CFD Trading: To Trend or Countertrend?

One of the most fundamental choices if you are trading price movements technically is whether to try to follow the trend or to counter the trend. This article provides a basic introduction to these two concepts.

With classic trend following the trader tries to exploit large price movements over substantial time-frames, usually for the duration of several months. A trade is entered at highs and lows looking for a sustained breakout and then exiting if the market reverses persistently. Swing trading is a name for trend following over shorter periods, days rather than months, say.

Countertrending is, as the name suggests, the complete opposite of trend following. You are effectively trying to take advantage of all those commonplace times when the markets are not trending and do this by selling into new highs and buying into new lows.

Whichever you choose, it is always important to analyse the state of the market to establish if the market is behaving in a way that is better suited to your strategy of choice.

Broadly speaking, markets can be in one of four conditions.

Stable and Quiet

When the market is stable and quiet you will tend to see prices sticking within a small range, and the market doesn't really go in any one direction for any kind of sustained period.

This kind of state doesn't really suit either a trend follower or a countertrender particularly: it's not a very interesting condition to trade unless you are writing options, which is a story for another time.

Stable and Volatile

A stable and volatile state is typified by large price swings over the course of the day or week, but the net change over the course of months is not large. In other words, choppy but ultimately moving sideways once you take out the noise.

This type of market suits countertrenders the best, giving them large price swings from which to profit but failing to break out of a narrow range in a way that could mean big losses for them.

Trending and Quiet

Trend followers are best off trading when a market is trending and quiet.

The price moves clearly in one direction when looked at over a long period without ever significantly moving in the other direction.

Trending and Volatile

A trending and volatile state will have big trading ranges. The net price will change by a large margin but over the course of this movement there will also be sizable retracements.

Swing traders would be attracted by the volatility of this market state (similarly, stable and volatile would also be a suitable condition for a swing trader).

For more information visit: http://www.igmarkets.co.uk.

CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved. IG Markets provides an execution-only service.

Article Source: http://EzineArticles.com/?expert=Nick_Dockerty