Contract for differences, also known as “CFD”-s are a powerful tool to make some money when trading. Nowadays a myriad online brokers offer access to all the various instruments in this leveraged form, opening up the opportunity for smaller accounts to achieve an exceptional return on investment. But there is a lot of work involved, no matter what.
If the markets are efficient, as one is made to believe, then there should be no possibility to achieve greater gains than the market average. In order to succeed however, one must have a clear cut advantage, an edge that separates them from the trading crowd. Technical analysis might be such a thing. Reading the clues from the past in order to take a guess at future movements is a relatively easy to understand concept. That is what Mr. Ralph Nelson Elliott used when he developed the concept named after him in 1930.
Mr. Elliott was an experienced and well-matured man in his sixties when he started to study the markets. His main focus was on the possibility to predict future movements of an instrument based on its past behavior. He studied various instruments in different kind of time intervals, from half-hour up to a year. A very impressive feat, if one remembers that there were no computers at the time to aid him. All charts were hand-drawn, usually by himself. His research showed results when he found out that no matter how small or large the time-frame, the movement of the chart can be divided into repeating cycles, reminding him of the movement of waves. This stems from the fact that no matter what instrument, there are usually flesh and blood people trading it. These people have feelings, desires and motivations just like any other individual. Greed and fear all play a role in trading with one side always having the upper hand. If he managed to locate one, then these waves allowed him to predict where an instrument will (or won’t) be in the future.
Throughout the years the many technological advanced have enabled any trader to profit from Mr. Elliotts’ work. When trading a CFD it is usually possible to add various studies and indicators to the chart, but the Elliott wave is usually very recognizable on a chart. It consists of a movement with 5 sections, followed by 3 correctional waves the opposite way. The direction always depends on the underlyings’ trend, meaning that a bearish trend will have the first 5 sections facing southwards on the chart, whereas a bullish trend will have a rising wave. The first 5 sections can be further dissected: Section 1, 3 and 5 are moving with the trend, while sections 2 and 4 move into the opposite direction. These opposing waves are usually smaller and are the result of profit taking or consolidation before the next bigger move.
This is a very basic method to bend the charts to one’s will. If a trader is able to recognize a wave pattern in the underlying CFD’s movement, then it is possible to predict where it is headed. Unfortunately there is still no “Holy Grail” in trading, all one can hope for is a slight move towards more favorable odds. If the trading system has solid foundations, like it has been proven in the case of the Elliott Wave theory after more than 80 years of “testing”, and is combined with superior risk management then that is all that is required. And that equals profits.
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