3 Momentum Trading Strategies to Go Short on Index CFDs

When markets are volatile, it makes sense to use momentum strategies that use this volatility to their advantage. One of the best transactions of the day techniques to capitalize on sudden market movements are done via the index CFDs.

This article outlines three key setups for shorting index CFDs and capitalizing on bearish momentum.

What is Momentum Trading?

Momentum trading involves capitalizing on a directional push in the market, in other words, buying strength in an uptrend and selling weakness in a downtrend.

This contrasts with range trading which aims to capitalize on price reversal from certain levels, for example support and resistance. Momentum trading seeks to capitalize on price breaking through certain levels or, with price continuing in the direction of a breakout once those levels have been breached.

For example, momentum traders typically look to buy when price breaks highs and stays long as long as it stays above those highs. Similarly, using momentum on the short side means selling when the price breaks through the lows and staying short as long as it stays below those lows.

There is a wide range of options available to traders, from bare-bones price action trading to indicator-based strategies. We focus on three of the best setups and techniques you can use in your momentum trading when looking to sell Index CFDs.

Three Key Dynamic Selling Strategies for Index CFDs

  1. Sell ​​with the confirmation of the ADX indicator

The first strategy we are going to look at incorporates the ADX indicator. If you are unfamiliar with this indicator, it is a great tool to help you with trading. The Average Direction Index (ADX) indicator is used to measure the strength of the trend. So, if the ADX moves up, the trend increases in strength, and when the indicator line moves down, the trend loses strength.

ADX indicator

It should be noted that the indicator does not show the direction of the trend. So the moving upper line means that the trend is increasing in strength but not that the price is rising and similarly, the lower moving line means that the trend is losing strength, not that the price is falling.

Source: FlowBank / TradingView

In the image above we can see a 30 minute chart of the FTSE 100. The price is initially moving muted with the ADX indicator also moving sideways, showing a lack of momentum in the market. However, when the price breaks through the lows, the ADX indicator rises sharply, reflecting market momentum, allowing sellers to enter and capture the ensuing bearish move.

  1. Indoor Bar Ventilation (Harami Chandelier)

This strategy uses basic analysis of price action and an understanding of market structure. So for those of you who haven’t dipped into the world of reading candlesticks yet, I hope this next one inspires you to do some additional research, as candlesticks alone can be a powerful indicator of the next direction of the price and are particularly useful for momentum traders.

One of the most useful candlestick patterns for momentum traders is the breakout of the inside bar. So essentially what this model identifies is:

  1. A large initial candle (which becomes the outer candle).
  2. A candle shape after which remains within the range of that initial candle (hence inside the candle). Attention: there can be either one candle inside, or several.
  3. Price breaking the range of the outer candle.
Source: FlowBank / TradingView

Apply this to short selling index CFDs. What we would like to see is that price breaks through a support level, starting the downtrend, then we want to identify an inside candle set in which price stagnates, then resumes the initial downtrend with a new surge of momentum made evident by the breakdown. We can sell when the price breaks the lows of the outer candle.

The beauty of this setup is that it works perfectly on the natural ebb and flow of the market. We identify an initial phase of momentum expansion, selling, then momentum contraction and some consolidation, giving us the inside candles, then entering as price enters the next phase of expansion and sell again.

Source: FlowBank / TradingView

Looking at the image above, we can see a great example of this setup in-game.

The price initially has an uptrend, but then reverses, passing through the latest swing lows and the uptrend line as well. At this point, we are looking to enter shorts to capture the sell. In the rectangle you can then see that the sell stops and the price forms a perfect inside bar set up with two inside candles before going through the lows of the outside candles, at which point we can enter our short position.

  1. Parabolic S&R indicator

The final strategy considered uses the Parabolic S&R indicator. For momentum trading, this indicator is truly one of the most effective to use and is incredibly simple.

The indicator measures the strength of momentum in the market and highlights a price level through which price should reverse to confirm a change in momentum.

So, when the price is trending higher, the Parabolic S&R indicator will plot a point below the market through which the price should reverse to return bearish sentiment. Likewise, if the price is trending lower, it will mark a point above the market through which the price must reverse to return bullish sentiment. The price is updated with each new candle formation.

Source: FlowBank / TradingView

If the dots are above the market price, it means there is a downtrend and if the dots are below the market, it means the market is in an uptrend. Therefore, the easiest way to trade the indicator, when shorting CFDs on indices, is to wait for the dots to turn above the market price, highlighting a downtrend.

Once the trend is in play, you can then look for periods where the momentum is contracting and the price is consolidating, and the dots are reversing below the market. The trigger to enter the trade is when the price breaks below the dots. The dots then return above the market price, confirming the resumption of the downtrend.

Final Thoughts

The strategies described here can be used across all timeframes and indices, so be sure to explore different combinations to determine what works best for you.

Periods of momentum expansion can be very profitable times for traders when equipped with the right tools, but remember to always manage your risk and take action to identify the right conditions for your style. of trading.

Source: FlowBank / TradingView

The image above shows a great example of how we can use the Parabolic S&R indicator in this way.

The NASDAQ was initially trending higher, supported by a rising trend line. However, the price then reverses and breaks through the rising trend line. We can see that during the uptrend, the indicator plotted points under the market, highlighting the uptrend.

Once the price has reversed, the indicator turns bearish with the dots moving above the market giving a sell signal.

We can then see how the price breaks down before consolidating, at which point the dots turn around. We can then wait for the dots to move back above the market as prices fall, giving us a new entry signal.

This indicator is also useful from a business management point of view. A short trade can be maintained without the temptation to hedge the trade earlier or move stops, until the points return below the market.

Esty Dwek, CIO

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