CFD Trading Strategies
Learn some of the mostly used trading strategies used for Contracts For Difference.
When to Exit a Trade
Having a profit target sounds like a logical solution, but then how much of a profit should you target, and how do you know whether you've closed a position too early?
One method is by setting multiple targets. If you set your first target at the initial risk taken you have not only made back what you originally risked on the trade once this target is hit, but you are free to let your profits run on the remainder of the position.
The simplest way to let your profits run is to set a trailing stop. A trailing stop functions like a conventional stop loss in that it will close your position automatically should the market turn (closing it at that level, or the closest level through which the market trades). However, unlike a conventional stop loss, which remains static, a trailing stop follows the market as it moves in your favour. This means that if you were long on some Share CFDs valued at $20 each and you set a trailing stop 10 cents behind your starting price, if the share price rose to $23, your stop would rise to $22.90. If the share price then turned and triggered the stop, you would have made a profit of $2.90 per share (excluding commissions, overnight interest, and any other charges).
So you have curbed your risk with your first target, and let your profits run with a trailing stop. So how long should the process take?
A simple way to establish the length of the trade is to refer to the charts you are using - if you are waiting for an economic announcement and are looking at weekly charts, your trade may take weeks or months. If you are looking at a breakout of support that has been developing for weeks, your trade may last for a few days. If you're examining moving average crossovers on 5 minute charts, then your trade is unlikely to last more than a few hours.
When your time is up, it's time to exit the trade.
No second-guessing - traders that question their systems are ones that are more likely to lose their hard-won gains. And with developments in mobile trading, you can easily monitor your open positions from anywhere and exit at the right time.
Please keep in mind that CFDs are leveraged products, so it's possible to have losses that are greater than your initial investment. As CFD trading might not be suitable for all people, please educate yourself so you understand the risks.
Trading Forex With Interest Rates
Typically, countries with higher interest rates are more likely to attract foreign investors as they can expect a higher return on their investment than they could expect should they invest locally. As currencies are traded in pairs, this means that the currencies of countries with higher rates can often rise against those with lower rates.
So why do interest rates rise? If an economy is doing well, growth is rising and unemployment is going down, with consumers spending more of their money. This starts to boost inflation as the demand for goods increases. As the role of central banks is to maintain a certain rate of inflation, central bankers begin raising interest rates to reduce consumers' disposable income, which in turn slows the rate of inflation.
Interest rates significantly contribute to the fundamental value of currencies - as stated above, higher rates attract foreign investment, and this increases external demand for the currency. At the same time, when central banks pump rates up it has the same impact as withdrawing funds from the economy, which further reduces supply and increases demand for the supply that remains. And, as in any market, higher demand and lower supply puts upward pressure on the price of that currency.
Central banks can also create a reverse scenario by lowering rates. If an economy is doing badly with stalling growth and rising unemployment, consumers are more conservative with their money. When the central banks lower interest rates, it is in the hope that consumers, who have extra cash now that their mortgage repayments aren't so high, will start spending that extra money and give the economy a boost.
However, this also causes foreign interest in the currency to fall, because the return on their investment isn't as high, which means that sellers start to outnumber buyers and the value of the currency starts to fall.
This makes rates and rate announcements an essential point of research for anyone interested in forex trading.
However, although these rules may hold up in 'normal' economic conditions, there are often exceptions, where a currency with a lower rate may outperform one with a higher rate. For instance, if an interest rate is rising due to concerns in the market about credit risk in an economy, then that currency is likely to fall, regardless of the central bank rate.
In Australia, the AUD has benefited from relatively high interest rates since the global economic crisis. However, if rate cuts continue it could become more vulnerable.