CFD Trading Strategy with Double Hedging

CFD  Trading Strategy – Double Hedging

Difficulty Level: Medium to advanced trader.

Suitable For: Both, Low and high risk investor/trader.

Theory: Use two different CFD accounts to hedge a CFD long or CFD short position.

Objective: To trade only when the likelihood of profiting is higher in the main position. Thus, profiting from one account and minimize losses if market goes against your main position.

Requirement: 2 CFDs accounts.

Possible Pros & Cons

PROS CONS
Lower risk Reduced Profit
Reduced Losses Could lose in both account
Profit from Up or Down Trend Double exposure
Trade with Confidence
Could profit in both account

Introduction

By trading with two CFD accounts and holding the same cfd in each account, in opposite direction, long v short, it could be a way of reducing the risk and increase confidence. It could be possible to realize profits and or minimize losses. Traders would have to manage their holding so that losses aren’t bigger than their profits. Caution has to be taken when the trend are in correction or changing direction.

It will be important to always has an appropriate balance of the amount holding. This type of strategy would make traders feel more comfortable when trading. Because if the market move against your principal position losses will be reduced.

How to Start

  1. Set up your 2 CFDs account with different providers. Make sure that both providers offer the same CFD Market or Instrument of your interest, for example RIO TINTO UK. The less trading commission the better.
  2. Follow the CFD and familiarize with it. This could take weeks or months. It also depends on your level of experience. It is better to do some theoretical trading practice first.Theoretical Trading Practice:A- Buy a long position of 500 RIO TINTO UK in one CFD account.
    B- In the other CFD account, sell or go short with 200  RIO TINTO UK.
    C- Look at the result after a day whether it satisfies your style or not.
  3. Write down how much are you going to risk. Then decide your position amount in each account. For instance 200 CFD of RIO TINTO UK in account “A” and 80 CFD of RIO TINTO UK in account “B”.
  4. Write down how much profit are you expecting to make and how much to lose in the hedging account.
  5. Note down your entry point and in which direction you think that the price might go. It is important to enter the market with confidence, if you distinguish a pattern, you may want to follow it for a few days to confirm that isn’t a false signal.

Before trading always check:

  1. Scheduled economic news, market events and/or economic calendar releases that could affect your position. Big companies usually trade in the same direction of the market otherwise something is up with the company share price.
  2. Check what indexes around the world are doing. It will be wonderful to think, that overnight the market will do well and next day, your local index will follow its peers good performance.
  3. Be as sure as possible that the Trend is steady and is not likely to change after you place your trade.
  4. Check how currencies or commodities would affect your CFD if you are trading an Equity CFD.

STEP 1

Once that you have chosen your entry point, decide in which direction you will have the bigger holding. For instance, if you think that RIO will go higher or is starting an uptrend, then,

in account “A ” buy (for example) 500 cfds of Rio Tinto. This would be your long position. Then in account “B” go short in the same Rio Tinto CFD, sell for instance 200 cfds of Rio Tinto. This would be your short position,  which is 40% of 500.

In both accounts and positions, make sure that stop loss is in place by the same amount of points or pips if your are trading currencies.

STEP 2

The recommendation for this strategy is to hold both position (long and short in the same CFD) overnight. If you are holding it overnight, then the recommendation is to close both position simultaneously, soon after the market opens or when ever you decide that you have achieved your target profit or your loses are enough or your stop loss have been reached.

There are a number of different scenarios that could happen. The important thing is not to panic. After all, in this sample you are 40% safe.

Scenario 1: The ideal One

This scenario is the perfect one. If the trade has been place at the right time and trend- The day after you have placed your positions, the share price will open substantially high, and it is recommended to close both positions.

For example if you place 500 CFD long in Rio Tinto and 200 short in Rio Tinto and the price went in your favour by 100 points you would have gain $300 minus commission and other fees.

Scenario 2: Incorrect Way

In this scenario the price will move against you, and you could incur a 60% loss, it is recommended to close both position. Time to re-think is the trade placed in the right direction and what was the main reason for the market to move against your position, perhaps was  an un-scheduled news release.

For example if you place 500 CFD long in Rio Tinto and 200 short in Rio Tinto and the price went against you by 100 points you would have lost 300 plus commission and other fees.

Notes: Others Scenarios

  1. Sometimes it happens that prices go up only to fall back below the opening price. It is not recommended to wait for this to happen.
  2. Prices could barely move, in a flat market it is difficult to do one day trading. Traders might have to risk its position for several days in order to achieve its profit target. And it is not recommended.
  3. Sometimes it happens that prices go down only to go back higher than the opening price. Traders shall not expect for or wait for this to happen.

Let’s get started...

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