Online currency trading is basically CFD trading on currencies, as traders do not take physical delivery of any of the currencies being traded. CFD currency trading has the following characteristics:
- a. Currency CFDs allow traders to trade the price changes of the underlying currencies. Ownership of the underlying currencies is not conferred to the trader.
- b. CFD currency trading is highly leveraged.
- c. There is no central exchange governing the trading of currencies. Prices are therefore derived from the liquidity providers in the interbank market, or from the dealing desk of market maker brokers.
- d. Currencies are traded around the clock, therefore, there will always be opportunities to trade currency CFDs from Sunday 9 pm GMT to Friday 9 pm GMT (Daylight Savings Time switched off).
- e. All currency CFDs are affected by the same type of news but in a different way.
- f. Schedule of news releases are contained in the economic news calendar that heavily impact prices.
Currency CFDs can be traded on regular platforms or even as prediction options on platforms such as those of Olsson Capital.
Fundamentals of Currency CFD Price Movements
Currency CFDs are impacted by a plethora of news releases, all of which are contained in the Economic News Calendar. Examples of market news with high impact on currency CFDs include:
- a. Interest rate decisions and accompanying central bank statements.
- b. Inflation data (producer price index/consumer price index)
- c. Employment data (e.g. UK Claimant Count and US Non-Farm Payrolls)
- d. Central bank interventions
- e. Retail Sales and other consumer sentiment report.
- f. Manufacturing data (especially from China)
- g. Gross Domestic Product (GDP) data
- h. Housing Data.
- i. There are a few others which are specific to certain countries. Examples are Jobless Claims in the US.
Technical Basis for Currency CFDs Trading
Technical analysis on Currency CFDs is well documented and practiced by traders all over the world. The same principles used in the technical trading of other assets are also used in trading CFDs on currencies. Currency CFD brokers have made the process slightly easier by providing interactive charts, tools for technical studies and indicators. The use of automated trading software has revolutionized currency CFD trading, as well as the use of virtual private servers.
What should the trader look for on the charts?
– The prevailing market trend, which is best visualized on the daily chart.
– Support and resistance levels, (current and historical)
– Chart patterns (triangles, wedges, etc).
– Candlestick patterns (morning/evening star patterns, and other strong reversal candle patterns).
– Information from technical indicators
The currency trading zones tend to overlap at specific times. These are the times when there is the most activity in the market. Furthermore, it is best to trade CFDs on currencies that are most active within a time zone. For instance, it is better to trade the AUD/USD during the Asian time zone and not during the London/New York time zone overlap.
The economic news calendar is the trader’s best friend. News impact on currency CFDs is very fast and huge; you do not want to end up on the wrong side of the trade. Unlike what happens with stock CFDs, big moves can occur on currency CFDs in seconds. Slippage is a real threat. You must study the economic news calendar well in advance and ideally, be out of the market when the news is released. You need a large deviation of the actual figures from the consensus figures to produce a good market reaction.
Trading currency CFDs based on the news is best left to the professionals. Retail traders do not have the tools that can give them an edge. The news produces a furious reaction in the first hour of release, but the effects can continue for days. Waiting for markets to digest the news is a smart action.
When an understanding of market trend as directed by the news is obtained, a technical-based entry can be made.
Case Study: GBP/USD
The Bank of England (BoE) in its statement on September 14, 2017, gave a very strong indication that it would raise UK interest rates before the end of the year. Rates in the UK have been at very low levels for a long time. This provided a much-needed boost to the British Pound which has largely been on the downtrend following the Brexit vote in June 2016.
Trigger: long trade.
A technical entry that supports this upside bias is then sought on the charts. It comes in the form of an initial spike, then a period of range-bound movement. Due to the bullish bias on the GBP/USD, the trigger to look for was an upward break of the trend line resistance. This was provided by a green (bullish) candle which closed above the resistance.
The Stop Loss (SL) was set below the support trend line, while the TP was set at the area where upside movement stalled, indicating resistance. Reward-risk ratio (TP:SL) should ideally be a minimum of 3:1 or higher for best results.
NB: Trendlines drawn must touch at least three areas where prices have formed highs or lows for such a trend line to be valid.