It is often said the market can move in three ways - up, down and sideways. Whilst this seems extraordinarily simple, it is possible to profit from each of these situations using CFDs and technical analysis.
Since the last quarter of 2009 to mid 2010, the Australian stock market has been trading in a largely sideways pattern. If we were to just hold a long position, it may not be very profitable. Given this, we need to be able to anticipate potential areas of support and resistance to help us take action if the market turns. Range trading can be very profitable but it takes a level of alertness.
Range trading the Australia 200 Cash Index
We can see from the chart above that the Australian market has turned five times from October ‘09 to May ’10. This does not mean it has gone from a bull to bear market five times, but it has simply turned within its trading range. There is a base support at about 4400 and the top is broadening - this is best drawn with a trend line. There is also some intermediate support at about 4600. The turning points can be anticipated with momentum indicators, over bought, oversold levels and the like. But we can also trade a range trading market simply from the price action.
Looking out for the entry and exit points
Once we have established our support and resistance areas (this was done in November ’09), we can then look out for the turns. If we look at the January ’10 as an example, using a weekly chart, we appear to be approaching an area of resistance. So if we are long at the end of 2009 we should be prepared for a potential turn. There’s a good chance the rally may continue through the resistance level, so we can keep our position open to continue profiting from the trade until confirmation of a change in trend has occurred. In the second week of 2010, we see the market come off its previous high. In the next week, if we are still long at this point and the market breaks lower than the previous week, then there’s a high probability a turn has developed. Looking at the chart, we can see that this did occur; as such we can close our long position, establish our shorts and place a stop above the most recent market high.
Now if we look at the first week of February ’10, there was a possibility of a turn as the market approached the 4400 level of support. The second week in February closed higher than it opened and did not make new lows. So in the third week once the previous high was broken at 4600, a new short-term trend was established. At this point, if we were still short, we can close out position, establish our longs and place a stop below the most recent lows. At this stage, we should be ready for the next leg of this market.
Take a CFD position
With this trading style you will never pick the top or bottom of the market, but it helps you to depict specific market driven points to change directions of your trade. It allows you to stay in trend and continue profiting from it as it continues and most importantly exit a position when the market has turned against you. This method can be executed with stop and limit orders so this can be implemented by following the market once a week, for example, on a Friday afternoon.
CFD trading offers a convenient way to trade ranging markets. It allows you to go long or short on a huge range of financial markets, including the Australia 200 at a 1 point spread during market hours.
You can find out more about trading CFDs with our online seminars, including:
- Swing Trading
- IG Markets' Charting Package
- Reading Chart Patterns
- Momentum Indicators
- The Momentum Divergence Trade
Apply for a CFD trading account to get started.
Updated: 5 May 2010
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