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Benefits and Limitations of CFD Trading

Contract for difference (CFD) trading is a short-term financial agreement between a trader and a broker. After the contract, the broker pays the trader the difference between the opening and closing positions of a specified currency pair. Depending on the direction taken by price movement, CFD trading can result into a profit or loss. If you are the trader and the price moves in your favor, you stand to gain.

However, if the currency price moves against you, you stand to lose. CFD trading is popular in the forex market with many reputable brokerage firms using it as a trending strategy. The firms use the trading strategy to protect your trading account by limiting any heavy loses that would put your account into debt. They do this by offering negative balance. CFD trading has many benefits but it also comes with some limitations.

Benefits of CFD Trading

1.    Allows Leverage/Margin trading

One of the key benefits of trading CFDs is that it allows you to trade leverage. What this means is that you can use a smaller amount of capital to control a much larger trading position. The lower the margin needed for investment the higher the chances of potential profits.

2.    Gives you room to go short

Short selling is a trading strategy many traders take advantage of especially when the prices in the market are falling. A CFD platform provides an investor with both the buy and sells prices. When the prevailing currency price conditions indicate an upward trade, you can trade with the buy price. If there is an indication of a potential downtrend from the prevailing market conditions, you can trade with the sell price.

Short selling involves borrowing an asset hoping the price will go down so you can make a profit later by buying it back. The strategy takes advantage of an unexpected currency price. Whether the currency price declines or goes up, you will most likely gain profit from the trade. The short selling strategy is challenging to execute with other products that are not derivatives.

3.    Allows trading a wide range of markets

Trading CFDs provides you with an opportunity to trade different markets that include digital currencies, forex, currencies, indices, commodities, shares, stocks and energy. You can also trade CFDs from a wide range of devices, which included mobile phones. CFD is accessible in only a single login, which saves you the trouble of login into multiple platforms when you need to access each portfolio.

Some brokers also offer their traders an around the clock trading platform allowing them to access their portfolios anywhere and at any time. Even when the currency prices are changing fast, you never miss valuable trading opportunities.

4.    Offers instant order execution

Unlike traditional brokers that take days to settle trades, a CFD platform offers you instant order execution. With this, you can instantly open and close positions, which provide you with the ability to react to market conditions in a better way and get more trading opportunities.

5.     Low fees and commissions

Most CFD brokers do not charge anything to open and close trading positions. All you pay for is the spread and you are good to go.

Limitations of CFD trading

1.    Overtrading

CFD trading speed is very attractive which can lead to over trading, which is a serious mistake to make. Trading without having your emotions in check just because the speed looks too good easily leads to tiny profits from bad opening and closing positions.

2.    Leverage

While leverage is the key advantage of CFD, trading it can also be a disadvantage. The same leverage that can give you substantial profits when the trade positions are in your favor can also start to eat rapidly at your capital if you do not get the leverage balance right.

The key to minimizing the risk is to reduce the leverage impact when positions do not go your way by using a slow and steady CFD trading approach. Some uncouth brokers might also take advantage of new CFD traders by offering trades with high leverage in the hope of gaining from the trader’s loss.

3.    Financing fees

Even if opening CFD position is free, some brokers might charge you financing fees if you keep an open position overnight.

Conclusion

Trading CFDs might be challenging for a newbie but with a committed and trusted broker, it is one of the simplest trading strategies. If you want to be on the safe side, you should choose a trading platform that provides you with the preference of using a demo account to help get a better footing at CFD trading. It is great strategy with many benefits but it has its risks that you can avoid if you trade with caution.

Reasons Why Every Forex Trader Should Learn About Fibonacci Retracements

Fibonacci retracement is a technical analysis tool in forex trading. The tool uses a template based on an ancient mathematical script to evaluate price movements and identify potential support and resistance levels.

The mathematical ratios and proportions are present throughout history and in nature, also called the Golden Ratio. It affects everything from snail shell shapes, ancient buildings, and the anatomy of the human body. Therefore, for a trader to use the Fibonacci mathematical principles, they need to understand these concepts.

What are Fibonacci Retracements?

In forex, the Fibonacci retracements are established areas of support (where prices stop going down) and resistance (where price stops going up). These retracement levels are drawn against the forex asset price. Every retracement level on the trading chart is a horizontal line that identifies the levels for analysis.

The determinant for the Fibonacci levels is via the connection of a trendline between the high and the low. The vertical distance sorted by these ratios is 61.8%, 38.2%, and 23.6%. While 50% is not officially a Fibonacci number, it is also used as a retracement level via this analysis method.

Uses of Fibonacci Retracements

Traders using the Fibonacci retracements can set stop losses, target prices, buy orders, etc. The Fibonacci retracements are used in various indicators such as Tirone levels, Elliot Wave Theory, Gartley patterns, etc. After significant price movements, traders can find resistance and support levels at the Fibonacci lines.

Traders must realize that Fibonacci retracement levels are nothing like MAs or moving averages which change with time. Instead, these Fib retracements are static and do not change. This means that identifying them is simple and allows traders to react as soon as prices change. The Fib levels are inflection points. This means traders expect a price action at these points, which may be a price break or rejection.

The Role of Fibonacci Retracement When Creating a Trading Strategy

Traders can use the Fibonacci retracements in different strategies. Most people are more used to 38.2% and 61.8% retracement levels, which determine pullback degrees, continuation pattern, and correlation after a bullish or bearish action.

As a continuation pattern, if the retracement has shown itself to be active in indicating resistance or support levels, traders can deploy a breakout strategy. You can enter a long position at the halfway mark or the 50% level and place a stop-loss order under the 61.8% retracement level. You can also use Fib levels at short order and near the peak of a significant move, with the Fib levels used as a take-profit mark.

Fib levels may be the most favorite technical indicators but are limited in their trading pair revelations. This is because they do not consider various variables like trading volume, volatility, and other factors affecting prices. The retracement levels reflect price relative to its previous price, so Fib numbers need to be factored in with other technical data.

Why Fibonacci Retracements Are Important to Every Trader

The Fib retracement concept indicates that markets retrace previous behavior with time. This means they follow a continual pattern, and you can say history repeats itself. You can estimate retracement levels depending on vertical lengths of support and based on the resistance levels.

Traders who use the Fibonacci levels based on these critical ratios mentioned before can stop losses or target prices. The ratios while trading is mainly pegged on empirical evidence and blindly having faith in the percentages. The Fibonacci numbers can measure and evaluate continuation patterns, and counter traders can set target prices.

A popular theory on the use of Fibonacci retracement is that markets are subjected to laws of nature, just like humans using them are. If this theory is true, then Fib numbers should apply to the forex markets.

Conclusion

We can see the Fibonacci retracements at work in commodities, stocks, and other financial markets. This means that every trader, not just in forex, should be familiar with the Fibonacci levels. Your expert skill in Fibonacci retracement evaluation will guide you when assessing trading opportunities in whichever investment market you are in. As random as they may appear, most price movements occur as a reaction to a more significant price movement when you are either hesitating or looking to make a profit.

Fibonacci Retracement in Stock Prediction

Fibonacci retracement levels are based on the primary numbers identified by Leonardo Fibonacci. While the Fibonacci sequence of numbers is not as necessary, the relationship between the numbers, expressed as ratios, is what forex traders use for technical analysis while trading.

Fibonacci retracements are formed by taking extreme points, i.e., a peak and a trough, on a stock chart and dividing the key Fibonacci ratios that Leonardo Fibonacci identified as the key financial ratios. The determined levels 23.6%, 38.2%, 50 %, 61.8%, and 100% are drawn to enable traders to find out the support and resistant levels.

Although the 50% level is not a Fibonacci ratio, traders often use it due to asset prices’ tendency to continue in a particular direction after the 50% retracement.

Predicting Stock Prices with Fibonacci Retracement

Like in nature, Fibonacci retracement plays an integral role in forex trade. Technical analysts use Fibonacci retracements to identify resistance and support levels, draw support lines, set target prices, and place stop-loss orders. Traders use Fibonacci retracement levels to determine how much of a previous move the price has retraced, in which case the direction of the last trend is likely to continue.

How to Apply Fibonacci Retracement in a Chart?

A trader can use the Fibonacci retracement level to indicate an entry point to trade. For example, if the trader notices that a stock has declined at 38.2%after a significant momentum, the trader could decide to enter the trade as the asset begins to register an upward trend.

When a stock reaches a Fibonacci level, it is often deemed a good time to buy because it is speculated that the stock price will retrace, enabling the trader to recover losses.

The Disadvantages of Using Fibonacci Retracement

There are a few conceptual and technical cons of using Fibonacci retracements,

Firstly, traders need to know that Fibonacci retracements are highly subjective. Not all traders understand how to use Fibonacci explicitly fully. Hence those who do and make a profit verify the effectiveness of the tool.

Traders also argue that the use of Fibonacci retracement to make technical analysis is a self-fulfilling prophecy. For instance, if traders are all using Fibonacci ratios, then the assets’ price will be affected by this fact. For example, traders using Fibonacci place a stop-loss order below the 200-day-day moving average of a company.

If a large number of traders have placed similar trades using the same tool and within the specified period, the stock is pushed down and confirms the movement that traders expected. Similarly, other traders will be tempted to sell their positions after the asset price decreases, thereby reinforcing the trend’s strength.

Although the short-term selling pressure in such cases is fulfilling, it has minimal bearing on whether the technical tool is not the price driving factor in weeks or months.

Fibonacci is also a numeric anomaly that is not grounded on any logical proof. Thus, the sequences, ratios, integers, and formulas of Fibonacci retracement are a product of a mathematical process and hence make the tool unreliable. It is important to note, however, that Fibonacci retracement levels are not inherently unpredictable.

The underlying principle of any Fibonacci tool is a numerical anomaly that is not grounded in any logical proof. The ratios, integers, sequences, and formulas derived from the Fibonacci sequence are only the product of a mathematical process.

Due to its highly subjective nature, the Fibonacci retracement strategy can only point to possible reversals, corrections, and countertrend bounces. This system struggles to confirm any other indicators and doesn’t provide easily identifiable solid or weak signals.

Conclusion

Fibonacci retracement levels is a great trading tool for you as a forex trader. It improves your trading by enabling you to identify opportunities for you to make entries into a trade or sell your shares. A Fibonacci retracement does this by allowing you to identify patterns that repeat themselves, thereby making your odd significantly high.

Due to the few conceptual and technical disadvantages of using Fibonacci retracements, such as its high subjectivity level, and the fact that it has no logical proof, it is advisable to trade with Fibonacci alongside another technical analysis tool to enable you to confirm anticipated outcomes.

Technical Indicators in Forex Trading

Technical indicators are tools used in forex chart analysis that give you, the trader, a better understanding of price movements and when it is best to make moves. Different technical indicator tools can be used to analyze price trends, measure volatility, price averages, and so much more.

Technical indicators for trading forex come in four main types. These are oscillators, trend following, support/resistance, and volatility. Each type is grouped based on its function, which can be anything from the ability to reveal currency pairs price averages over time to giving the trader an idea of the current support/resistance levels.

Read more “Technical Indicators in Forex Trading”

What You Should Know About Scalping

The Scalping trading strategy profits from small price changes. The profits on these trades are taken quickly once the trade becomes profitable. All trading forms require a trader to exercise discipline. Since the number of trades is substantial, the gains from each small trade are small. The scalper needs to adhere to a strict trading system and avoid huge losses that can destroy the other successful trades.

Read more “What You Should Know About Scalping”

Ways on How to Make a Living Trading Forex

Forex trading is a venture that one can choose to do on a part-time or full-time basis. It depends on what exactly one wants to focus on. Forex trading however is a business that one can take part in at any time of the day or night. Read more “Ways on How to Make a Living Trading Forex”

Factors that Affect Forex Trading

The word forex is an amalgamation of two words. The first word “foreign” refers to the scope and environment of the trade. It shows us the global nature of both the transactions as well as the currencies involved in this operation. Read more “Factors that Affect Forex Trading”

Best 9 Forex Management Advices

Forex trade is now very common with most people opting to put their surplus capital in it. That is because it is a rather easy investment to venture into. All you require is to have access to a computer plus a fast network or connection. However, the trade can only be lucrative and profitable for you if you do the right things.

Read more “Best 9 Forex Management Advices”

All You Need To Know About Fibonacci Retracements In Forex Trading

Trading in forex is a tricky business, especially for new traders. Since the forex market is highly volatile, an investor needs to know when to buy or sell stocks to maximize profits. Successful forex traders use the Fibonacci retracements to predict the market trends for high returns. Read more “All You Need To Know About Fibonacci Retracements In Forex Trading”