With the recent developments of mobile trading technology, a broader audience of traders now has access to the CFD markets and many of these investors are disinterested in using the traditional buy and hold strategies that have typically been implemented previously. Fortunately, CFD trading offers a diversified array of trading strategies that are well-suited for all investment styles, market environments and financial goals. Some of these strategies are more appropriate for leveraged trades, so a detailed analysis of each method should be undertaken before real money is invested in these markets.
One advantage of these trading methods of that they can be applied to a wide variety of financial instruments and this essentially means that these methods have been researched and back-tested by traders in many different markets. It should be noted that most trading styles are much shorter in duration than what is seen with traditional stock investing but when looking at these shorter time frames, technical analysis tends to have greater levels of success. Here we will look at the three foundational approaches taken by technical CFD traders when they look to establish new positions: Trend Trading, Range Trading, and Contrarian Trading. There are many variations that can be taken but these three approaches form the basis of nearly every other commonly used trading method.
One of the first maxims new traders hear is that the “trend is your friend.” The essential argument is that most asset classes tend to trade with an underlying momentum that can be identified by looking at price activity as well as technical chart indicators such as the ADX or MACD. Up-trends are generally defined as being comprised of a series of higher highs combined with a series of higher lows. In contrast, downtrends are seen when lower highs are combined with lower lows in price activity. Many CFDs tutorials often advise new traders to look for trends and establish trade ideas based on the underlying momentum, as this is an easy way to turn the forecasting probabilities into your favor.
Range trading conditions occur when prices are confined by upper and lower limits, which prohibit an asset from establishing a clear trend in either direction. Ranges are defined by support and resistance levels, which are areas where prices have historically met selling pressure (resistance) or met active buyers (support), pushing prices higher. Buying positions are generally established when prices obey support levels and sell positions are favored when prices fail at previously established resistance. Additionally, profit targets are very clear with range trading methods, as many traders will look to close long trades when prices approach resistance and to close sell trades when prices approach support.
Contrarian is probably the most difficult CFD trading strategies, as it requires a great deal more practice in identifying critical reversal points on your charts. One common characteristic of a successful reversal entry occurs when prices have extended too far in one direction without any corrective retracements. Chart indicators such as the Relative Strength Index (RSI) can be used to clearly see when prices have become “overbought” or “oversold” and these areas can be used to establish new contrarian positions.
The trading strategies outlined in this article comprise the basis from which most other CFD trading styles are generated. These strategies achieve higher levels of probability when combined with other method, such as a fundamental analysis of the macro economic factors affecting prices or the use of technical indicators to remove some of the subjectivity from your chart analysis.