How CFD traders use analysis

  • By Luke Andresen

  • January 16, 2019
  • 2:15 am BST

It might seem obvious to point this out, but anyone looking to be successful in trading on the markets needs to have access to accurate data and proven methods of interpreting it correctly. As those using contract for difference (CFD) trades are working in a fast-paced and often volatile arena, looking for an edge on price swings that traders sometimes measure in minutes, the challenges are even more defined than they are for those using older, more traditional financial instruments.

With several options available, how CFD traders use analysis comes down to personal preference to some degree, but in other ways, they can use established and accepted approaches to great effect.

Different tools 

Any form or method of analysing gathered information needs to have an established set of rules or procedures that can produce repeated results when using the same data set. Only when traders prove this can they introduce new data and draw certain conclusions.

When it comes to different types of analysis undertaken by CFD traders, there are several major options that usually come up in conversation. Essentially, any strategy used can effectively be an analysis, but while some popular tricks such as trading on a “news” strategy might involve analysing headlines, they do

not require the same kind of detail as more traditional methods.

Functional and technical

The terms “functional analysis” and “technical analysis” refer to established methods that are not particularly difficult to use but do need some training to understand. Based on mathematical interpretations of data and information on previous price fluctuations and value changes, the resulting charts can spot repeating trends and forecast how markets are most likely to behave in the future.

Generally speaking, the main difference between these two popular forms of analysis is that functional analysis works best over longer time periods and technical analysis is more suited to shorter time frames. With this in mind, the latter has become a highly valued tool for CFD traders.

Technical analysis

An Investment Trends Australia CFD Report from 2012 found that technical analysis was by far the most popular method used by forex, index, commodity and share CFD traders. As well as being a favourite of DIY investors, many hedge fund managers use the process to come to their own decisions on taking positions on trades and even buying and selling assets away from CFD investments.

The report revealed that 70% of CFD traders involved technical analysis, and frequent traders were more likely to make use of the tool. Fundamental analysis was the second-favourite method and taking recommendations from other analysts was the third-favourite technique.


Technical analysis is based on studying indicators from the past to predict movements in the future. Director of LCG Markets Australia Ashley Jessen said: “Successful trading is all about putting the odds of a profitable outcome in your favour, and many traders believe technical analysis can provide that edge.”

Any small boost that a trader gains can result in big rewards, especially in the fast-moving world of CFD trading. Moving averages, a feature of technical analysis, works well in trending markets, while stochastic or RSI indicators, also called “oscillators,” are more suited to range-bound markets. By knowing which factors are more important to the areas that traders operate in, a CFD investor can pinpoint the data sets needed and focus on getting the right determinations to help take a position.

Trend-based trading

While some might ask what the difference is between technical analysis and more general chart-based approaches, the answer really lies in the aims that each individual trader might have. In essence, successful CFD trading means finding the right entry points to take a position at the right time. Therefore, chart patterns can play a key part in analysis. However, in fast-paced environments such as forex pairs that CFD traders often favour, trend-based strategies and data interpretation methods are far more valuable.

Easy answers

Of course, there are no quick and easy options that can make CFD trading successful without traders putting any time and personal effort into the project. Even experienced traders and advisors who use technical analysis every day must keep on top of the subject, put in many hours of dedicated education and learn to exploit the system properly.

An even bigger concern for a novice CFD trader should be the automated software systems that promise quick returns for little outlay. The truth is that to use technical analysis or any other tool successfully, traders need far more than pre-produced data coming out of software that is trying a to be a “one-size-fits-all” solution. The only real way for traders of any type to become successful is to use their own knowledge and understanding to interpret data before applying it to their own decision-making processes.

Prediction or prophesy?

For some, there might seem to be little distinction between prediction and prophesy, but price fluctuations and value changes can only ever truly be based on rough estimates rather than specific price-point facts. The results of the analysis will never really be much more than an idea of a probability within a certain range of possible outcomes, but this is not to say that by using analysis correctly, traders cannot make significant gains and profits.