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CFD trading strategy: How to use moving averages to generate buy and sell signals

by , 23 September 2015

Moving averages are a popular tool used by many traders. They work well with a number of underlying assets.

Moving averages could be the perfect trading tool to add to your CFD trading arsenal.

So how can you generate buy and sell signals with moving averages?

Let's take a look…


Why you should use two moving averages when looking for CFD trades


You can just use one moving average on your charts, but it’s better to opt for a minimum of two.

This is because sticking to one can generate false signals and this could lead you to put on CFD trades that are destined to fail.

For instance, just because a share price rises through its short-term moving average, doesn’t mean it’s a buy signal.

The price could drop back under its moving average. You could see a number of buy and sell signals when the market is trending sideways.
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Using one moving average can lead you to buy at the top and sell at the bottom, exactly the opposite of what you want to achieve.

This is why you need to use at least two moving averages. Pick a short-term moving average and a longer-term moving average to use together.


How to find buy and sell signals for trading CFDs


For example, you decide to use the 30 day moving average and the 100 day moving average, explains Frank Hemsley in Profit Watch.

Using these together, a buy or sell signal comes when these two lines cross over. Some traders only place trades when the moving averages are both moving in the direction of the buy or sell signal.

Buy signals
These happen when the short-term moving average passes above the rising longer-term moving average.

Sell signals
Sell signals happen when the short-term moving average falls below the declining longer-term moving average.

Have a look at the price charts of shares you’re following. Use two moving averages, like the ones above, and see how the price reacts at these crossovers.

You can play about with different combinations to see what works best. Then you can think about putting your signals to work on a CFD trade.

So there you have it. How to use moving averages to generate buy and sell signals trading CFDs.

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