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3 Momentum Trading Strategies For Going Short Index CFDs

When markets are volatile, it makes sense to use momentum strategies that use that volatility to their advantage. One of the best day trading techniques to capitalise on sharp market moves is via index CFDs. 

In this article, we outline three key setups for shorting index CFDs and capitalising on bearish momentum. 

What is Momentum Trading?

Momentum trading is all about capitalising on a directional burst in the market. This means buying strength in an uptrend and selling weakness in a downtrend.

This contrasts with range trading which aims to capitalise on price reversing from certain levels, e.g support and resistance. Momentum trading looks to capitalise 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

  1. Selling with an ADX indicator confirmation
  2. Using inside bar pattern breakdowns
  3. Using the Parabolic S&R indicator 

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 your trading. The Average Direction Index indicator (ADX) is used to measure the strength of the trend. So, if the ADX is moving higher, this means the trend is increasing in strength and when the indicator line is moving lower this means the trend is losing strength. 

 

ADX indicator

 

ADX Indicator

Now, one important point to note here is that the indicator doesn’t show the direction of the trend. So, the line moving higher means the trend is increasing in strength but not that price is moving higher and similarly, the line moving lower means the trend is losing strength, not that price is moving lower. 

 

adx indicator momentum trading strategy

Source: FlowBank / TradingView

 

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

Inside bar (Harami candlestick) breakdowns

This strategy uses basic price action analysis and an understanding of market structure. So, for those of you who haven’t yet dived into the world of candlestick reading, hopefully this next one inspires you to do some further research because candles alone can be a powerful indicator of where the price is headed next and are especially useful to momentum traders. 

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

 

  1. A large initial candle (which becomes the outside candle) 
  2. A candle form after which stays within the range of that initial candle (hence, inside candle). Please note: there can either be one inside candle or several. 
  3. Price breaking through the range of the outside candle. 

 

inside bar setup in trading

Source: FlowBank / TradingView

 

Applying this to shorting index CFDs. What we would want to see is price breaking down through a support level, commencing the bear trend and then we want to identify an inside candle set up whereby price stalls and then resumes the initial downside move with a new surge of momentum made evident by the breakdown. We can sell as price breaks the lows of the outside candle. 

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

 

insde bar trade example

Source: FlowBank / TradingView

 

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

The price is initially trending higher but then reverses, breaking down through the latest swing lows and through the rising trend line also. At this point, we look to enter shorts to capture the sell off. In the rectangle, you can then see that the sell-off pauses and price forms a perfect inside bar set up with two inside candles before breaking down through outside candle lows, at which point we can enter our short trade. 

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 momentum strength in the market and highlights a price point through which the price would have to reverse to confirm a shift in momentum. 

Thus when the price is trending higher, the Parabolic S&R indicator will plot a point below the market through which the price would have to reverse to turn sentiment bearish. Similarly, if the price is trending lower it will plot a point above the market through which the price needs to reverse to turn sentiment bullish. The price point is updated with each new candle formation. 

 

parabolic s&r indicator trade example

Source: FlowBank / TradingView

 

If the dots are above the market price, this means that there is a bear trend and if the points are below market, this means the market is in a bull trend. Therefore, the most simple way of trading the indicator, when shorting index CFDs, is to wait for the dots to flip above the market price, highlighting a bear trend. 

Once the trend is in play you can then look for periods where momentum contracts and price consolidates, and the dots reverse below market. The trigger to enter the trade is when the price break below the dots. The dots then flip back above the market price, confirming the downtrend is resuming. 

Final Thoughts

The strategies discussed here can be used on all timeframes and across all indexes so make sure to explore some different combinations to figure out what works best for you. 

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



parabolic s&r trade with market structure

Source: FlowBank / TradingView

 

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

The NASDAQ was initially trending higher, underpinned by a rising trend line. However, the price then reverses and breaks down through the rising trend line. We can see that during the uptrend, the indicator plotted dots below the market, highlighting the bull trend. 

After the price reverses lower, the indicator flips bearish, with the dots moving above market, giving a signal to short. 

We can then see how price breaks down before consolidating, during which point the dots flip. We can then wait for the dots to move back above market as price breaks down giving us a fresh entry signal. 

This indicator is also useful from a trade management standpoint. A short trade can be maintained without the temptation to cover the trade early or move stops, until the dots flip back below the market. 

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