CFD Trading Tips

By mosesbet · Filed Under CFD Trading Leave a Comment 

Trading CFDs can be extremely profitable in short term trading, and on high quality stocks, but there are some simple trading tips you can follow that can actually help you avoid unnecessary losses, by simply not trading the wrong stocks, or not trading at the wrong time.

Don’t trade on popular rumours

Most of the news stories and financial reports on the media are useless for trading, it only real time news that can be used in momentum strategies that are worth following, and these are only available on premium data feeds. Beyond that, you should ignore all other news, including earnings reports! The probability of making a profit by gambling on an earnings report is appallingly low, as low as 12.5% some wise traders believe! If you do decide to trade on high quality impartial rumours, please consider subscribing to a high quality news services such as Reuters or similar, it is impossible to profit from the news stories seen on TV and the popular media, the only possible exception is the Financial Times, and its premium content,  but even that is often highly ambiguous and confusing, especially a new trader is more likely to lose money by following the tips on the Financial Times website rather than trading on their own judgement.

Watch out for the seasonal cycle

Markets have a strong tendency to decline during the months of March or October, it could be either month in a given year where markets plummet. This is not an absolute rule that has to be in place every year, but statistics shows that over many years this tendency is there, every time markets make big bottom, with the Dow Jones index seen well below 10,000 points,  it’s either March or October, so please exercise caution on this, and watch out for false rallies in the months preceding these 2 months!

Don’t trade pharmaceutical stocks or brokers’ recommendations

Most stock brokers that facilitate both CFDs and actual stocks may push you to buy a specific stock or fund, this is not recommended! And especially stocks in the pharmaceutical sector are to be avoided at all costs, the industry is always volatile, hit with scandals, approvals and disapprovals of new products and exaggerated claims of these new products, why not invest in energy stocks, oil stocks and real estate stocks instead? All strategies involving CFD trading can be implemented on such stocks without the risk of the underlying stock going bust.

Evaluating trend momentum

CFD trading costs a certain amount of money in daily interest when buying (going long on a stock), watch the ADX index (Average Direction Index), this simple indicator can tell you where a stock is going in terms of trend momentum, in order for the stock to move fast either up or down, a trend has to be established, and the ADX indicator should read at least 20.  it certainly doesn’t make sense to buy and hold a CFD contract on stock, that is believed to go up but its ADX reading is below 20.

Notice on the chart below, how BP stock makes solid moves, either up or down, only when ADX is above 20 (Thick black ADX line), green and red lines indicate actual established price direction, green over red, and red over green indicate a possibly established uptrend or downtrend respectively, but if ADX is below 20 the trend is likely to be more of a sideways price movement:

Generally, the stock market only trends for a fraction of them time,  as much as 75% of the time it goes nowhere, by detecting that long time of almost trendless activity, the trader dramatically improves the chances of winning, simply because most of the confusion and potential monetary losses occur during that 75%.

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