crypto trading strategies cfd

Top Crypto Trading Strategies Using CFD Trading Indicators

Differentiating yourself from the crowd requires a well-thought-out plan in all areas of life, including when it comes to making money. To profit from any market, like the top traders, you need a strategy that sets you apart from the crowd. Traders that consistently turn a profit employ trading indicators to execute their plans to perfection.

What Are CFD Indicators?

CFD indicators are plotted as lines on a price chart to identify specific signals within the market, providing insights into potential market movements. They are mathematical tools that analyze market data to identify trends, patterns, and trading opportunities for traders. These technical indicators are prevalent among traders who engage in CFD trading for profit. Some of the most popular indicators crypto traders use include the following:

Moving Averages

A moving average shows the average price of a cryptocurrency over a set period. Some standard periods used for moving averages are 20, 50, 100, and 200 days.

For example, a 20-day moving average shows the average closing price over the last 20 trading days. It “moves” because the earliest trading day drops off the calculation on each new trading day, and the new day is added.

Moving averages smooth out day-to-day price fluctuations, and help identify price trends. They can provide support and resistance levels and help signal trend reversals when the price crosses the moving average.

Typically, faster-moving averages like 20 or 50 are used on charts to generate trading signals and spot changes in the shorter-term trend. Slower moving averages like 100 or 200 assess longer-term trends. Comparing moving averages of different periods is a core technical analysis technique traders use.

In short, moving averages provide simplified trend-following signals from historic price data to help make trading decisions. They bring clarity to price action analysis.

Relative Strength Index (RSI)

The RSI is an oscillator that measures momentum by comparing the value of recent price gains versus recent losses, generating a value between 0 and 100. Traders widely use the RSI to identify overextended market conditions that could foresee a reversal.

When the Relative Strength Index surpasses 70, the asset is deemed overbought, signaling the potential for a pullback in price. 

Conversely, when the RSI falls below 30, the asset is considered oversold, suggesting a possible buying opportunity. Traders often use the RSI to effectively time entry and exit points for trades.

Bollinger Bands

crypto trading strategies cfd
Source: Freepik

Bollinger Bands are composed of a center line, typically a moving average, flanked by two bands representing standard deviations above and below. The bands widen during increased volatility and contract during low volatility. Bollinger Bands are widely employed to spot overextended price levels and gauge volatility.

The price touching the upper band may signal an overbought condition and potential for a reversal, while the price hitting the lower band can signal an oversold condition and possible buying opportunity. Hence, the bands serve as dynamic support and resistance levels.

MACD (Moving Average Convergence Divergence)

The MACD is a momentum indicator that defines the similarities between two moving averages of a security’s price. It has a MACD line paired with a signal line. The MACD line traversing above the signal line is bullish, suggesting a potential uptrend. In contrast, the MACD line crossing below the signal line generates a bearish signal, indicating a likely downtrend.

Traders regularly use the MACD to confirm trends and spot prospective entry or exit points. The MACD line crossing above the signal line can signify a buying opportunity, while crossing below may signal a selling opportunity. The crossovers of the MACD line over or under the signal line provide trade signals.

Effective Cryptocurrency Strategies to Maximize Profits

1. Trend-Following Strategy

The trend-following tactic relies on the market’s tendency to move in one predominant direction for a prolonged time. Traders using this tactic buy or sell assets based on the current trend. In cryptocurrency CFD trading, technicians employ indicators like moving averages, RSI, Bollinger Bands, or MACD to identify trends and enter well-timed trades.

Traders can further combine multiple indicators to validate the trend before placing trades aligned with the prevailing direction.

2. Breakout Strategy

The breakout strategy relies on the notion that when an asset’s price penetrates a substantial support or resistance level, it tends to keep traveling in that direction. Traders employing this plan wait for a breakout event and subsequently enter a trade aligned with the breakout’s direction.

Technical analysis tools like Bollinger Bands can identify prospective breakouts and enable trades in cryptocurrency CFD trading. Since the bands act as dynamic support and resistance, the price closing outside the bands signals a breakout and suggests new highs or lows ahead.

3. Scalping Strategy

Scalping is suited for traders comfortable with volatile strategies aiming to profit from minor price shifts. This technique works best with high-volatility cryptocurrencies analyzed on short timeframes. Scalpers target tiny gains per trade, so commissions must be considered. Potential trades arise when the price crosses the moving average or pulls back from support/resistance.

As a short-term approach, scalping involves numerous trades daily, capitalizing on small oscillations. Traders use tools like the RSI to spot these temporary movements and enter timely positions. Though tiny profits per trade, regular gains compound over time. 

4. Range Trading CFD Strategy

Range trading is another popular CFD approach involving identifying critical support and resistance levels between which prices tend to oscillate. Once spotted, long trades can be entered at support, while short trades are opened at resistance.

Effective implementation relies on indicators like Bollinger Bands or RSI to pinpoint overextended levels signaling reversals. Range trading thrives when volatility is low, and markets are directionless. However, news events driving breakouts must be monitored.

The range trading strategy profits from non-trending, sideways price action. Oversold assets are purchased, while overbought ones are sold.

Volume data also signals impending breakouts. Surges in volume at range extremes hint at potential breakouts to plan timely entries.

Choosing the Best Trading Strategy

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Source: Master130, via Freepik

The best approach often requires comparing the strategy to your trading goals and risk appetite. Each method fits only some traders, so there is no ‘perfect’ strategy. However, integrating multiple strategies allows you to capitalize on various market conditions while reducing risk through diversification. For instance, trend-following strategies blossom in directional markets, while range-bound tactics fare better during consolidations. Combining the two can enable traders to profit in both trending and non-trending conditions, and these indicators help you improve accuracy.

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