What is CFDs Trading and How They Work

2023.01.19 2023.01.19
What is CFDs Trading and How They Worklogo

As you probably know, at the moment there are 4 main types of global markets (stock, commodity, currency and cryptocurrency exchanges). Not so long ago, trading in financial markets required you to have a separate account on each of the exchanges. Traditional trading in shares of foreign companies was completely impossible due to legislation.

However, after the English brokers came up with a Contract for Difference, anyone could trade anything anywhere while having only one CFD trading account with one of the brokers.

This is because CFDs are not the asset itself, but rather just a deal for the price difference. With this contract, you only can get the difference in price from the moment the contract is signed to the moment it is closed, and you do not own the asset itself.

This makes CFD contracts much more convenient, cheaper, and simpler than traditional trading in standard futures or options.

The article covers the following subjects:

What are CFDs (Contracts for Difference)?

Let’s define CFD. Here is a CFD definition:

CFDs are complex instruments that are a type of transaction between two parties regarding the value of an underlying instrument in the future, in which both parties undertake to settle an amount equal to the difference between the opening and closing trades’ prices.

So what is a CFD? Let me try to explain CFD meaning in more detail. CFD is a“contract for difference”, and it is a contract or transaction between a seller and a buyer with the aim of making a profit from the future difference between the closing trade and opening trade prices.

If the closing trade price is higher than the opening price, the seller pays the difference to the buyer, and if the closing price is lower than the opening price, the buyer pays the difference to the seller.

And of course, since a CFD contract is a derivative financial instrument, in addition to the difference itself, it also regulates the time during which this difference is determined.

Initially, the main task of the contract for difference was to make stock trading available. And since stock CFDs are the most popular ones, we will look at what is a CFD position in trading as an example.

Let’s say you want to buy 100 Boeing Company stock contracts. The cost of one stock is $160. In order to buy the stocks themselves, you will need $16,000.

But when buying stock CFD contracts, you do not need to have the entire amount on your CFD trading account, you only need the margin. The LiteFinance CFD broker has a 2% margin on stocks.

So to buy 100 lots of #BA (Boeing Company) stock CFDs, you need only 2% of 16,000, which is only $320 + a small exchange commission, which we will not take into account yet. Several days passed, and the stock price rose to $170 per stock. The price has increased, which means the seller must pay us the difference, which will be equal to 170 – 160 = 10 dollars. Now we multiply 10 by the number of contracts (100) and get 1,000 dollars.

That’s it. Hope from now you could clearly understand what does Contract for Difference mean.

Now let’s see what we would get by purchasing the stocks themselves, and not a contract for difference.

Imagine we bought 100 stocks for $16,000, the price rose to 170 and the value of our stocks increased to 17,000. 17,000 – 16,000 = 1,000. So we got the same 1,000 profit, but in the case of stocks, we would need $16,000 on the account.

In the case of CFD products, we only needed $320. And if there’s no difference – why pay more? This is basically the main advantage of CFD trading over trading the underlying asset itself.

To summarize, it becomes clear that with contracts for difference, we can make transactions that were previously unavailable to us on any exchange. We do not need to have a lot in our CFD trading account to make huge profits.

In my example, we got 1,000 dollars of profit by investing only 320 dollars, and this is more than 300% of the return on investment, which is almost impossible when working with the asset itself.

What is CFD Trading

In order to understand what the CFD underlying market stands for, why it is so popular in the world and how to become CFD traders, let’s take a look at its history.

The first contracts appeared in the mid-90s of the last century in London. In those days, the Forex global markets were still very young and were a currency exchange in the most direct sense: only currencies were traded on it.

The main trading power was concentrated on the Stock Exchange, where real assets (stocks and bonds) and derivatives were competing for the clients.

Since the stock market was one of the main financial markets and there were no alternatives for experienced traders of that time, the government regulated and tightened the screws as it pleased. The exchange legislation changed almost every year, and the main restrictions were associated with the use of the leverage.

Of course, now we are all accustomed to using leveraged trading and change it as we please, from 1:1 to 1:1000. Back then even 1:5 leverage was available only to a narrow circle of financial tycoons.

The second major tax was Stamp Duty. This tax charged large commissions on the purchase of real estate, land, as well as stocks, bonds and other investment instruments.

These two reasons have become the main driving force for young financiers in their search for solutions to avoid these restrictions.

And so the young derivatives company Smith New Court found a solution. “Why buy shares, register them, pay large commissions and taxes if we are not interested in the company itself, but only in changes in the buy and sell prices of its stocks?”

And the financial services company decided to offer its clients to trade not the stocks themselves, but to buy and sell a contract for the difference in the current market price of this stock. And since the issuer of these contracts was the financial services company itself, it had the right to sell them with any leverage its client wanted.

At first, only hunters for short-term deals were interested in the new instruments, but later large investors also seriously considered trading CFDs with stocks. It allowed them to avoid paying a large tax, since there was no actual ownership of the underlying asset.

In the late 90s, a boom in tech companies began and contracts for difference changed significantly. Gerard and Intercommodities became the first financial services company to offer its clients stocks CFD trading via the Internet on the special GNI Touch platform. This is how the first prototype of the modern Forex market appeared.

Over time, online CFD stocks trading began to be offered by other financial companies and CFD providers around the world.

In fact, contract for difference brokers of that time created their own underlying market that was much more accessible for simple private CFD traders, and you didn’t have to be a professional in order to work on it.

The CFD volatile markets allowed anyone to make money on the price difference without owning a real asset. It’s also a time saver because you don’t have to wait until your request for the purchase of a security goes through all the stages from the CFD broker and the exchange to the clearing house and the depository.

A CFD is a derivative financial instrument, which means that it is always based on some underlying asset.

The first CFD assets were based on stocks, and now there is contracts for difference trading for almost everything that can be sold.

Recently, a CFD deal for the outside temperature was registered in the United States. Two people registered their bet in this unusual way, and the loser had to pay the winner the difference in air temperature from the moment the contract was concluded.

CFD trading has a lot of advantages over traditional trading. They include practically unlimited leverage, instant transactions, and low CFD margin. And finally, you can trade CFDs with short positions, while non-margin stocks cannot be short, you can only buy. However, don’t forget that leveraged trading includes high risks and can make your investor accounts lose money when trading CFDs.

How Do CFD Works with Examples

Now let’s figure out how to trade CFDs. It’s best that we use a real example.

For example, we decided to purchase a Tesla stock (#TSLA) CFD. In my opinion, now is a rather convenient moment to purchase contracts for stocks of this particular company. They recently had a significant decline, and according to one of the main strategies, which I will discuss in more detail below, it is rational to buy now.

Before you buy or sell anything, you need to weigh the pros and cons. Pros include, of course, the expected profit, and cons are possible high risk and the size of commissions and spread.

Everything is pretty clear with the profit, so let’s discuss the high risk of losing money in more detail. The fastest way to calculate these parameters is the trader’s calculator. You can use it right here:

The first step is to enter the parameters of your trading CFD account: account type, account currency and account leverage. I have entered the parameters of my trading CFD account;

Now let’s move on to the settings of our future trade. Select the type of trading instrument, in this case it is “NASDAQ contract for difference”;

Next, select the underlying asset. As we have already decided this is Tesla stock, the ticker is #TSLA;

Next, enter the estimated trade volume, or how many CFDs we want to buy. Here you need to know how many contracts there are in one lot. For CFDs on stocks, this is almost always 1 CDF = 1 lot. I decided to buy 100 lots;

Set the type of trade. In our case, this is buy or “long”;

Now we set the price at which we want to buy. Since I intend to buy at the current market price, it is filled automatically;

And now we set the price we expect to see. I expect possible growth around $460 per stock;

After entering the parameters, we press “calculate”, and below appear all the parameters of our future trade;

First, let’s pay attention to the price of one point. At our volume, it will cost us $1;

Next, you can see the margin. This is the amount of money that will be required in our CFD account to buy 100 contracts. As I said above, we do not need the entire value of the stocks, but only a 3% part of the total amount, which is calculated as follows:

Next is the spread that we will pay when opening a trade for our volume. As you probably know, spread is the difference between the buy and sell prices, and it looks like this:

Next comes swap, the overnight commission;

And finally, the calculator gives our estimated profit from the trade with the entered parameters.

There is yet another type of fee – the commission.

As you already know, most brokers on the CFD trading market have 2 types of retail investor accounts, Classic and ECN. Of course, there are also free demo accounts, where you can practice CFD trading, but that’s a completely different story. In short, the main difference between these retail investor accounts is precisely the types and amounts of fees, such as spreads, swaps, and commissions.

On Classic accounts, the spread is higher than on ECN retail investor accounts as it consists of two components – the exchange spread and the brokerage spread.

The market is a free trade zone and everyone wants to make money, both the exchange and the CFD provider. ECN accounts use the so-called “raw” market spread without the broker’s markup, which is much more attractive for CFD traders who work on short time intervals.

But since this is not beneficial for the broker, they charge a commission on these retail investor accounts, which is always a fixed amount. This commission is different for different types of instruments. For example, to trade CFDs with stocks it is 25 cents per lot.

And now a lifehack:

The screenshot above shows how I sold 2 different contracts for difference, one for Google stock and the other for General Electric.

Notice how different the stock sell prices of these companies are. But the most remarkable thing is that the commission in both cases is 25 cents. However, for Google stock, this commission is only 0.017% of the stock price, which is very very low. But for General Electric, this commission is 4.09%.

So we see that it is much more profitable to trade more expensive stocks under such conditions. In fairness, it should be noted that ECN retail investor accounts were created mainly for CFD trading.

Before opening the trade, let’s recall how the profit is generated when working with contracts for difference.

In CFD trading we profit from the difference between the opening price and the closing trades’ positions.

First, let’s look at what happens when you buy a CFD.

The screenshot above shows a trade to buy a NASDAQ CFD.

Since the buy and sell price of the underlying asset and the buy and sell price of the contract for difference are the same, the profit and loss will be calculated in the usual way. Anything above the buy price will make a profit, and anything below it will make a loss. You can close a CFD at any time.

When you choose short selling CFDs, it’s basically the same, only now you profit when the sell or buy price of the underlying asset is below the sell or buy price at which the trade was opened.

Another important issue is the duration of CFD trade, and here I would compare it with its closest neighbor derivatives — futures and options.

As you probably know, one of the main parameters affecting profit when working with derivatives is the duration of the trade.

In the picture above, I compared a CFD with a futures contract and an option over a one-year interval.

As you can see, you will need to conclude both futures and options every quarter in order not to lose in value. You can buy futures for a year, but the buy price will be much higher than the current market price.

It’s the same with the option. But contracts for difference is an indefinite instrument since the underlying asset has no maturity. You can keep your trade open for as long as you like.

Let’s now look at the trade.

For clarity, I made the trade on two different ECN and Classic retail investor accounts at the same time in order to help you understand the tangible difference between the trading conditions.

Trading conditions can be viewed in the “information about instrument” tab.

The first and most important difference is the spread or difference between the buy and sell price. ECN accounts use raw market spread without a broker’s markup, and this is clearly seen in the screenshot above: the spread on an ECN account is 75 points, while on a Classic it is 94 points.The second difference is the amount of leverage built into the instrument, which we will talk about later. On an ECN account, the leverage is 1:50, and on a Classic account, it is 1:33.The third difference is the margin percentage, which determines the required margin for trading a CFD. On ECN accounts, it’s 2% of the total value of the underlying asset, and on Classic accounts, the margin is 3%, which requires a larger amount on the trading account.

Now let’s trade.

I will open CFD trades on two different accounts.

First we choose the type of trade: we have already decided to buy.The next step is to set the required volume in lots. 1 lot is equal to one stock for these stocks. We are buying 100 lots. Click “buy”.After the trade is opened, compare the parameters between the accounts. To do this, click on the status bar of the trade. Here you can see the first difference – margin. As I said above, the margin trading percentage on the accounts is different, and this difference of 1% cost us more than $400 in margin. On the ECN account it is less and amounts to 845.18 USD, and on the Classic account the margin amount is 1,271.19 USD.To open the parameters window, you need to click on the three dots to the right of the “close” button. Don’t miss or you’ll close your position by accident.Another important difference between the accounts is the commission. As I said above, it is 25 cents per stock. We have bought 100 shares (contracts), which means that the commission will be 100 times higher, namely 25.00 USD. There is no commission on the Classic account, and we saved $25, but it’s not so simple. If you remember, the Classic account has a larger spread, which usually compensates for this commission.As a result, our current profit will add up to the difference in quotes and commissions. The profit formula will look like this:

In other words, I bought 100 contracts of Tesla stock. The buy price of one point is $1. If I bought at 400 and closed at 410, my profit would be: 100 * 1 * (410-400) = 1,000 dollars.

After some time, I closed my CFD trades, and the profit on both accounts was roughly the same.

As I said, the high spread on Classic was compensated by the commission on ECN, and the only difference was in the margin, which was lower on ECN.

CFD Markets

As I have said several times, the scope of contracts for difference is very broad.

At the moment, there are 4 main types of exchanges (stock, commodity, currency and cryptocurrency). CFD trading exist for almost all types of instruments on these exchanges.

The most popular way to trade CFDs is still with stocks for the most popular companies, the so-called “blue chips”.

Why? Let’s recall how contracts for difference were created.

First of all, they are for investors who cannot not buy shares of foreign companies by virtue of the law.

In second place are contracts for commodities such as oil, gold, coffee, tea, gas and many others.

The third most popular choice are contracts for stock indices.

Lower in this list are CFDs for currencies and cryptocurrencies.

I have compiled a table of the most popular contracts for difference by type of exchange.

By the way, my CFD provider LiteFinance has all the instruments in this entire list. It’s one of the first Forex brokers to offer CFD Forex trading services.

How to start Trading CFDs

Now let’s find out how to trade CFDs. However, before entering this underlying market, it’s crucial to be aware that CFD trading involves risk and may lead you to losing money rapidly unless you have a clear understanding of this financial instrument.

The first step is to draw up a strategy. It can be hypothetical or quite real in the form of step-by-step instructions. For those who are just taking their first steps in the financial markets, I recommend drawing up a plan on paper.

Are you ready? Then let’s start:

1. First of all, you need to register an account with one of the Forex brokers.

Why Forex? Because Forex brokers have the most extensive range of contracts for difference, which is much wider than that offered by stock brokers and investment banks.

I worked on my instructions for you in my LiteFinance personal account, which I’ve had for many years.

Why did I choose to trade CFDs with this provider? Because I’ve been satisfied with it for many years.

However, I do not recommend starting trading with real money right away. In order to get started on this market and not let your investor accounts lose money when trading CFDs, it would be best to start with virtual money, i.e. create a free demo account.

2. After you’ve created the free demo account, you are in your personal account. On the left is the main vertical panel, where you select the first item of the menu “Trade” and click on it.

3. The trading page will open, and at the bottom of the screen you can see a gray highlighted horizontal bar in which zeroes (0.00 USD) appear in four columns. This is the trading terminal panel, where you can find a record of the funds in your trading account. Now it is empty because our demo account is empty.

4. First you need to deposit to your account. To do this, click on the blue “Deposit” button.

5. Then a window will appear in the middle of the page, consisting of two parts. First, we are offered to open a real account. In the second there are two fields; enter the required deposit amount in the upper one. 10,000 virtual dollars is enough for a start.

6. Now press the “Continue” button.

7. After a few seconds, your balance is not 0.00, but 10,000 USD.

8. It’s time to start testing. To do this, click on the “Trade” tab on the main panel.

9. A menu will appear at the top, where all traditional trading instruments are classified by groups. Since we are going to open a CFD trade, we are primarily interested in stocks, which means that we will select the “Stocks” tab in the panel.

10. A list will open with all the stocks for which the broker provides a contracts for difference. Earlier in the article, we mentioned Tesla stock CFDs. Since we know them a little better than others, let’s practice CFD trading on them. Click on the name of the stock or on the logo.

11. After clicking, a window for trading these stocks will open. In the center of the screen there will be a stock price chart. If you are already familiar with the basics of technical analysis, you can apply it.

12. After analyzing the price behavior, I decided that I would play long. So we switch to the “buy” tab on the right in the trade type field.

13. In the line below you need to enter the desired buy volume. The minimum volume is 1 lot or one stock. But since we have 10,000 USD, it makes no sense to buy one share. I decided to buy 100 stocks, or 100 Tesla CFDs.

14. After checking all the data, we only need to click “Buy”, and our request will go to the broker and the CFD trade will be opened.

15. After just a few minutes, I saw the result of my actions. The values ​​in the lower field of the terminal began to change and the price really went up, bringing me a profit of $173. For clarity, profit is displayed in green and loss in red.

16. Our balance has also changed in the terminal field. Now it’s not 10,000, but 10,148.

Now a question. Why is my profit $173, while net income on our account is $148? The answer is simple – commission. The broker took the commission when the trade was opened, and it is automatically deducted from the profit. As you remember, it’s 25 cents per contract, or in our case, 25 dollars, since we have 100 contracts. 173 – 25 = 148.

17. A profit of $173 is quite enough for a start, so we can close our trade.

To do this, click on the field where the balance is changing and a tab will open a little higher with our trade or trades. We find the right one and there will be a “Close” button on the right. Click it and our trade is closed.

18. Profit on a demo account is certainly good, except we don’t have a tangible result apart from the joy of achievement.

If you seriously decide to learn how to trade CFDs with profit, you need to start making real money, and you need a live account for this.

First, let’s switch our personal account to live CFD trading. To do this, click on your profile icon in the upper right corner of your personal account.

19. A small settings tab will open, where you need to click on the “Enable Live Trading” button.

20. After clicking on this button, the status of your personal account changes to “Live Account”. We are doing a serious trading journey now.

21. First of all, we need to deposit money to the live account. To do so, select the “Finance” tab in the main panel.

22. In the window that opens, in the top menu, select the item “Deposit”.

23. A window will open with deposit options, from a bank card to electronic payment systems. You can choose whichever method is more convenient for you.

24. After choosing the deposit method, you need to place a deposit request.

The first field will be the deposit amount.

Everyone’s situation is different, but I will give you one tip. I have been working in various financial markets for more than 10 years and came to the conclusion that the deposit amount only depends on the goals that you set.

All the goals can be divided into 3 types: trying, playing, and earning. And “playing” is by no means a joke. After we switched to live trading mode, the jokes ended. Because our own money is at stake and we don’t want to just give it away.

If you are in this category, in order to trade CFDs, to understand how it all works and try to earn your first capital. An amount twice the price of the chosen stock will be enough.

Why twice the price? So that one or several unsuccessful CFD trades do not damage your deposit too much. In the case of our Tesla stocks, where one stock is worth about $400, $1,000 is enough.

Playing. This option is suitable for those who are interested in the financial markets but have no desire to get into all the intricacies of trading power, learn and calculate. They just want to buy a certain stock for a certain amount of money and earn 100, 200, 300 or even more percent of profit.

Do you think this is unrealistic? It’s not, but such trades are 99% luck, and that is why this category is called “playing”. However, I know a lot of examples of quite successful playing.

For example, let’s go back 2 weeks and sell CFDs for the familiar Tesla company, which then cost $ 2,200 per stock. A little over 100 contracts could be sold for $1,000, and in just one day they brought $180,000.

This is a very real story, only there were few lucky players since the probability of such a fall was almost zero. So if you are into this kind of trading style, deposit 1,000, 2,000, 3,000 or however much you want, bet all the money on some unlikely event and wait.

If it happens, you will get rich in one day, but if it doesn’t work, at least you tried.

Someone will be able to work out their own profitable strategy and start earning steadily with the help of the knowledge gained along the way.

Someone will apply this knowledge and experience to work in a field related to financial markets.

Someone will gain invaluable experience and decide to go along the path of creating a brokerage company.

And someone will choose the path that I have chosen. In addition to quite successful trading journey in the market itself, I found myself in education and financial analysis.

If you want to follow the path of becoming a real trader and learn how to make money, you need strong start-up capital and some calculation skills.

My first serious capital was about $4,000. I have already written many articles where I talk in great detail about trading costs. So if you need more information, find my other articles.

Let’s continue. Today I have chosen 4,000 as our start-up capital because the stock trading costs $400.

25. After depositing, click on the “Trade” button and see the required amount appear on your account. It will be displayed in the “Total Funds” field.

26. I have 4,852 instead of 4,000 because I already had a balance of 852 dollars from my early activities.

27. Let’s start our serious trading.

Let’s click on the “Stocks” tab and slow down a bit. Since we have real money, rash actions are not for us. First of all, we need to draw up a so-called trading plan.

You can find a bunch of articles about trading plans both on the Internet and on this blog. But since I mentioned it, I will draw up a short trading plan for you too.

A trading plan is a set of rules that you absolutely must follow in order to achieve a positive result. And it basically looks like this:

My trading plan, which I use now, has 37 points, and I know all of them by heart. The process of evaluating a potential asset can take me from a few seconds to a week.

For someone who sees a trading plan for the first time it will take about an hour to work through a single point. But without a trading plan your CFD trades will be random, and we can’t talk about a stable profit. I will not go into detail on each point of the trading plan, as I am going to devote a separate article to this. Let’s get by with the basic sections.

In order to make an informed decision to open a long or short position, we at least need to decide on the working time when the instrument is being traded, choose the trading instrument, usually after technical or fundamental analysis, and distribute a part of the capital for the trade.

28. After you have coordinated your desires with the trading plan, you can finally start trading. Click on the selected instrument. In our case, this is again our favorite Tesla.

29. If we stick to technical analysis, we should pay attention to the price chart.

There are a huge variety of trading strategies, but one works almost flawlessly – the market gap. I will not go into details, because I’ve described this strategy in detail in one of my articles.

The general idea is that trading has just begun and a price gap has formed, which is likely to lead to a short-term rise in the stock price during the next hour or two. Time is running out and you need to act.

30. Since the market rises in price, it means that we will buy. We set the trade type as “buy”.

31. Then we set the volume of the trade. I’ve already calculated that 100 contracts will cost me about $900 in CFD margin. This is quite acceptable for my balance of almost 5000, so I will buy 100 contracts.

32. After setting the parameters, I click “buy”.

33. And now a side note for those who are not great at financial analysis and trading strategies. There is a section “Analytics” for you; the button is located on the main panel of your personal account.

34. In the window that opens, click on the “Analytics Feed” and find the required instrument in the feed.

35. There’s today’s Tesla review there. When you click on it, you will see a brief analytical review of one of the company’s analysts with their opinion on this instrument. You can use the author’s arguments and do what they recommend. But for the future I will say that it is always better to rely on your own opinion.

36. While we were hanging out in the “Analytics” tab, changes occurred in the price chart. The price started to rise, as we expected.

37. And now it’s time to take a look at the trading panel to assess the state of our deposit. During those 10-15 minutes that we studied analytics, prices rose and at the moment our trade is bringing us a profit of $560.

38. I believe that this is more than enough for a 10-minute trade. Our strategy has worked and we should hurry to close our trade and take the profit. You already know how to do this, click on the “Close” button.

39. After the trade is closed, I suggest enjoying the first profit properly. In other words, you need to withdraw the profit and feel it in your hands.

40. This is a very useful exercise for novice and experienced traders, which is great for building self-confidence. To withdraw profit from a CFD trading account go to the “Finance” section.

41. Only now, instead of the “Deposit” tab, click on the “Withdrawal” tab.

42. Again, select the withdrawal method.

Your CFD trading account will appear in the field with the balance and amount available for withdrawal. I have 5,479. If you remember, I deposited 4,000, plus there were about 900 dollars on the account. In total, I decided to withdraw the surplus over 5,000. 479 dollars is quite enough to go and buy myself a gift for diligence and a well-thought-out strategy.

CFD Trading Examples

After we have analyzed how CFD trading works and explored CFD position examples, let’s summarize and recall the basic principles when working with a contracts for difference.

The first thing to recall is how CFDs work, how profit and loss are determined.

After we have made the decision to start trading, we must turn to our trading plan.

After deciding on a trading instrument and parameters, we make a decision to buy or sell. The trading result will directly depend on whether we choose the direction correctly.

Determining the expected result is easy. Above I have already given the full calculation formula, but there is also a simplified formula. You just need to multiply the difference between the closing and opening prices by the price of one point at the volume of your choice.

In the picture above, I decided to move away from stocks and show this through the example of a Brent oil contract. It is the most popular commodity CFD on exchanges.

For example, we decided to buy oil contracts. Oil is sold in lots, and the minimum lot is 0.1. However, since the contract itself is relatively cheap, you can safely buy a full lot or more.

For our example, I bought 1 lot. The buy price was $40.00, and the price I subsequently sold it at was $45.00. The sell price is higher than the buying price, hence I made a profit.

By the way, how many points did the price pass? 500. Why?

Because a point is the minimum price change increment on the stock exchange. Before becoming 45.00, the price rose from 40.00 to 40.01, 40.02 and so on, changing by 1 point or more.

So the profit is equal to: the price of a point (1 dollar) multiplied by (sell price (points) minus (buy price (points)), which is 1 * (4500-4000) = 500. That’s it.

If you are unlucky and the price does not go up, but the falling market occurs, your buy position generates a loss. It will be calculated using the same formula 1 * (3500-4000) = – 500. The loss in this case will be 500 dollars.

We’ve covered profit and loss, now let’s figure out how the margin works.

At the heart of CFD trading is CFD margin trading, when a trader earns based on the leverage provided by their broker. We will talk about this in detail below. However, it’s important to note that margin and leveraged trading is a double-edge sword, meaning that it could significantly magnify your profits, but, on the other hand, make your retail investor accounts lose money rapidly.

Margin lending makes it possible to work with large sums with only the minimum required deposit on the account.

Therefore a trader can work with stocks or commodities and make money on them without having the full amount to buy the underlying assets.

Let’s look at how it works using the example of stocks of one of the most popular companies in the world – Google, or Alphabet Inc.

The cost of one stock at the moment is approximately $1,445. In order to buy it, we need the entire amount. In fact, even more with the commission and spread.

But if you decide to buy not the stock itself, but a Google CFD that is equivalent in size to one stock, you will not need to have the entire sum of $1,445 in your account thanks to margin percentage.

The margin for this stock is only 2% of the total value, or $28.98. In other words, you get the same stock, only many times cheaper. tThe profit on it will be calculated as usual: how many points the price moves in your direction is how much you get.

CFD Trading Strategies for Beginners

This is one of the most important sections that will discuss trading strategy or tactics of market behavior.

A well-defined strategy will help you make money on market movements.

There are many trading strategies specifically to practise trading with contracts for difference, but I suggest you consider the most basic and accessible ones.

Short & Long CFD Trading

Let’s start our review with the most common Forex CFD strategy called “buy low, sell high”. It will look something like this in the chart:

The picture above shows two charts of market movements for 2 different underlying assets.

The top chart is Facebook stocks, and the bottom chart is stocks of the most popular online auction eBay.

As you can see, Facebook stocks were on the falling market for a long time and at some point reached equilibrium when the price stopped actively going down. This moment is called the balance of supply and demand. Very often the stock price changes after equilibrium.

In other words, if the prices have been experiencing falling markets for a long time, it will soon begin to grow. There is no other option.

After they are on the falling markets, they became cheaper and more attractive for buyers, since now less money was required to buy them. At the same time, the longer they fell, the higher the potential for future growth. Hence the first rule – “buy low”.

Another scenario is as follows: when eBay stocks are growing for a long time, sooner or later a moment should come when the major buyers will reach their targets and take their profits.

When this happens, the money supply with which they spurred growth will go away, and only the money supply of those who decided to play short selling CFDs will remain in the asset. And that’s when the money supply of sellers exceeds the mass of buyers, a reversal occurs and the stock begins to fall. Hence the second rule – “sell high”.

I think there is nothing complicated about this strategy. Everyone knows it, but this only makes it more effective. It worked 100 years ago and it works now.

Leverage in CFD Trading

This is another very important section in trading. Now is the time to talk about leverage. Leverage on Forex is an interest-free loan provided by a broker, which allows you to make trades with a volume greater than your own capital.

Without the leverage that your broker provides you, trading on the exchange for individuals would be unprofitable both for a trader and a broker. However, it’s crucial to underline that it’s possible to lose money when trading CFDs with leverage. It’s a tricky instrument that, on the one hand, helps you to increase your returns, but, on the other hand, could make your retail investor accounts lose money.

Despite the fact that trading on the world’s stock exchanges is quite active, daily price fluctuations are about one percent of the value of underlying assets. And without leverage, a trader’s income would be a few cents even in the most successful trades.

For example, you want to buy 1 share of Hewlett-Packard, which costs $18. Even on the best day, the value of the shares can change by 3-4 dollars, and therefore your income will be 3 dollars. How do you make millions on the exchange? You can only do it with leverage.

Let’s look at examples:

Example 1

First, let’s look at leverage for currencies.

Let’s say we decided to make money on changes in the rates of Forex pairs. For example, we’ll take the USDCHF currency pair, which was at 1.0000 not so long ago.

We’ve decided that the rate of this currency pair will grow, and therefore we need to buy.

The base contract size for currencies is 100,000 units. In other words, a 1-lot CFD trade will generate income or loss as if from $100,000. In order to avoid giant losses in case of failure, it can be reduced to a minimum size of 0.01 lot, and then the volume of the currency will be 1,000.

We are buying 0.01 lot of the USDCHF currency pair at 1.00000 in the hope of growth. In this case, each point of long or short term price movement will bring profit or loss, depending on our lot. With a lot of 0.01, each point will be equal to $0.01.

There is a simple formula for calculating the point price. You can find it here.

After a while the price rose and the quote was 1.01000. It increased by 1,000 points. So the profit for our CFD trade will be 1,000 * 0.01 = 10 dollars.

If we use a large volume, for example 0.1, then the profit will increase 10 times and become $100, and so on. The higher the leverage, the higher the possible profit, but don’t forget about the high risk and the possibility of the margin call. In case of failure, your loss will also be leveraged and can deplete your deposit just as quickly.

Example 2

Now let’s look at how leverage works in the case of contracts for difference.

Let’s analyze how leverage works for Google stocks. When trading CFDs, the minimum volume is very often one stock, in other words 1 lot is equal to 1 stock.

One stock costs $1,444, and in the case of the Forex market, we do not need the entire amount on the balance. But more on that later.

When buying 1 lot of stocks, the leverage will be 1:1 and will be regulated by a simple increase in the number of stocks bought.

If we buy 10 contracts, the leverage will be 1:10. If we will buy 100 contracts, the leverage will be 1:100. It couldn’t be easier.

The price of one point for 1 lot will always be equal to the minimum change in the stock price, i.e. 1 cent or 0.01 dollars.

Let’s calculate how much we will make if the stock rises from $1,444 to $1,450.

If we buy 1 contract, the profit will be equal to the number of points passed multiplied by the price of a point, or 600 * 0.01 = $6.

Well, of course, if you increase the leverage, you just need to buy more contracts, for example, 100, then the profit will also increase 100 times and amount to 600 dollars.

Margin in CFD Trading

Without the margin leverage that a broker provides you, trading on the exchange would be almost impossible for individuals, and brokers’ income would be almost zero.

So margin trading is good for everyone involved in the trading process. With the help of margin, experienced traders can make transactions for which their own funds would simply not be enough. However, it’s crucial to remember about the margin requirements to prevent the possibility of a margin call.

For example, you want to buy 10 Google stocks. Not everyone will be able to afford it, since one stock costs $1,445, and ten – $14,450. With the help of margin lending, I can buy 100 Google stocks with only about $400 on my CFD traders’ account.

Let’s look at an example:

Above, I already gave you the formula for calculating the margin. Here it is again:

The key parameter here is the percentage margin, it defines how much of the total value of the asset you need to have on your account to complete the trade.

For example, in the case of Google stocks, the margin is only 2% of the total value. In other words, to buy 1 stock we need only $28.89 instead of $1,444. Thanks to this, we can afford more than 30 shares with only $1000 on our account.

Hedging in CFD Trading

Now I want to tell you about a reliable strategy for trading CFDs. This is a hedging strategy. In the financial world, hedging is a way to protect capital from high risk of losing capital. In our case, we will use hedging against the possible high risk of falling markets.

The picture above shows how it works.

For example, we decided to buy Apple stock. The market rises in the chart and everything seems to be fine. But suddenly we learn that the company may have temporary problems that may be associated with a defective batch of new iPhones. This has not affected the stocks in any way yet, but it’s highly probable that it will.

There is no point in closing trades, as the problems are temporary and the price should rise in the long term. In this case, there’s a trick we can do. We go to a second account and monitor the chart with price movements.

After a while, the stock really begins to decline, and at the moment when the price reaches our buy level, we open exactly the same position on the second account (with the same volume), but this time it’s a sell position.

If the price falls even lower, profit will be generated on the second account, which will be equal to the loss on the first account.

After waiting for some time, we have a choice. We can close the profitable position on the second account and wait until the price rises and returns to profitability on the main account. Or we can wait until the price returns to the level from where we started.

The choice is yours here, but you just need to understand why you are doing this overlap. If you want to get additional profit, you have option 1, but it is risky. If you just wanted to avoid a temporary loss, you have option 2, which is called breakeven.

CFD Trading Strategies for Professionals

Now let’s talk about how CFD trading works for experienced traders. This does not mean that they are not suitable for beginners, they just require certain basic knowledge. They are often a symbiosis of basic technical analysis strategies and the contract for difference structure.

Let’s start with the most popular ones.

Rangebound (Range) Trading

The range trading strategy is perhaps the most popular one among Forex traders.

The basic principle of the strategy is based on working in the price channel. You monitor the price movements on the chart for sideways fluctuations or a corridor with a slight slope. Then you add one of the channel indicators (CCI or RSI) and compare the highs and lows in the price channel with the points where the indicator line exits the overbought and oversold zones.

If the point coincides completely, this is a signal to enter the market. If the price reached the line in the chart, but the EMA line did not reach the zone on the indicator, such a signal is insufficiently reliable and is not taken into account in the strategy.

Breakouts

The fractal breakout strategy is also quite popular among traders.

It is mostly used on intraday intervals.

As in the previous strategy, it’s based on a breakout of a sideways movement or a flat. Bollinger Bands and Bill Williams fractals are used as indicators.

You look for the moment in the chart when the price breaks the level of the nearest fractal and wait for the chart to go beyond the border of the nearest Bollinger band. Then the signal is considered true. Stop loss is usually set at the level of the opposite fractal.

Contrarian Investing

The contrarian investing strategy is more of a fundamental strategy, since it is based not on the price chart, but on the study of the opinion of the crowd.

This strategy was first described by George Soros in his book The Intelligent Investor, where he compared the opinion of the crowd to controlled chaos.

The principle of the strategy is to find countertrend points. You find an asset that has a pronounced directional pressure and form a position against this movement.

In other words, you are making a trade against market opinion. Tesla stock can serve as an example. When it was announced last week that the company would not be included in the S&P500 stock indices, only the lazy was not selling it. This is precisely the situation for this strategy. There is a high probability of a reversal and growth in the near future.

Trend Following

The trend following strategy is quite popular among indicator strategies. However, in my opinion, it has a number of disadvantages compared to the channel strategy.

The principle is to open a position in the direction of a newly formed trend. You find the trend formation point based on the main signal from the intersection of the fast (21 periods) and slow (55 periods) moving averages. The signal is then filtered using two oscillators usually MACD and RSI. Make sure that the price stays within the corridor on the RSI, and the price is in the required trend on the MACD.

For example, in the case of a buy position, the fast EMA crosses the slow one in the chart and at the same moment, the RSI is inside the channel, and the MACD histogram is in an uptrend – the signal is true, you can buy. The trade should be closed when the RSI indicator exits the channel.

Scalping (aka Spread Trading)

There are a lot of scalping strategies, but I will suggest that you consider indicator session scalping, which is most suitable to trade CFDs.

The strategy is based on the comparison of signals from 4 main indicators. The main signal is from the MACD oscillator, and then we check this signal using the RSI and two MAs.

The point of the strategy is that the signal matches on all four indicators.

An example of them matching is in the chart above.

We get a buy signal when: MACD forms the first bar above the 0 level, RSI crosses the middle 50 level upwards, and the fast linear weighted moving average with a period of 10 is above the exponential moving average with a period of 26.

Swing Trading

Swing trading is not a strategy, contrary to what many people think. Swing Trading is a complex set of rules, methods and market knowledge that together give you a clear and structured trading plan that takes into account every detail.

In general, swing trading is considered to be a trading method in which a trader keeps a position following the trend open for as long as possible, ignoring corrective movements. With the proper approach, this takes advantage not of a small piece, but of the entire trend.

Swing positions are often held for more than a month. But there are also global swing positions.

In the chart above you can see my real trade in gold, which I kept open for almost a year, adding and removing accompanying short-term trades along the way without touching the main one.

Generally speaking, I consider swing trading to be the pinnacle of the trading art, and I am going to write a separate article about this method soon.

News Playing

News trading is a very popular type of trading.

As a rule, news trading is divided into 2 types: trading on periodic news and trading on events. Periodic trading is mainly done using the economic calendar. But for event trading, you need to be aware of everything that is happening around the instrument you are interested in.

For example, I chose events around Walmart Inc. At the end of August, it was announced that the company was buying the popular TikTok service and the stock began to grow actively. This is an example of a buy deal. However, a month later, news appeared in the media that the Chinese government was likely to block this deal, and the price of Wal-Mart stock began to fall actively — this is a sell signal.

CFDs Benefits & Risks

So what is CFD trading anyway and what is special in trading CFDs? A way to make money or another unnecessary financial instrument?

An analysis of the pros and cons will help answer this question.

When brokers around the world began to actively trade contracts for difference ten years ago, of course, I asked myself: “What are CFDs anyway?”.

As I studied the new type of contracts, I found a number of advantages in it over other available contracts. However, as time went on, I found obvious disadvantages as well. Let’s look at both.

CFD Benefits

I used to practise trading with CFDs. This helped me to discover four main advantages over other types of contracts:

You need very little capital to trade. I have talked about this advantage many times in this article.

The margin is the biggest advantage that makes CFD trading work almost anyone. What is a 2% margin compared to a $1,500 stock price? For some 30 dollars, I get the opportunity to earn 100, 200, 300 and even more dollars of income per day.

Very low commissions. When it comes to buying stock of a company for the long term, for a period from several months to a year, I immediately think about the fees.

These fees include acquisition taxes, commissions for inclusion in the register of shareholders, possible delivery commissions (in the case of commodities), leverage, overnight and other charges.

This set makes you think seriously before buying any instrument for your existing portfolio. However when I decide to buy a CFD, I don’t think about that at all, because all I pay is a one-time spread, a commission of 25 cents per lot, and a swap, which is less than one cent.

For example, when buying 1 Google stock contract for $1,500, you will pay 80 cents in spread, 25 cents in commission and 1 cent for ten days of ownership. And that’s it! For a $1,500 contract, you only pay $1 in commission. The conclusion is obvious.

Portfolio hedging option. I’ve already talked about hedging above. There are many derivatives for hedging, such as options and futures, but contracts for difference trading is much more affordable compared to them.

In fact, contracts for difference are the perfect way to create locks and synthetic hedging positions. But their main advantage is the ability to instantly hedge a long or short position in physical stock. I’ve described the process above.

Convenience. This item summarizes all of the above. Convenience applies to everything related to contracts for difference. This is the minimum margin, and unlimited leverage, and practically no commissions. But one advantage is worth mentioning separately – accessibility.

Forex brokers provide CFD trading on all types of instruments in one convenient and familiar terminal. You do not need to have accounts on different types of exchanges, many CFD providers have access to all types of the most popular contracts for difference.

CFD Risks

As for the disadvantages, I have found only two. Perhaps they are not even disadvantages, but nevertheless, I recommend that you always pay attention to the little things, because they affect the result.

No legislative regulation.

I think many could say “What kind of laws are we talking about if we trade on offshore popular trading platforms and do not pay taxes?”

This is certainly true, and I am immensely glad that I don’t have to pay income tax. But I will give you the following statistics.

In recent years, cases of disputes between brokers and their retail clients concerning most CFD trades have become more frequent. This is because the broker is usually the market maker of the contracts for difference, and therefore they set the rules themselves. There is no clearly written specification of a CFD and this makes it non-standardized. In case of any dispute, the broker will always be right.

For this very reason, I strongly recommend to conduct CFD trading work with an unverified broker. It is better to choose CFD providers with a slightly higher commission, but you can be sure that you will not be deceived.

A CFD investor is not a shareholder.

Again we can say that this is not quite a disadvantage.

This may not be very important for a beginner, but it’s different for an experienced trader.

The difference between buying a CFD position and buying a physical stock is in regulation.

If you purchased a stock and entered it in the register of shareholders, you will be the owner of it until you sell or transfer it to another person. No other issues, be it flood, fire, global crisis, COVID-19 pandemic, bankruptcy of your broker or anything else, can affect this process in any way. The stock will remain yours even if the broker through which you bought it has not been a broker for 10 years.

Even if the company whose stock you have decides to close or another company buys it, you will still have the stock and it will have value.

When managing CFD work, only your broker is responsible for it. If something happens to the broker, your contracts will disappear just as they appeared.

So, once again — choose trusted brokers!

CFD Trading Platforms & Tools

Now it’s time to talk about the financial instruments you use when doing CFD trading work.

1. Trading platforms

Contracts for Difference are the most common exchange-traded contract, and therefore do not require any special software. An ordinary practice trading terminal offered by your broker is quite enough to manage CFDs work.

The most popular platform, of course, is the MetaTrader 4 trading terminal. In my opinion, there is no better trading terminal. It has everything you need for trading, a large set of technical analysis financial instruments, and the ability to download historical charts.

There is also a new version of this terminal, MT5, but it is not as popular as 4.

There are several quite convenient online platforms that have recently begun to appear. Their advantage is convenience, since the platform is built right into the trader’s personal account, and the owner has instant access to all the opportunities of interacting with the broker.

2. Trading tools

Tools are all the additional features that your broker provides.

This includes economic calendars and free access to the necessary analysis. Only very reliable authorized financial service providers can ensure that since not everyone can afford their own analytical department. There are additional programs, which include the trader’s calculator that I have already described. You can also add news feeds, which are necessary for news traders.

3. Graphical analysis elements

Such tools are usually built into the trading platform. But time does not stand still and new trading indicators or graphic elements are constantly appearing. You need to download, install, and practise trading with them in your trading terminal.

4. Trading advisors

These tools are essential to automate your trading. Trading with trading robots is called algorithmic trading. Their advantage is that they do most of the work for the trader, from looking for signals to enter the market, to fully automated trading without the participation of the trader.

A successful trader has the entire set of tools in their arsenal. Leading brokers know this and try to offer their clients this set in one place and on one platform.

As I have said more than once, I choose LiteFinance — a broker with 15 years of experience in the financial markets.

I have been working with this broker for over 5 years, after trying many different brokers before that.

The main advantage of LiteFinance is its accessibility.

Everything you need is in one place.

The structure of the website is user-friendly –  you don’t have to go through a bunch of links to get where you want. You get everything you need in 2 or 3 clicks.

And as a specialist, I am absolutely satisfied with the trading conditions, commissions, and the server’s response to instant price changes or slippage. Also, the company allows scalping and swing trading.

CFD Rules & Tips

Now let me give you some tips for building your own successful trading strategy. No matter how trite it may sound, any trading strategy is a set of rules. Let’s make the rules:

1. Always follow the rules!

The first and foremost rule is to always follow the rules of your trading strategy. Any slip-up or indulgence is guaranteed to lead to a loss or problems.

2. Use restrictive orders

When trading CFDs, you will most often deal with stocks, and trading in stocks is strictly timed. There will be breaks in trading, after which unexpected price changes may occur. To prevent these changes from hitting your wallet, you must always remember to limit risks.

3. Don’t be afraid to make decisions

I know from my own experience that you will never create a successful investment strategy if you are afraid to make a mistake. Without mistakes, you will never learn. To avoid fatal mistakes, see point 2.

4. Watch your leverage

Always keep your leverage in the planned range before opening a trade and don’t do anything you did not plan in advance.

In other words, if you are in a trade, and an event occurs that confirms your prediction, you should not increase the position size if you have not planned it in advance.

5. Calculate your trade before you open it

Before you open a trade, you must clearly know what purpose you are pursuing and how much you will lose if something goes wrong.

6. Never listen to anyone

If someone tells you that they earned millions on Bitcoin, this does not mean that you should drop everything and buy Bitcoin. Remember, most rumors are created on purpose, and they will not bring you any profit. If someone tells you that LiteFinance is a good and reliable broker, do not just blindly trust them – do your own research and make your own conclusions.

7. Use trading breaks

You shouldn’t be in the market all the time. Take breaks, your body really needs them. Fatigue leads to mistakes. It is especially helpful to take breaks after bad trades.

8. Analyze your mistakes

To prevent the further risk of losing money rapidly, after you have made a bad trade, determine whether it was your own mistake or it was a trivial market risk. If there was a market error and you closed a trade with a loss, but within your own rules, give yourself some credit, because even in this difficult situation you remained true to your strategy.

Market mistakes do not happen so often, and if you are always ready for them, your profit will grow.

CFD Trading vs. others financial instruments

All that’s left is to compare CFDs with other instruments offered by the exchanges and brokers.

CFD vs. Share (Stock) Trading

When comparing stock CFDs and physical stocks, there are several things that should be mentioned:

Pros of CFDs:

Minimum margin requirements;Unlimited leverage;No commissions and taxes;Ability to open short selling CFDs;Possibility of hedging.

Pros of physical stocks

Transactions are strictly regulated by law;Can be a collateral asset in financial disputes;In case of liquidation of the broker, the stocks will remain;The owner is a voting shareholder of the company.

CFD vs. Spread Betting

When comparing CFDs and spread betting, there are several things that should be mentioned:

Pros of CFDs:

Minimum margin requirements;Unlimited leverage;No commissions and taxes;Regulated by the law “on dealer activity”;Possibility of hedging.

Pros of spread betting:

The client sets the size of the trade;Ability to trade the difference in spread.

Cons of spread betting:

There is no regulatory framework;Activities equated to bookmaking;Upper threshold for profit.

CFD Vs. Futures

When comparing CFD trading with buying futures contracts, there are several things that should be mentioned:

Pros of contracts for difference:

Minimum margin requirements;Unlimited leverage;No commissions and taxes;Ability to open short contracts;Possibility of hedging;High liquidity;The contract has no time limit.

Pros of Futures Contracts:

Possibility to hedge the underlying asset;Strict regulation by law;Ability to open short contracts;Guaranteed fulfillment of obligations under the contract.

CFD vs. Options

When comparing CFD trading with buying option contracts, there are several things that should be mentioned:

First I should say, if there were no CFDs, I would have called options the best financial instrument in history without hesitation.

Pros of contracts for difference:

Minimum margin requirements;Unlimited leverage;No commissions and taxes;Ability to open short contracts;Possibility of hedging;High liquidity;The contract has no time limit.

Pros of Option Contracts:

Possibility of very cheap hedging of the underlying asset;Strict regulation by law;Ability to both sell and buy a contract;Guaranteed performance of obligations under the contract;The best built-in loss limitation system among all exchange instruments.

Cons of Option Contracts:

Low liquidity;Please note! Binary Options trading is an unregulated shadow OTC-market. There’s a high chance of coming across a fraudulent financial service provider.

Conclusions

Summing up, I would like to say that CFD trading is an ideal option for beginners and traders without a significant capital. Traders with a large amount of funds at their disposal in the existing portfolio may choose to buy the underlying asset itself due to insufficient legal regulation and high risk of losing money associated with the use of leverage.

When making a choice in favor of contracts for difference, it’s crucial to remember the risks associated with CFD contracts. Without a robust risk management plan, retail CFD traders’ accounts may start losing money rapidly. If you decide to opt for low fees and low cost, then CFDs provide an excellent alternative to most other trading methods.

Nevertheless, remember that the only measure of success for any trader is only the amount of profit, and the instrument of choice is ultimately irrelevant.

But enough conversations, it’s time to get to work. I wish you good luck. If you have any questions, I am always happy to help!

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.Use my promo-code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experienceTelegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Short Term Investments Balance Sheet

2023.01.17 2023.01.17
Short Term Investments Balance Sheetlogo

Short-term investing means placing excess cash into various assets for a short time to make quick profits.

Short-term investors are people who

Prefer low risk in their personal finance. They prefer to make temporary investments and then withdraw money fast once the profit becomes tangible. They aren’t psychologically ready to be waiting for long, and they are often afraid of force majeure that can devalue their net income.

Have a superficial knowledge of investing specifics, can’t assess risks and other relevant factors, or simply don’t have time for that.

Are emotional adventurers. They want to see quick, tangible results and are often fans of scalping, high-risk Pump & Dump strategies, pyramid schemes, and HYIP projects.

I’ll examine short-term investments and their pros and cons in this article. I’ll provide short-term investment examples and talk about the rules for reporting temporary investments on a balance sheet when forming or rebalancing an investment portfolio.

The article covers the following subjects:

What are short term investments?

There’s no common term for “short-term investments” because “short-term” will mean different periods for different asset groups. I would say that “short-term investments” means exploiting an investment idea or event that is supposed to happen in the near time and then withdrawing excess funds from the asset. If a strategy implies exploiting a series of events regularly without withdrawing the investment, it can be called a medium-term strategy.

Investments are called “short-term investments” or “medium-term investments” based on how often the asset’s price changes amid some important events. A short-term strategy implies investing in highly liquid assets – the company’s current assets – that can be bought and sold with a minimal margin.

Short term investments examples

In accounting, short-term investments refer to working assets used within a period of less than one year. Long-term investments are over one year.

In classical investing (bank deposits, government bonds, municipal bonds, treasury bonds, mutual funds), short term investments refer to investing within one month (short term mutual funds, government bonds, and other types of short-term investments).

In Forex trading, short-term strategies imply opening trading within one day. They include scalping and intraday strategies.

There are two ways of earning from the best short-term investments: exploiting spreads – the difference between an asset’s buying and selling prices – and earning interest.

Short-term investment objectives

To protect free cash from inflation. For example, we can invest excess cash in deposits and local government securities.

To gain net income from a particular fundamental event. For example, buy Amazon stocks before a financial results publication and sell them after the quotes grow.

To earn from active trading and minimize risks. Examples:

Scalping. A price direction doesn’t matter to traders. They earn from any short term investments move.

Social Trading. An investor can copy a trader’s high-risk money-making signals and then close trades a bit earlier with moderate profits and low risks.

To gain some investing experience. Beginner investors don’t have to make long-term investments.

Top 10 best Short Term Investments types

Each of the following options can yield from 0.5% to 100% per annum or more in one day or in a few months. They all belong to short-term investments and such investments are characterized by different risk levels.

Short-term investment options

1. Short-term bank deposits, call deposits, high-yield savings accounts.

One-week or one-month deposits that can be immediately withdrawn at a client’s request.

Pros:

Reliability. Fixed bank deposits are insured. In the USA, it’s Federal Deposit Insurance Corporation that underwrites bank deposits.Low entry threshold.

Cons:

Another example of short-term investments is certificates of deposit. They are marketable securities issued by banks.

2. Peer to peer lending (P2P)

There exist micro-financial companies and platforms where physical persons lend money to other physical persons. An investment period lasts from a few days to a few months.

Pros:

Profitability is much higher as compared with bank deposits.

Cons:

High risk. Such deposits aren’t insured, and there’s a high chance of not getting money back. Such platforms can go bankrupt, or they can be financial frauds.

Crowdlending can be an alternative to P2P lending. Investors are physical persons, and borrowers are legal entities there. You are likelier to have your money back with profits than with P2P lending. However, the investment period is longer and starts at one month.

3. Treasury bonds, government bonds, and municipal bonds

Pros:

They are government-secured and imply low risks.

Cons:

Profitability levels comparable with inflation ones.

4. Stock market assets: shares, corporate bonds, commodity futures, etc

For example, a short term investments strategy may be buying shares on the stock market before publications of financial reports. That will be short-term trading based on fundamental analysis.

Pros:

Wide variety of investment vehicles to create a well-balanced and diversified investment portfolio.Moderate risks.

Cons:

Relatively low profitability in the short term.

5. Investment funds, short-term investment funds, short-term mutual funds

Imply asset trust management. The main investment assets are stock markets’ assets, metals, commodities, bank deposits, real estate, etc.

Pros:

Strict regulation aimed at minimizing investing risks.Relatively low entry threshold.The investor doesn’t need to look into financial specifics or explore if the market declines or grows.

Cons:

No guarantee of profitability; possibility of loss.

6. Currency purchase at banks, exchange points; trading currency pairs in currency or OTC markets

Pros:

Ordinary people can protect money from short-term hyperinflation.Active traders and investors can earn from short-term currency moves.

Cons:

For ordinary people, it’s just protection against inflation, no real profitability. No guarantees; possibility of loss.For active traders, the risk is quite high.

7. Passive investments at Forex: social trading and some other options

You open an account with an online broker and copy trades from professionals into your separate account.

Pros:

Cons:

Experience in risk management and trading is obligatory. An investor needs to know quite much about trading statistics and types of strategy.

8. Investment in highly liquid assets

Investment in IPO or collection coins, or everything that can yield quick short-term profits.

Pros:

Eventual profitability: 10% or more within 1-30 days.

Cons:

High risk of overestimating an asset’s prospects.Promising assets are hard to find.

9. Cryptocurrency

Cryptocurrencies’ market volatility is 0.5-5% a day. They are one of the most profitable and highest-risk tools for short term investments.

Pros:

High profitability. A few days can be enough to cover the margin and commissions.

Cons:

10. HYIPs (High-Yield Investment Programs)

 Financial online pyramid schemes that don’t disguise their essence. They are the favourite short-term investment asset for those who love ventures and excitement. Read about HYIPs in our review Pyramid schemes: to be or not to be?

Pros:

Profitability can go up to 100% and more within a few days.

Cons:

Similar to casinos or lotteries in terms of earning opportunities.

Those were just a few examples of a short term investment with different risk degrees. Feel free to add some more options into this list in the comments section if you have some!

Why make short-term investments?

1. You can earn fast from fundamental analysis.

Example: on 30th July 2020, Apple published its Q3 financial reports. The 11% profit growth and 18% net profit growth per share raised quotes immediately.

We can profit from publication of Non-farm Payrolls in the same way.

2. Most often, the entry threshold is relatively low. For example, 50-100 USD will be enough for investing in CFDs on shares, commodities, or currency pairs. The minimum sum for investing in deposits is up to 500 USD.

3. Opportunity to cash in investments quickly. For example, a lot of long-term mutual funds don’t permit any early money withdrawals. If a force majeure event occurs (a pandemic, a new economic crisis), a trader will be watching his or her losses grow.

The main advantage of short-term investments including short term mutual funds is that they can be withdrawn fast. Although short-term investments incur different levels of risks, this kind of investment is a better option than investing in the long term.

How to invest short term?

Social trading is one of the most appealing short-term investment options for a few reasons:

Low entry threshold: the minimal deposit is just 50 USD.Basic economic and trading knowledge is enough. You copy professional traders’ trades automatically, without having to look too much into their strategies or following news.You can uncopy a trader at any moment.

You will only need to

Open an account and top it up. The link is here.Choose one or several traders from the rating by clicking on “Copy” in the investment vehicles panel of your Client Area. Choose traders with higher profitability and a lower risk level. Risk levels are calculated automatically according to LiteFinance’s risk management system.

Beginner short-term investors should choose traders based on the following criteria:

Risk level: 1 or 2.Number of investors: over 100.Account lifespan: from 6 months.One trade’s lifespan: up to several hours intraday.Profitability level: the higher, the better.

Check this review of Social trading to learn how to choose traders to copy.

How To Calculate The Short-term Investment Balance Sheet

A balance sheet is a company’s statement that evaluates its financial state in a certain period (long or short period). A balance consists of two parts:

1.Assets: the resources that a company owns and that are expected to yield profits in the future. These are resources owned by a company or payable to a company: for example, money or receivables. Assets include:

Non-current assets — low liquidity assets. Real estate, equipment, intangible assets, capital investments, etc.Current assets — high liquidity assets. Current temporary financial investments: in deposits, marketable securities, etc.; receivables; money; stocks. The term “receivables” is also known as commodity credit.

2. Liabilities are a company’s debts to other persons. In the future, they will result in the company’s money outflows. Liabilities include:

Capital – authorized capital, capital reserve, revaluation results, undistributed profit.Short-term and long-term liabilities: payables, debt, etc.

A Balance is always in equilibrium: the left part is always equal to the right one:

Assets = Liabilities + Capital

Short term investments balance sheets are:

1-year deposits.

Marketable securities bought: company stocks, government bonds, and corporate bonds, investing in certificates of deposit, etc.

Short-term loans.

In accounting, all the above-mentioned refers to legal entities, but it can concern private investors too. On a good short-term investment portfolio balance sheet, assets are diversified based on term, liquidity, risk levels, and profitability.

A balance sheet which shows assets on separate lines allows structuring information efficiently:

it reduces profitability to a common denominator, for example, expresses total profitability in % per annum;

it allows comparing risk levels of different periods (long and short periods) and assets;

it determines the most and the least profitable instruments in the short term.

Regular revaluations and restructuring of short-term investment portfolios are called “rebalancing.”

Example of short term investments on the balance sheet

Let’s find out how to create and optimize a short-term investment balance sheet through the example of social trading.

Step 1. Form an initial balance. Add to your portfolio three traders that comply with the following criteria:

Account lifespan: from 6 months.Number of investors: at least 50.One-month profitability: from 3%.

That’s a conservative, low-risk portfolio. Also, it would be wise to diversify your portfolio based on strategy types and assets by copying trades of Forex, stock, and commodity traders.

Step 2. Make a balance statement. A statement is a table for writing down temporary investments and for rebalancing.

My working capital is 100 USD, and the investment term is one month. Before distributing my money among the three traders, I check their 3-month yield curves and their traded assets. The assets are all different: various currency pairs and occasional copy trading. The yield curves are more interesting:

1. Gerakan Rahsia:

My working capital is 100 USD, and the investment term is one month. Before distributing my money among the three traders, I check their 3-month yield curves and their traded assets. The assets are all different: various currency pairs and occasional copy trading. The yield curves are more interesting:

2. Leophamtrader:

The risk level is 3. The 3-month equity is growing, but in a longer term, trading is unstable.

3. NoDamage:

The risk level is 3; the 3-month and 6-month deposit curves are stably growing.

So, let’s invest 50% in the third, most successful trader, 20% in the second trader, and 30% in the first, lowest-risk trader.

Step 3. Short-term investment rebalancing. Since the investment period is one month, review the portfolio weekly. There are three ways to rebalance a portfolio:

Withdraw profits from a successful trader’s trades and reinvest them in that trader again.Make a payment into the account and invest it in the least successful trader to cover his/her losses, hoping that the drawdown is temporary.Withdraw profits from a successful trader’s trades and reinvest them in the least successful trader to cover his/her losses.

However, remember that profitability factors do not guarantee future success. The market is cyclic, and the current loss may yield profits in the future.

One week later, we see the following results:

The first and the third traders got positive in a week, though they didn’t reach average monthly results. The second trader got negative, and the level of interest in that trader has fallen. On the whole, the short-term investment made profits in a week.

I marked the last column orange and left it empty deliberately. You should fill it in yourself according to your strategy. You leave everything as it is, or you rebalance your portfolio using any of the three methods above, change a trader, or add more traders into the portfolio every week. You can download an Excel table here.

That was a general principle for making a short-term investment portfolio sheet. Feel free to ask me any questions in the comments section below.

reza1214

Average monthly profit

302131.23%

Vlad

Average monthly profit

9697.95%

DG-INVEST

Average monthly profit

8570.55%

t

teyebe

Average monthly profit

3990.52%

ALI_KH

Average monthly profit

3849.41%

Make profits from the first day of trading without training. The best traders from the whole world gathered on the same platform to share their money-making strategies.

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Summary

A short-term investment is a type of investment that is generally held for one year or less before being liquidated. It typically involves investment banking, money market accounts, income statements, treasury bills, and debt securities. Short-term investments generally provide their owners with liquidity and allow for making fast profits with a moderate deposit. Profit levels depend on risk levels: deposits hardly ever cover inflation while cryptocurrencies can yield 1-2% profits and more in a few days.

When forming a short-term investment portfolio, an investor needs to consider the following factors:

Period. From a few minutes to one year.Risk level. Balance lines can vary from lowest to highest risk.Profitability and liquidity levels.

Remember to rebalance and optimize your portfolio to have the highest yields and not to risk too much.

Short-term Investment Balance Sheet FAQ

Which is an example of a short term investment?

A company’s short term investments generally refer to holding their money for periods of less than a year. This could include investments in money markets, or peer to peer lending services. These short term investment opportunities give the company an opportunity to generate income with minimal risk over a relatively short period of time.

Deposits: temporary deposits, call deposits, high-yield and normal savings accounts.

Stocks: opening of a trading account and buying stocks before financial publications with a subsequent sale.

Scalping: making profits from short-term trades, from a few seconds to a few minutes.

Cryptocurrencies: high-risk asset with daily profitability of 0.5-5%.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.Use my promo-code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experienceTelegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Short-term analysis for oil, gold, and EURUSD for 16.01.2023

2023-01-16 2023-01-16
Short-term analysis for oil, gold, and EURUSD for 16.01.2023logo

I welcome my fellow traders! I have made a price forecast for US Crude, XAUUSD, and EURUSD using a combination of margin zones methodology and technical analysis. Based on the market analysis, I suggest entry signals for intraday traders.

Gold is trading in the short-term uptrend.

Oil price forecast for today: USCrude analysis

Oil is trading in the short-term uptrend. The upside target is the upper Target Zone 84.17 – 83.12. The price is being corrected now. If correction continues, the price should reach strong support levels, where one could enter new purchases.

Strong support levels are now support (A) 76.92 – 76.57 and support (B) 75.17 – 74.64. To enter a long trade, expect the test of any support zone and look for a buy pattern. The first upside target is today’s high.

USCrude trading ideas for today:

Buy according to the pattern at support (А) 76.92 – 76.57. TakeProfit: 80.30. StopLoss: according to the pattern rules.

Buy according to the pattern at support (В) 75.17 – 74.64. TakeProfit: 80.30. StopLoss: according to the pattern rules.

Gold price forecast for today: XAUUSD analysis

Gold is trading in the short-term uptrend. Last Friday, the price broke out Gold Zone 2, 1905 – 1902. The next upside target is Target Zone 3, 1940 – 1933. I recommend entering new purchases on the correction.

In case of a correction, the price should reach strong levels, support (A) 1894 – 1890 and support (B) 1877 – 1872. Enter a trade only when there is a corresponding pattern. The first upside target is today’s high.

XAUUSD trading ideas for today:

Buy according to the pattern at support (А) 1894 – 1890. TakeProfit: 1928. StopLoss: according to the pattern rules.

Buy according to the pattern at support (В) 1877 – 1872. TakeProfit: 1928. StopLoss: according to the pattern rules.

Euro/Dollar forecast for today: EURUSD analysis

Euro is trading up in the short-term trend. The price reached Gold Zone 2, 1.0869 – 1.0858. This zone has not been broken out, so the price won’t be rising instantly. If Gold Zone is held down by sellers, there could be a descending correction.

Following the correction, the price could reach support (A) 1.0768 – 1.0757 and support (В) 1.0715 – 1.0699. If so, one could enter long trades with the first target at today’s high.

EURUSD trading ideas for today:

Buy according to the pattern at support (А) 1.0768 – 1.0757. TakeProfit: 1.0872. StopLoss: according to the pattern rules.

Buy according to the pattern at support (В) 1.0715 – 1.0699. TakeProfit: 1.0872. StopLoss: according to the pattern rules.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.Use my promo-code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experienceTelegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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XAUUSD: Elliott wave analysis and forecast for 13.01.23 – 20.01.23

2023-01-13 2023-01-13
XAUUSD: Elliott wave analysis and forecast for 13.01.23 – 20.01.23logo

Main scenario: consider long positions from corrections above the level of 1784.20 with a target of 1950.00 – 2000.00.

Alternative scenario: breakout and consolidation below the level of 1784.20 will allow the pair to continue declining to the levels of 1723.86 – 1614.73.

Analysis: a descending correction appears to have formed as the fourth wave (4) of larger degree on the daily chart, with wave С of (4) completed inside. Apparently, the fifth wave (5) started forming on the H4 chart, with the first counter-trend wave of smaller degree i of 1 of (5) formed, a local correction completed as wave ii of 1 of (5), and wave iii of 1 of (5) developing inside. Supposedly, wave (i) of iii of 1 is developing on the H1 chart. If the presumption is correct, the pair will resume rising to the levels of 1950.00 – 2000.00. The level of 1784.20 is critical in this scenario as its breakout will enable the pair to continue declining to the levels of 1723.86 – 1614.73.

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Pound will choose a rival. Forecast as of 12.01.2023

2023-01-12 2023-01-12
Pound will choose a rival. Forecast as of 12.01.2023logo

The pound is not the best performer in the new year, but it is neither an outsider. A breakthrough in the talks on Northern Ireland and the BoE’s hawkish stance support the GBPUSD. Let us discuss the Forex outlook and make up a trading plan.

Weekly fundamental pound forecast

The foreign exchange market literarily depends on the weather. The war in Ukraine and the associated energy crisis worried investors in European securities. Still, the fall in gas prices to the lowest levels since the end of 2021 has become a kind of safety cushion for the European economies. The euro rallied up, the pound followed its course for a long time. However, different weather in different parts of the continent affects the GBPUSD traders’ sentiment.

According to forecasts from meteorologists, cold weather will come to the northwest of Europe in the week ending on January 20. The temperature in London will drop 2.8 degrees below normal, and in Oslo, it will be 3.5 degrees below average. Frost will test both the UK economy and the pound.

Sterling has recently faced moderately negative domestic data, indicating that the country is in a recession and hawkish comments of the BoE officials. According to Chief Economist Huw Pill, the UK economic problems are typical for both the US and the euro area. In particular, the sharp rise in gas prices formed the basis for the inflation rise to 11.1% in October. At the same time, UK employment remains as strong as in the United States, which increases the risks of high wage pressure on the CPI.

This combination suggests a long-term persistence of high inflation and calls for a continuation of the BoE monetary tightening cycle. The derivatives market expects the interest rate to rise by 100 basis points to 4.5% by the summer and to remain at this level until 2024. The fact that CME derivatives are betting on the Fed dovish shift as early as 2023 supports the GBPUSD bulls.

The pound also strengthens as the UK index FTSE 100 performs better than the S&P 500. Their ratio is rising better than in 2010. UK companies’ stocks look cheap and attractive. The capital flow from the USA to Europe will encourage the GBPUSD bulls.

Dynamics of UK stock indexes/US stock indexes ratio

Source: Bloomberg.

Furthermore, the global risk appetite is up, favourable for the Sterling, and there is the breakthrough of London and Brussels in the negotiations on Northern Ireland within the framework of Brexit. However, the pound also has many soft points, including the recession and the worsening of the energy crisis amid the cold weather. So, the GBP trading strategies should be selective.

Weekly trading plan for GBPUSD, EURGBP, GBPJPY and GBPCHF

In particular, along with purchases of GBPUSD on the breakout of resistance at 1.223 in the face of further slowdowns in US inflation and the Fed’s monetary tightening, as well as the weakening of the US dollar, one could also sell the GBPJPY and GBPCHF with targets at 154.5 and 1.105. It is also relevant to enter EURGBP long positions with target profits at 0.896 and 0.906 as the ECB tightens its monetary policy more aggressively than the BoE.

Price chart of GBPUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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How to trade or invest in the Nikkei 225 index?

2023-01-10 2023-01-10
How to trade or invest in the Nikkei 225 index?logo

 The Asian stock market is not popular and widely advertised around the world. However, in trading and investing, popularity is not always the key to success.

As an indicator of the state of the Asian financial market, the Nikkei 225 Index provides traders with high volatility and investors with stability and smooth price movements. The Asian philosophy of life and discipline influences the performance of companies in the region, which is reflected in the dynamics of the index quotes.

In this article, you will learn about the advantages of the Nikkei 225. An index worth paying attention to in addition to European and American instruments.

The article covers the following subjects:

What is the Nikkei 225 Index?

The Nikkei 225 or Nikkei Stock Average is the leading Asian stock index traded on the Japan Stock Exchange in Tokyo. The market capitalization of companies included in the index is about 60% of the total capitalization of the Tokyo Stock Exchange. The Nikkei index includes 225 shares of the largest Asian companies from more than 30 sectors of the economy.

The index gets its name from the Japanese newspaper Nihon Keizai Shimbun, which first published the total value of Japanese companies in September 1950.

Most of the companies in the Nikkei 225 are involved in large-scale production. 57 are included in the technology sector, 59 in the mining industry associated with the search, extraction, and processing of natural resources. Therefore, the quotes of the Nikkei index are significantly affected by the cost of copper, a strategically important industrial raw material for the entire Asian region. Thus, the Nikkei 225 serves as an indicator of the Japanese economy’s health, reflecting the industry’s situation.

Nikkei 225 Index overview

Nikkei 225 ticker: #JP225.

Nikkei 225 futures ticker: #NK.

Current price: 1 NK = 26 435.00 USD.

Based on: stock prices of the companies with the highest market capitalization listed on the Tokyo Stock Exchange. Their shares must be in the free float.

Main trading platforms: Tokyo Stock Exchange. Derivatives are also traded on such US exchanges as CME (Chicago Mercantile Exchange) GLOBEX, CBOE (Chicago Board Options Exchange), and Singaporean SGX.

Leverage: 1:100.

Margin percentage: 1%.

Maximum trade volume: 100 lots (100 CFDs, each equivalent to the current index price).

The size of one lot is equal to the market price of the Nikkei 225 index.

Nikkei 225 calculation

The Japanese borrowed the Nikkei 225 formula from Dow Jones in 1975. The US index is calculated using the same method.

Nikkei 225 = Sum (adjusted price N) / d, where:

adjusted price N is the price of the company’s share adjusted for the lot. The price of shares, the minimum lot size of which is 100 or even 1000 pieces, is lower than those sold individually. For this reason, an adjustment is made;

sum (adjusted price N) is the sum of the adjusted stock prices of 225 index companies;

‎d (‎divisor) is a special coefficient used in the calculation of the index to take into account the effects of changes in the number of stocks in circulation during a split or consolidation and the consequences of revaluation of the index basket.

Thus, the Nikkei 225 index change depends only on the share price change, not taking into account the current capitalization of companies. The free float indicator (the percentage of shares in free float) is also not considered.

The stock index is updated every five seconds during the working hours of the Japanese stock exchange.

Why Should You Trade or Invest in the Nikkei 225?

The Nikkei 225 is one of the best stock market indices diversified by the sector. It includes companies from 35 economic sectors. Therefore, an investment in the Nikkei 225 is similar in terms of diversification to a portfolio that includes hundreds of securities.

It is rebalanced every autumn. As a result, companies with negative development dynamics are replaced by new ones with better performance. This increases the possibility of growth of such an instrument compared to single shares, dependent on the financial health of a particular company.

Also, the Japanese market is characterized by political stability and business management discipline, which affects the value of shares of companies included in the Nikkei 225.

Nikkei 225 is highly volatile. The average daily value fluctuates around 500 points:

The average monthly value fluctuates around 1700 points:

This instrument is suitable for traders whose strategies are associated with impulse price movements.

The second advantage of the impulse trading style is the Tokyo Stock Exchange’s opening hours. It opens after the American trading session, so the first working hour is characterized by a strong reaction to the results of US trading. As a result, gaps regularly form on the Nikkei 225 price chart between the last session’s closing price and the opening price of the current one. This feature provides an opportunity to trade the Nikkei 225 in a countertrend expecting that the price will tend to close the gap.

The index also correlates well with the Dow Jones and the Japanese yen, allowing traders to use directional and arbitrage trading strategies.

How to Make Money with the Index?

It is possible to benefit from the Nikkei 225 price movement only indirectly:

 

Intraday trading, medium-term investing

Position trading and long-term investing

Instruments

CFD, futures, options, stocks

CFD, futures, options, stocks, ETFs, mutual funds

Investment horizon

during the trading session

CFD, futures, options, shares ≥1 trading session

ETFs, mutual funds ≥ 1 month

Average number of trades

from 20 per month

from 1 to 50 per year

Main timeframes

М1, М5, М15, Н1

Every timeframe

The impact of the spread on the result

strong

weak

Expected annual return

100% / year*

from 12% / year**

Probable maximum drawdown

37,5%***

from 12%****

* Based on the risk per trade of 1%, the ratio of profitable/losing trades is 50/50, the profit/loss ratio is 2/1.

** 12%/year is the average annual return of the Nikkei 225 over the past ten years.

*** According to the rules of hedge funds, reaching a drawdown of 37.5% indicates that the trading system is inoperable, as a result of which trading should be stopped.

**** According to the rule, the risk is directly proportional to the portfolio’s return.

Choose instruments depending on the Nikkei 225 investment horizon. It is reasonable to use CFDs, futures, options, or company stocks for short-term investments. For medium and long-term investments, use the above instruments, ETFs, and mutual funds.

During intraday trading, the price chart is analyzed in real time on time frames from M1 to H1. When investing, it is also possible to use small timeframes for a more accurate entry into a trade.

Due to the small value of intraday trades, their profitability is highly dependent on the spread. The larger it is, the more profitability decreases.

Key Nikkei 225 Trading Strategies

Let’s consider one simple strategy and a more complicated one. The first Nikkei 225 trading strategy is based on the divergence between price and Force Index. It shows the principles of counter-trend Nikkei 225 trading. The second strategy builds on a direct correlation between the Nikkei 225 and the Japanese yen, namely the USDJPY, which outperforms the index by several weeks. Therefore, USDJPY technical analysis can help predict the Nikkei 225 index’s future rate.

Divergence with Force Index Strategy

Price movements are not characterized by V-shaped reversals, that is, when the price rises sharply and then plummets. This happens during the release of important news. In other cases, the price movement resembles a heavy truck, which first slows down for a long time and only then turns around.

This slowdown effect appears on the Nikkei 225 price chart as a divergence in the dynamics of the price and the oscillator. The essence of the phenomenon is that before a reversal, the price usually continues to move by inertia, but the indicator helps to identify the slowdown.

It is necessary to use indicators Force Index (13) and Fractals.

Timeframe M30. Smaller timeframes in the case of Nikkei 225 are too heavy to analyze, and the impact of the spread will be stronger there.

Analyzing the chart in the form of a price line will help to focus better. Like the Force Index indicator, the price line is based on closing prices. Therefore, the picture will be easier to analyze.

Let’s take a look at the Nikkei 225 chart:

The price continues to decline, updating the low. However, the Force Index shows a decrease in the price movement strength. The new low of the indicator is higher than the previous one. This Nikkei 225 trading signal indicates an increase in reversal possibility, which makes purchases reasonable.

Below is an example of an uptrend slowdown:

The price updated the high, but the Force Index indicators show a “slowdown,” as the new indicator high is lower than the previous one. Thus, the probability of a downward reversal increases, and sales become relevant.

To enter a trade, traders can use a candlestick or bar chart. It is also possible to use the Engulfing Price Action pattern when a new candlestick’s closing value overlaps the previous candlestick range.

Rules for entering purchases:

the new price low is lower than the previous one, and the new Force Index low is higher than the previous one;

the price is higher than the candle that formed the low;

stop loss is set behind the price low;

take profit is 1/1 or 1.5/1 compared to the stop loss value.

The blue arrow indicates the moment when the price crossed the candle that formed the low. This is a buy signal. The red horizontal line shows where the stop loss is set.

Rules for entering sales:

the new price high is higher than the previous one, and the new Force Index high is lower than the previous one;

the price is higher than the candle that formed the high;

stop loss is set behind the price high;

take profit is 1/1 or 1.5/1 compared to the stop loss value.

For sales, the same conditions apply, but vice versa. The blue horizontal level is drawn along the bottom of the candle that formed the high. The blue arrow points to the candle that has broken out this level.

It is better to enter trades using pending orders. Set Buy Stop for purchases and Sell Stop for sales. Since the strategy is traded on the M30 timeframe, the trader will have enough time to set the above-mentioned orders.

A small take profit/stop loss ratio is due to the fact that the strategy is counter-trend. Its purpose is to catch small price rebounds, and not try to enter trades at the beginning of a new trend.

‎Correlation with USD/JPY Strategy

After the 2007 financial crisis, the correlation between the Nikkei 225 and the Japanese yen changed from reverse to direct. Therefore, the Nikkei 225 and the USDJPY currency pair have an inverse correlation since the Japanese yen is the quoted currency in this pair:

This strategy is based on the fact that the Nikkei 225 tends to lag behind the USDJPY. This makes it possible to predict the future dynamics of the index based on the growth or fall of the USDJPY price.

The strategy is more suitable for Nikkei 225 investments. However, it is also possible to trade it intraday.

First, place the Nikkei 225 and USDJPY charts next to each other. Then put the RSI indicator with a period (13) and levels of 30, 50, and 70 on each of them. The working timeframe for both charts is D1. For long-term investment, it is possible to use the weekly chart.

Charts can also be placed horizontally. However, this is not necessary, as the Nikkei 225 signal appears after the USDJPY movements and not simultaneously with it.

To begin with, wait for a signal about the potential start of USDJPY price movement to appear. For this purpose, the RSI indicator (13) is used. It shows the ratio of descending and ascending price candles for a given number of periods. In our case, for the last 13 days.

RSI (13) < 50 for a downward movement means that over the past 13 days, the price has decreased in more than half of the cases;

RSI (13) > 50 for an upward movement means that over the past 13 days, the price has risen in more than half of the cases.

Remember that RSI (13) for USDJPY does not go beyond the critical levels of 30 and 70, respectively.

Next, find on the Nikkei 225 chart the moment when the price has not yet reversed towards the USDJPY movement. However, the probability of this is above average. For this, overbought and oversold conditions are used. That is, the longer the price rises or falls without correction, the higher the probability of a reversal.

RSI (13) > 70 indicates an increased probability of the end of the upward movement and a downward reversal;

RSI (13) < 30 indicates an increased probability of the end of the downward movement and an upward reversal.

A signal to enter a trade appears if the corresponding conditions on USDJPY and Nikkei 225 occur simultaneously.

Conditions for Nikkei 225 buy trade:

 Conditions for Nikkei 225 sell trade:

It is better to open a Nikkei 225 trade after the RSI indicator (13) leaves the overbought zone:

Otherwise, it is impossible to set a stop loss reasonably since overbought/oversold conditions do not guarantee an instant reversal.

The buy entry signal appears on September 30. But the RSI (13) on the Nikkei 225 leaves the oversold zone the next day. The blue horizontal line marks the level of entry into the trade at the top of the price candle, after the formation of which RSI (13) rose above the level of 30. The place for setting the stop loss is marked with a red horizontal line.

A sell signal appears on September 3. However, RSI (13) exited the overbought zone on September 17. The entry level is marked with a blue horizontal line at the bottom of the price candle. After its formation, RSI (13) fell below the level of 70. The place where the stop loss has been set is also marked with a red horizontal line.

Look for the RSI indicator (13) entry signals on both charts only after the price candle closes.

According to the strategy, the take profit is from 1:1 to 2:1 in relation to the stop loss value. With a higher value of the RSI indicator, the take profit should be increased. Thus, due to the analysis of a larger number of periods, it will be possible to capitalize on more significant price movements, but at the same time, the share of profitable trades will decrease.

Ways to Trade the Nikkei 225

Nikkei 225 is traded by means of derivatives:

CFDs are concluded between a trader and a broker regarding future asset price changes. CFDs are provided in the Forex market;

Futures. The index serves as the underlying asset of the Nikkei 225 futures. Therefore, unlike oil or metal futures, it does not imply physical delivery of the asset. It is traded in the exchange market;

Options. These instruments allow traders to purchase the underlying asset at a certain price in the future. While trading the Nikkei 225, a futures contract for this index serves as the underlying asset;

ETFs give the right to a part of the investment portfolio compiled by the issuing company. In the case of the Nikkei 225, the portfolio comprises companies’ stocks included in this index.

CFDs allow traders to earn on asset price changes without owning it. The parties compensate each other for the price difference from the moment of the conclusion of the contract until its termination.

Nikkei 225 Cash CFDs

CFDs allow traders to earn on asset’s price changes without having to own it. The parties compensate each other for the price difference from the moment of conclusion of the contract until its termination.

When trading Nikkei 225 CFDs, traders can use the highest leverage compared to other instruments. As a result, trading with a minimum volume does not require a large deposit.

Nikkei 225 CFD price chart:

It will take about $4 to open a trade with a volume of one contract, with a leverage of 1:100. The cost of one point, in this case, is $0.02.

The current spread is 4-6 pips, and the average daily range (the average distance the price passes per day) is about 366 pips. If an intraday trader can capitalize on about 30% of the trade’s movement (120 points), then the spread will be 2-3% of the final result. This figure is below average. However, as the size of a profitable trade decreases, the spread effect will increase. Thus, it is undesirable to use 225 CFDs for scalping. It is better to enter the classic day trading, which includes one or two trades, with a profit potential of 20-30% of the average daily range.

Thus, for comfortable trading with a minimum volume with a risk of about 1% per trade and a stop loss of 10% of the average daily range (35-40 points), traders will need $80-100.

Nikkei 225 CFDs fluctuate the most during the Asian session, as shares of the index companies trade during the Tokyo Stock Exchange working hours.

 

Nikkei 225 Futures

Futures have higher requirements for deposit size than CFDs since the exchange can only rarely offer leverage of more than 1:5.

There are two types of Nikkei futures:

1. Classic (with the NK ticker)

Below is the Nikkei 225 futures chart (M-15 timeframe):

The contract size is calculated by the formula:

1,000 yen x current Nikkei 225 price

The current contract size is 1000 x 28120 = 28,120,000 yen or about $200,000.

To buy one such contract with a leverage of 1:5, it is necessary to have at least $40,000 in the trading account.

The price of 1 point is 1000 yen or about $7.

2. Mini-contract (with NP ticker)

Below is the Nikkei 225 mini futures chart (timeframe D1):

The contract size is calculated by the formula:

100 yen x current Nikkei 225 price

The current contract size is 100 x 28120 = 2,812,000 yen or about $20,000.

It is necessary to have at least $4,000 to enter a trade.

The price of 1 point is 1000 yen or about $0.7.

Both contracts are denominated in Japanese yen. The main trades take place on the Chicago Mercantile Exchange (CME) and the Tokyo Stock Exchange (TSE).

Due to the almost zero spreads, futures are more suitable for short-term trading and scalping, as the impact on the result of trades will be minimal. These instruments are most volatile in the first two hours after the opening of the relevant exchange, the CME or the TSE.

Nikkei 225 Options

There are two types of options:

Thus, the futures market serves as the underlying market for options.

A trader’s forecast about the future movement of the options price is limited by time. Therefore, not the event of an increase (in the case of a call option) or a decrease (in the case of a put option) of the value of an asset is fundamentally important for an option trader, but that this event happens after a predetermined time.

Let’s say the price rose from 27100 to 27200 in 10 minutes and then dropped to 27150 during the next 20 minutes. A trader who bought a put option with the expectation that the price would rise above 27170 in 30 minutes is most likely not exercising his right to buy the asset. Because even though the price reached 27200, it later fell to 27150 and, at a given point in time, was below the desired value. In the same case, a CFD or futures trader who set a take profit of around 27190 would close the trade with a profit. On the other hand, an options trader would not take a loss similar to the triggering of a stop loss.

Options give the right to withdraw from a transaction if the price has not gone in the desired direction. In this case, the expenses of options traders are limited by the size of the option premium they risk in their trades.

If the price changes in the right direction according to the forecast, the traders can exercise their right and make a profit as from a classic trade.

Nikkei 225 ETFs

ETF is an instrument for long-term trading and investment. The Nikkei 225 ETF issuer forms a stock portfolio in accordance with the structure of the index. Buyers of the ETF are entitled to a portion of this portfolio (in particular to dividends), similar to the actual ownership of stocks. This investment instrument involves long-term investments.

The most popular Japanese Nikkei 225 ETFs:

Over the past two years, the NEXT FUNDS Nikkei 225 Leveraged (blue line) has outperformed the Nikkei 225 (red line) in terms of returns, 15.52% vs. 7.58%. Currently, the ETF price is around 14,600 yen, or $103.66. The chart is presented as of November 20, 2022.

The yield of the Daiwa ETF Japan Nikkei 225 Double Inverse (blue line) has been underperforming the benchmark, the Nikkei 225 index (red line), over the past two years. This ETF suffered a loss of -19.79%, while the index’s return was 7.58%. The cost of this ETF is one of the lowest, 900 yen or $6.5.

The largest-cap Nikkei 225 ETFs include U.S. companies:

Name

Ticker

Issuer

Commission

Capitalization, billion $

iShares MSCI Japan ETF

(EWJ)

Blackrock

0,47%

12,7

JP Morgan Betabuilders Japan ETF

(BBJP)

JPMorgan

0,19%

3,9

Wisdomtree Japan Hedged Equity fund

(DXJ)

Wisdomtree

0,48%

2,95

I do not recommend trading Nikkei 225 ETF intraday, as there are more convenient and liquid instruments for trading.

Ways to Invest in the Nikkei 225

There are three ways to invest in the Nikkei 225:

investing in stocks of companies included in the index;

investing in Nikkei 225-based funds (ETFs, mutual funds);

investing in derivative financial instruments (futures and options).

The first method has the lowest efficiency in terms of advantages and disadvantages. Before investing in the Nikkei 225 by purchasing the index stocks, it is necessary to accumulate a substantial sum of money. Some stocks are traded only during working hours of the Tokyo Stock Exchange, which increases the probability of gaps and, as a result, unpredictable losses. Since some stocks of Japanese companies are not highly liquid, it can be difficult to sell them. Investors may have to agree to a lower sale price if there are no buyers at the desired price.

Investing in funds is the most suitable method if the investor’s goal is to profit from the Nikkei 225 dynamics. ETFs follow the underlying asset dynamics more accurately than mutual funds, whose managers can form a portfolio of stocks with different proportions than in the index. As a result, the return of a mutual fund can differ from the benchmark, both for better and worse. ETFs have minimal fees, on average, about 0.5% of the investment value. ETF fees are lower than that of mutual funds because there is no need to pay fees to the fund manager. Also, by trading ETFs, traders can receive dividends from stocks of Nikkei 225 companies.

Investing in futures and options is more suitable for experienced investors who are not looking for similarities with the dynamics of the Nikkei 225 index. Nikkei 225 stocks’ derivatives are traded on most of the world’s exchanges, so the probability of gaps is extremely small. This allows traders to predict risks better. On the other hand, creating a portfolio of futures and options by analogy with the Nikkei 225 index will also require a significant sum of money, just like buying stocks. This method is suitable for short- and medium-term investors interested in investing in some Nikkei 225 companies and forming their own portfolios.

What Drives the Nikkei 225 price?

The index is influenced by the Bank of Japan, which is among the top 10 shareholders of 90% of the index’s companies. As a part of economic stimulus measures, the bank annually invests millions of dollars in the assets of Japanese blue chips.

The Nikkei 225 is sensitive to economic developments in the US, Japan’s main trading partner, on which the volume of exports depends. Therefore, the well-being of Japanese companies is associated with a change in the US purchasing power. Changes in the following indicators of the US economy have the greatest impact on the index:

GDP;

the number of new jobs;

CPI;

RSI.

Due to the large share of exports, the index reacts positively to the JPY depreciation. This makes the production of Japanese goods cheaper and, as a result, increases their competitiveness in the world market.

The Nikkei 225 is also affected by the state of the Chinese economy, as large Japanese manufacturing companies have many Chinese branches.

The index is regularly affected by natural disasters due to the large share of manufacturing companies and Japan’s geographical location. After the accident at the Fukushima-1 nuclear power plant caused by the tsunami, the index fell sharply by 11%.

 

How does the Nikkei 225 reflect the economic situation?

The index characterizes the state of the Japanese economy but with low accuracy. Japanese products are too export-oriented, so the dynamics of the index also reflect changes in the volume of US-China bilateral trade and economic indicators.

Since the share of technology companies in the index is more than 40%, the indicators characterize the economic situation in this industry to a greater extent.

Pros and cons of Nikkei 225 trading

The Nikkei 225 is well diversified by sectors and the number of companies included. Such index derivatives as futures, options, ETFs, and CFDs have above-average liquidity. The Nikkei 225 is also highly volatile, as more than a third of companies are in the high-tech sector. This is noticeable during the intraday Asian session and swing trading when analyzing timeframes over D1. Nikkei 225 is more stable during crises than its European and American counterparts due to the large number of real sector companies included in it.

The disadvantages of the index are related to the narrowness of the Asian market and its dependence on exports. The US economy recovers faster from crises due to abundant resources, while the Asian economy needs more time, which affects the index dynamics. Also, the working hours of the Tokyo exchange, where the Nikkei 225 is traded, are less convenient for European and US investors compared to the CME or LSE exchanges.

Pros:

diversification leader;

increased liquidity;

increased volatility: this is one of the most volatile stock indices;

offers a wide range of derivative instruments;

the index is influenced by fewer factors that affect company’s stocks;

most companies are included in the real sector of the economy.

Cons:

inconvenient trading time for European and US residents;

high probability of gaps;

slow recovery after drawdowns, in comparison with US indices;

a large number of external factors affecting the index dynamics.

List of the Nikkei 225 Companies

The Nikkei includes the 225 largest Japanese companies. The index is considered the most diversified in the world. The electronics sector includes 29 companies, making it the largest one. It is followed by the chemical sector (18 companies), the machine-building sector (16), and the financial sector (11).

Nikkei 225 top companies (by market capitalization):

Name

Capitalization (trillion JPY)

TOYOTA MOTOR CORP

27.743

KEYENCE CORP

14.251

SONY GROUP CORPORATION

13.959

NIPPON TEL & TEL CORP

13.257

SOFTBANK GROUP CORP

9.592

MITSUBISHI UFJ FINANCIAL GROUP INC

9.016

KDDI CORPORATION

8.959

DAIICHI SANKYO COMPANY LIMITED

8.846

FAST RETAILING CO LTD

8.393

NINTENDO CO LTD

7.572

RECRUIT HOLDINGS CO LTD

7.239

SHIN-ETSU CHEMICAL CO

6.972

TOKYO ELECTRON

6.967

SOFTBANK CORP

6.945

HITACHI

6.909

DAIKIN INDUSTRIES

6.609

MITSUBISHI CORP

6.511

SUMITOMO MITSUI FINANCIAL GROUP INC

6.279

ITOCHU CORP

6.253

TAKEDA PHARMACEUTICAL CO LTD

6.225

Nikkei 225 Trading Hours

Nikkei 225 trading hours are from 00:00 to 07:00 (GMT) as the index is traded on the Tokyo Stock Exchange.

Below is a list of the main exchanges for trading index derivatives (futures, options, ETFs):

Chicago Mercantile Exchange (CME). Working hours: 15:00 to 23:00 (GMT);

Chicago Board Options Exchange (CBOE). Working hours: 14:30 to 21:00 (GMT);

Singapore Exchange (SGX). Working hours: 00:30 to 09:00 (GMT).

Weekend trading is not available for the Nikkei 225.

Conclusion

Nikkei 225 is the most diversified index. Companies from classical and high-tech industries are proportionally represented in it, which increases Nikkei’s profitability potential during the growth of the global economy and provides stability during crises.

Nikkei 225 is not the most popular index among traders and investors. It is considered a rather complex instrument, as it is influenced by the economies of Japan’s partner countries.

It is better to enter Nikkei 225 derivatives trades during the Asian session when liquidity and volatility are at their highest. If a trader does not exit trades before the end of the trading session, the chance of gaps will be high. Trading CFDs partially solves this problem on weekdays.

The Nikkei 225 is not the highest-yielding index, so it is better to consider long-term investments in it as a way to preserve capital and hedge against inflation.

Price chart of NI225 in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Short-term forecast for BTCUSD, XRPUSD and ETHUSD 09.01.2023

2023-01-09 2023-01-09
Short-term forecast for BTCUSD, XRPUSD and ETHUSD 09.01.2023logo

I welcome my readers!

I have prepared a short-term cryptocurrency forecast based on the Elliott wave analysis of Bitcoin, Ripple, and Ethereum. I offer entry signals to trade each cryptocurrency.

Bitcoin is developing a horizontal contracting triangle.

The article covers the following subjects:

Elliott wave Bitcoin analysis

The Bitcoin market is forming a major correction B as a contracting triangle [A]-[B]-[C]-[D]-[E], as shown in the chart. Now the final actionary wave (Y), which is part of the corrective wave [C], is unfolding. It is expected to end at the level of 17900.00. At the indicated level, wave [C] will reach the 76.4% Fibonacci level of wave [B].

Trading plan for BTCUSD today:

Buy 17200.05, Take profit: 17900.00

Elliott wave Ripple analysis

XRPUSD is building a downward impulse wave C. It began to unfold after the completion of the contracting triangle B. Wave C consists of five sub-waves [1]-[2]-[3]-[4]-[5]. The final sub-wave [5] will unfold as the impulse (1)-(2)-(3)-(4)-(5). To complete this impulse, the last sub-wave (5) is required. It is expected to end around the low of 0.298, marked by an impulse sub-wave (3).

Trading plan for XRPUSD today:

Sell 0.349, Take profit: 0.298

Elliott wave Ethereum analysis

The ETHUSD market is building a complex correction B, which is part of a larger zigzag wave (Y). Correction B may end as a double zigzag [W]-[X]-[Y]. This requires the final sub-wave [Y]. The price within the sub-wave [Y] may rise again to the high of 1355.00, where the first actionary sub-wave [W] was completed earlier. In the current situation, it is reasonable to consider opening long trades.

Trading plan for ETHUSD for today:

Buy 1304.57, Take profit: 1355.00

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.Use my promo-code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experienceTelegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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XAUUSD: Elliott wave analysis and forecast for 06.01.23 – 13.01.23

2023-01-06 2023-01-06
XAUUSD: Elliott wave analysis and forecast for 06.01.23 – 13.01.23logo

Main scenario: consider short positions from corrections below the level of 1866.32 with a target of 1741.81 – 1711.41.

Alternative scenario: breakout and consolidation above the level of 1866.32 will allow the pair to continue rising to the levels of 1920.84 – 1950.00.

Analysis: a descending correction appears to have formed as the fourth wave (4) of larger degree on the daily chart, with wave С of (4) completed inside. The fifth wave (5) appears to be forming on the H4 chart, with the first counter-trend wave of smaller degree i of 1 of (5) completed as its part. Apparently, a local correction started to form as wave ii of 1 of (5) on the H1 chart. If this assumption is correct, the pair will continue falling to the levels of 1741.81 – 1711.41. The level of 1866.32 is critical in this scenario as a breakout will enable the pair to continue growing to the levels of 1920.84 – 1950.00.

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Will Mexican weaken? Forecast as of 05.01.2023

2023-01-05 2023-01-05
Will Mexican weaken? Forecast as of 05.01.2023logo

The Mexican peso could turn from a leader to an outsider in Forex. All bearish drivers have already been priced in the USDMXN. Let us discuss the Forex outlook and make up a trading plan.

Weekly Mexican peso fundamental forecast

Due to the pandemic and war in Ukraine, seismic shifts are taking place in the global economic system. There is a redirection of flows of raw materials, capital, and human resources, which affects various countries and their economies. The new trend is deglobalization, and it started with trade wars between the US and China. The faster this or that state adapts to innovations, the more benefit will be for its currency. A typical example is the Mexican peso, which in 2022 appreciated against the US dollar by more than 5% and became one of the strongest currencies of the year.

With lower wages than in China, an established manufacturing sector, and proximity to the United States, Mexico is reaping the benefits of deglobalization. Deliveries of its manufactured goods to the United States in January-October increased by 60% compared to the period before the pandemic. It is curious that the country increased exports in such low-tech areas as plastics and textiles while China reduced its exports in the same sectors.

Dynamics of US imports from Mexico and China

  

Source: Wall Street Journal.

Improving foreign trade, aggressive tightening of monetary policy by the Bank of Mexico, and growing demand for carry trades involving the peso were the main bearish drivers for the USDMXN decline in 2022. In 2023, the situation could radically change.

The Central Bank began to raise the main interest rate before the Fed, from June 2021, and by the end of last year, brought it to a record 10.5%. At the same time, there are more and more signals in recent meetings that the cycle of monetary tightening is coming to an end. Even despite the acceleration of inflation in Mexico from 7.46% in the second half of November to 7.77% in the first half of December. If the regulator stops raising the rate and the Fed pushes it up to 5.1%, and possibly 5.4%, as Minneapolis Fed President Neel Kashkari suggests, monetary policy divergence will support the USDMXN growth.

Dynamics of Mexican inflation

   

Source: Bloomberg.

Mexico also has problems with foreign trade. The conflict between Mexico, the US, and Canada, provoked by the energy policy of Andrés Manuel López Obrador, is fraught with disruption of economic ties, which will negatively affect the peso. Traders of the Chicago Mercantile Exchange, whose activity is considered an indicator of market sentiment, bet on the weakening of the Mexican currency.

Weekly USDMXN trading plan

I suppose the resilience of the US economy and keeping US inflation at elevated levels will restore the demand for the greenback, which will be a better tailwind for the USDMXN than the end of the Bank of Mexico monetary tightening cycle or the Mexico City-Washington-Ottawa trade dispute. Of course, this cannot go on indefinitely. Over time, the situation in the USA will worsen, and prices will fall, which will encourage the USDMXN bears. In the meantime, it makes sense to buy the pair when the price breaks out the resistances at 19.43 and 19.5.

Price chart of USDMXN in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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Economic calendar for the week 02.01.2023 – 08.01.2023

2023-01-03 2023-01-03
Economic calendar for the week 02.01.2023 – 08.01.2023logo

Review of the main events of the Forex economic calendar for the next trading week (02.01.2023 – 08.01.2023)

Next week is the last week of the month and year, which means there will be little activity (Monday is Boxing Day in the Catholic countries of Europe and the US), and the world will prepare for the New Year 2023. There will also be few releases of macro statistics.


2022 is over. This Sunday, January 1, the new year 2023 begins. December brought surprises: for example, the traditional pre-New Year’s rally (or the so-called Santa Claus rally) did not take place. The US stock indexes and stock market participants ended this year on a negative note. The winner, however, was the dollar. By the end of the year, it gained 8%, judging by the chart of the DXY index.

Next year, as many economists expect, will not be as successful for the dollar. As expected, the Fed will complete the cycle of tightening its policy in the first months of 2023. If the Fed officials move from raising the interest rate to lowering it, this will be a turning point in the uptrend of the dollar.

Next week, the first week of the new year 2023, may provide new information and food for thought: on Wednesday, the minutes of the December Fed meeting will be published, and on Friday – the monthly report of the US Department of Labor.

Market participants might also want to pay attention to the publication of important macro statistics from Germany, Canada, the US, and the Eurozone.

We should also note that very often in the first days of the new year, new trends emerge on the market. It could happen this time as well.

* during the coming week, new events may be added to the calendar and / or some scheduled events may be cancelled.

** GMT time

Monday, January 2

No important macro statistics scheduled to be released.

Tuesday, January 3

13:00 EUR Germany Harmonized Index of Consumer Prices (HICP) (preliminary release)

This index is published by the EU Statistics Office and is calculated on the basis of a statistical method agreed between all EU countries. It is an indicator for assessing inflation and is used by the Governing Council of the ECB to assess the level of price stability. A positive result strengthens the EUR, a negative result weakens it.

Previous indicator values: +11.3% in November, +11.6% in October, +10.9% in September, +8.8% in August, +8.5% in July, +8.2% in June, +8.7% in May, +7.8% in April, +7.6% in March, +5.5% in February, +5.1% in January 2022 (annualized). If the December data turn out to be better than the previous values, the euro may strengthen in the short term. The growth of the indicator is a positive factor for the euro. The data suggests mounting inflationary pressures in Germany, which in turn is putting pressure on the ECB to tighten its monetary policy. Data worse than the previous value will have a negative impact on the euro. Forecast: +11.8% in December.

Wednesday, January 4

15:00 USD US Manufacturing PMI (from ISM)

The US Manufacturing PMI published by the Institute for Supply Management (ISM) is an important indicator of the state of the US economy as a whole. A result above 50 is considered positive and strengthens the USD, while one below 50 is considered negative for the US dollar. Forecast: 49.6 in December (against 49.0 in November, 50.2 in October, 50.9 in September, 52.8 in August, 53.0 in June, 56.1 in May, 55.4 in April , 57.1 in March, 58.6 in February, 57.6 in January). The index is above the level of 50 and, despite the relative decline, has a relatively high value, which is likely to support the dollar. Data above the value of 50 indicates an acceleration of activity, which has a positive effect on the quotes of the national currency. If the indicator falls below the forecast and, especially, below the value of 50, the dollar may sharply weaken in the short term.

19:00 USD Minutes of the Federal Open Market Committee meeting

The publication of the minutes is extremely important for determining the course of the current policy of the Fed and the prospects for raising interest rates in the US. The volatility of trading in financial markets during the publication of the protocol usually increases, since the text of the protocol often contains either changes or clarifying details regarding the results of the last FOMC meeting of the Fed.

As a result of the meeting that ended in December, the leaders of the central bank raised the interest rate by 0.50% (up to 4.50%), but not by 0.75%, as in June, July, September, November, and announced their intention to continue to resist rising inflation by tightening monetary policy.

A soft tone of the minutes will have a positive impact on stock indices and negatively on the US dollar. Tough rhetoric of the Fed’s leaders regarding the prospects for monetary policy will push the dollar to further growth.

Thursday, January 5

13:15 USD ADP National Employment Report

Usually, the ADP report on the level of employment in the private sector has a strong impact on the market and dollar quotes. An increase in the value of this indicator has a positive effect on the dollar. The number of employees in the US private sector is expected to increase by 134,000 in December (against March, 375,000 in February, 372,000 in January 2022, by 807,000 in December, 534,000 in November, 571,000 in October, 568,000 in September, 374,000 in August, 330,000 in July, 692,000 in June, 978,000 in May, 742,000 in April, 517,000 in March, 117,000 in February, 174,000 in January 2021). The relative growth of the indicator may have a positive impact on the dollar quotes, and the relative decline of the indicator can influence it negatively. The market reaction may be negative, and the dollar may decline if the data also turns out to be worse than the forecast.

Millions of Americans have previously been laid off due to the coronavirus pandemic and related quarantine measures. Most of the layoffs were concentrated in the tourism and retail sectors. Other important sectors of the economy also suffered. The ADP previously reported that the most significant drop in employment was recently noted in the construction sector and the financial services sector.

Although the ADP report does not have a direct correlation with the US Department of Labor official data on the labor market, which will be published on Friday, the ADP report is often its harbinger, having a noticeable impact on the market.

Friday, January 6

07:00 EUR Retail Sales in Germany

Retail sales is the main indicator of consumer spending in Germany showing the change in retail sales. A high result strengthens the euro, and vice versa, a low result weakens it. Previous values: -2.8% (-5.0% yoy), +0.9% (-0.9% yoy), -1.3% (-4.3% yoy) , +1.9% (-2.6% YoY), -1.5% (-9.6% YoY), +1.2% (+1.1% YoY), – 5.4% (-0.4% YoY), +0.9% (-1.7% YoY), +0.2% (+6.9% YoY), -0.2% (+10.1% YoY) in January 2022.

The data speaks of the instability of the recovery of this sector of the German economy. Data better than the forecast and / or the previous value is likely to have a positive impact on the euro, but only in the short term. Forecast for November: +0.3% (-2.5% in annual terms).

10:00 EUR Consumer Price Index. Core Consumer Price Index (preliminary release). Retail sales in the Eurozone

Consumer Price Index (CPI) is published by Eurostat and measures the change in prices of a selected basket of goods and services over a given period. The index is a key indicator for assessing inflation and changing consumer preferences. A positive result strengthens the EUR, a negative result weakens it.

Previous values: +10.1% in November, +10.6% in October, +9.9% in September, +9.1% in August, +8.6% in June, +8.1% in May , +7.4% in April and March, +5.9% in February, +5.1% in January, +5.0% in December. If the data turns out to be worse than the forecast, the euro may sharply decline in the short term. Data better than the forecast and / or the previous value may strengthen the euro in the short term. The target level of consumer inflation of the ECB is slightly below 2.0%, and the data indicate an acceleration of inflation in the Eurozone.

Core Consumer Price Index (Core CPI) determines the change in prices of a selected basket of goods and services over a given period and is a key indicator for assessing inflation and changing consumer preferences. Food and energy are excluded from this indicator for a more accurate estimate. A high result strengthens the EUR, while a low result weakens it. In January, Core CPI grew by +2.3%, in February – by +2.7%, in March – by +2.9%, in April – by +3.5%, in May – by +3.8 %, in June – by +3.7%, in August – by +4.3%, in September – by +4.8%, in October – by +5.0%, in November – by +5.0 %. If the data for December 2022 turns out to be worse than the previous value or forecast, this may negatively affect the euro. If the data turns out to be better than the forecast or the previous value, the euro is likely to react with an increase in quotations. Core inflation in the Eurozone is accelerating, which is positive (under normal economic conditions) for the euro.

Retail sales is the main indicator of consumer spending showing the change in retail sales. A high result strengthens the euro, and vice versa, a low result weakens it. Forecast for December: +0.1% (+2.4% yoy), against -1.8% (-2.7% yoy) in November, +0.4% (-0.6% yoy) in September, -0.3% (-2.0% yoy) in August, +0.3% (-0.9% yoy) in July, -1.2% (-3, 7% YoY) in June, +0.2% (+0.2% YoY) in May, -1.3% (+3.9% YoY) in April, -0.4% (+0.8% YoY) in March, +0.3% (+5.0% YoY) in February, +0.2% (+7.8% YoY) in January. The data suggests that retail sales have not yet reached pre-coronavirus levels after a sharp drop in March-April 2020, when tight lockdown measures were in place in Europe. However, better-than-expected data is likely to have a positive impact on the euro.

13:30 USD Average hourly wages. Non-farm Payrolls. Unemployment rate

The most important indicators of the state of the labor market in the US in December. Forecast: +0.4% (against +0.6% in November, +0.4% in October, +0.3% in September and August, +0.5% in July, +0.3% in June , May and April, +0.4% in March, 0% in February, +0.7% in January 2022, +0.6% in December, +0.3% in November, +0.4% in October, +0.6% in September and August 2021) / +0.057 million (against +0.263 million in November, +0.261 million in October, +0.263 million in September, +0.315 in August, +0.528 million in July, + 0.372M in June, +0.390M in May, +0.428M in April, +0.431M, +0.678M in February, +0.467M in January 2022, +0.199M in December, +0.210M in November, +0.531M in October, +0.194 million in September, +0.235 million in August 2021) / 3.7% (against 3.7% in November and October, 3.5% in September, 3.7% in August, 3.5 % in July, 3.6% in June, May, April and March, 3.8% in February, 4.0% in January 2022, 3.9% in December, 4.2% in November, 4.6 % in October, 4.8% in September, 5.2% in August 2021), respectively.

In general, the indicators can be described as quite positive, if not encouraging, apart from the NFP section. Market participants can sharply react negatively to its weak value. Nevertheless, it is often difficult to predict the market reaction to the publication of indicators, because many indicators for previous periods are subject to revision. Now it will be even more difficult to do this, because the economic situation in the US and many other major economies remains controversial, with increased risks of recession and high inflation. In any case, when the data from the US labor market is published, a surge in volatility is expected in trading not only in USD, but throughout the financial market. Cautious investors might prefer to stay out of the market during this period of time.

13:30 CAD Unemployment rate in Canada

Statistics Canada is to publish data on the country’s labor market for November. Unemployment has risen in Canada in recent months against the backdrop of massive business closures due to the coronavirus and layoffs among other things. Unemployment rose from the usual 5.6% – 5.7% to 7.8% in March and to 13.7% in May 2020. If unemployment continues to rise, the Canadian dollar will decline. If the data turns out to be better than the previous value, the Canadian dollar will strengthen. Decreasing unemployment rate is a positive factor for the CAD, rising unemployment is a negative factor. In November 2022, unemployment was at 5.1% (against 5.2% in October and September, 5.4% in August, 4.9% in July and June, 5.1% in May, 5.2% in April, 5.3% in March, 5.5% in February, 6.5% in January 2022). Forecast for December 2022: 5.1%.

15:00 USD US Services PMI (from ISM)

This indicator assesses the state of the services sector in the US economy. These services sectors (unlike the manufacturing sector) have virtually no impact on the country’s GDP.

A result above 50 is seen as positive for the USD. Forecast for December: 55.5 (against 56.5 in November, 54.4 in October, 56.9 in August, 56.7 in July, 55.3 in June, 55.9 in May, 57.1 in April , 58.3 in March, 56.5 in February, 59.9 in January, 62.0 in December), which is likely to have a generally positive impact on the USD. However, a relative decline in the index, and especially below 50, may have a short-term negative impact on the dollar.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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