Mastering CFD Trading: Pair, Hedge & Swing Strategies

Many people who enter the market to trade initially use indicators as their first strategy to find trading signals. However, in reality, we can gain additional advantages in trading by using other methods in the CFD market. These include Pair Trading, Hedge Trading, and Swing Trading strategies. Combining these three strategies can help traders develop a more comprehensive perspective in analyzing and making trading decisions. This is why we've written this article - to delve into how these three strategies can be applied to CFD trading.

Let's Understand The Basics Of CFD Trading

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CFD trading, or Contract for Difference in full, is an investment method that speculates on price movements of various assets without actually owning them. The main concept of CFD is a contract between an investor and a broker to exchange the difference in the price of an underlying asset between the opening and closing positions. 

The advantage of CFD trading is that profits can be made in both rising and falling markets. It also requires less capital than buying actual assets due to the leverage system (read about leverage). 

However, CFD trading carries high risks and requires in-depth knowledge of financial markets. Investors should thoroughly research, practice market analysis skills, and have a solid risk management plan before starting to trade. While there are various strategies used in CFD trading, today we will focus on three CFD trading strategies: Pair Trading, Hedge Trading, and Swing Trading.

To better visualize and understand, IUX offers a demo account where you can apply your techniques or strategies in real-world scenarios with unlimited virtual funds. Equipped with a variety of tools, it helps you build familiarity and confidence before trading for real. Try it now!

What is Pair Trading strategy?

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Pair Trading strategy is a trading technique that traders can effectively use in the CFD market due to the flexibility in opening both long and short positions. This strategy involves simultaneously opening a long position in one asset and a short position in another. 

The two assets are typically from the same industry or have a statistical relationship, such as Apple and Microsoft stocks or gold and silver. The core of this strategy is to capitalize on the price relationship between the pair of assets. When this relationship deviates from the norm, traders buy the undervalued asset and sell the overvalued one, expecting prices to return to their normal relationship in the future. 

The advantage of Pair Trading is that it's a market-neutral strategy, helping to reduce risks from overall market movements. However, this strategy requires detailed data analysis and close market monitoring, as the relationship between the asset pair can change when new factors come into play.

What is Hedge Trading strategy?

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Hedge Trading is a risk management technique that traders use to protect against losses in the market by opening positions opposite to their main investment. This method helps traders better handle market volatility, even though it comes with additional costs called premiums. 

When hedging, traders often use derivative financial instruments such as options or futures to balance their investment portfolio. The advantage of hedging is that it reduces the risk from unexpected price movements, but it may also decrease potential profits. 

In the CFD market, hedging can be done by opening a short position in the same asset or a correlated asset to offset potential losses from an existing long position.

Additional explanation : Hedging is an investment strategy used to reduce risk or protect against losses in investments. It involves investing in assets or financial instruments that are likely to move in the opposite direction of the main investment, helping to offset potential losses from the primary investment. It's like buying insurance for your investment to reduce the impact of market volatility or unexpected events.

What is Swing Trading strategy?

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Swing Trading strategy is a trading method that focuses on profiting from short to medium-term price movements. Traders hold positions for a few days to several weeks. This method primarily relies on technical analysis to find suitable entry and exit points by examining chart patterns and various indicators. 

The advantage of Swing Trading is that it requires less time commitment than day trading, making it suitable for those with limited time to monitor the market. However, it comes with risks associated with holding positions overnight and over weekends.

How to apply These 3 Strategies in CFD trading

Using all 3 strategies for CFD trading can significantly increase profit opportunities and reduce risks. We'll introduce 3 main strategies that traders can apply to their trading, along with methods to combine these 3 strategies to create a more comprehensive and flexible trading approach.

Using Pair Trading in CFD Trading

• Choose CFD pairs with a correlation, such as CFDs of stocks in the same industry or currency CFDs with economic links.

• Open a long position in the CFD expected to perform better and a short position in the CFD expected to perform worse.

• Set equal trade sizes on both sides to create a hedge and reduce overnight holding fees.

• Close positions when the prices of both assets return to their normal relationship.

Using Hedge Trading in CFD Trading

• Use CFDs to hedge risks in your existing investment portfolio.

• Open CFD positions opposite to your current positions. For example, if you hold actual stocks, open a short CFD position on those stocks.

• Use CFDs of other related assets to hedge risks. For instance, use crude oil CFDs to hedge risks of oil company stocks.

• Adjust CFD trade sizes to match the desired level of risk protection.

Using Swing Trading in CFD Trading

• Use technical analysis to identify suitable entry and exit points, using tools like Moving Averages, Bollinger Bands, and RSI.

• Open CFD positions when signals of a new trend appear, and hold positions for several days to several weeks.

• Set Stop Loss and Take Profit levels to limit risks and lock in profits.

• Monitor news and significant events that may impact the prices of the CFDs being traded.

How do we combine all 3 strategies?

Here's an example of using all 3 strategies together in trading. Start with Swing Trading to identify medium-term market trends, using indicators like Moving Averages and RSI to find suitable entry points. Once a position is opened, use Pair Trading to reduce risk by opening opposite positions in correlated CFDs.

For instance, if you open a Long contract for one oil company, Short another oil company that's likely to perform worse. Finally, use Hedge Trading for additional risk protection by opening positions in related asset CFDs, such as crude oil CFDs, to hedge against oil price volatility.

Closing contracts and profiting in this combined strategy requires considering multiple factors. When Swing Trading signals a potential trend change, such as RSI entering Overbought or Oversold territory, or the price crossing a significant Moving Average line, that's when you should start considering closing positions.

For Pair Trading, look at whether the price difference between the asset pair has returned to the average. Hedging positions should be closed when the risk they're protecting against decreases or disappears. We can profit from the price gap that develops between the assets we've bought.

Note: This article is for informational purposes only and does not constitute investment advice.