Understanding Technical Analysis and CFDs
In a trade simulation game such as this one, a demo account is created in https://www.plus500.com.my then transactions are made for 4 different contracts (Ni, Pan & Poteshman, 2008). The contracts are included from four different asset class categories; the contract includes open position and then subsequently close positions to realize profits or loss. Trading in virtual account with virtual money has enabled understanding related to technical analysis and trading strategy and fundamental analysis has been ignored in totality, this can be used for future trading. Technical analysis using candlestick patterns has been undertaken. The transactions were conducted to provide a hedge position against market condition for index, forex, equity futures and commodity. Each transaction has been analysed with the concept from Contract for Differences (CFD) along with the risks involved (Xing, Zhang & Zhao, 2010). Risks in futures considerations are generally higher compared to equity shares as downsides can be considerable.
Trading in equity, forex, commodity or future and options market requires some knowledge of technical analysis. In all types of trading, the fundamental underlying factor has to be known and understood, which is of demand and supply factors (Goyal & Saretto, 2009). Technical analysis encompasses understanding of price and price related behaviours. A contract for difference (CFD) is a contract between an investor and an investment bank. CFD and trading in futures seem to be similar product categories. When the contract is drawn to close, the parties to the contract exchanges difference between the opening and closing price for the specified financial instrument such as forex, commodity, equity futures and so on. CFDs allow investors to gain economic exposure to a listed company for a fraction of cost, which is need in buying of shares (Brown, Potoski & Van Slyke, 2008). In these cases investors do not need to pay stamp duty, but only takes a bet for buying in longer position or selling in short position.
In the current analysis, transactions have been done for the following trades, a depiction of which is given in the attached figure and the description follows;
Justification for each trading transactions and their outcome has been justified as below;
The above trades have been conducted by analysis of past trends prevailing in the market. Analysing the first trade of Equity F/O of Arcelor Mittal, it was seen that the future contract price of the Company had risen in the past week. Technical analysis of the future price reflects bullish candlesticks, which then gradually reversal in market trend. There is a strong support level of the future price at 24.75. The price, at which the contract Buy was undertaken, was estimated to rise when the contract will be closed towards end of the day. However, the Future price of Arcelor Mittal closed at a low, which led to the loss. The contract was entered into for 470 shares estimating that the price for the futures will be 25.30, but the price upon closing came down to 24.98. The position was estimated to yield better returns however, the downside risks was considerably low when compared against equity markets (Chang, Hsieh & Lai, 2009). In the equity markets, purchasing 470 shares would have required considerable amounts of funds, diversification would have been difficult. In futures market, easily exposure to a large cap well-known company could be opted for at a nominal rate of 25.19 only. The purchasing of the contract was expected to provide a leverage position in the market by setting a level price. However, the contract price fluctuations in the futures market led to the balancing of loss.
Equity F/O of Arcelor Mittal
The next contract for Buy of Capita Futures ended in a loss of RM-2077.37. Analytical detailing from plus500 related to the future revealed that 88% was Buyer of the Contract. Analysing trends of the future it can be seen that there has been a bullish trend on 16th and 17th and 18th of October, post which the market sentiment deteriorated. Moreover, the fixed spread was 2.07 with a leverage of 1:10, which was very attractive at a buying position. The contract included 9000 shares, it was estimated that the price of Capita Futures will close above 130.00. The stock was gaining and the futures were stable in the past few weeks depicted from the technical analytical graphs (Johnson & So, 2012). The close position ended with 128.16 due to which the losses incurred.
Analysis of the second trade of Sell of Germany 30 reveals a profit. The trade has been conducted using 137 contracts where it was estimated that the price of the index at the end of the day would fall below 11720.00. Technical analysis reveals a support level at 11500 with candlestick reflecting patterns at such levels. The bet was selling of contract for Germany 30 below the depicted price levels, upon closing of the contract time a profit was realized as the price of the index fell far below estimated. The decision to purchase Germany 30 futures was undertaken as it was seen to be a highly volatile stock. Moreover, analysis of the equity market for Germany on 17/10/2018 revealed negative sentiments, where most of the large cap stocks were losing. This led to undertaking a decision to sell contracts of Germany 30 index futures. Index future for Sell position is taken to be able to hedge position against the possible losses. The hedge position was assumed taking into consideration the declining price of the Index.
Another contract in which index future of UK 100 Sell was selected is analysed. The contract ended in a loss of RM-27775.48. There were 35100 contracts selected for this trade and the contract lasted for a day. Technical analysis reveals strong support at7000 levels for the index, with candlestick patterns revealing strong trends reflecting underlying fundamental reasons. The contract required overnight funding. The index future contract was expected to perform better but it closed at a low. Upon closing of the sell contract at price lower than at which it was expected led to loss in the contract.
Buy of Capita Futures
In the next trade of Buy Call 2880 Oct USA 500 index a loss of RM-7254.50 has been realized. The index call option had 1230 options where it was estimated that Call rates will rise at the end of the day. The candlestick patterns show long candles reflecting a bullish trend. Later the price dropped. This current contract was entered into with the understanding that the call will rise to 6.50. The index of USA 500 performed overall well that day but there were certain technical issues of certain large cap stocks that drove down call rates for the index. The Call option was selected to provide a hedge position.
In the Forex trade position of USD/ZAR, there was significant amounts of profits earned RM8,155.14. The contract amount for the futures was $1500,000. Analysis reflects strong bullish trends from long candlesticks. This can be connected to fundamental analysis as well. In the past few weeks due to trade position of USA, it was significantly seen to be gaining across currency of South Africa. Due to major trade deficits of South Africa, the currency was expected to weaken against the USD. Therefore, the forex future was opted as there was tremendous opportunity for the trade to perform well.
Another trade undertaken was in commodity futures for Buy position. The contract was entered into for 66400 Barrels and there was loss made RM-99285.26. This futures contract was taken in Buy position expecting that oil future will rise. The contract period was one day, opened one 16/10/2018 and closed on 17/10/2016. With oil prices souring world over, everyone will be bullish on this contract. However, this contract did not have a favorable outcome. Technical trends reveal support at 69. 52 levels. There has been a bearish trend in the market.
Commodity F/O: Open transaction on 16/10/2018 and closed on 17/10/2018 Oil where profit/ loss is RM0.00
In the last trade, for commodity Oil Sell, there was no profit or loss made. The Sell contract was entered into for 66400 Barrels. The contract lasted for a day on the 16/10/2018. As the opening and closing rate for the contract remains the same, there is not much gain realized (Busch, Christensen & Nielsen, 2011).
Conclusion
The above analysis of trade positions reveal that not much profitability has been attained from conducting of the trades. However, there has been tremendous development of skills related to trading. While trading in the future and options market it is rather very difficult to ascertain profitability and appropriate technical knowledge has to be present for the same. Technical analysis was included here and fundamental analysis was excluded as fundamental analysis requires knowledge related to the industry and prevailing external factors that might affect share price or the commodity price. Often technical analysis cannot be fully being depended upon due to presence of complex signals or accuracy, in such cases fundamental analysis plays a major role. All the trades have been conducted taking into consideration the assumption of presence of technical knowledge and skills in futures market trading. Developing of such skills will allow greater skill development in future and trading for other investor clients. In such cases it is best to undertake technical along with fundamental analysis.
References
Brown, T.L., Potoski, M. and Van Slyke, D.M., 2008. Changing modes of service delivery: How past choices structure future choices. Environment and Planning C: Government and Policy, 26(1), pp.127-143. Accessed on 12th October 2018, from https://journals.sagepub.com/doi/abs/10.1068/c0633
Busch, T., Christensen, B.J. and Nielsen, M.Ø., 2011. The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange, stock, and bond markets. Journal of Econometrics, 160(1), pp.48-57. Accessed on 11th October 2018, from https://www.sciencedirect.com/science/article/pii/S0304407610000564
Chang, C.C., Hsieh, P.F. and Lai, H.N., 2009. Do informed option investors predict stock returns? Evidence from the Taiwan stock exchange. Journal of Banking & Finance, 33(4), pp.757-764. Accessed on 11th October 2018, from https://www.sciencedirect.com/science/article/pii/S0378426608002707
Goyal, A. and Saretto, A., 2009. Cross-section of option returns and volatility. Journal of Financial Economics, 94(2), pp.310-326. Accessed on 12th October 2018, from https://www.sciencedirect.com/science/article/pii/S0304405X09001251
Johnson, T.L. and So, E.C., 2012. The option to stock volume ratio and future returns. Journal of Financial Economics, 106(2), pp.262-286. Accessed on 10th October 2018, from https://www.sciencedirect.com/science/article/pii/S0304405X12000797
Ni, S.X., Pan, J. and Poteshman, A.M., 2008. Volatility information trading in the option market. The Journal of Finance, 63(3), pp.1059-1091. Accessed on 14th October 2018, from https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2008.01352.x
Xing, Y., Zhang, X. and Zhao, R., 2010. What does the individual option volatility smirk tell us about future equity returns?. Journal of Financial and Quantitative Analysis, 45(3), pp.641-662. Accessed on 10th October 2018, from https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/what-does-the-individual-option-volatility-smirk-tell-us-about-future-equity-returns/ECFD16BA9ACBDC8D577D1BD866FBEA72
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