What is Contract for Difference (CFDs)?

A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.

It is basically an agreement between two parties to exchange, at the close of the contract, the difference between the opening and closing price of the contract, multiplied by the number of shares specified with the contract.

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CFD Trading Strategies

CFDs: Long vs Short

The purchase of an asset is commonly referred to as “long position”, which it means that an asset will gain in value. On the contrary, a “short position” takes place when an investor “sells” an asset at a certain level. The expectation is that the price of the asset will fall over the life of the contract.

CFDs: Long term vs Short Term

Short-term trading, allows traders to profit from price changes from hour to hour (intraday trading), or minute to minute. With short-term trading you can limit your financing costs and consequently to manage your margin. Conversely, the long-term trading offers a higher level of forecasting, which is created by the underlying trends governing the market. It also allows traders to capture larger price movements, as these trades typically last from a month to year.

CFDs: Hedging Strategy

It is a protective tactic as opposed to a strategy designed to achieve new gains. When hedging, traders are already established in open positions and are looking to protect these positions from losing any of their value. Essentially, this is done by taking an opposing position. The advantage of this strategy is that your total position is protected and there is no possibility of new losses. The downside is that this removal of risk will also mean there is no possibility of reward, and additional gains will not be seen. Typically, this strategy is implemented during times of extreme volatility where price activity becomes unpredictable and traders want to eliminate the potential risks involved.

CFDs: Swing Trading

Swing trading is the attempt to benefit from smaller reversals within larger trends. The advantage of this trading strategy is that trades are easy to identify and. The main disadvantage, however, is that it can be difficult to identify the exact reversal point.

Market analysis: Main Types of Analysis

1.Fundamental Analysis

It is an attempt to study everything that can affect the security’s value, including macroeconomic factors. All the news reports, economic data and political events that come out about a country are similar to news that comes out about a stock in that it is used by investors to gain an idea of value. This value changes over time due to many factors, including economic growth and financial strength. Fundamental traders look at all this information to evaluate a country's currency. One of the most important event in forex is Non-Farm Payroll.

2.Technical Analysis

An analysis of supply and demand in the market to determine where the price trend is headed. In other words, technical analysis attempts to understand the market sentiment behind price trends rather than analysing a security’s fundamental attributes. There are some main technical indicators that you can use:

  • Bollinger Bands:When the market becomes more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average).
  • Relative Strength Index (RSI):An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and it is a good candidate for a pullback. If the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
  • Stochastic Fast:Readings above 80 are considered overbought and below 20 oversold.
  • Support and Resistance:is a concept that the movement of the price of a security will tend to stop and reverse at certain predetermined price levels. These levels are denoted by multiple touches of price without a breakthrough of the level.

3.Moving Average Convergence Divergence

Is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD indicators can be interpreted using three different methods: Crossovers, Divergence and Dramatic Rise.

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