There is a good reason why CFD trading tips often revolve around the importance of technical analysis. Learning CFDs is really all about learning to monitor and predict price action, with little concern for the long-term value of the underlying asset or any other market condition. So, finding good technical indicators that focus on price movement and are easy to learn is often a top priority for new CFD traders.
Learning to effectively incorporate the use of technical indicators into your trading strategies will have a positive impact on your trading experience, but where do you start? There are a lot of options. Some CFD brokers have 100 or more technical indicators built into their trading platforms that unsurprisingly do more or less the exact same thing. While it is vital to learn to use more than one technical indicator, constantly comparing one with another to avoid falling for false signals or using 100 at once is not exactly practical. There are a few essential technical indicators that new CFD traders will want to consider.
There are numerous indicators that use moving averages. Technical indicators based on moving averages help identify the overall momentum of a trend, regardless of random short-term price fluctuations. The indicator will simply plot a line on a chart that shows the average price over a period of time. This can help traders isolate the trend and can signal when the trend is likely to reverse. They are moving averages because they chart price action over time, and as the price moves, new data factors into the calculation, causing the average to move.
Moving averages, then, show the average price of an asset over a set period, but unsurprisingly, there are different ways to do this and different types of moving averages. You can calculate a simple moving average by adding recent closing prices and dividing them by the number of time periods in the calculation, creating a trend line over a series of data points. An exponential moving average focuses on the most recent prices, giving those prices a higher “weighting” or more significance than other prices further along the set of data points. Thus, exponential moving averages are also exponentially weighted moving averages.
There are several specific indicators that use moving averages in different ways, including the well-known Moving Average Convergence Divergence (MACD) and Bollinger Bands, a tool that uses an exponential moving average to track longer-term trends. Different charting tools track slightly different data, so far from making each other redundant, learning to use a few different indicators that utilise moving averages in different ways will enable traders to make more accurate price action predictions and more successful trades.
Relative Strength Index
The Relative Strength Index (RSI) is another valuable indicator in CFD trading, allowing traders to assess the strength or weakness of a particular trading instrument. The RSI is basically a momentum oscillator that calculates relative strength based on the closing prices of an instrument over a set period of time.
The RSI works by comparing recent gains and losses in a market, from which it is possible to measure the speed and change of price movements. It is used by CFD traders to monitor price action, identify momentum and gauge when an asset is overbought or oversold. Forex traders can incorporate the highly popular RSI into different trading strategies and use it alongside other well-liked technical indicators to develop a successful long- or short-term approach to CFD trading.
Swing traders also like the RSI and often use it alongside other tools, such as the Moving Average Convergence Divergence or a Point and Figure chart. The RSI is also popular with momentum traders who tend to draw data from several different sources and may combine the RSI with Rate of Change tools and an Average Directional Index.
Volume indicators such as the on-balance volume (OBV) take total volume traded over a certain time and assign it a positive or negative value. When the price of an instrument is high, it receives a positive value, and when it is down, it gets a negative value. This effectively combines volume with price data to determine how strong (or weak) a price trend is.
There are several popular volume indicators, including the OBV, Money Flow and Chaikin Money Flow. There is no great advantage to using multiple volume indicators, but again, you should remember that technical indicators all work using slightly different values and data. For this reason, if your broker’s trading platform gives you access to several different volume indicators, then comparing one with another can give a more accurate picture than using one in isolation.
Ultimately, learning to use anyone technical indicator is fairly straightforward. Learning to use several different indicators and combine the data that they provide into a sophisticated, in-depth, technical analysis of the market is much more challenging. Sometimes, technical indicators seem to contradict each other, which can easily be a false signal but can also be the sign of an upcoming reversal, with some indicators lagging behind others.
Experienced traders eventually learn to combine many different indicators, charts and signals to predict price action, and they will still get caught out from time to time. If you are less experienced but ready to learn more about technical indicators and how to combine them to develop top-level technical analysis skills and solid trading strategies, then you might want to dig into our extensive archive of articles about technical analysis.