As CFD trading is a relative newcomer to the derivatives trading world, it is no wonder that it also brings innovations in analysis techniques and methods.
As CFD trading is a relative newcomer to the derivatives trading world, it is no wonder that it also brings innovations in analysis techniques and methods. Recent years have seen even greater developments in terms of new software products and indicator tools as well as revisions in the way that chart analysis occurs.
For new CFD traders, these elements may seem like wonder tools that take the work out of the process, but trying to remove the human element from making assessments and decisions rejects the fact that when it comes down to the bottom line, market analysis is intrinsically highly subjective.
There is no doubt that some aspects of CFD trading can benefit from various levels of automation and even the use of robots, but ultimately, none of these approaches can take the place of hard work and research. This is especially true when it comes to using chart patterns.
Chart pattern analysis
One of the most popular techniques for forecasting price activity in CFD trading is chart pattern analysis. Traders use this to decide which positions to take, but it can be an intricate and complex process to master. Chart patterns break down into two categories: reversal patterns and continuation patterns.
Reversal patterns point towards a current trend becoming over-extended and suggest that it will shortly change course. On the other hand, as the name suggests, a continuation pattern points towards an underlying momentum within a larger trend that is still going strong.
“Head and shoulders” chart pattern
The “head and shoulders” formation is one of the most well-known chart patterns. There are three peaks that characterize this pattern. The “‘head” is the highest in the middle, and the two outside peaks on either side – the “shoulders” – are both slightly lower. This formation leads to the assumption that prices are currently in an uptrend but are reversing.
A reverse head and shoulders pattern with inverted peaks is a signal for possible bullish activity, as it shows that the previous downtrend is running out of steam.
Double top and triple top
Other common chart patterns include double tops and triple tops with corresponding double and triple bottoms. A double top has two price peaks in the same area of the chart, demonstrating the assumption that prices have rallied twice up to a certain resistance level but then failed.
The level strengthens at that point, indicating that it is a strong resistance point for future trades. A triple top indicates an even stronger resistance level. The same idea works in reverse where prices indicate a support level.
Triangle patterns are seen as continuation patterns because prices form a direct lower baseline against a hypotenuse, which shows the constriction of price activity over a defined period of time. Variations of a triangle chart show uptrends or downtrends. There are also many other chart patterns that can be of use to CFD traders, including flags and rising and falling wedges.
The successful trading of CFDs means finding the right entry points in favourable areas of operations, so understanding how chart patterns can play an important part in an analysis toolkit is extremely useful. Trend-based trading strategies are key to making CFD trades. Eliminating drawdown and lowering the chance of margin calls are both important factors.
Finding accurate charts across different CFD asset markets is not difficult these days, and the near-real-time flows of data offered by various online platforms make DIY trading easier than ever.
There are many trading strategies for CFDs and finding the ones that work best is a personal journey for each trader. Knowing how to use various analysis tools, often in conjunction with one another, is all part of building the skillset that makes for a successful trader.
Trading CFDs naturally appeals to those who are looking for a fast-paced environment that requires quick reactions to changing circumstances. Although some might say that chart patterns are not suited to this task, an understanding of underlying trends and historical data such as support and resistance levels is vital.
New developments in the financial and forex markets can happen quickly, and this is why many trades take place based on an interpretation of news headlines. Taking a new position involves various modes of analysis followed by a decision, so news feeds and flows need considering. They can actually influence the prices and values of underlying assets.
CFD trading occurs in a global arena that operates 24/7, so having access to as much information as possible can only help traders increase their performance. The advantages of using chart patterns might not be obvious to someone who is primarily trading based on a news strategy methodology, but underlying trends that move in one direction or another can often lead the way to an increased awareness of the micro-movement possibilities that make or break many CFD trades.