Chasing the Dream: How Traders Use CFD to Sharpen Strategies

Many new traders start in the forex and CFD sphere, and why would they not? It’s popular, fast-paced, and widely accessible from most of the world. Furthermore, there’s a whole slew of resources available, making it easy to learn and progress for those who want to put in the hours. In fact, a lot of forex traders are completely content simply trading currencies for a shot at some extra income, a challenge, or even for entertainment.

However,  there’s also a large portion of traders who get stuck after a while. Either they can’t figure out an issue with their trading game and something keeps throwing them off, or their progression stalls and they feel like they are stuck in a rut. These traders often try to find solutions through additional learning and trying to figure out how they can fine-tune their tactics. And while this is great if it works, there’s also another way to push through.

Trading technology and the industry itself are constantly undergoing rapid evolution. Many new services, tools, and ease-of-use solutions are becoming available day-to-day. One of the most flourishing segments, of course, is CFD trading. In turn, CFD brokers are becoming more advanced, and giving traders more options to improve themselves.

This article will cover why forex traders may want to consider broadening their horizons to include CFDs, as well as how they can use widely available CFD platforms to level up their trading game.

Why consider trading CFDs and not just forex?

Forex and CFDs are fairly similar and often offered by the same service providers. However, some forex traders prefer to only stick to currency pairs. That may be because they are comfortable, because CFDs are wider in scope and thus intimidating, or for another reason altogether. Whatever the cause is, traders should not sleep on CFDs.

How important is diversification for forex and CFDs?

The first and most obvious reason is diversification. Don’t put all your eggs in one basket is the first piece of advice many traders hear. And in practice, it’s a very simple but very effective way of avoiding disastrous losses. Sometimes certain industries or market segments are unaffected, while others suffer catastrophic losses. And a trader with both in their portfolio will suffer much less than one with only the falling group.

However, this isn’t the primary reason for forex traders. After all, forex is a fairly unique market where prices depend on ratios rather than individual assets. As such, it’s borderline impossible for the entire industry to slide. Forex traders can diversify by holding safe pairs containing the JPY and riskier AUD-based pairs, for instance.

Additionally, since forex traders tend to stick to short to mid-term strategies, their portfolios are much slimmer and more risk-resistant than long-term investors. As such, the real reason to trade CFDs is not diversification, but the untapped potential.

The real reason for FX traders to consider CFDs

Forex pairs, the most commonly traded majors and minors at least, are relatively stable. They move in pips, so forex traders usually need to take larger positions to see significant gains.

However, for CFDs: oil, gold, و stocks, for instance, larger moves are fairly common. As such, traders who target the mid-term or even short-term traders with good timing can see great results from these.

These assets, especially energies and metals, require a fairly similar skillset as forex trading. Good CFD traders stay on top of global events, albeit on a slightly larger scale than FX traders. As such, even though it requires a bit more effort, traders can broaden their forex skillset to include CFDs.

Finally, it also lets them capitalise on a larger variety of market conditions. And even if traders don’t intend to track CFDs themselves, it’s smart to at least have a baseline of understanding, since they can affect forex as well. For instance, oil prices can cause currency price shifts in major oil-producing countries.

The tools at your disposal

With that lengthy explanation out of the way, it’s time to tackle the tools traders can use, and how they can use them to go beyond what’s in their regular trading routine. This article will take MetaTrader 4 as an example, since it’s the most widespread, but keep in mind that most modern trading platforms boast similar functionalities.

The baseline MetaTrader 4 experience

Out of the box, MetaTrader 4 is a great tool. It allows traders to access various assets, place trades, set their take profits and stop losses, and carry out a relatively calm, albeit basic trading routine. Not that there’s anything wrong with that but almost everyone knows it already.

What’s interesting is the variety of features that MT4 boasts that can be used to improve various aspects of trading. Here, we’ll go over some, from the simpler to the relatively more complex.

Levelling up SLs

New CFD traders get the advice to always set take profit and stop loss levels for their trades to mitigate risk. However, those aren’t the only options, as trailing stops offer a different option, more suitable for certain scenarios. For instance, if an asset is moving upwards and a trader sets a normal SL, it’d only terminate the trade after it’s fallen below the initial level.

But a trailing stop, as the name implies, follows the trade and then stops it when it reverses. As such, it can ride out a temporary trend, with the caveat that the MT4 platforms needs to remain active for it to work.

TPs and SLs can be further levelled up with EAs, which this article will cover soon. Partial take profits can, for instance, stop a part of a trade once it reaches a certain level, and multi-level TP/SL’s operate similarly, with the ability to set multiple thresholds where trades are partially closed.

Levelling up analysis

When most traders create a strategy, they usually test it with a demo account to see if it works. Then, they use the trade history tab to analyse their results and come to conclusions.

However, MetaTrader 4 offers backtesting features, which let the platform automatically run a strategy on real past market conditions. In other words, it cuts out all emotion, and any shortcuts or compromises a trader may use in manual trading.

This offers different, raw results, but ones that are still viable and valuable. Again, it requires the use of EAs, which are the next topic.

Levelling up efficiency

Manual trading is the preferred method for most traders, but there’s a way to make things more efficient. EAs allow what’s called algo trading, or feeding a strategy to an algorithm that will then carry it out on behalf of the trader.

Now, EAs vary wildly, some adding extra options, and some full-on automating trading. Forex and CFD traders with some technical knowledge can craft EAs by themselves, but there’s also a massive library of free and paid options available from different online sources.

And while EAs can trade by themselves, it’s wise to oversee them. As such, most traders trade parallel to them, and use them as a way to implement tried-and-true tactics to familiar assets and free up some of their time and mental energy.

Levelling up charts

Lastly, it’s important to note that, even if forex and CFD traders want to do everything manually, there are way more options than the baseline platforms. Custom libraries can include wide arrays of indicators and custom tools built to better understand markets. Traders who like to glean as much info from charts as they can are almost sure to find tools that can make their lives easier.

Conclusion

Even beyond what was mentioned, there are many tools like Trading Central, which many brokers integrate into MT4, or VPS, which lets MT4 run 24/7 with extremely low latency. The important thing to take away is that trading tools are extremely varied, and traders should not ignore the potency of technical tools in their routines.

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This information is not considered investment advice or an investment recommendation, but instead a marketing communication.