STRUMENTI DI TRADING

WHAT ARE CFDS?

A CFD which stands for Contract For Difference is a financial product with is traded on the financial market. In essence, it is an agreement formed between an investor and a broker/dealer recording each side’s guess on the direction an asset price will go. Investors find this method to be very beneficial due to the convenience a trader has on the price fluctuations of a financial asset. The most beneficial aspects are that no physical asset is being purchased, plus gains and losses are calculated based on the contract and the resulting asset price. With no physical claim to assets, investors can enter into contracts at lower costs. You can find CFDs for virtually every asset groups. One of the most sought-after CFDs are ones dealing with commodities (i.e., gold, oil, sugar, coffee, wheat, silver, e.t.) Traders tend to find it very difficult trading in commodities due to the need for storage, and shipment of this favorite type of asset. This is where CFDs become an unbeatable choice for commodity trading. CFD trading is not solely for commodities as most recent, other famed assets such as stocks, indices, or currencies have become a popular pick on online financial platforms.

HOW CFDS TRADING WORKS

The trick is to understand the basis for CFDs trading, once you have that covered the rest is pretty much straightforward. An investor first chooses an asset that he feels the value will either increase or decrease. When the trader feels the price will go up, he/she will select what is known as a “long position.” On the other hand, if the trader believes the asset will decrease in worth, they will choose a “short position.” The next step is deciding how much it is that you want to invest. If the resulting amount moved in the direction you predicted or entered into the contract, your profit is based on the amount the price changed. For example: A long position on a CFD for silver with the price increasing from 1550 to 1580, the gain is as follows: (1580-1550)*contract size. For a short position: if a trader entered into a contract when the price of wheat was 43.20 and the price goes down to 32.00. Here your gain will be (43.20 – 32.00)*contract size. In the above two cases, we showed examples of winning contracts. All traders should keep in mind that if the price of a given asset goes in the opposite direction as they predicted, then it will result in a loss on that particular contract. The math is the same as above.

ADVANTAGES OF TRADING CFDS

For advantages in trading CFDs, you need not look far. The main advantage is that CFDs are more affordable. For the likelihood of the same profit amount, your initial investment is significantly lower than for other trading methods. Another plus for investors paying a low fee is the ability to enter more trades. The second notable advantage is the ability to profit even when the market is falling. Just because the market is not doing well doesn’t mean that you won’t. With such a high volatility in the market, your chances for success increase. When trading, you don’t have to stick to one specific part of the market, CFDs opens the doors to the entire market. You can enjoy all the asset classes and much more. Being a leveraged financial instrument, CFDs add more conveniences to the trader.

RISKS INVOLVED IN TRADING CFDS

As previously mentioned, using a leveraged investment may work to your benefit when profiting. However, it may become a drawback when it comes to a trade that loses. An investor may hurriedly lose his/her entire investment if a trade goes the opposite direction, against the contract. There are times when a dealer can’t offer a protection plan against a negative balance, leaving the investor the possibility of losing more than their original investment. Brokers try to avoid this by requesting that the trader place a “margin” on the trade. The margin acts as a buffer in the account protecting some of the investment. Regardless, on where the asset traded on or the direction a trade takes, leveraged trading still carries a higher risk factor than investing without a leverage applied. Because CFDs don’t require a high investment amount, and due to their trades being short-termed, many new investors or beginners, end up being carried away by entering numerous trades. Amateur investors are cautioned and advised to start off by sticking to a precise plan and research how to practice risk management prior to over investing.

HEDGING WITH CFDS

CFDs can also be used as a means to supervise your investment risks. Traders who possess former portfolios of stocks are commonly known to use CFDs as a protection for the worth of their investments across a short-term duration. Investors increase the probability of profits and protect their current investments by hedging the price of the portfolio with CFDs.

CONCLUSION

Although the methods of how CFDs work seem simple to grasp, at the same time, investors need to be wary that CFDs trading is a high-risk undertaking. It goes without mentioning that a golden rule is that all traders should only partake in CFD trading with money that they can afford to lose.

CFD TRADING ASSETS

One reason so many investors flock to CFD trading is due to the array of assets that are available. As we make trades in the financial markets, we handle unique assets which have their own specific features. They can be stocks, currencies or even commodities in the form of rice, crude oil or wheat, to name a few. These may be assets that only live in a virtual sense like market indices. Regardless, the kind of asset being traded, the fundamentals of trading CFDs is the same across the board. Traders earn when they correctly choose the track a price will move and the number of profits made rests on the CFD’s starting and ending price.

CFD ASSETS TYPES

Generally, CFD brokers will grant their clients the following asset choices:

Commodities

Currency Pairs

 Indices

Stocks

CURRENCY PAIRS

Currency pairs typically combine all the majors such as the EUR, USD, GBP, CHF, AUD, CAD, and JPY. We at GXCM, offer our clients in the forex markets the minor currency pairs plus exotics. The leading reason traders like trading on currencies are due to the high volatility and continuous change this asset offers. CFD traders are thus awarded boundless prospects for profits.

COMMODITIES

Commodities which are natural material goods can be set into two classes, hard and soft commodities. The hard commodities are the goods which need to be mined/removed from the ground (like crude oil, gold, rubber or silver) and other minerals. Soft commodities, on the other hand, represent in most particular the agricultural resources (cotton, wheat, rice, sugar, and coffee) including other crops and livestock. Commodities are an essential asset due to their world use and consumption. This asset is highly valued, they are the fabric of lives, an element that we could not survive without. With that said, it is no wonder why geopolitical news of poor weather conditions and natural disasters can significantly affect the yielding of these commodities, which ultimately affect the value of the commodity.

INDICES

Indices are an arithmetical gage of the worth of a portion of the stock market. The building blocks of a market index are usually made up of stocks of companies, which are deemed as embodiments of a section of the local economy. For example, the index that calculates the wellbeing of the oil and gas sector will contain the stocks of the leading gas and oil firms in the industry. Popular Market indices, usually traded by CFD traders comprise the FTSE 100, S&P500, Dow Jones Industrial Average, DAX, Nikkei 225, and NASDAQ.

EQUITY

Equity or stocks are financial bonds that provide their owners the rights and rewards of ownership in a company. Today, because we have progressed in the online trading technologies, anyone can attain and buy stocks online, through an online trading platform. It would be safe to say that among all the assets available, stocks are the asset type that virtually everyone recognizes. Stocks have been around longer than other markets. CFDs contracts on stocks, allow you to profit from the price movements plus from stock splits and bonuses awarded to the stockholders. Not to mention, with CFDs, you can leverage your trades, in contrast to trading with actual stocks.

CFD TRADING STRATEGIES

In this section, we will cover the trading strategies used when opening CFD assets trades. As previously mentioned, there exist various CFD asset: i.e., cryptocurrencies, commodities, stocks, indices, and currencies. What sets the asset classes apart is the trading hours. Stocks and indices usually are traded for limited hours during the day. Because of this, you will notice these assets by their breaks in the charts one trading day to the other. For this reason, we removed them from the CFD trading strategy that will be discussed in this section. This CFD trading strategy uses the iFibonacci.ex4 indicator, which utilizes the Fibonacci ratios to chart both Fibonacci fans including retracement lines in a mechanical fashion, leaving all CFD traders free of this task. It is an excellent system to use for the beginner trader. Among the already mentioned, this indicator also plots Fibonacci arcs, single pivot lines, and other support/resistance lines as desired aiding the investor in CFD trade exits and entries.

CHART SETUP

Indicator: iFibonacci.ex5 (default setting) Time frame chart: 30-Minutes, 1-Hour, 4-Hours, CFDs:, Commodity CFDs, Cryptocurrency CFDs, and Forex CFDs.

SETUP

Allow the indicator to map out the retracement lines and fans on the chart automatically. The indicator can be implemented on many CFD charts, this way the investor has the ability to make a trade on anyone if a signal was received.

ENTRIES

Different setups can be used to trade on a long entry with the same guidelines apply for short entries as well. Entries can be arranged as a return off the retracement lines or Fibo Zone (FZ) lines (represented by the fan lines). The below example demonstrates how these trades are performed. The example is a 15-minute chart for Bitcoin/USD. The iFibonacci.ex5 indicator has mapped on this chart, the following: a. Several Fibo Zone fan lines, coinciding to the Fibonacci numbers 38.2%, 50%, 61.8%. There is also a brown 0% line. b. The Fibonacci retracement lines paralleling to the Fibonacci numbers 38.2%, 50%, 61.8%, and 100%. There is also a brown 0% line. c. A brown pivot line, which can be used as a support or resistance, contingent on where the price action is originating from. In this example, the price is advancing from above so it is used as a support. The nature of trade entry is to trade long off a bounce of price of either/or the pivot line, the Fibo retracement lines or the FZ lines. The trade models shown are all long trades, which means we should look for valid support areas to trade from.

TRADE 1

The pivot support is created when a price fails to go below the pivot line, producing both a red doji candle plus a hammer. Thus, Trade 1 is to go long at point X, which is where the 38.2% Fibo Zone line crosses the pivot line. Having used the FZ 38.2% as the access point, the wise exit level would be the FZ line above this, which is the 0% FZ line (shown on chart).

TRADE 2

Following this trade, the next support is noticeable at the 61.8% retracement line (points A and B). Therefore the next long entry must be at this level or near to it. This is patterned at point C (pivot line support). A trade opened here has to end at any of the FZ lines above: 61.8%, 50%, and 38.2%, in that order. Here, it concluded at the 50% FZ line. Are you able to make out possible entry and exit points on the EUR/USD chart below? If you can, congrats! You have been successful in understanding one of the several CFD trading strategies that you can use.

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