This CFD trading strategy is a trend following strategy. ‘Let the trend be your friend’ is one of the sayings that traders have, and it is based on the sound idea that it is easier and less risky to trade in the direction of the prevailing trend. This strategy does not anticipate and therefore capture all of a price move, but there are very few strategies that can. Rather, when you buy into strength you are hitching a ride on a train that is already moving.
As contracts for difference give you so much leverage on your money, it does not matter that part of the trend may be missed rather, a solid and relatively safe upward moving stock will still give great profits when traded with a CFD. This strategy is aimed to not be risky, as one of the conditions for entry is that there is an uptrend in three different ways.
The first place that we are looking for an uptrend is in the overall market, which we might define as the FTSE All Share Index if we are interested in the English markets. There are several ways of defining an uptrend, and it can be as simple as inspecting a long-range chart for a steady upward movement. An alternative method is to look at the simple moving average over a long period, say 200 days, and make sure that it is steadily rising.
The second place in which we would identify an uptrend is in the sector of interest, such as energy or mining. We would look for a solid rising composite index for the sector in order to be as sure as possible that it was worth trading in. And thirdly, we would also want to see a steady uptrend in the particular stock that we have chosen.
Now we are looking for a particularly strong stock, and we can measure this by seeing how the stock performed relative to the overall market and to its sector. We want to see a performance which is better than both the market and the sector by a certain amount, say 10% better than the market and 2% better than the sector over the previous month.
Having found a stock that satisfies these conditions, we can enter a trade by buying a long CFD in that stock. Immediately, we will place a stop loss in case the trade goes the wrong way, and an indication that it has failed would be if the price drops below the low price of the previous few weeks, so that is where the initial stop would be placed.
Assuming that the stock continues to perform, we would only exit the trade if the upward trend of the sector reversed, or if the stock failed to perform better than the overall market for a couple of weeks, as this would indicate that the stock was weakening. We could also use a protective trailing stop to monitor the stock’s performance, and end the trade if there was a fall back.
Of course, when buying fast risers it is important that you dedicate time to monitor the trades as shares which have risen a lot in a short period of time have the tendency to be subject to rumours and/or speculation. A false rumour can turn a fast-riser into a losing one as traders exit en-masse.