What Are CFDs?

Keeping A Watchful EyeReading Market Reactions

As any successful CFD trader will testifythere are countless different prompts and signals that factor in to trading decisions throughout the course of the day; and taking account of these is all part of the territory when it comes to trading successfully.

Ignoring those signals as they emerge means potentially missing out on lucrative opportunities, and when it often feels much easier to lose money than make it in CFDs, it’s absolutely vital to capitalise on every possible opportunity that comes your way.

For many traders, watching the response of the markets to economic indicators, market news and current affairs as they happen can be both a good way of identifying trading opportunities and for getting a feel for the levels of optimism in a particular market. By reading and taking these signals on board, you can be better positioned to jump on trends early, and take advantage of momentum in your selected markets.

Markets are reactionary by their very nature, and while some traders and institutions will second-guess trading patterns and trends, there comes a tipping point at which a news signal can push markets either up or down. Usually, depending on the item of news or the relevant economic indicator, it’s pretty easy to determine the effect on the market.

Here Is a Simple Example

For example, if a large supermarket chain is fined for price fixing, chances are their shares will take a hit as a consequence. This is because the risks of staying exposed to shares in the supermarket has increased, and plainly because many investors think others will be in the mood to sell, rather than to invest.

When contracts for difference traders move in numbers, this has the effect of sending the market spinning in one direction or the other, which is where serious profits are to be made for the cunning, dynamic CFD trader.

Analyse the Market

Furthermore, by reading and anticipating the way the markets are likely to react to announcements released throughout the day, you can effectively identify opportunities that might not otherwise be evident in analysis price data. Analysis of market behaviour is even a favoured research method of many traders, who choose it in preference to in-depth price and technical analysis methods.

By tuning in to market movements, spotting opportunities for profiting from both upward and downward trends becomes more straightforward, assuming you’ve joined the dots correctly and reached the right assumptions about how the markets will treat certain current affairs and outcomes.

If you’re serious about succeeding as a CFD trader, it’s crucial that you come to terms with the fact that your fate is largely decided by the markets. If you call a reaction in the wrong direction, you could lose big, and quickly.

But by keeping a watchful eye on the markets you trade and on news stories as they break throughout the day, you should be able to better draw a correlation between market prompt and market reaction, which will in turn give you the tools to make better, more profitable trading decisions, while also helping you to cut down on any losing positions before the markets unleash their full force against you.

Final Word

Contracts for difference are widely used by many financial institutions and hedge funds around the world but they come with their own risks. It is important to understand the risks involved in trading CFDs.

Let’s have a look at those risks:

1. Leverage. CFDs are a leveraged product and thus your losses can be immense, one of the ways to minimise your losses is to use stop loss order. Also, keep in mind, that you losses can exceed your initial deposit so check with your broker.

2. No equity ownership. Unlike trading shares in a conventional way, with contracts for difference you do not own the share you trade on and thus you lose the option of attending annual general meeting (it is when shareholders annually meet to discuss the course of action of their company).

3. Small Cap Stocks. You need to check with your broker what stocks are offered and not many CFD companies offer small cap shares. So if you want to trade shares of small companies then conventical share trading might be better for you.

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