This trading strategy is similar to the buying on a retracement strategy, but applies to a down trending market. The idea is that there is a steady and established downtrend, which in the nature of things will have the occasional rallies. If we take advantage of these to sell the stock short using CFDs, this can be a profitable exercise.
As you may have noticed, stocks seem to struggle sometimes to increase in value, whereas when they are losing value it often happens quickly. The psychological reason for this is that most people go long on stocks, and no one likes to lose, so as soon as the price starts dropping traders rush to sell off their holdings. By a process of supply and demand, this pushes the price lower.
Again, the best way to trade this stock chart movement is by using CFDs, for the advantage of the leverage that can be obtained. In this case, you will also receive some interest to your account because you have taken a short position. Just as you pay interest for the margin when you take a long position, you benefit from interest, although not to the same percentage, by going short.
To find a suitable candidate for this CFD strategy, you first need to have a bear market. This way, you are trading with the trend which is always considered a less risky prospect than countertrend trading. You can often identify a downtrending market just by looking at the charts, but as a word of caution, you should make sure that you look at different time frames so that you are not confusing a downtrend with a retracement in an uptrending market.
The second step is to wait for a rally in the downtrend. This can be identified by looking for a weekly high which is higher than the highs achieved in the previous two weeks. This stock now goes on your watch list, as it is too early to risk going short, in case the rally continues.
The end of the temporary rally can be called when the price starts dropping, and falls beneath the previous weeks lowest point. At this point you can short the stock using contracts for difference to maximize the effectiveness of your trading capital.
As always, immediately after entering your trade you should set a stop loss point. In this case, a suitable price would be the highest high from the past few weeks. If the stock price rises back to this level, then the trade has failed and you should exit your short position for a loss to save any further losses.
If all goes well, and the stock price continues to fall, then you can use a trailing stop to follow the price down and exit the trade if the price starts climbing back again. Another exit method would be to track a short term moving average, say a 20 day SMA, and exit the trade if the moving average changes direction and starts rising.