Education

Why is Risk Management Important?

Effective money management and risk control is crucial while trading the financial markets. The high leverage levels offered to CFD traders has made it crucial to understand how much leverage your trades encompass.  Therefore, you are required to carefully manage your risk exposure. Successful risk management must begin from the outset of trading.

Most traders lose money by making unnecessary mistakes. One of the leading causes of losing money comes when traders fail to separate their emotions from the trade. If you want to understand risk management, then you need to overcome these mistakes. All risk management means is how much a trader is willing to risk and how much they wish to gain. By following the risk management strategies below, you have the potential to become a successful CFD trader:

1.  Use stop loss and take profit orders with your trades. This will allow you to exit trades with the desired gains, while also being able to cut your losses if the market moves against you.

2.  Calculate the risk-reward ratio of each trade before investing money. This is vital if you want to become a successful trader over time.

3.  Consider using both fundamental and technical analysis while trading the markets. Political and economic conditions highly affect the financial markets. By following both economic releases and past price levels on charts, you will have the ability to better predict future price movements of your preferred CFDs.

A Brief Guide To Fundamental Analysis (part 4)…

Durable Goods Order

Durable goods orders are the number of new orders placed with domestic product manufacturers for future and immediate delivery of factory goods. A record of orders for durable goods shows how busy factories will be in the following months to come. The data from this provides an insight to the demand for consumer products such as cars and home appliances. In addition to that, this also tells if a business investment is going forward.

FOMC Meeting

The Federal Open Market Committee is made up of the seven Governors of the Federal Reserve Board and five Federal Reserve Bank presidents. This meeting is held eight times a year and has the agenda of discussing about the near term direction of the monetary policy. Whatever changes decided on the policy are announced immediately after the meeting.

Retail Sales

Retail sales are measured through the receipts at stores that sell tangible and non tangible products. Since consumer spending accounts for two thirds of the economy it is easy to get an idea of where the economy is headed depending on what consumers mostly buy. The pattern in consumer spending is frequently the primary influence on stock and bond markets.

Current Account

Current account is the measure of the country’s international trade balance in tangible products, services as well as unilateral transfers. An investor can follow the level of current account as an indicator of trends in the foreign market. Current account data is significant because this can directly impact the financial markets especially the foreign exchange value of the dollar.

Employment Data

The employment data give the most comprehensive report on how many people are looking for jobs, how many are employed, what they’re getting paid for and how many hours they are working. These numbers are the best way to measure the current state as well as the future direction of the economy. By analyzing this data, investors can sense the scale of tightness in the job market.

ISM Manufacturing Index

The Institute for Supply Management (ISM) compiles an index of national manufacturing conditions. The ISM manufacturing data gives an in-depth look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this ISM report has a big influence on the markets.

Beige Book

The Beige book, formerly called the Summary of Commentary on Current Economic Conditions, is a compilation of economic conditions from each of the 12 Federal Reserve regional districts. The Beige Book is used at FOMC meetings and can portray an overheating economy or inflationary pressures.  If this happens, the Fed may be more inclined to raise interest rates in order to moderate the economic pace.

Leading Indicators

Leading indicators is a composite index of ten economic indicators that usually lead the economic activity as a whole. The index of Leading Indicators is designed to forecast turning points in the economy such as downturns and recoveries.

A Brief Guide To Fundamental Analysis (part 3)…

Along with technical analysis, fundamental analysis is another widely used method when making decisions in the trading market. While technical analysis makes use of past data to predict the future price, fundamental analysis on the other hand provides a much more intellectual analysis through the use of information like sales, ratios, profits, business concept, and competition among many others. Some of the factors that come into play when it comes to fundamental analysis are as follows:

Gross Domestic Product (GDP)

GDP is the broadest measure of aggregate economic activity and this includes every sector of a country. It represents the total value of the country’s production during the period  and these consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners as well as government entities. The GDP of a country is an important fundamental analysis factor because it is the most comprehensive economic scorecard.  Traders closely keep track of the economy because it usually dictates how investments will perform. Healthy GDP growth usually translates into strong earnings for the corporate entity.

Personal Income and Outlays

Personal income is the dollar value of the income received from all sources by individuals. Personal outlays on the other hand include consumer purchases of durable and non durable products and services. Since the Personal Income gives a household the power to spend or save, this makes a handy way to gauge the strength of an economy and where it is headed.

International Trade Balance

Another important factor in the fundamental analysis is the International trade. The level of this as well as the changes in imports and exports specifies the trends in the foreign trade. This is important because the data involved can directly impact the financial markets especially the foreign exchange value of the dollar.

Consumer Price Index

The Consumer Price Index is a measure of the average price level of a fixed set of goods and services purchased in an economy over a period of time. This is perhaps the most widely used monthly indicator of inflation. The Consumer Price Index is also regarded as the Cost of Living measure because it is used to adjust contracts of all types that are tied to inflation. By keeping track of the trends in the inflation – whether this is rising or falling, traders can anticipate how different types of investments will perform in the market.

Jobless Claims

This is a record of the number of individuals who filed for unemployment insurance for the first time. Jobless claims are an easy way to get an idea of the strength of a market. The fewer the people file for unemployment insurance, the more have jobs and this tells a lot about the economy.

Housing Starts

This is the number of residential units on which construction is begun each month.  The rate of housing starts tells us a lot about the demand for residence and the outlook for the construction industry. The trends in the housing starts carry significant clues for homebuilders, mortgage lenders as well as home furnishing suppliers which in turn gives a picture of the trends in the market.

Producer Price Index

The Producer Price Index or PPI measures the average fluctuations in the selling prices that are received by domestic producers for their outputs. The PPI for finished products is a major indicator of commodity rates in the manufacturing sector. Unlike the consumer price index, the producer price index is more sensitive to the pressures of demand and supply.

Consumer Confidence

This is a survey conducted by the Conference Board to determine the attitudes of consumers about the present situation as well as their expectations with the current economic condition. The pattern that is found from this greatly influences the stock and bond markets. A strong economic growth means healthy profits for corporate entities and higher stock prices. When consumers are more confident with the economy and their finances, they have a greater spending power. With this in mind, it is quiet easy to get a hindsight to the direction of an economy.

A Brief Guide to Technical Analysis (Part 2)…

Line Charts and Bar Charts

Charts are primary tools used in technical analysis. They offer a visual aid to interpreting the trend and market action. With a chart, the old saying “A picture is worth a thousand words” is never more appropriate. There are different types of charts used to determine various aspects of the markets. In most cases, the x-axis measures the time while the y-axis measures the price level. These charts come either as line charts and bar charts.

Line charts are used to determine the closing price while bar charts represent the price performance for a specific period which could be as long as a month or as short as a minute. Daily bar charts are the most commonly used types of charts by traders.

The candlestick charts help traders determine what is most likely to happen in the movement of the market. These candlestick charts display the opening and closing prices as a solid body with the highs and lows as additional vertical lines. A candlestick shows the constant movements during the day, and so at what price people were willing to buy or sell. As with a technical analysis, the explanation of candlestick charts is based primarily on the patterns, which have been observed over several centuries as to how they can be used to forecast the price movement of a product. There are bullish patterns, bearish patterns as well as neutral patterns which indicate the movement in the markets.

Trend Lines

The basic trend line is a simple yet one of the most crucial tools in trading. The trend line is constructed where there are three higher or lower points which are to be connected. From this, a channel is outlined that can then be used to monitor the price action. When it comes to drawing a trend line, this involves some experimenting until the trader finds the right type. In some cases, a trend line which appears to be correct may actually need to be redrawn. For a trader who is getting started with trend lines, there are some useful guidelines that he needs to keep in mind in order to come up with the right one. With much practice, drawing trend lines becomes easier.

Trend lines come in many different motions and it is important for traders to understand the significance of these trends to avoid the risk of entering or exiting the market at the wrong time. There are two basic factors used to determine the significance of a trend line namely, the length of time it has been intact and how many times it has been tested.

Support and Resistance Levels

In technical analysis, support and resistance levels are one of the most essential components. Basically, these are price areas where an abundance of trading has taken place and where a great deal of buying or selling pressure is present. Underlying support keeps a market in an upward trend while overhead resistance keeps a market trend lower. These indications are used to manage risks and identify profit opportunities within the market.

Basically, a support level is the price area that calls for an increase in the demand for that product and resistance levels is a price illustrated by increased selling pressure or increased supply of a particular investment product which tends to level off advances.

Moving Averages

The moving averages are arguably the most reliable and practical technical analysis indicator. These are used to smooth out market changes as well as short term volatility which then help the trader determine which way the market is moving.  This is basically an indicator that shows the average value of a security’s price over a certain period of time. When interpreting a moving average, this is done usually by comparing the relationship between a moving average of the security’s price with the security price itself. A buy or sell signal is generated depending on the direction of the security price which can either be above or below its moving price.

There is also the case of multiple moving averages. While one moving average is a very useful tool in technical analysis, multiple moving averages can actually be more powerful when plotted on the same chart. Moving averages however work well in trending markets only. When a market changes in a slim trading channel, moving averages usually generate false signals.