What is Momentum Trading?
Momentum trading is all about capitalizing on a directional burst 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 reversing from certain levels, e.g support and resistance. Momentum trading looks to capitalize on price breaking through certain levels or, price continuing in the direction of a breakout once those levels have been surpassed.
For example, momentum traders typically look to buy as price breaks through highs and stay long while it remains above those highs. Likewise, using momentum on the short side means selling as the price breaks through lows and staying short while it remains below those lows.
There are a wide range of options available to traders from naked 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 short index CFDs.
Three Key Momentum Selling Strategies For Index CFDs
-
Selling with ADX Indicator Confirmation
The first strategy we’re going to look at incorporates the ADX indicator. If you are unfamiliar with this indicator, this is a great tool to help you in trading. The Average Direction Index indicator (ADX) is used to measure the strength of the trend. So, if the ADX is moving higher, the trend is increasing in strength, and when the indicator line is moving lower, the trend is losing strength.