Moving averages as part of CFD buy and sell strategies

  • By Noah Schumacher

  • June 28, 2018
  • 1:28 am BST

Everybody likes to have an idea of what’s to come in the future, and this is especially so when trading. For years, traders and investors have been finding ways to plan strategies for the buying and selling of assets, particularly when the markets are changing. Of course, some predictions cannot always be trusted, such as the predictions that if the US dollar were to reach a certain rate against the Italian lire (back in the day), it would result in definite market movements. However, CFDs can be extremely successful in your trading and there is plenty of CFD advice and techniques for traders that are highly beneficial when used correctly and objectively.

Look at the bigger picture

For CFD traders, although predicting future movements can allow for advantages, the trading mindset is based on the use of techniques that track the current and ongoing movement of prices. Finding the average of a movement, albeit risky at times, can be highly beneficial when studied and mastered, and when the right techniques are used. This method calculates the moving average prices of assets such as shares, currencies and commodities over a chosen period of time. By looking at the average price changes from Monday to Friday, you are afforded a lot more insight than if you were to only consider the closing price on the Friday. This can be seen if the asset has traded at $3 on Monday, $4 on Tuesday, $3.5 on Wednesday, $3 on Thursday and $4.5 on Friday. The average would then be $3.6. If you had looked at Friday’s $4.5, you would have assumed that the price is higher than what the average actually is. A moving average can also indicate whether or not there is a buying opportunity. If a moving average represents a decline, a trader would be more inclined to sell, and if the average indicates a rise, the trader would be more inclined to buy.

Potential caveats

The weighting of these trends can, at times, be in favor of the most recent price, throwing the average off somewhat. However, any average can be used to your advantage. For example, you could look for trend reversals, or turning points as trends change direction. If your chosen average were moving upwards but were to drop slightly, it wouldn’t influence the movement that much. However, if the average drops lower than the moving average, it will indicate a reversal. Similarly, if a falling price turns to rise above the moving average, it will also indicate a reversal and should be taken as a form of advice on your next CFD trading move, as it creates signals as to whether you should buy or sell.

Observing crossovers

When monitoring moving averages, a shorter period of time will show more reversals, while a longer period will indicate less. This is useful because you can combine the two to form a new average of reversals. If a short-term average exceeds a long-term average moving downwards, you can take it as a signal of a reversal further downwards. Similarly, in the event of a short-term average that exceeds the long-term average moving upwards, an upward reversal can be noted.

These strategies are intended to provide a clearer picture of the trends in the market and where certain assets are headed. These moving averages can be incorrect or deceiving at times, such as during market volatility, and might indicate misleading reversals. However, the usage of the moving average in your strategies can provide essential insight on what other markets might be signaling and allow for more informed trading decisions overall.