3 Essential CFD Trading Strategies

Contracts for differences and quite popular in the trading world. They have seen Increasing popularity in recent years

Short-term Trading

CFDs are a great trading tool for short-term traders. It works best for those who wish to trade anywhere between a few minutes and a few weeks. They work best in the short term because they are margin products. Profits are derived from differences in opening and closing prices. Since they are derivatives, traders only need to invest in a small percentage of the value of the underlying asset. It also means that even small changes in prices will be magnified. This makes most traders prefer to trade in the short term.

They are a cost-effective investment that allows traders to spread their capital. With the right strategies, such as analyzing trends it can be quite lucrative. Even though it is a short-term investment, traders can double their money in a relatively short time.

CFD traders can go long or short which means that they can speculate on price movements going up or down and make a profit if their predictions are correct. Traders have the benefit of opening and closing contracts with ease. This makes it easy for traders to close a trade if price movements turn against them and this makes CFDs a great mode of trade for short-term traders.

3 Essential Strategies For Trading CFDs

There is a lot of misinformation surrounding trading and a common misconception is that trading is a form of gambling. However, trading requires hours of analysis and study. Without proper knowledge and understanding of how the markets and price movements work, it is difficult for traders to be successful. CFDs are no different. Speculating price movements requires good research and proper strategizing for the best results.

Several factors will affect the strategies a trader implements.

  • Analysis – The type of analysis will affect the kinds of strategies a trader uses. Normally, for CFDs, traders use technical analysis. However, there are cases where traders combine technical analysis with fundamental analysis to come up with more comprehensive strategies.
  • Risk Tolerance – Traders must always assess how much risk they are willing to take. CFDs come with tremendous risk and because of their nature, losses will be amplified. A trader must first determine how much they can afford to lose and create strategies based on their risks. For example, a trader can put stops that hinder excessive losses in cases where the price movements turned against them.
  • Financial Ability – The ability to trade will be determined by the capital. A benefit of trading CFDs is that they are cost-effective yet a trader must first consider whether they can afford all the costs involved in the trade. This will also determine the kind of strategies that traders use.

Many other factors affect how traders make strategies. Here are some essential strategies used by traders.

  1. News Trading

This usually involves day trading and scalping as the means of trading. Such trades are opened and closed within a single trading session. It has the benefit of cutting costs because such trades aren’t open overnight and therefore traders don’t have to pay overnight fees.

Using scalping as a news trading strategy is beneficial because they are flexible and have low transaction costs. Traders using this strategy can make quick profits within a few moments and move on to the next trade.

  1. Pair Trading

It is based on the correlation of two trades in the same industry. One of these trades being long and the other being short. This is a strategy that is commonly used for CFDs on stocks but it can also be used on ETFs, currencies, and commodities. This strategy doesn’t focus much on the direction of price movements which makes it a great choice for CFDs. It also works for both high and low volatility in the market.

  1. Hedging

This is a strategy used to reduce the risks of making losses. It protects against potential short-term losses.

Wrapping It Up

It is the responsibility of CFD traders to understand how the market works and learn what strategies to implement. Strategies can prevent huge losses which traders may incur what prices move against them. A good strategy requires in-depth analysis. Traders need to be patient to study and analyze charts, even in real-time. CFDs are a lucrative way for traders to make a profit.

Using Fundamental Analysis in Forex Trading

Fundamental analysis is one of the essential aspects of forex trading. A lot of traders think that technical analysis can be helpful when it comes to predicting price movements. However, combining technical and fundamental analysis offers better results.

Fundamental analysis involves analyzing social, political, and economic forces that affect currency prizes. It also involves analyzing news headlines and economic data reports. Fundamental analysis gives traders a clear picture of what they need to do to make money from the forex market.

Key Economic, Political and Social Factors that Affect Exchange Rates

Economic events have a lot of influence on political and monetary policies. Therefore, it is essential to understand how certain economic conditions and factors will affect the volatility of currency prices. Understanding these events and their effects will enable a trader to take advantage of currency price movements.

Economic Health

The economic health of a country significantly affects the currency exchange rate exchange. A good economy leads to a higher currency value, while a bad economy leads to a lower currency value. A strong economy attracts foreign capital, which drives up the currency exchange rates. Robust economies have low unemployment rates; thus, people have money to spend.

Inflation

Inflation is the purchasing power of one currency compared to another. Inflation is the reason why different currencies have different purchasing powers. Inflation can also be responsible for fluctuations in currency exchange rates.

Countries with high inflation rates have weaker currencies, while those with low inflation rates have stronger currencies. Forex traders should understand the changes in inflation rates and their effect on exchange rates. Understanding this will enable them identify opportunities and know what currencies to trade.

Interest Rates

Interest rates significantly influence exchange rates and inflation. Central banks use interest rates to control inflation. High interest rates attract foreign capital, which strengthens local currency exchange rate. However, if the rates are high for too long, inflation goes up.

Political Stability

A politically stable country will attract foreign capital, which will improve the exchange rate of its currency. Political stability also affects financial policies and economic drivers, which have long-term effects on the exchange rate.

Political instability drives investors away. The economic environment is adversely affected, and the local currency weakens.

Public Debt

Many countries borrow to finance economic growth. However, too much public debt can lead to inflation and deter foreign investment. This will have a direct effect on currency strength and the exchange rate.

Balance of Trade

The difference between a country’s exports and imports is referred to as balance of trade. If a country’s exports exceed its imports, then it has a positive balance of trade. A positive balance of trade means that foreign currency inflow is higher than outflow, which strengthens the local currency’s exchange rate.

On the other hand, a country that imports more than it exports has a negative balance of trade. This means that the inflow of foreign currency is lower than the outflow, hence a weaker exchange rate.

Confidence and Speculation

The confidence level of traders can affect the exchange rate of a currency. Currency fluctuations from speculation are mostly sudden, irrational, and short-lived.

For example, economic news may make forex traders either bearish or bullish on a currency, which will affect the exchange rate. However, the economic information itself did not affect the currency fundamentals.

Government Intervention

Governments use several techniques and tools to manipulate their local currency exchange rates. Some of the methods that central banks use include adjusting local lending rates, buying foreign currency, printing money, and adjusting interest rates.

The main objective of manipulating these factors is to have favorable conditions for cheap credit, economic growth, more jobs, and eventually a stable currency exchange rate.

Current Account Deficit

The current account deficit and balance of trade are closely related. A country’s current account deficit is compared to that of its trading partners. If a country has a higher current account deficit than its trading partner, then the country’s currency with a higher deficit is weaker.

Countries with low current account deficits have stronger currencies, while those with high current account deficits have weaker currencies.

Conclusion

With the help of fundamental analysis, forex traders can gain a deeper understanding of the factors that influence currency exchange rates. Analyzing these factors provides traders with accurate and timely information that will help them trade currencies successfully.

 

How Fear And Greed Affect Your Forex Trading

One of Warren Buffet quotes says, “Failure comes from ego, greed, envy, fear, imitation. I am smart not because I am smart but because I am rational.”

If you want to be successful in any business, you must be logical in your approach. Forex trading is no exception since success needs discipline, expertise, and patience. To become a great forex trader, some may tell you that you must have trading strategies that will offer you the necessary analysis.

However, psychology is the most crucial factor in ensuring that you use your trading tactics with confidence, consistency, and discipline. The mind is indeed your most valuable trading asset, but it can be your most fear-inducing liability as well. It is an incredible power that you can utilize to your advantage or one that can quickly put an end to what could have been a good run.

Fear and greed are two contrasting psychological states, and they are significant motivators with a considerable impact on our lives. They are also unavoidable conditions in forex trading unless you are a robot. Fear and greed can affect the forex trading performance of anyone irrespective of their trading skills.

However, it is much of a struggle for novices more than for experienced traders because they might be too eager to reach their goals far too quickly, thus preventing them from keeping their emotions under control.

Greed

Greed is a desire to have more of anything, such as material things. On the other hand, fear is an adverse emotional reaction triggered by an imaginary threat of something wrong happening, such as loss, harm, or injury.  In forex trading, greed inflates liquidity in the currency market, which pushes prices higher up, with the selling starting only after the more prominent foreign exchange traders start trading.

Forex traders display greed by looking at their open profits and calculating the gains achieved so far. If they are happy with the payments, they start figuring how much more they could add to what they already have if they extend the time for the trade to stay open. Open profit indicates that any trade transactions you make will not earn you any profits until after the complete close of the position.

If a profitable position does not exhibit an exit, the only thing you will have in your trading account balance is the potential of a profit and nothing else. Many forex traders, especially those new in the currency exchange market, do not know the difference between secure and open profit.

Therefore, they engage in trading behaviors that include changing the objective of their initial profit, driving it away just as the price approaches. The result of this greed is that the traders that do this do not get their initial profit target, but instead, they end up with a much smaller gain.

Fear

Whilst an increase in market prices portrays greed, the opposite is true about fear. A decrease in the same represents the fear of losing control of the currency market. As per the concept of some traders, prices increase due to greed and fall due to fear. The risk of losing money leads to anxiety, which can turn into positivity or a detrimental result. It plays to your advantage because you might end-setting stop losses on your transactions, saving you the loss of your trading account.

On the other hand, fear can become a liability. Consider the following scenario: you decide not to enter a decent trade setup with an attractive price action merely because of the extreme fear of losing money, possibly because of recent streaks of poor trading results. Furthermore, after risking a substantial amount of money in a trade and losing afterwards, you will tend to get fear out of using the same amount of money for your future transactions.

Wrapping up

Greed and fear are incredibly potent factors in forex trading that affect all forex traders, even the most seasoned experts. However, they are both psychological emotions that you can easily control with discipline, consistency, and knowledge about forex trading. Before you start actual forex trading, you should practice with a demo account until you are sure you can work on your emotions for successful trading.

Forex Trading 101

Foreign exchange, more commonly referred to as Forex, is the selling and buying of currencies in exchange with other currencies. It is the largest trading market globally. This is because countries, businesses, and people participate in forex trading.

It is easy to commence forex trading because all you need is little capital to start. Sometimes, people even participate in forex exchange without knowing it. For example, when you’re on vacation and convert your monies to that of another country you are taking part in foreign exchange.

In forex trading, you will always find a currency’s value being pushed either down or up. The following are some forex basics to get you started.

Currency Pairs Outline 

Before commencing with your first-ever trade, you need to get conversant with currency pairs. Here are some of the key points you should take note of:

  • As earlier stated, currencies in the forex market trade-in twos. For example, if you want to exchange euros for dollars, you have two currencies involved. The USD/EUR price tells you how many euros it will take to purchase a (USD) U.S. dollar.
  • In forex, particular currency pairs are designated by symbols. For example, AUD (Australian Dollar), JPY (Japanese Yen), NZD (New Zealand Dollar), CAD (Canadian Dollar), CHF (Swiss Franc), and GBP (Great Britain Pound).
  • All forex pairs have market prices that are associated with them. This means the amount the secondary currency will take to purchase a unit of that first currency. For example, if the USD/EUR is 1.4746, it means that you’ll need 1.4746 euros to purchase a dollar.

Tip: If you’d like to know how many USD you’ll need to purchase a euro, flip that pair to EUR/USD. Then, device 1 by 1.4746 (or whatever that current rate will be). Using this example, the result is 0.67815. This means you will need 0.6782 to buy one euro. 

An overview of Market Pricing 

Here, you will get to hear a different terminology (pip) as is used in the forex market. The term is used to describe currency pairs’ prices. The moment you understand how you can calculate trade profit, you will be a step closer to a successful first trade.

Pip (point in percentage) is a name used in indicating the 4th decimal place in currency pair. In the JPY, it is used to describe the 2nd decimal place. Most exchange pairs move about fifty to a hundred pips daily. This depends on the whole market conditions. When a USD/EUR moves to 1.4750 from 1.4700, it is said to have moved 50 pips. That way, you’ll have made a 50 pip profit.

Note: The best way you can learn about forex is by finding out how prices move in real-time. You can try out demo accounts (that way, you won’t incur any actual financial risks). Many forex accounts offer mobile and online-app-based trading accounts’ simulators. 

How does Currency Trading Work?

Currency trading is a round-the-clock market. It does not open from Friday to Sunday evenings. Even so, the 24hr trading sessions tend to be deceptive. There are 3 sessions including the United States, Asian, and European trading sessions.

Even though there are sessions that overlap, the main currencies in all markets mostly trade in the assigned market hours. This is to means, that there are currency pairs that will have larger volumes in some sessions.

What changes currencies?

Many stock traders take interest in forex because the forces moving the stock market are the same forces moving the currency market. Supply and demand are among the largest. For example, when there is a global need for dollars, the dollar value will go up. When many dollars are circulating, prices go down. There are also other factors such as interest rates, which affect the prices of currencies.

Conclusion

Much like all things in the world of investing, learning about forex trading is not difficult. The tough part comes in when you’re trying to find a winning strategy for trading. This will take more than one try to get it right.

Most forex brokers have dummy accounts you can use to familiarize yourself with the real thing. Most of these demo accounts enable you to trade using virtual money. That way, you have time to find trading strategies using oscillators.

Fundamental Analysis vs. Technical Analysis in the Forex Trading Market

In forex trading, fundamental analysis and technical analysis are the two main schools of thought used by traders to influence their trade decisions. While these two are not mutually exclusive, most traders often use one of the analysis types.

From a data standpoint, both technical and fundamental analysis offer unique advantages to forex traders. To use these analysis options to your benefit, you need to understand what they are and how they differ. Here is everything you need to know about fundamental analysis and technical analysis in forex.

Technical analysis in forex trading

This is a data reading method that helps traders to forecast changes in currency prices in the future based on past price movements. Technical analysis can be affected by numerous external factors, sometimes leading to different outcomes.

Price data is the primary tool used in technical analysis and is the most important consideration. With this data, technical analysis can provide a framework for analysts to make market decisions by reading the current price action while comparing it with historic appearances.

Technical analysis can be used in different markets, including currencies, stock indices, individual stocks, futures, and commodities. As long as a market has high liquidity and is hardly influenced by outside forces, technical analysis can be the best way to make trade decisions in such a market.

The fundamentals of technical analysis are based on three core beliefs:

  • Price discounts every other market aspect – technical analysis dictates that the current price of a currency pair is a reflection of all information available to market players. It also believes that any new data can quickly reflect in the security’s price.
  • Price moves in an observable trend – technical analysis believes that price moves in a predictable trend that is non-random and thus observable by a trained eye. The trend starts from a trading range and moves into the consolidation phase before the emergence of a new trend phase.
  • History repeats itself – technical analysis believes that market trends are repetitive and recursive even though there are no two identical price patterns in history. However, there are similarities in trend patterns that go beyond randomness.

Benefits of technical analysis in forex

  • It can be applied to any trading timeframe, making it ideal for short-term and long-term traders.
  • Ability to analyze different trends using different studies like trend lines, moving averages, support and resistance, swing highs, and lows, among other studies.
  • Helps with timing trades for the best trading opportunities.
  • Technical analysis shows the mood of the market.
  • It is simpler to use and less time-intensive.

Fundamental analysis in forex trading

This is a type of forex market analysis that determines the underlying value of a security by assessing and studying economic data. In forex, fundamental analysis evaluates the overall conditions of an economy using different data such as employment rate, GDP, interest rates, and inflation, among other factors.

In the forex market, fundamental analysts are mostly interested in central bank activity. This means accessing stakeholders’ meetings, interest rates decisions, and speeches made by high-ranking central bank officials.

Fundamental analysts gauge the overall market conditions by use of different economic reports where they seek to find mispricing that can offer good forex trading chances. Most fundamental traders are short-term traders interested in capturing price moves in volatile periods. They can also be long-term traders interested in monthly or annual trends.

Fundamental analysts are more focused on the why as opposed to the what. They seek to understand the cause of different economic standpoints and use this data to forecast the market. Most fundamental traders use the forex market to buy high yield currencies against lower yield ones. Referred to as carry trade, this strategy is common amongst most long-term fundamental traders as well as global investment funds.

Benefits of fundamental analysis

  • It helps to explain price movements through studying major economic news and other factors that drive up currency prices.
  • Fundamental analysis provides the trader with insight into global markets. This gives the trader a better understanding of a country’s economy and other economies globally.
  • Fundamental analysis makes it easier for an analyst to find currency valuation by studying consumer sentiments, inflation, interest rates, and industrial production, among other relevant factors.
  • It provides long-term trend patterns.

Which one is best?

The best analysis type for you depends on the kind of trader you are and the kind of data you are after. Some traders prefer to use one of the two, while others use a blend of both. When it comes to choosing, there is no right or wrong answer. You only need to take time to understand both approaches and find the one that works best for your forex trading techniques.

Why Forex Traders Should Use Bollinger Bands

Forex trading is the most volatile market and requires sophisticated tools for the trade. Bollinger band is a popular trading instrument in the forex market. The tool will help you to determine the incremental price.

It would help if you capitalized on the incremental price for maximum profits. Since the prices in the forex market are constantly changing, a forex trader needs to keep track. Bollinger band can keep the fast changes in the market. The band offers a technical solution in the forex market.

 What Are Bollinger Bands?

The Bollinger bands have the following unique features that make them appropriate for the forex market:

Technical Features

The Bollinger band is a technical tool that analyses the market trends and draws trend lines. Trend lines are two standard deviation lines drawn from a simple moving average price of the stocks. The trend line helps the traders to identify the appropriate trading times. From the trend lines, you will be able to see when the sales or purchases are high.

Setting Limits

The Bollinger upper and lower bands can be used to set the market limits. These bands show the price volatility of the prices, which will enable you to make informed decisions.

 Measuring The Deviation of The Price

The Bollinger bands are used to measure the deviation of the price from the average to the highest. When prices escalate, the Bollinger bands change their shape immediately.

The change in shape is easily noticed, thus enables you to make a swift decision. Forex trading decision needs to be executed swiftly before the prices change again.

Backup Plan

Since the prices in the forex market keep changing, a trader requires to have a backup plan. The Bollinger bands provide a backup plan where you can always refer to when making decisions. Due to the volatile nature of the stock market, it is not easy to notice the entry and exit points.

Failure to notice these points is frustrating and can lead to losses. Bollinger bands clearly show the exit and entry points. You can use Bollinger bands as a strategy in forex trading for maximum profits.

High Returns

The bottom line of forex trading is making profits. Executing trader at the opportune time will bring high returns to your forex trading. Bollinger bands give a signal when the currencies are doing well. Investing in such times brings high yields to the business.

How Do Bollinger Bands Work?

Bollinger band is a high-tech tool that is used to compute the market averages. You can use the Bollinger bands to calculate the averages and to set the SMA limits. The following simple steps are used to determine the Bollinger bands:

Step 1: First, calculate the simple moving averages by setting the limit of the SMA. If you set a 20-day limit, you calculate the average for the closed prices for twenty days.

Step 2: Then, obtain the standard deviation of the security price. Standard deviation helps to determine the deviation of the numbers from the average. Standard deviation is calculated by taking the square root of the variance. The variance is obtained from the differences derived from the squared mean.

Step3: Finally, determine the upper and lower bands by multiplying the standard deviation value by two. The standard deviation value is derived from adding or subtracting each point that occurs on the simple deviation average.

How To Utilize the Bollinger Bands in Forex Trading

There are several ways in which you can use the Bollinger bands in forex trading:

Checking At the Position of The Prices

You can use the Bollinger bands to determine whether the market is oversold or overbought. When the prices are near the upper band, it shows that the market is overbought. The market is oversold if the prices are close to the lower band.

The Lengths of The Bands

The Bollinger band lengths keep changing depending on the volatility of the market. When the market is highly volatile, the band lengths widen. These bands contract during less volatile times.

Use Of the Squeeze

Squeeze is the coming together of the bands due to the constriction of the moving averages. Squeeze shows the direction of the market. When the market is volatile, the bands widen. During the less volatile days, the Bollinger bands contract.

Heikin Ashi Technical Trading Technique for Forex Trading

Forex trading involves using different indicators to analyze the currency market before making a move. Some of the trading strategy indicators are complex, and they take too much time to read the charts and formulas. However, some technical indicators show traders the latest trends and potential currency reversals within the shortest time possible. One such strategy is the Heikin Ashi trading technique.

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Line Charts Vs. Candlesticks Vs. Bar Charts

Some of the most essential and popular technical analysis tools in forex trading are trading charts. In technical analysis, charts provide the foundation for price volatility and movements.  Moreover, they are the easiest to understand even for forex trading beginners, and you can set them up in varying styles showing differing timeframes.

If you are a long-term forex trader, you can choose to track the currency market using a weekly or monthly trading chart. If you are a short-term forex trader, 60-minute trading charts to 5-minute trading charts are ideal for you. You can also choose to look at several charts showing varying timeframes depending on your trading horizon.

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Forex Trading Accumulation/Distribution Indicator

Forex traders use many types of technical indicators, most of which are readily available in trading platforms to analyze and determine the currency price movements. Some of the most popular indicators include oscillators, Relative Strength Index (RSI), Parabolic SAR, Fibonacci, etc. These indicators help identify overbought and oversold price key levels, among other trends.

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Forex Basics- Using Oscillators in Your Daily Trading

If you are an experienced online trader, you have heard phrases such as “plan your trade” and “keep your losses to the bare minimum. But when you are new, you fly by the seat of your pants and want to rush things so that you can make money quickly.

But hold your horses’ buddy. Things don’t work that way. To be a successful trader, you have to play by the book. Otherwise, your pockets will always be empty. 

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