Published On: Wed, Jan 2nd, 2013

CFD trading and fundamental analysis

Short term CFD traders are not the most likely candidates to make use of fundamental analysis. One would normally find them glued to their laptops, analysing the latest share, commodity or currency prices and accompanying technical indicators.

The truth is, however, that even short term traders can often make good use of at least basic fundamental analysis.

A trader who is, for example, trading CFDs in the shares of a particular company should at the very least be aware when that company is to make announcements regarding dividends. He or she should also be aware of any other pending news releases regarding new products or important changes in management.

The reason for this is that any such announcement could have an important and dramatic effect on the share price of the company. News about an exciting new product could send the price of a company’s shares through the roof and conversely, news that the company is about to lose a key researcher could cause the share price to plummet.

Traders who are involved in CFD trading in a particular industry could do well from studying the key economic indicators for that industry. A simple example is someone trading CFDs in gold. Not only will the gold price be influenced by specific events which could cause a significant change in the demand or supply of the metal, but it will also be influenced by macro-economic indicators such as GBP, inflation, exchange rates et cetera.

Those who trade commodity CFDs will no doubt know how important it is to keep abreast of not only events influencing the price of any specific commodity, but also events that would have an effect on all commodities of a particular class.

A drought could, for example, seriously affect the supply and hence the price of grain CFDs. In fact, anything that affects the supply or demand for grain will have an affect on its price and the astute CFD trader should be aware of it.

Commodity CFD traders should therefore be aware of things like seasonal variations in demand and supply. They should know, for example, when the corn harvesting season starts, they should also be aware of droughts affecting the industry and they should know at what time of the year there is traditionally a sharp surge (or lull) in demand.

A word of caution

The above should not serve to entice traders to ‘trade on the news’. No doubt one should be aware of important events in your chosen field of trading, but one should also be aware of a very important reality: by the time the retail trader finds out about an event the news might already be reflected in the price of the underlying asset.

If Apple should for example announce record earnings tomorrow, do not simply rush out and buy CFDs on Apple shares. First study the behaviour of the price chart over the previous week or two. If it has already enjoyed a significant bull run, chances are that all the big trading companies expected the news and that the actual announcement would therefore not be followed by a further upsurge in the share price.





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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.