Trading Shares and Forex with CFDs

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CFD is the recognized acronym for “contract for difference” which is essentially an agreement between two interested parties, i.e. a buyer and a seller.  The latter vouches to fund the difference between the opening and final prices of the underlying asset as defined in the contract.

Buyers will collect a profit if price advances higher during the lifetime of the contract. In contrast, they will lose money if price descends during the interim. CFD trading has become very popular within the financial sector in recent years. They are utilized to speculate on all the four main trading categories, which are stocks, indices, Forex and commodities.

The primary intention of this article is to demonstrate how CFDs can be used to trade Forex and the Stock Markets. This objective will be accomplished by first introducing the Forex and Stock markets. A simple technical indicator will then be described which you can deploy to detect quality entry points for new CFDs based on both these two markets.

 

The Forex market

Forex is the standard acronym for the FOReign EXchange Market which is utilize by investors to trade currency pairs, e.g. GBP/USD and USD/CHF. You can easily gain entry to this exciting market by registering with a Forex broker.

There are numerous key influences that affect the supply and demand of a currency pair such as political events, market psychology and economic data releases. For example, trading psychology can influence Forex in various ways such as the following:-

1. Distressing international events can generate ‘risk aversion’ causing investors to flee to safe-haven assets.

2. The ‘purchase the rumor, sell the fact’ adage can influence scheduled events before they have even happened.  Often under these conditions, traders will respond in an opposing manner to that expected when the event does finally occur.

3. The publication of key economic indicators can dramatically impact investor psychology generating serious price spikes. Examples are the balance of trade levels, inflation levels, deficits or surpluses, economic productivity and economic growth.

 

The Stock Market

You must appreciate that the Forex and the stock markets exhibit a very positive correlation. For example, if the Dow Jones Industrial Average declines then so do the higher-yielding currencies, such as the Euro and Sterling. Conversely, if the Stock markets surges then the safe-havens, such as the greenback and YEN, do as well.

In addition, Forex displays enhanced levels of volatility whenever the stock markets are also very active. If you can learn the art of detecting these relationships, then you will augment your abilities to trade Forex successfully. You can achieve this objective by analyzing stock market directional movements initially because they could supply you with clues to forthcoming Forex developments.

In addition, you need to realize that this correlation is present because significant price movements are generated primarily by the actions of large corporations and governments executing their financial strategies. As a key attribute of such activity, these bodies often activate substantially large currency dealings. As such, you should observe increased levels of volatility in both Forex and the Stock Markets whenever such events occur which are adept of creating serious price spikes.

 

Trading with Technical Indicators

Many traders utilize these tools to help them trade CFDs more effectively. The prime reason for doing so is that technical indicators can identify quality times to enter and exit new CFDs without relying on fundamental considerations. In particular, you can use these powerful instruments to study the trading charts of currency pairs if you are planning to execute a CFD based on the Forex market. Similarly, you can study the directional movements of stocks in order to initiate CFDs using shares as their underlying assets.

Let us now study a popular technical indicator to understand how you can utilize it to instigate CFDs based on stocks or currency pairs. The Simple Moving Average (SMA) displays readings that are calculated by adding together the closing values of a specified number of time periods and then dividing the resultant by the number of periods. This indicator is classified as a lagging tool as past price information is utilized to forecast future directional movements.

Many CFD traders deploy this tool to help them identify promising entry points for CFDs structured on currency pairs or stocks. They accomplish this task by installing both fast- moving and slow-moving simple averages onto the trading chart of the underlying asset of interest.

Consequently, they detect when to buy a long CFD whenever the fast-moving SMA crossovers above the slower moving one. They will then aim to close their trades when they next identify the faster-moving SMA dropping back beneath the slowing SMA. This indicator performs best when it is activated on the trading charts of currency pairs or stocks that are based on the longer time-frames from the daily upwards. This is because the statistics and technical indicator readings produced are of superior quality then those generated by charts constructed on the shorter time frames.

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