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Friday, 20 June 2014

Mortgages and Bonds

It's been a very long time since I last wrote on this blog. I've been very busy with exams and other stuff. I recently had to do an essay on mortgages and bonds, which is attached below. I wish to upload an new updated copy that will teach you partial derivatives and simple calculus needed to understand the paper. After you have mastered this you should be able to read the essay. It was compiled in LaTeX

Friday, 14 December 2012

EUR/JPY – Trade Overview


Strategy: Trend trading (in addition to RSI and MA)

We will be giving an analysis on the FX pair. Spread betters and have been speculating this pair since the EU slashed interest rates.

Macro-economic view

The reason why the pair was in a downtrend during April and July 2012 is largely due to the ECB cutting interest rates.  This meant capital flight.

A reversal then followed at 0.94 as we can see from the chart below, we see that there were several kinks in the chart which is due to the optimism of the Greece deal, which has gone through now. Recently Greece bought back 31.9 billion of their debt showing dedication to the programme set out by the IMF and ECB.  

After a revised reading on Japan’s GDP, they are back into recession. Unfortunately for the Japanese they seem to be having a lot of misfortunes since they have been in recession for 20 years previously. In addition, deflation has been a persistent problem for the Japanese economy. This played positively on the pair.

Japan will be holding an election on 16/12/2012 and this will decide what polices are likely to be run. The policies that may be implemented are likely to be axe in government spending and increase in taxes. Spread betters will be looking for an opportunity to go short here on the pair in the long term.

Technicals

The pair is currently trading between S1 and R1. Our S1 is a strong support since it was last tested late last month. However previously it was a resistance which it broke through and now has become our support. Our R1 was last tested February and March 2012. In March it did break this resistance level but lost momentum and R2 became the new resistance. In addition, we can see from the chart that R1 is being tested as we speak. If R1 is broken then we could see a move like we saw in between January and March of this year and we could see the top between R1 and R2.

However from the RSI we can see that there is a bearish divergence (signified by the blue lines) which may signify that the pair may be reaching its top and may signify that there may be a reversal. This is very likely to happen as the RSI has been in the overbought territory 5 times already. However the moving averages seem to contradict this view and are giving us a bullish outlook as we can see the 50-day MA (white) has crossed over the 200-day MA (yellow). In addition the bearish divergence may fail if the trend is strong, and in this case it seems like it is.
Support 2 (S2)
Support 1 (S1)
Current Price
Resistance 1 (R1)
Resistance 2 (S2)
100.306
105.679
109.760
109.927
111.409






In the short term I am bearish as I think the pair will repeat a similar move it made in the beginning of the year. In addition, the RSI has consistently been in the oversold region and the bearish divergence supports this view. If you are spread betting then I would go short on the pair.

In the long-term I am bullish on the pair, I think the Euro Zone will be sort out its problems, Greece seem to be dedicated to the programme given by the ECB and IMF.

Spread betters will have good opportunities to go short and long, due to the factors stated above. If you haven’t jumped on the bandwagon then you can start trading online using platforms. This will enable you to spread bet, place trades and back test on the designated platform. Before you start trading online remember that you need to do you research before you place a trade as you may end up making losses.

I hope you found this post informative and I hope this at least provides a foundation for trading CFD's. The blue words in the text, when clicked provide more information on the word. This post is intended to educate the reader.

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets

Thursday, 15 November 2012

CFD’s - (Contract for Difference)



Wow, it been a long time since my last blog post. This is because I was busy with exams. So this week I am talking about CFD’s.  Let me first define what a CFD is. A CFD (Contract For Difference) is a deal which happens between two parties where one party is the buyer and the other is the seller where the settlement is a difference in monetary terms on the underlying instruments (which is used as a reference).  So the buyer doesn’t actually purchase the financial instrument. The buyer then takes advantage of the market as when the price differential in the underlying instrumental difference increases. So the buyer is making a profit.  A CFD is a derivative, consider a financial instrument then the derivative is the market price of that financial instrument derived from underlying assets.

When I first read up about CFD’s I said to myself this is just like a futures contract. It turned out they are like futures but there are some major differences. I have listed the biggest key differences between the two below:

  • CFD’s generally have smaller contract sizes although they can be bigger if you want them to be 
  • They don’t have a contract expiry date
You can trade on margin which is if you are low on funds you can buy a lot of shares effectively by borrowing money (leverage) but you have to deposit an amount to cover the risk that you may not be able to pay it back to the broker/exchange. When you buy these “shares” (under CFD’s you don’t actually own shares) you are charged a lending rate which is the LIBOR rate. In general, there is a financial cost everyday, whilst your trade is live overnight you can calculate this charge by using the equation given below:





When you close your trade you pay commission charge which is typically 0.1%.

Just like trading any other securities you can go long or go short, however you can trade any product you wish, from indices, commodities, Forex and energies. When going long, the LIBOR rate is added to your broker margin percent. However when going short if the LIBOR > (greater than) broker margin percent then you are credited, but if the LIBOR < (less than) broker margin percent than you are debited.

If you placed a trade to buy shares in a company in the FTSE 100 then any profits or losses these will be put on a rolling contract. A rolling contract for a CFD basically means that any profits/losses will be credited/debited to your account and the profits/losses are realised.

So what are the benefits of CFD’s

  • They are versatile and the market is 24 hours a day, so you can buy it when the FTSE closes or the DAX closes
  • You don’t need a lot of money to start trading CFD’s
  •  If you buy long on equities before the ex-dividend date then your account is credited with the dividend payout for each share after the market closes. Do bear in mind that Financial charge may outweigh this.
  • You don’t need to physically own the instrument to trade, this also means that you do not need to pay stamp duty and capital gains tax, HURRAY!!
  • Just like trading any other financial instrument


CFD’s in a sense is basically like spread betting you are in a sense placing a trade on the outcome of the market, and you also incur a financial charge for every night the trade is live for. In addition the valoume of trading CFD's has significantly grown over the years.

How do you trade CFD's

You trade CFD’s not over the phone but via electronic trading, this is done over the internet. You can do it from home using the software given to you by a broker or now you can do it online with no software but some sites require you to install Java. In addition, electronic trading ensures that the trade is executed in less than a nanosecond, so you don’t miss out in the action. Over the phone whilst talking to your broker, prices would fluctuate whilst you talked, hence electronic trading has helped smooth out this so called “insider information.” Electronic trading has developed a lot over the years from algorithmic trading to high frequency trading. 

I hope you found this post informative and I hope this at least provides a foundation for trading CFD's. The blue words in the text, when clicked provide more information on the word. This post is intended to educate the reader.

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets 

Tuesday, 16 October 2012

Trading Strategies – Forex

There are different types of trading strategies in Forex, in a way there are two divisions for devising strategies. In normal life strategies are used to gain advantages for example in chess or to make revision timetables so you can ace exams etc. Strategies in Forex are used to make investments profitable. These two divisions are key to making strategies and they are TA and FA (Technical analysis and Fundamental Analysis).  So you are probably asking what is TA and FA? They are crucial in Forex markets and any other markets.


Technical:

Quite a lot of traders use technical analysis and some traders that solely rely on technical analysis. In TA charts are used to determine the market outcome, technical analysts will use the charts to predict the price at the end of the day/month/year. They also use indicators to analyse the data more so they can see whether the market outcome they predicted will come true. In addition they will analyse the data for future entries in to the market and determine the currency of the pair. Below I will be talking about strategies for Forex, I will start off with the easiest strategies:

Moving averages

So here you can see below there is a downtrend in EUR/AUD. You can predict whether there will be a downtrend and entry should be done when the longer moving average dips below the shorter (fastest) moving average. Here I am using 50-day moving average and 200 moving day average and my time frame is 1 day. So the 1st arrow as you can see from the chart is where you would enter this is because when a shorter moving average crosses the longer moving average this signifies a down trend for the pair, as you can see later on a down trend appears, so the investment here would be going short . Beware of the market lag, as you may have noticed that the pair is already in a down trend, and then the longer moving average crosses the shorter moving average which signifies that there will be a uptrend, here you will notice a big lag in the market (2nd arrow) so the investment here would be going long.  You might be wondering why I have put a 3rd arrow,  the reason is that the shorter moving average may cut the longer moving average and may signify a downtrend.


Trend trading:

This is probably the most simplistic trading strategies used, you may have heard the song “Follow the Leader” that’s basically what you do, you trade the trend. When it’s an uptrend you should undertake investment in going long, and when it’s a downtrend you should undertake investment in going short. We can use our previous chart here EUR/AUD, I have drawn channel lines to signify a downtrend in blue.



RSI (Relative Strength Index)
This is a powerful indicator and not be underestimated in Forex markets, it is widely used in other markets as well.  So what’s the strategy here as you can see the currency has been over bought when the peak finishes on the overbought area this is an entry, undertake an investment going short. In addition you can see there is a drop in price for EUR/GBP so even if you miss it out on the day you can still jump in for the action. Basically when the RSI is above 70 then the currency is being overbought in the market



Next we move on to over-sold currencies signified by the graph below:


As you can see the area shaded in pink is the oversold region and there is a peak around 17th July here you would undertake an investment to go long. Using the same strategy buy at peak, here the oversold level is 30.
The disadvantages of RSI are that you need an exit plan, as it depends on when you want to exit.
I hope you enjoyed just some of the trading strategies. I hope I have given you an insight you on how to trade Forex using the strategies indicated above however these are basic strategies. 


However I am not finished, we still have FA, which is what causes a lot of volatility in the market, FA is the analysis of the impact of economic events on the market present and future. When a central bank decides to raise in real interest rates. Higher real interest rates mean a increase in price for the currency as more people will want to investment as they will get a higher rate of return (e.g. savings) and vice versa. News heavily affects the Forex rates. You can quite clearly see from this article:



If you think the results will be good then you can undertake an investment, if you think they are going to be rubbish short sell.

Don’t stick with just one side of the strategy division merge both of them. A wise friend of mine said: “Don’t trade purely on technical’s, trade on numbers as well.” By numbers he meant fundamentals, you will understand the power you have when you use both, as technical analysis is mainly based on human psychology.



Here are some great links for strategies: http://forex-strategies-revealed.com/basic

Please note this is my opinion and he/she (the reader of this post) should not place a trade with the information provided in this post as this may result in a loss for the individual. I will not be held responsible for the loss you make. The data presented may be inaccurate/incomplete and will be inaccurate due to the nature of financial markets