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CFD Trading with Moving Averages

Trading with Moving Averages
Written by Andy

Many traders develop more and more complex trading strategies in an endeavor to find a perfect trading system, also referred to as The Holy Grail. The truth is that there is no perfect system, and the more indicators you use, the more likely they are to conflict and leave you with no clear plan. If you want to trade contracts for difference for a profit, you could do worse than using a simple CFD trading strategy such as one based on a set of moving averages.

Look first at a simple moving average and an exponential moving average, both based on 100 days. That is, put SMA 100 and EMA 100 on your price chart. These will allow you to confirm the direction of the trend. If the EMA is above the SMA, then a long-term uptrend is confirmed. This is because the EMA has a greater emphasis on more recent prices, so if it is higher than the simple average, then the recent prices have been higher.

Now if you add EMA 13 and EMA 21 to the chart, you can check on the intermediate trend of the security. In this case, you want the shorter time frame, that is the EMA 13, to be above the EMA 21, and that indicates that the previous month has also been in an uptrend. Both the EMA 13 and EMA 21 should be above the hundred day averages, and this will confirm that you are looking to place long CFD trades.

The last two actions are just to confirm that we have a good uptrend for this trend following CFD trading strategy. The final step is to put two short term averages on the chart to provide a signal for making a trade. Add both an EMA 5 and an EMA 6 to your chart. As you have discovered, in an uptrend the average with the shorter number of days should be higher than the other, and we use this as a signal for entering a long CFD trade.

The actual signal to enter a long position is when the EMA 5 crosses the EMA 6 to go above it. The shorter term average being higher means that the price is trending upward. As soon as you place the trade, you should put a stop loss in position. This time, use a stop loss based on the Average True Range (ATR) indicator, which is a measure of the volatility of the price of the stock. Set a stop loss at two times the ATR below the current price, and trail it up as the price increases.

Any indication that the trend is flagging, such as any of the moving average pairs reversing their positions, is a warning sign and you should exit the trade and take your profit.

Though simple, this CFD trading strategy is effective, and the leverage available through CFDs means that it can produce good profits. You can use exactly the same idea and strategy in reverse to find good shorting prospects.

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