Trading Strategies
These strategies are for discussion purposes only and should not be interpreted as any solicitation to trade. Any decision to trade will be dictated by market conditions and the client's requirements. Although there are no time limits on CFDs, they are most suited to short-term trading situations. CFD trading strategies can be discussed with your personal broker at Blue Index.
EQUITY TRADING STRATEGIES
Short term speculation: long or short
It is not necessary to own the physical shares in order to open a long or a short position using a CFD. If you perceive a share to be undervalued or overvalued you can go long and short as you wish. You can use leverage to maximise your potential returns. This makes CFDs ideal for short-term speculation. Most CFD contracts are closed within a few months; the average period a CFD is kept open is about 6 weeks.
Hedging: reduce or remove risk
You may have a longer-term commitment to the shares within your portfolio. There will be occasions when you feel that these shares are likely to fall in price in the short term. It can be a costly exercise to sell these shares and then buy them back once the market has corrected. Shorting CFDs in these shares is a much more cost-effective method of capitalising on a short-term fall in the share price.
Trading Strategies
CFDs provide the level of flexibility necessary to conduct trading strategies from the simplest Pairs Trade to the more complex Arbitrage. An example of a simple pairs trade would be if you believe one company is undervalued compared to another (e.g. Vodafone against MMO2), you can buy the cheaper share whilst selling the expensive one.
An example of some recent strategies are as follows:
Fundamental Pairs: Easyjet/Ryanair, Glaxo/Astra
Merger pairs trade: Sanofi/Aventis, AT&T/Cingular
Dual Listing arbitrage: Royal Dutch/Shell
Holding Company arbitrage: C.Dior/LVMH
Share Class arbitrage: VW prefs/VW ords
Other capital structure trades: Rights Issues
FOREX TRADING STRATEGIES
Stock trading strategies for Forex trading - Currency traders make decisions by analysing technical factors and economic fundamentals. Traders must decide which style and/or combination of analysis works best for them.
TECHNICAL ANALYSIS
Probably the most successful and most utilised means of making decisions and analysing FOREX and commodities markets is Technical Analysis. The difference between technical and fundamental analysis is that technical analysis ignores fundamental factors and is applied only to the price action of the market. Technical analysis has become the primary tool to successfully analyse and trade shorter-term price movements, as well as to set profit targets and stop loss.
Technical analysis primarily consists of a variety of technical studies, each of which can be interpreted to predict market direction or to generate buy and sell signals:
Trend Analysis - let the trend be your friend
Finding the prevailing trend is an essential first step in analysing the overall market direction and provides you with a back ground to make a trading decision. Weekly and monthly charts are most ideally suited for identifying that longer-term trend. Once you have found the overall trend, you could select the trend of the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell the rallies during downward trends.
Support & Resistance
Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern at whereas a resistance level is the high or the peak point of the pattern. These points are identified as support and resistance when they show a tendency to reappear. It is best to buy/sell near support/resistance levels that are unlikely to be broken. Once these levels are broken, they tend to become the opposite obstacle. Thus, in a rising market, a resistance level that is broken, could serve as a support for the upward trend, whereas in a falling market; once a support level is broken, it could turn into a resistance.
Lines & Channels
Trend lines are helpful tools in confirming the direction of market trends. An upward straight line is drawn by connecting at least two successive lows. The continuation of the line helps determine the path along which the market will move. An upward trend line is a good method of identifying support levels and a downward trend line (connecting successive highs in a down trend) is good method of identifying resistance levels. The validity of a trading line is partly related to the number of connection points. A channel is defined as the price path drawn by two parallel trend lines along successive highs and successive lows. The lines serve as an upward, downward or straight corridor for the price.
Moving Averages
Moving averages tell the average price in a given point of time over a defined period of time and help to define the overall price trend. They are called moving be ca use they reflect the latest average, while adhering to the same time measure. A weakness of moving averages is that they lag the market, so they do not necessarily signal a change in trends. Using a shorter period, such as 5 or 10 day moving average, would be more reflective of the recent price action than the 40 or 200-day moving averages. Moving averages are most often used by combining two averages of distinct time frames. Whether using 5 and 20 day MA, or 40 and 200 day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average. Conversely, sell signals are suggested when the shorter average falls below the longer one.
FUNDAMENTAL ANALYSIS
A fundamental trading strategy focuses on the economic, social and political forces that drive supply and demand. There is no single set of beliefs that guide fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, monetary policy, inflation, and unemployment.
Fundamental analysis is most often used in assessing the general market trend as it does not provide specific entry and exit points that are essential to profitable short term trading, especially in FOREX where the leverage is high. Therefore it is most commonly used in combination with Technical analysis.
For further information on Trading Strategies please call the trading desk on +44 (0) 20 7398 2553.
