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Technical trading is perhaps the most involved style of trading strategy, and one that is certainly not for the faint of heart. To a greater or lesser extent, most traders incorporate some elements of technical trading into their strategy. But for those who would choose the path of a technical trader, complex data analysis and statistical processing is in place to provide an overwhelming mash of at times contradictory indicators. Be that as it may, technical trading operates on the principle that the evidence never lies, and in drawing conclusions backed by figures and analysis of the data and price charts, many traders find their natural rhythm and trading consistency.

Technical trading is all about analysing graphs and price charts to identify certain patterns and spot anomalies which could give rise to a profit. The modern day trading arena – whether its CFDs, share dealing or whatever – is a sphere dominated by analysis, data and tools to help brokers make more informed decisions, and this is only on the increase as brokers continue to jostle for some form of differentiation from the crowd.

The theory goes that by getting to grips with past performance and price patterns, it becomes more possible to get a feel for the market’s tolerance to certain price points, making it that much clearer when a share becomes over- or under-priced, thereby leaving opportunities for significant profit.

Technical Trading Strategy Benefits

The key advantage to technical trading is that very little is left to hunch. When you’re sitting with price data over a period of the last few months, and you’ve established clear price limits and boundaries, it can after time become obvious when a share is on the move, and the indicators should ideally clearly point to a particular investment decision. The more analysis you conduct, the more comfortable you are with a share or market background, enabling you to be in a better position to better determine how to react to certain movements.

Of course, this has to be tempered by the complexity and the level of involvements technical trading requires. The process of analysing graphs and interpreting data is one best suited to those with a passion for numbers and arithmetic, and while most traders will to some extent enjoy mathematics and statistics, there can come a point with technical trading where it becomes a bit too much.

If you intend on building in technical analysis into your trading strategy to any great extent, it’s probably more advisable at first to do so on a staggered basis, taking cues from external factors like corporate announcements in addition to a cold, hard interpretation of the numbers – ideally to help break you in to your new trading strategy, if not from the point of saving your sanity.

Technical trading has a number of merits to it, and there is much to be said for the trader who is dedicated to sifting through charts and graphs throughout the trading day. It’s not an easy path to tread, but building a level of competent comprehension when it comes to trading statistics can help identify a wealth of subtle trading opportunities that other strategies may fail to pick up on.

Top 5 Technical Indicators Video

Hedging is the process by which investors seek to position themselves as safely as possible, offsetting long positions with corresponding short positions in order to attempt to guarantee a profit – whether markets move up or down. The flexibility afforded by trading CFDs makes it possible to take positions on both sides of the fence, and allows you to capitalise on wider market movements that impact on your positions while taking steps to ensure you profit whatever happens.

Hedge funds, as is apparent from their names, aim to hedge their positions to guaranteed earnings for their clients, and will the strategies used are far from foolproof, the hedging mindset is one that has a significant role to play in minimising risk and creating a steady, profitable portfolio.

How’s Hedging Different?

Hedging differs slightly from pairs trading in so far as it tends not to be restricted to single pairings. Hedging is more of a portfolio consideration, and tends to look at sectors and industries which conversely relate to one another, and can even cross trading instruments and asset classes. The point of hedging is to minimise risk, and ideally generate a profit in the process. Much of the magic in hedging lies in understanding how markets and industries interrelate, and how prices are likely to react to indicators affecting their sectors.

For example, it might be the case that the government is proposing to invest more heavily in green energy. A position in support of green energy producers might be offset by a short position on mining companies with a heavy exposure to coal, given that we might expect the latter to perform less well over time as a consequence of the government announcement.

The hedge here is that green energy companies will do well off the back of the announcement, and the steps taken to short coal mining companies neutralises the risk of volatility in the green energy market. This gives the trader a better chance of realising a smaller profit – something which is essential when managing other people’s money, and particularly welcome in an otherwise volatile trading environment. When executed well, hedging strategies can offset the bulk of the risk of any position, and can go a long way towards ensuring stability across a portfolio.

Hedging Strategy Benefits

While minimising risk is a crucial part of hedging, it also reduces the profit potential for those trading with a hedging strategy in the short term, favouring instead a more stable, steady approach. This means potentially sacrificing wildly successful positions to the extent that your offsetting hedge trade fails, but nevertheless maintains a manageable risk profile and ensures your don’t fall too far behind on any one sour position.

Hedging as a strategy is more than just an idea, and there have been many books and journals dedicated to identifying and exacting workable hedges. When trading CFDs, the margined nature of the product increases even further the need for cautious, prudent hedging, and for the conservative trader with a desire to preserve capital and avoid losses, factoring in a degree of hedging can be an ideal way of building your trading capital and gaining experience in one of the most fundamental areas of sustainable trading.

Video Explaining Hedging in More Detail

Perhaps one of the most common strategy adopted by regular CFD traders, pairs trading (may be called arbitrage trading) is a good way to both double up on the gains of specific market movements while also acting as a counterbalance, or hedge, against markets moving in unexpected ways. Relying on a traders ability to find correlative positions and identify corresponding trends across different instruments and markets, pairs trading strategies form at some level part of the strategies of more experienced traders, and are a simple way to breed some measured consistency into your trading portfolio.

A pairs trading strategy usually involves adopting two related positions – one going long, the other going short – in an attempt to create a direct trade-for-trade hedge. More often than not, this would be done within the same industry, picking a likely strong performer and a likely weak performer to interrelate.

Pairs Trading Benefits

The idea with pairs trading is that you’re effectively giving yourself a second chance of making a profit, and an opportunity to capitalise on downwards market movements. In order to make a pairs trade profitable, the earnings from one position need only outstrip the losses of the corresponding position, and in some instances both may do well. By taking a second, notionally linked position, you’re effectively giving yourself a better chance of striking gold with one – even if the market moves counter to your rationale.

For example, you may believe one airline is destined to do better than another, so go long on Airline 1 and short Airline 2. In doing so, you’ve effectively hedged your position – all you need is for Airline 1 to improve in value more than Airline 2 falls (or vice versa) to create a profitable trade, and the degree to which prices move in your favour is of course exaggerated by the margined nature of CFD trading.

Pair Trading Strategy Difficulties

Unfortunately, the real skill in pairs trading lies in spotting trends amongst assets and trading bases, and often this comes down to overdue market corrections or temporary blips in pricing. Effectively, this means that as a pairs trader you are constantly resigned to scouring through data for solid pairings to arbitrage, and it can take some time to become familiar enough with market analysis techniques to identify these occurrences. That said, it can often be possible to identify situations where pairs will produce a virtually guaranteed profit, and with the backing of leverage this can be particularly lucrative.

A carefully measured and reasoned pairs trading strategy can be a highly effective way to mitigate against losses whilst ensuring you have the opportunity for maximum profits on the upside. By identifying and trading on correlations, including inverse relationships, pairs trading makes it possible to amplify your sure-fire gains and guard against unexpected and sudden market jolts, providing you with a means of reducing your risk while going some way to stack the odds more in your favour.

Ultimately, if its good enough for the professionals, it’s good enough for the majority of private traders, and with the relative ease of execution of pairs trading with CFDs, the strategy provides a solid blueprint for building a profitable trading account.

Essence of Pairs Trading Strategy Video

When it comes to settling on a coherent trading strategy, none comes close in terms of apparent ease of execution like momentum trading. Momentum trading is where the trader looks to identify trends in price movements and waits to see those movements taking effect before opening complimentary positions to ‘ride the wave’, often relying on macroeconomic indicators and industry developed to predict when markets are likely to start moving. When trading CFDs, the benefits of momentum trading on margin can be significant, leading to vast profits as your positions move with the momentum of the markets.

Of course, while momentum trading might seem straightforward, easy to understand and low-risk, that’s never a guarantee, and there may well be problems facing the trader who approaches with such a mindset. Choosing the right positions takes time, and is usually a cross between understanding and interpreting the impact of corporate and economic announcements while analysing charts and previous price data.

Perfect Your Momentum Trading

As a trader employing a momentum trading strategy, it can be possible to take full advantage of heavy price movements through the relatively transparent shifting in price of certain assets. At the opening of the trading day, you will usually be able to get a feel for the sectors and companies that are performing well, and it just takes one positive corporate announcement to buoy that particular stock and the industry as a whole. By browsing the online forums, blogs and chat rooms, it quickly becomes apparent the stocks that everyone’s talking about – keep an eye on them, because chances are they’ll start to rise at some point over the coming trading day.

A good momentum trading strategy seeks to find the intersect between economic interpretation and effective analysis of trading data, identifying shares which appear to be preparing to break through their previous upper limits to reach new heights. You are looking primarily to identify stocks that have been performing well and are poised to break through, either positively or negatively, and you should create a shortlist of ‘watch’ stocks for the first part of your trading day.

Alongside that, you should aim to keep a constant eye on the financial media as the day wears on, and you should already be anticipating announcements that could have an effect on the price of the securities on your watch list. When the conditions are right and prices seem to be moving in one definite direction, it’s time to open your contract and wait for the position to unfold.

A Word Of Caution With Trading on Momentum

When trading on momentum, it’s always a good idea to set stop losses, to limit your liability and close out on bad calls before they take a stranglehold of over your trading account. Set stops somewhere between the previous high and low limits for capital preservation if you’re going long, and do likewise with a stop limit if you’re shorting – this is usually a good point to cut things off, and might just be the point of no return for a once promising security on that trading day.

Of course, momentum trading isn’t a strategy you can perfect in a matter of moments or even days – it takes time to practice and refine your approach, and even experienced traders are still learning lessons. But by giving yourself a strategic area in which to do further reading to start to build up your trading experience, it can be possible to relatively quickly start banking winning, profitable and above all consistent trades.

Video on How to Read Momentum

When it comes to settling on a particular trading strategy, one of the most common that springs to mind is scalping. Scalping is the process of snatching quick profits from trades, often closing out early and moving on after a short period of time whenever the potential for a small profit presents itself. Applied to contracts for difference, scalping strategies can be particularly effective in delivering a steady stream of profits, but also difficult to execute with a few key barriers to easy profits.

Example of Scalping

• Long tails suggest struggle between the bulls and the bears and thus market moves sideways presenting a great opportunities for scalping. Find short term support and resistance and trade of those levels as seen on the image above.
• Don’t ever try to scalp around important announcements which can cause big swings in either direction; it is better to wait for the quiet times when markets move sideways.
• Scalping and a very short term strategy, make sure you don’t use this strategy for a long term trading and make you apply “stop loss” order to keep potential losses in check.

Here’s a run down of the advantages and disadvantages of scalping strategy.

Scalping Benefits

• Leverage: the primary advantage of scalping with CFDs is the role of leverage, which acts as a buffer to bring larger profits from each trade. Because the scalp takes place over a very short period of time (often a mere matter of hours or even minutes), the margined nature of CFDs allows you to maximise earnings over the short space of time, with margin requirements of as little as 5% making generous gearing ratios possible.
• Low Financing Costs: when dealing with leverage and margin, the costs of borrowing can often stack up, particularly when positions are held overnight or for a matter of days. With a scalping strategy, you get the benefits of a leveraged position without the drawbacks of expensive financing costs, which can often eat considerably into the profit portion, simply by holding on to your leveraged portion for less time.
• Minimal Risk Exposure: the chances of losing too much over the course of a few scalping trades are minimal, and markets seldom move so violently as to cause any serious damage over such short periods of time. Likewise, by locking in profits when they arise, there’s very little chance of being in a position long enough for markets to correct and start to act against you.

Scalping Risks

• Limited profit potential: while scalping demands that you quickly lock in profits and close out transactions, this is often at the expense of more generous returns that come with time, and by limiting your positions arbitrarily you may be curbing your potential for taking a profit, which can be particularly hard to stomach when it later becomes apparent you’d backed a winner.
• Time-intensive: as trading strategies go, scalping is one of the most time consuming, relying on constant market engagement to make sure you’re taking profits when they show and cutting out at the right times. While broker orders can foot much of this responsibility, it’s still essential that you remain consistently on the lookout for your next scalp whilst also managing your current open positions.
• High transaction costs: because you are out to bank small profits wherever possible, the costs of transactions begin to look more significant, and automatically start you off on the wrong footing with each and every trade. Particularly given the higher transaction costs on leveraged positions, this can make scalping individual profits sufficient to exceed the applicable costs a tricky task.

Scalping Trading Video to Demonstrate the Strategy in Action

One of the comparatively longer-term trading strategies often adopted by investors is known as swing trading. Swing trading is the process of investing at the top and bottom of previous price movements, striving to profit on the anticipated correction to come, and can take place over days, weeks and even months in so far as is permitted by financing costs. By virtue, swing trading has the potential to generate significant prices on the recovery of a CFD, but is naturally fraught with danger, and high in risk without the right stops in place to limit liability.

Example of a Swing Trade

Swing Trading Benefits

Swing traders generally look to identify instruments and assets that are trading below or above the range at which they legitimately should, taking positions on the correction to capitalise on the return to a price range the market can stomach. This is usually done by interpreting graphs and identifying break-out points with particular stocks that appear to be trading over (or under) the point of their inherent value – thus, swing traders pick up on price anomalies, leverage their position with CFDs and look to ideally profit on the difference.

Swing trading can also benefit from wider market trends, and is often best executed when working with the momentum of a market already in flux. When a correction is due and the markets are working in your favour, it can be significantly easier to capitalise on your positions and maximise your profits than where the markets are working against you. Although the possibilities for profiting are clear in both environments, working with the market does tend to deliver more generous returns, and can even cause swings beyond the point of correction to load up on your earnings.

Swing Trading Risks

The main risk associated with swing trading is that you buy on the strength of a false positive indicator, only for underlying prices to continue to fall. Naturally, this can be a devastating position to take, particularly when trading highly leveraged CFDs, and you really can’t afford to absorb too many losses of this kind.

For this reason, it’s important to make sure you’re only investing on the strength of a credible, real price rise, which may mean sacrificing a small amount of profit as you hold off to ensure prices are moving as you expect. Don’t get greedy here – take your time over entering positions to guard against the possibility of a total collapse of asset price, and ensure you have stop losses in place at all times to guard against every eventuality.

Swing trading is but one of many trading strategies that can be applied to CFDs trading, and it’s very much up to you as a trader to find a strategy that suits your trading style and ability. Swing trading is definitely not the easiest strategy to execute, and nor is the lowest risk. But what swing trading does have in its favour is the ability to realise larger profits for those positions that do hit the nail on the head, and provided you take steps to mitigate the risk of a share price collapse, swing trading can prove a valuable strategy to have in your arsenal.

Swing Trading Video Explaining Entrance and Exit Points