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Financial markets are so large and so ubiquitous that it is easy to forget how remarkable they are. Attempts to visualise or put a number on their scale – whether it be the $6+ trillion daily traded FX volume, the New York Stock Exchange’s $25 trillion total market capitalisation, or the almost $130 trillion notional outstanding bonds worldwide – do not do justice to the sheer scale of the various flows of money and assets that make up global financial markets.
CFD traders do not buy and sell financial assets, instead entering into contracts to exchange a cash sum equivalent to the change in market price for a given asset, but we are still keenly interested in how markets function, because without this we cannot understand their price action. To make sense of global markets, we need to think rationally about what they are for, who uses them, and how the behaviour of different market participants influences prices.
The largest financial market depends on how you measure them: in terms of daily trading volume, forex is by far the largest, but debt markets including money markets lead the way in terms of outstanding notional value. ADSS CFD traders deal with all markets, opening long and short positions on crypto CFDs, equity CFDs, alongside forex, indices, ETFs and commodities. Each market has its own peculiarities, and strategies may need to be adjusted or refined to apply to new markets. Assets can normally be categorised as ‘risk on’ or ‘risk off’, with risk on assets performing well during periods of economic growth, but suffering from volatility and sensitive to weaker performance, while risk off assets perform better during downturns, and are sometimes referred to as safe havens.
Equities are traded on exchanges, and they are the most important asset class for the typical investor. Compared to all other asset classes equities as a class have the strongest tendency towards long-term growth, with global stock markets essentially always growing over multi-decade timeframes. In the short-term, nothing could be further from the case, with stocks notorious for sudden plunges, often driving overall markets into panic and sometimes tipping entire economies into recession. Stock CFDs can be traded against the stocks of individual companies or the market as a whole using indexes, which track the overall performance of a stock market or geographical region. Equity prices are influenced by the overall business environment, company-specific factors, and investor sentiment. As a rule, stocks are classic risk on assets, with risk-loving investors assigning more of their portfolio to stocks.
Forex is the largest market by daily turnover and is particularly well-loved by technical day traders. Divided into different categories by currency type, the most traded currencies are known as reserve currencies, with the dollar the most important followed by the Euro and Japanese Yen. Generally speaking, the currencies of large economies are less volatile, while small emerging markets currencies see larger price movements and reduced liquidity.
Currency rates are always relative, since there is a currency on each side of every trade, and they are mainly driven by geopolitical and trade factors. Whether a currency is risk on or risk off depends on the characteristics of the underlying economy, and the actions of its banking authorities: generally, the major currencies are risk off assets, while emerging markets currencies are risk on, but adverse market news can cause volatility in any market.
ETFs and indices are sometimes considered a subset of the equities market, but ADSS CFD traders deal with them as separate contracts. An exchange traded fund is a security that pools a sum from multiple investors to buy a basket of stocks, in a similar fashion to mutual funds, except that ETFs trade directly on exchanges and can be bought and sold like stocks. Index CFDs and CFDs on ETFs allow CFD traders to share in the price action of an ETF without taking ownership of the underlying asset; often indices are less volatile than individual stocks as they are less influenced by business-specific factors, such as poor management.
Commodities markets are some of the most varied, ranging from strict exchange-based systems, in some cases (as in the London Metals Exchange) preserving open outcry, in-person trading, to derivative contracts traded without any transfer of the underlying. The price action of commodities is complicated, with the controversial commodities supercycle affecting – allegedly – certain industrial and agricultural commodities on a multi-decade cycle.
To understand how a particular commodity CFD contract will trade, it is necessary to know a bit about the underlying product: how much of it is extracted, who are the biggest producers, what is its price history. This will help you produce a view on the likely longer term price trend and the potential for any sudden shocks, which will help guide your short-term, technical trading. CFDs play an important role in retail commodity trading, because many commodities are traded exclusively in high-value futures contracts, well outside the buying power of most day traders.
What’s more, there is a risk of physical delivery with some commodities forwards and futures, which is something very few traders are adequately prepared to deal with. In terms of price characteristics, as a rule commodities are risk on assets, with the important exception of gold and to a lesser extent silver.
If you want to know how a market works, you need to know who is trading it. Market participants range from retail CFD traders through to giant investment managers and national governments, and participants have both very different needs in the market and different means of doing it.
In markets where long-term investing is predominant, there will likely be positive buying pressure over the long term, as investors buy the financial asset for the purposes of capital appreciation. In markets like forex, short-term traders are more important, and so we expect to see greater liquidity, higher daily volumes, and a greater use of technical strategies by traders. Because technical strategies are self-reinforcing – that is, if everyone thinks they’ve seen a sell signal, it will come true – technical trading is best rewarded in markets where it is most popular, so knowing where day traders are most active is helpful information.
Conversely, markets such as some industrial commodities where activity is concentrated in hedging activity by producers and end users might behave in ways that seem bizarre to a pure technical analyst. These markets require an understanding of the economics and business operations behind extraction, shipping and processing of the commodity.
Financial markets are vast, and some of them (money markets, for example), are obscure. With CFDs, the price action of a greater and greater number of financial assets is within the reach of day traders, who can access these markets without minimum contract sizes and without taking possession of the underlying asset. But to trade in a market, you need some idea of what is being bought and sold, who is doing it, and how things work. Familiarity with the markets comes with time, but an important place to start is by educating yourself, improving your financial literacy, and understanding where you can best make your mark on financial markets.