CFD’s - (Contract for Difference)

Wow, it been a long time since my last blog post. This is because I was busy with exams. So this week I am talking about CFD’s.  Let me first define what a CFD is. A CFD (Contract For Difference) is a deal which happens between two parties where one party is the buyer and the other is the seller where the settlement is a difference in monetary terms on the underlying instruments (which is used as a reference).  So the buyer doesn’t actually purchase the financial instrument. The buyer then takes advantage of the market as when the price differential in the underlying instrumental difference increases. So the buyer is making a profit.  A CFD is a derivative, consider a financial instrument then the derivative is the market price of that financial instrument derived from underlying assets.

When I first read up about CFD’s I said to myself this is just like a futures contract. It turned out they are like futures but there are some major differences. I have listed the biggest key differences between the two below:

• CFD’s generally have smaller contract sizes although they can be bigger if you want them to be 
• They don’t have a contract expiry date

You can trade on margin which is if you are low on funds you can buy a lot of shares effectively by borrowing money (leverage) but you have to deposit an amount to cover the risk that you may not be able to pay it back to the broker/exchange. When you buy these “shares” (under CFD’s you don’t actually own shares) you are charged a lending rate which is the LIBOR rate. In general, there is a financial cost everyday, whilst your trade is live overnight you can calculate this charge by using the equation given below:

When you close your trade you pay commission charge which is typically 0.1%.

Just like trading any other securities you can go long or go short, however you can trade any product you wish, from indices, commodities, Forex and energies. When going long, the LIBOR rate is added to your broker margin percent. However when going short if the LIBOR > (greater than) broker margin percent then you are credited, but if the LIBOR < (less than) broker margin percent than you are debited.

If you placed a trade to buy shares in a company in the FTSE 100 then any profits or losses these will be put on a rolling contract. A rolling contract for a CFD basically means that any profits/losses will be credited/debited to your account and the profits/losses are realised.

So what are the benefits of CFD’s

• They are versatile and the market is 24 hours a day, so you can buy it when the FTSE closes or the DAX closes
• You don’t need a lot of money to start trading CFD’s
•  If you buy long on equities before the ex-dividend date then your account is credited with the dividend payout for each share after the market closes. Do bear in mind that Financial charge may outweigh this.
• You don’t need to physically own the instrument to trade, this also means that you do not need to pay stamp duty and capital gains tax, HURRAY!!
• Just like trading any other financial instrument

CFD’s in a sense is basically like spread betting you are in a sense placing a trade on the outcome of the market, and you also incur a financial charge for every night the trade is live for. In addition the valoume of trading CFD's has significantly grown over the years.

How do you trade CFD's

You trade CFD’s not over the phone but via electronic trading, this is done over the internet. You can do it from home using the software given to you by a broker or now you can do it online with no software but some sites require you to install Java. In addition, electronic trading ensures that the trade is executed in less than a nanosecond, so you don’t miss out in the action. Over the phone whilst talking to your broker, prices would fluctuate whilst you talked, hence electronic trading has helped smooth out this so called “insider information.” Electronic trading has developed a lot over the years from algorithmic trading to high frequency trading. 

I hope you found this post informative and I hope this at least provides a foundation for trading CFD's. The blue words in the text, when clicked provide more information on the word. This post is intended to educate the reader.

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets 

Trading Strategies – Forex

There are different types of trading strategies in Forex, in a way there are two divisions for devising strategies. In normal life strategies are used to gain advantages for example in chess or to make revision timetables so you can ace exams etc. Strategies in Forex are used to make investments profitable. These two divisions are key to making strategies and they are TA and FA (Technical analysis and Fundamental Analysis).  So you are probably asking what is TA and FA? They are crucial in Forex markets and any other markets.

Technical:

Quite a lot of traders use technical analysis and some traders that solely rely on technical analysis. In TA charts are used to determine the market outcome, technical analysts will use the charts to predict the price at the end of the day/month/year. They also use indicators to analyse the data more so they can see whether the market outcome they predicted will come true. In addition they will analyse the data for future entries in to the market and determine the currency of the pair. Below I will be talking about strategies for Forex, I will start off with the easiest strategies:

Moving averages

So here you can see below there is a downtrend in EUR/AUD. You can predict whether there will be a downtrend and entry should be done when the longer moving average dips below the shorter (fastest) moving average. Here I am using 50-day moving average and 200 moving day average and my time frame is 1 day. So the 1^st arrow as you can see from the chart is where you would enter this is because when a shorter moving average crosses the longer moving average this signifies a down trend for the pair, as you can see later on a down trend appears, so the investment here would be going short . Beware of the market lag, as you may have noticed that the pair is already in a down trend, and then the longer moving average crosses the shorter moving average which signifies that there will be a uptrend, here you will notice a big lag in the market (2^nd arrow) so the investment here would be going long.  You might be wondering why I have put a 3^rd arrow,  the reason is that the shorter moving average may cut the longer moving average and may signify a downtrend.

Trend trading:

This is probably the most simplistic trading strategies used, you may have heard the song “Follow the Leader” that’s basically what you do, you trade the trend. When it’s an uptrend you should undertake investment in going long, and when it’s a downtrend you should undertake investment in going short. We can use our previous chart here EUR/AUD, I have drawn channel lines to signify a downtrend in blue.

RSI (Relative Strength Index)

This is a powerful indicator and not be underestimated in Forex markets, it is widely used in other markets as well.  So what’s the strategy here as you can see the currency has been over bought when the peak finishes on the overbought area this is an entry, undertake an investment going short. In addition you can see there is a drop in price for EUR/GBP so even if you miss it out on the day you can still jump in for the action. Basically when the RSI is above 70 then the currency is being overbought in the market

Next we move on to over-sold currencies signified by the graph below:

As you can see the area shaded in pink is the oversold region and there is a peak around 17^th July here you would undertake an investment to go long. Using the same strategy buy at peak, here the oversold level is 30.

The disadvantages of RSI are that you need an exit plan, as it depends on when you want to exit.

I hope you enjoyed just some of the trading strategies. I hope I have given you an insight you on how to trade Forex using the strategies indicated above however these are basic strategies. 


However I am not finished, we still have FA, which is what causes a lot of volatility in the market, FA is the analysis of the impact of economic events on the market present and future. When a central bank decides to raise in real interest rates. Higher real interest rates mean a increase in price for the currency as more people will want to investment as they will get a higher rate of return (e.g. savings) and vice versa. News heavily affects the Forex rates. You can quite clearly see from this article:

http://www.fxempire.com/fundamental/fundamental-analysis-reports/eurusd-fundamental-analysis-october-16-2012-forecast/

If you think the results will be good then you can undertake an investment, if you think they are going to be rubbish short sell.

Don’t stick with just one side of the strategy division merge both of them. A wise friend of mine said: “Don’t trade purely on technical’s, trade on numbers as well.” By numbers he meant fundamentals, you will understand the power you have when you use both, as technical analysis is mainly based on human psychology.

Here are some great links for strategies: http://forex-strategies-revealed.com/basic

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets 

EUR/AUD - Overview

Been trading EUR/AUD lately, as you can see from the picture below there is a reversal making the EUR/AUD more bullish. Here is my stop loss, take profit, entry

Entry - 1.17540

Take Profit -  1.20000

Stop loss - 1.1590

Strategy: Trend trading and momentum

So we shall do an analysis both fundamentally and technically:

Fundamentally:

This is a date by date commentary of important news updates for both the EUR and the AUD.

EUR became weak against the AUD as they had a contraction in PMI (Purchasing Managers’ Index – measures the activity level of purchasing managers in the manufacturing sector). The PMI of August was below 50 which in this case is a contraction in the sector. This can be a leading indicator of overall economic performance. As the number is below 50 this implies that we should be still seeing a bearish trend of EUR/AUD.  Booom Australia comes back with a positive trade balance which is an important economic indicator. The trade balance is a really important indicator to the currency, as positive trade balance means that Australia is exporting more than importing. Traders will be looking at this and may be purchasing AUD due to the bullish outlook, however some traders will be reluctant to swing AUD as this looks temporary but isn’t as we shall see later

Next we come on to consumer spending, Australia had +1.0%, this accounts to the majority of economic activity, and this is another plus for Australia. Euro Zone also had a positive consumer spending of+ 0.1%. Although previously this was +0.8% so a reduction by 0.7%, this would have reflected negative on the Euro, making it further weaker. AUD was further strengthened by a reduction in unemployment from 5.3% to 5.2%, and of course as follows is an increase in job creation of 14K. The GDP for Euro for August was- 0.2% which didn’t exactly help. Australia then released their wage price index which was a positive 1.0% which is the measure of the change in the price that business and the government pay for workers excl. Bonuses. This is a leading  indicator of CPI, however the Euro Zone’s CPI is unchanged at 2.4%, although the next I speak on will have low volatility in the market it’s worth taking a look, the Euro Zones trade balance is +10.5bn and current account +12.7bn.

This is why Australia seem to have the upper hand but today commodity prices fell, as we know Australia have a large primary sector, they are 2^nd world’s largest gold mining and holds some of the world’s largest resources eg. bauxite, iron ore, lead, zinc, silver, uranium, diamonds etc. A decrease in commodity prices will mean that Australia will sell the same for a lower amount hitting their current account but leaving or increasing their trade balance. However there has been an increase in the price of gold from $1,570 to $1,650 this will aid the AUD by making it stronger. There is a strong positive correlation between the commodity and the AUD. The rise in gold prices is due to USA restarting QE which in effect inflates the economy making money have less value and thus this result in gold prices increasing. Thus this may have a negative effect on the EUR/AUD in the future, we will have to see, and gold prices will be bullish for a few weeks or months.

I do believe that Australia is a hot prospect for the future and they have not quite realised their potential.

Technical:

Few glad I got that over with so know we move on to the technical side of things. As you can see from the picture below there has been a downtrend signified by the equidistant channel. In the picture there is a red line signifying a support level, this is the lowest ever the pair has been. We can see further by momentum that momentum is +ve for the pair. As we can see the pair has broken the resistance of the 0.236 level and this is not the support level for the pair. We can see that the pair will be bullish as the shorter moving average has  crossed the longer moving average, due to the lag factor it took a few moments to show this bullish move, I will leave you to ponder whether you think the pair is bullish or bearish.

Interesting article to supplement this: http://www.bloomberg.com/news/2012-08-23/new-zealand-dollar-rises-as-fed-s-evans-urges-easing.html

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets