If you are interested in any type of online trading, whether it’s Contracts For Difference (CFD) or Binary Options (BO), you’ve most likely heard of currencies, indices, stocks, and commodities. These are the Big 4, the most popular asset classes, which you will find on almost all brokers. Thus it’s only normal that we learn more about them and see what influences their movement. Buckle up!
Currencies are traded in pairs, but the pair is never perfectly balanced. Think of the two currencies in a Forex pair as two athletes on the track, both with similar capabilities: they will constantly shift places and overtake each other. Now let’s think of the EUR/USD pair: when the Euro is stronger than the US Dollar, the pair will go up and when the Dollar is stronger, the pair is going down. The balance of power between the two changes constantly and that is what generates price fluctuations, trends, retracements, and reversals. Incidentally, the word “retracement” is a financial term meaning: A temporary reversal in the direction of a stock or currency price that goes against the prevailing trend. A retracement does not signify a change in the larger trend.
Although a very large number of currencies can be traded in the Forex market, the most frequently traded ones are called the Majors. A characteristic of the Majors is that they all contain the US Dollar. These pairs constitute about 85% of the Forex market volume. The remaining 15% is composed of currency crosses (pairs that do not involve the US Dollar) and exotic pairs.
The Majors are EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, USD/CAD and NZD/USD. These pairs are so often traded that traders even gave them nicknames and the most interesting one for me is “Cable” for the GBP/USD pair. The pair got its nickname from the time when an actual communications cable ran under the Atlantic Ocean, synchronizing the quote for GBP/USD between New York and London. Good thing we have wireless technology now, right?
Most Forex pairs can be traded 5 days a week, 24 hours a day, but it would be a good idea to check your broker’s “Asset Index” to make sure. Trading hours can differ from broker to broker.
The charts are in constant turmoil, with each currency trying to get the upper hand on its counterpart. But what drives them and how can we benefit from that? Well, a country’s currency is strongly influenced by the overall state of the economy, important political and financial news, central bank rates, speeches by bank chiefs, natural disasters, geopolitical events and sometimes even rumors.
Based on these factors, but not limited to them, a currency can strengthen or weaken but we must also take a close look at the influencing factors for the other currency in the pair. For example, if good news is released for the Euro and worse than expected numbers come out for the US economy, we can expect the EUR/USD pair to go up, because now the Euro is stronger than the US Dollar.
News and all the events we talked about above constitute the fundamental part of the currency movement, but there is another type of analysis that plays a big role in the financial markets: Technical Analysis. This type of analysis is done by identifying trends, support and resistance levels and using different technical indicators or tools. A trend is basically an extended move in either direction and good profits can be achieved by trading in the direction of the main trend. Support and resistance levels are potential turning points. Resistance can be identified above the current price and it is a zone from where price returned on several occasions in the past. Support is always lower than the current price and the same principles apply. Support and resistance levels and trends are the main ways of applying technical analysis to currency trading. You can read more detailed explanations in my other articles.
My Trading Experience with Currencies
One of the most important financial events is the announcement of the Official Interest Rate by the European Central Bank (ECB), followed by a press conference where the President of the ECB gives a speech and then answers journalists’ questions. Usually, volatility is crazy during the press conference and the President’s words are immediately analysed (and sometimes misinterpreted) by traders. This can generate a lot of whipsaws and false moves, especially on the EUR/USD pair, but other pairs are affected as well. One minute you can get the impression that the price is going up and the next minute it reverses and moves furiously down. I went into some bad trades, receiving some false signals from the market during the ECB press conference and then I decided (and I recommend it to you too) to stop trading during the ECB Presser.
All currencies have specific news, with a great impact on their movement. Usually, all Central Bank Rate announcements have a great impact on their respective currencies and one of the most important financial events for the US Dollar is the Non-Farm Payrolls (NFP) release. You should let the market cool down during these events and start trading afterward. Also, don’t forget to check out a Forex calendar to be aware of the major events of the pair that you are trading.
The concept of an index (plural indices) in trading refers to a statistical measure of the change in the overall performance of a given control group formed by individual companies. Before you start throwing eggs and rotten tomatoes at me, let me assure you that I will explain it again, this time using normal English because the first sentence makes my head spin too.
Ok, one the most known, traded and talked about indices is the S&P 500 (Standard & Poor’s 500). This index contains 500 large and publicly traded American companies and its value is derived from the stock prices of each one of those companies. Each company has a different weight in the overall index value and this weight is determined in our case by Standard & Poor (S&P).
The value of an index will fluctuate up and down based on the performance of the companies contained and it serves as a measure of short term overall economic health for its respective country. When I say “for its respective country” it’s because there are different indices for different countries: the most prominent ones for the USA are S&P 500 and Dow Jones; FTSE 100 for the UK, the DAX in Germany, CAC in France and Nikkei for Japan. These are just a few examples and because they are one of the most frequently traded assets, online CFD/BO brokers offer an impressive variety of indices for trading. The trading hours can be different from broker to broker and it’s always better to check with your broker’s Asset Index to find out the exact times.
As previously mentioned, indices are based on the performance of several large companies and all these companies are publicly traded. If they are publicly traded, then they have stock prices, right? That’s exactly what influences indices: the stock price of the companies in it. Then going even deeper, a company’s stock price is influenced by its overall performance and also Supply and Demand. Indices are also a measure of the overall state of the economy so in periods of an expanding economy, the indices in that country are likely to go up and vice versa for periods of economic regression.
The information about popular indices is widely available and almost every time you hear talk about the financial market, S&P, Dow Jones or FTSE are probably mentioned. Any reputable broker will provide you with live news, keeping you updated on the major headlines. When trading indices we must pay extra attention to events like powerful storms, hurricanes, earthquakes or even terrorist attacks because these kinds of events have a great impact on a country’s economy and consequently on indices.
My Trading Experience with Indices
We all have trading stories and today I am going to tell you one of my own… it’s rather a small discovery I came across by accident. One day I was trading the S&P… nice Buy after a big drop that resulted in a bullish divergence. I’m not a big fan of trading reversals and I prefer to go with the trend, but this divergence was too good to miss.
Usually, once I place a trade I don’t like to watch it, biting my nails until expiry time and according to my habit, I opened the S&P trade and started looking at other charts to see if I could spot another good opportunity. The first chart I looked at was EUR/USD… and then it hit me: the EUR/USD chart was very similar to the S&P chart. It had almost the same drop and bullish divergence was forming, but while my Buy on S&P was already moving into profit territory, this chart was looking like it was just getting ready to go up, following the movement of the S&P. I don’t know if it was a rushed decision, but either way, I opened a Buy on EUR/USD as well.
Fifteen minutes later it proved to be a good decision as both my trades closed at a profit. So, in this case, EUR/USD followed the movement of the S&P, I doubled my profit and I was now sitting on my couch with a big grin on my face thinking if it was just an isolated occurrence or something that I could repeat in the future. Well, time to wipe the smile off my face and start to backtest the phenomenon.
Let’s start with the basics: what is a Commodity? The term “commodity” is used to describe an item produced to satisfy certain needs but has almost no qualitative differentiation in the market. Ok, I am going to use examples: Rice is a commodity, but we cannot tell where or by whom it was produced just by looking at it or by tasting it. Copper, Gold, and Silver are commodities, but they are almost the same all over the world and their respective prices are universal.
Other examples of commodities are Coffee, Tea, Wheat, Corn, Coal, Soybeans and one of the most traded, Oil. Although there are a lot of commodities, most brokers offer trading just on Oil, Gold and Silver and these can be traded around the clock starting Monday morning and ending Friday evening. Because the trading hours can differ a little from broker to broker, you should check your broker’s Asset Index section.
Now that we know what Commodities are, we must find out what makes their prices fluctuate. The answer is Supply and Demand. Think of it this way: if everybody needs oil (Demand is high) but if there isn’t enough for everybody (Supply is low), then the price of oil will go up. On the other hand, in times when demand is low and there is enough oil to cover all the needs and then some, the price will go down because the buyers are not willing to pay a high price for the commodity. These are the basic principles behind Supply and Demand and the balance between them can be influenced by many things.
Let’s assume that the new electric car is invented with extraordinary characteristics, similar to a Ferrari and it costs just about $15,000. Now that would be nice and I bet everybody will rush to the nearest car dealer to get one. I know I would! But if that car doesn’t use oil anymore and the whole world now owns one, who will be left to buy oil? Very few. This means that the Demand for oil suddenly dropped, but there is a lot of Supply. The result can be seen in the price of oil: it will drop like a wingless airplane.
This is, of course, a fantasy scenario and it will probably not happen; at least not very soon, but I hope you get the whole Supply and Demand idea. Any event that influences the Supply and Demand of a certain commodity will have an effect on the price of that commodity and consequently, this will be shown on your charts.
My Trading Experience with Commodities
Commodities like Oil, Gold or Silver can sometimes have stronger moves than Currencies or other assets so we need to be more careful not to get caught on the bad side of a trade. I consider a strong move to be one that covers a big distance in a short amount of time or one that stretches over a longer period of time without having a significant retracement. To better understand what I mean, just look at an oil or gold chart at the time when the US Election Official Results came out and then compare it with the movement of any of the currency pairs that contain the USD. You will see that oil and gold moved a lot stronger.
The thing about commodities moving stronger makes me think about a time when I was working for a trader who was so sure of himself and his trades that he would not get out of a bad trade even if the market was screaming to do so. During an important event for oil that was expected to drive the price higher, he placed a Buy trade, but the price soon started to drop hard, disregarding what market participants “wanted” it to do. His trade was closed at a loss… and I thought his next trade will be a Sell as price continued on its downward path. But his stubbornness kicked in and he continued to Buy oil… constantly increasing the amount traded. Unfortunately, just two hours later, the oil price dropped about 300 points and he was down more than $8,000. In case you are wondering… yes, this is a real story, but he can afford the loss; most of us can’t, so whatever you do, don’t try to prove to the market that you’re right, or take revenge on it because it will come back to bite you hard. Try to keep a balance between the fundamentals and technical analysis and even if a financial event makes you think that the price will go in a certain direction, always try to confirm it from a technical point of view.
Apple, Microsoft, Exxon, Mobil, Facebook or McDonalds are all companies that influence our everyday lives. There’s a big chance that you are reading this article on a computer that uses Microsoft or Apple operating systems, you probably have a Facebook account and if you drive a car, you know what Exxon is. All these companies have one thing in common: we can buy their stocks and even better, we can trade Contracts For Difference or Binary Options on their stocks.
The term “Stock” refers to the initial capital invested in a company by its owners. The whole stock of a company is divided into shares (usually the plural form – stocks – is used as a synonym for shares) and owning a share means owning a fraction of that company. However, when we are trading online (BO or CFD) we are not buying stocks; we are just placing a Buy/Call if we think the price of a certain stock will go up or a Sell/Put if we think it will come down.
Other frequently traded stocks besides the ones already mentioned above, are Google, Vodafone, British Petroleum, Coca Cola and Intel. Trading on stocks can be done only when their respective stock market is open (just a few hours a day), unlike trading on currencies, which can be done around the clock during the working days of the week. Your broker will inform you about the exact trading hours in the Asset Index section of their website.
I talked about a stock going up or down, but let’s see what makes a company’s stock price fluctuate. And the answer is… Supply and Demand, just like in the case of commodities and many other financial assets. If Demand is high for the products made by a company, this will lead to more income and profit for that company and given that share prices are directly influenced by the company’s economic situation, they will go up. To simplify, if a company performs very well the price of its shares will probably go up. If the company is in financial trouble, the share price will go down.
The way for us retail traders to gauge how a company performs is by keeping a close eye on their Earnings Reports and also any news that can affect that company. Hypothetically, let’s assume that Apple announces that they will release a new iPad with 3D capabilities, no glasses required. Nice thought, I know. Once the new iPad is released and it is indeed a competitive product, a lot of gadget lovers will rush into the Apple stores to get their hands on one. But what do you think that will do to their stock price? It will most likely bring it up because now everybody is interested in Apple and buys their products which will eventually be positively reflected in their sales numbers and earnings reports and a well-performing company has a high share price.
Of all the assets available for trading, probably stocks are the most appealing to the new trader because usually, brokers feature the stocks of big, well-known companies. Since almost everybody has heard about those companies, you don’t need to be a financial wizard to find out if and when Google launches a new smartphone or if Facebook accounts will require paying a monthly fee.
My Trading Experience with Stocks
Keep an open mind and don’t let your trading be influenced by your own opinion of a certain product or company. I am going to make it clearer: as I said, it is very probable that we are using some of the products of the companies we are trading. Without question, we have different opinions on different products: if I chose to buy an iPhone, then I consider it better than Samsung’s product. And here comes the unconscious mistake that we must avoid: never allow yourself to become biased towards a certain stock just because you use and love the products of the company.
It might seem like something that is not worth mentioning and you could say “Yes, of course, I am not going to trade bullish on Apple just because I like the iPhone”. But your subconscious can make you do weird things. If you already like a product and on top of that you earn some money from trading that company’s stock – thus only good things came from your “relationship” with that company – you will somehow become emotionally involved and you will potentially give unnecessary importance to a small positive event related to that company.
Wrapping It Up
It was a long article, I know, so I will keep it brief: do your homework! Whatever asset you are trading, in whatever style (binary or Contracts For Difference), make sure you get very familiar with its movement and with the main factors that affect its price. Do your homework – that’s the best advice I can give you!