage. If you’re unsure about how they operate, consider taking an online course and start with a demo account to boost your confidence.