Using Technical Analysis to trade CFDs
- Technical analysis is the study of price action; technical analysts believe prices follow patterns and that history tends to repeat itself, so key market levels reached in the past will again be important in the future.
- I have found that charts are useful in helping me decide where a share is and when it is good to exit and enter. It is not perfect and one of the reasons I screwed up recently in the USA was that I saw a big reversal day before the current sell off and concluded that there was too much buying pressure for the market to sell off. So I have abandoned daily reversals for weekly reversals as to market strength.
- Use the IG Markets ProRealtime charts to filter for good and bad fundamentals and create shortlists of potential long and short stock candidates. You just have to let the price come to you. If the instrument has been trading in a tight range for an extended period of time, then chances are that there will be sizable movements when there's a breakout out of this range. These provide for good opportunities as long as you cut losses short if the breakout doesn't come through. If you find a good stock which is breaking out then you can just let it run and adjust your stops as you go locking in profit.
- Look for shares making higher highs and higher lows (or alternatively shares making lower highs and lower lows). It makes sense to trade in the same direction as established trends as these tend to persist for long periods of time.
- Do look out for key support and resistance levels - these are key points on a price chart that have been approached several times in the past but not breached. For instance if you have gone long but the price is approaching a key resistance level, you might take this as a sign to consider closing the position.
- Plot a few moving averages on your price charts and study price action looking for candles as they approach the lines (up or down). Prices tend to pull back to these levels. Loosen up the stops a bit but ensure your first profit target is around 2x the stop distance. If the market is in an uptrend, wait for the price to pull back to the previous high and then check for price action and vice-versa in a downtrend. It is also a good idea to check that volume is decreasing on the pullbacks.
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