Stocks are typically traded on stock exchanges. Traders would usually trade stocks through stockbrokers, who provide their clients with platforms to purchase and sell their stock holdings. Some stockbrokers would also undertake to trade on behalf of their clients.
However, CFD stocks are different in some ways.
- a. CFDs only allow traders to trade the price changes of the underlying stock assets. Stock CFD trading does not confer ownership of the underlying asset.
- b. Stocks can be traded on a cash-only basis, or cash-and-margin basis. All CFD stock trades are leveraged.
These factors have implications on how traders can trade CFDs on stocks. The following is a description of the issues involved as well as how typical CFD stock trades are undertaken.
Fundamentals of Stock Price Movements
Stocks are impacted by the following news:
- a. Earnings
- b. Mergers and Acquisitions
- c. Expansionist moves (such as increasing existing equity stake in a company)
- d. Scandals
Technical Basis for Stock CFD Trading
CFD stocks are amenable to being traded using technical analysis. The same principles used in the technical trading of other assets are also used in trading CFDs on stock prices. Technical analysts study price action, which they believe tends to occur in a repetitive fashion over time. Since repetition of historical setups is a basic tenet of technical analysis, the trader can simply wait for a pattern that has occurred in the past to recur, which can then be traded with the expectation of the same outcome repeating itself.
In technical analysis, it is all about the charts. Technical analysis is the basis for trade entries and exits. Important considerations are:
- – The prevailing market trend
- – Support and resistance levels
- – Price patterns
- – Candlestick patterns
- – Information from indicators
To begin with, you need access to an interactive chart. You can use any of the free ones that come with online platforms, or you can purchase any of the commercially available ones.
You also need to consider the parent exchange where the stock CFD you want to trade is located. This is important, as various exchanges open and close at different times. The stock markets are not 24-hour markets; you can only expect prices to move when the exchange that houses the underlying stock who’s CFD you are trading is open for business.
Take a look at the news. Earnings reports are usually released every quarter. The earnings season calendar will indicate when the earnings reports for the various stocks on different exchanges will be released. Other news items such as the release of a new product, a new software, expansions, mergers & acquisitions as well as any sort of scandals are news that will push stock prices in either direction. Get a feel of what the market response to the news is if any.
Once a market direction looks like it will be established, you need to make a technical entry. Is there a price pattern forming? What do the candlesticks say? Is price action approaching a support/resistance area? These are factors that will determine whether to make a trade entry and how to make such an entry.
Case Study: Alibaba (Symbol: BABA)
Alibaba Group announced on September 26, 2017 that it was increasing its stake in Cainiao Network from 47% to 51% by investing an additional RMB5.3 billion (US$807 million), and also committing to make further investments of RMB100 billion (US$15.2 billion) over the next five years in a move to expand its logistics network and shorten delivery times for its products to 24 hours and 72 hours respectively for local and international orders. This was news that was seen as positive for the stock. So the market bias for this news release for Alibaba was bullish.
Trigger: long trade.
A technical entry that supports this upside bias is then sought on the charts. It comes in the form of a falling wedge. The trade is, therefore, to set up a long-trade on the break of the upper border of the wedge (break of the resistance) for a ride upwards to the nearest resistance.
The Stop Loss (SL) is set below the wedge support (lower trend line which borders the wedge) and the TP can be set at the site of a historical resistance area. Reward-risk ratio (TP:SL) should ideally be a minimum of 3:1 or higher for best results.