Trading Forex With Fibonacci Ratios

Those who are into Forex trading can also make use of the Fibonacci Ratios. The ratios come from dividing any two consecutive numbers in the Fibonacci number sequence to get a mean that is 1.618. This is also referred to as the golden ratio which can be observed in the natural world as much as it is in the trading world. Forex traders have to be aware of the two most important points when they are making trading decisions. These are points 38.2% and 62.8%. However there are also other important points to watch like 75%, 50% and at 33%.

Traders can make use of the Fibonacci ratios to place their stop loss orders. This will prevent them from incurring too much loss in their trading activities especially when they are already trading against a support line. Aside from this, traders are also able to determine the risk that they are taking based on their position size. They are also able to lock in their profits based on the Fibonacci ratios.

In order to benefit from the use of the Fibonacci system in Forex trading, people have to learn how to determine the market trends accurately. They also have to know when the retracements may be expected so that they may know the right trading moves to employ. They can for example buy when they see that the price of the asset is on the support level or they may opt to sell instead if the price in the market in going down.

Forex traders may be able to make use of the Fibonacci ratios through charts where they can plot the support or resistance zones. They have to draw the trend once it has completed a cycle. Traders have to find a completed trend within a given time frame. They need to be able to identify the same trends on the pair of currencies that they are dealing with. Traders have to make use of the charts that they have drawn as guides in making decisions.

When Forex traders see that the price is steadily going up, they may take a long position meaning they can buy the currencies but they have to check diligently as the price approaches one of the Fibonacci Ratios. It is possible for the price to go down and they may lose in their trading transaction if they are not able to sell before this happens. In order to prevent this loss, they need to place an order for a stop loss so that they may be able to save the profit that they have already made instead of losing it. It is also possible that the trends will move the other way and prices move down. In such situations, the Fibonacci Ratios are considered as resistance and traders may exit their positions.

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What Is Index-Based CFD Trading?

As its name is suggesting, index-based trading of contracts for difference or CFD is about speculating on the overall performance of the stock market or its sector. This is not the same as trading on shares. This is because the latter has more focus on the stocks of certain and single company rather than the market as a whole. Index, in contrary, refers to the market or sector that comprises of different companies. Hence, what this means is that it will be looking in to the performance of the sector rather than the performance of just a single company.

Among the most common indices where traders can make CFD positions include the FTSE 100, S&P 500 as well as Dow Jones and many more.

In making a position in this form of CFD trading, the trader agrees in exchanging the difference of the price of a certain index from one point or time to another period. In order to understand this, a person needs the basic knowledge on how contract for difference trading works.

With the foregoing, this form of trading means that there are buyers and sellers. The contract or agreement states that the seller will be paying the buyer for the difference. This difference is the disparity between the value of a certain asset at current prices and the contract price. If the said difference is, in contrary, negative; then it means that it would be the buyer needs to pay the seller instead.

Now, applying this to indices, a seller and buyer will have a contract or agreement. If a trader expects the S&P500 index to go down in the coming days, then the right position to take is a "short" position, which means to sell the position. This is because if traders expect it to de-valuate in the coming trading, then the wise investor would dispose it by selling it. However, on the other hand, there would also be some speculations that are in contrary to the former. Some would expect the index to appreciate in the coming days. In this instance, the best thing to do is to take a long position, which is to buy.

In this regard, why would a trader choose this instrument over the others when it comes to CFD trading? The answer to this is quite easy. This is because this instrument allows a trader to have an easy access to unfamiliar market. The best thing about this is that traders can do this without worrying too much on paying clearing fees. Aside from that, most of the main indices are basing on the blue chips, which is an appropriate measure of whatever the sentiments are in the current market. In other words, this means that a trader is primarily investing or positioning on the blue chips rather than a single share.

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"R-C-M-L" in CFD Trading

RCML refers to the four (4) extremely significant things that investors should understand when it comes to trading contract for difference or CFD. These are about its risks, costs, as well as the aspects of margin and leverage. It is in this regard that this article will try to explain these aspects in as layman as possible so that people can comprehend these concepts better.

What are the risks of trading CFDs?

First and foremost, more than the profits and earnings that an investor can benefit from trading in this platform, it is always vital to know the risks of trading these instruments. This is because these are also the factors that will determine whether a trader will earn something or not in the end. For example, even if a trader has the best plan or strategies, it will be futile if they will not take into consideration the risks at all. In other words, they might even fail too if they are not going to account these.

What is the cost of CFD trading?

Secondly, on the other hand, the cost of trading these instruments should also be among the first things that traders must ponder on. The general rule of thumbs suggests that when the costs are too high and beyond the rewards that the traders are expecting, then there is no point in engaging into this in the first place. These costs include the money traders need to spend for opening an account, hiring a broker as well as the capital requirement. Of course, traders must balance the cost with the rewards. There should be more rewards than the cash outflow.

What is margin and how it works?

Thirdly, margin is one of the most basic concepts that investors should understand in this platform. This margin refers to the deposit requirement in order to secure the transaction against those with leverage. This is extremely valuable in order to make the leverage work smoothly. In most trading platforms, the margin requirement is at 5% mark. Hence, this affords the leverage up to a factor of 20. Nevertheless, this rate may still vary, depending on the market condition as well as overall trading climate.

What is leveraging in CFD trading?

Fourthly and lastly, trading in this platform is all about leveraging. This is, in fact, the key element of trading this instrument. Aside from that, this also sets apart this from the other financial instruments out there. This is because it is a fund or capital that traders can use in order to access large transactions in the short-run. Hence, this may have an effect to provide greater capital returns than just trading in ordinary manner. However, traders should not abuse this because this also amplifies the possible losses.

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CFD Trading and Surrounding Regulations

In United Kingdom, the Financial Services Authority is the one regulating and monitoring the world of contracts for difference (CFDs). Aside from that, there are various European Union directives pertaining to this transaction. Most of those directives seek to make the trading field smooth all throughout the entire region. It is in this light that traders and investors need to comply with the policies of the FSA so that they can continue to trade without hindrance or discontinuance. The FSA is also the one that is regulating the brokers working on this field. Hence, investors who are hiring brokers need to make sure that the one they got is an authorized or regulated one.

With the foregoing, the other regulations surrounding the CFD trading touch other aspects too. Some of these include the taxation, pricing or costs and even assets that investors can trade.

Taxation: Gambling versus Investment

On the one hand, the taxation treatment for this is primarily dependent whether the law considered it as a gambling or a form of investment. In UK, it is not equivocally a form of gambling. Well, this is because gambling is about fortune and chance. However, CFD trading does not solely rely on pure chances and luck. This is also because there are measurable factors that traders can research and interpret in order to get over the risk and earn profits.

In this regard, the government of UK taxes the income of a trader from this transaction. In some countries, this is not taxable at all since some governments treat this as a form of gambling rather than an investment. In terms of the taxation, it is, in fact, liable to capital gains when the trader gains more than the annual exemption level of £10,000. However, this is not liable for a stamp duty unlike in share transactions.

Pricing and Costs of CFDs

Like most of the financial instruments, the pricing of CFDs is primarily dependent on the market rate, in addition to the weighted factor. The broker includes the said factor in order to have a more accurate impression of where the market is most likely headed. In terms of the costs, CFD trading is more cost efficient. This is because it consists of only the commission of the broker and the financing cost.

Assets for Trading

Investments can engage into CFD trading with a wide range of assets, markets as well as instruments. For instance, traders can participate in a transaction in FTSE 1000 shares or even on index. Aside from that, other popular fields where investors can trade on CFDs include different commodities like rice, pork, livestock as well as precious metals. Further, this can also be traded on currents, bonds and interest rates.

Pent Up Silver Demand and The CFTC Linchpin   Pointers for Commodity Traders   The Gann Technical Analysis of Price Movements   Various Orders in Futures Trading   Reasons Why China Wants Its Citizens to Own Precious Metal