Trading strategies for CFDs, commodities, and indices
Given that trading is a wide and diverse field, people involved in it deal with a broad variety of assets. Each of the groups of assets rotates within its separate market segment, characterized by specific procedures and patterns. Given these facts, it is not surprising that, in each segment, the trader must rely on different strategies and decision-making models. This article will discuss the best strategic models for working with CFDs, commodities, and indices.
Contracts for difference (commonly referred to as CFDs) are the agreements that allow traders to conduct purchasing and vending operations regarding the assets while avoiding the necessity to own these assets. These deals involve two major parties, with a broker being a counterparty to a trader. In the most general terms, the mechanics of CFDs’ functioning can be deconstructed in the following way: the trader opens the position, an agreement with the broker comes in power, the broker becomes obliged to cover the difference that will emerge between the assets’ opening and closing cost.
There are many reasons due to which traders prefer CFDs. Among them, the simplicity and straightforwardness of the whole process, as well as the lack of unobvious pitfalls, play a significant role. Due to these attributes, the CFD trading model is applied to various types of assets, not being limited just to one group. Let’s illustrate the specifics of CFD-related strategies based on trading cryptocurrencies, namely Bitcoin.
In the traditional model of crypto trading that does not involve CFDs, a seller borrows cryptocurrency and vends it. After some time passes and the price of the coin decreases, the trader acquires them back, and the difference between the vending and buying prices becomes their profits. Meanwhile, CFD trading significantly simplifies the trader’s task in this regard.
Crypto coins are a well-suited trading object given the volatility of their prices and the significant fluctuations through which their value passes. As a result, they often become the target of swing and position trading. When this cryptocurrency is traded using the CFD model, traders also often use price action trading as a fairly effective strategy. Its main element is a meticulous study of price charts and the determination of approximate patterns which prices are most likely to follow. With the consideration of these patterns, the trader predicts future fluctuations and makes strategic decisions based on these data.
In order to use this strategy, you should first focus your attention on the EMA chart provided by your trading platform. This visual figure shows the movement of 34 EMA (exponential moving average). When trading Bitcoins using this strategy, you should keep in mind the two basic rules. First, if the price rises over 34 EMA, you should go long. If it falls under 34 EMA, it is better for you to go short.
In terms of price action trading, there are two essential techniques. The first one is known as “the hammer.” It is a trading model within which a bullish trend appears in the market rapidly due to the traders’ failure to provide timely market closure at a low point, as a result of which buyers flood the market again and close deals at a high point. The second model is “the shooting star,” which is opposite to the first pattern mentioned above. It is bearish in its essence, emerging when the buyers cannot close the market at a high point, due to which sellers reemerge and close it at a low point.
In this regard, the rules described above can be modified to a slight extent. Hence, if the price rises over 34 EMA while the hammering tendency is being formed, you should go long. If it falls under 34 EMA while the shooting star tendency develops, it is better for you to go short.
By applying the price action strategy to trading CFDs, a person can conduct operations of long- and short-term character regarding numerous assets, including, but not limited to, cryptocurrency. This model is rather straightforward and easily understandable, making it suitable for most traders, even those who do not have excessive experience in the field.
Commodities are just as popular of an asset as any other object traders conduct operations with. There are various items that could be considered commodities in the context of this particular field. However, the most popular among them are precious metals (gold and silver), precious stones, oil, or any other material, physically tangible objects. Since these items are linked to frequent directional trending, it is not surprising that they are pretty popular among the traders as the subjects of their deals.
Meanwhile, when crafting a strategy to trade commodities, one should keep in mind that this market is influenced by the economic categories of supply and demand, which, in turn, are closely correlated with global and local events. As a result, fundamental analysis is a must-have tool in the arsenal of a trader who is going to engage in commodity trading.
Among the common trading models, those most suitable for commodities are swing, position, and seasonal trading. However, it does not mean that a person cannot try to use other models or combine their elements with those mentioned above. For example, some traders combine swing and day trading models’ elements to operate in a shorter time frame and reduce risk.
If you want to focus on commodities in your trading activities, the RSI and MACD indicators are most suitable for your purpose. They help the traders identify trending markets, as well as those that are forecasted to change their direction. Besides, with these instruments, it will also be easier for a trader to define the overbuying and overselling trends in the markets, which information is essential when dealing with commodities.
Although the RSI and MACD charts may seem overly complicated and scary to beginners, crafting a clear and precise strategy will help the trader to navigate their indicators quickly. Besides, there are several universal rules related to using these charts in commodity trading. Hence, it is advisable to go long in case if MACD is over the zero line and go short in an opposite situation. As for the RSI indicator, a trader is advised to go long in case the RSI drops below 30 and go short when this figure crosses the top mark of 70. By combining these two sets of rules, traders can increase the accuracy of their forecasts and the effectiveness of their performance.
In addition to CFDs and commodities, trading can also focus on indices. They are popular among different types of traders, both those who prefer short- and long-term strategies, since this model provides solid conditions of trading on different timeframes. The most widespread strategies in this segment include swing, day, position, and seasonal trading. The indicators applicable to this type of trading are numerous and diverse, including Bollinger Bands, MACS, RSI, and other similar tools.
There are 19 stock indices that traders can utilize in their activities. To be more illustrative and clear when discussing the strategies related to them, let’s consider one particular index, namely DAX30, and the peculiarities of dealing with it. It is closely linked to day trading, so you should keep in mind the peculiarities of this modus, namely the necessity to maintain a high trading frequency. In such conditions, the chances of winning are just as high as those of losing, making risk management highly important for those involved in the general process.
When using DAX30, a trader can rely on a wide variety of technical analysis instruments. The combination of their indicators can become a basis for general rules applicable in most situations. Thus, for instance, if the graphs demonstrate that the price exceeds 50 EMA, while the MACD is over the zero line, it is necessary to go long. If the price is lower than 50 EMA, while the MACD passes under zero line, going short becomes a preferable option. Besides, going long is also advisable in case if the Bollinger Band’s lower line is rejected by the price. If this same thing occurs with the upper line, going short would be a good decision.
Trading can hardly be considered an exact science in which certain rules and axioms are universally correct regardless of the specifics of each situation. Therefore, all the strategies described above should be taken as a conceptual framework and starting point for individuals to develop their own approaches to trading. A strategy is always an individual tool that correlates significantly with the style and personality of a trader. Therefore, you should take into account the information provided above, but at the same time, look for your own approaches to trading with the involvement of various assets that will suit you best.