As contract for difference (CFD) trading continues to grow in popularity with many of the more established financial instruments that the markets use, a number of investors are wondering if 2019 should be the year in which they make a change.
This form of derivative trading is quite different from others. The fast-moving environment that it encourages means that investors who are looking for a hands-on experience are gaining interest in CFDs in greater numbers every day. With forex, indices, commodities and shares all offering opportunities for CFD trades across global markets 24/7, it is no surprise that the practice is heating up.
As with any other form of trading based on the markets, there are numerous methodologies, strategies and tactics favoured by CFD traders. Here are some of the most important that could play a big part in traders managing a successful CFD portfolio in 2019:
The UK, Australia and other countries are seeing a big upswing in CFD trade volumes, as the recent volatility of markets, both in terms of major stocks exchanges and international forex currency rates, suits the short-term outlook of many CFD traders.
Because owning the underlying asset does not play a part in any CFD strategy, using a leveraged approach lies at the heart of trading in this ever-growing sector. This means that risk management needs to be part of general thinking and awareness, which can come down to taking the reality of volatility onboard and applying a detached and emotionless overview of investments and positions.
Hedging is a main protective strategy that is likely to be important if 2019 sees a continuation of the recent twists and turns in the markets. Most people will be familiar with the term “hedging one’s bets,” and this is essentially what CFD trading involves.
Most CFD strategies target the achievement of new gains and prioritise profits over minimising potential losses. However, as with any leveraged product, CFDs do have inherent risks for investors, so traders having protective tactics at their disposal is highly important.
If traders are “hedging,”, then they will have already established open positions and looked at ways to protect them. By taking an opposing position that deliberately opens a trade inverse to the open position in question, losses can mitigate due to the new trade making gains in response to a loss.
Of course, these movements tend to cancel each other out, so while a total position may receive protection, the removal or significant reduction in risk also greatly reduces the possible reward. Consequently, hedging in terms of CFDs is only really appropriate in times of extreme volatility, when price movements become historically unstable.
One of the reasons that hedging is far less common in CFD trading than in other areas is due to the time frame aspect. While an option or a future may be set to run over quite a lengthy period and hedging against movements at various points may make sense, the severe short-term nature of many CFD trades (sometimes called intraday trading) means that long-term positions are less common.
Taking a strategic approach based on profiting from price changes that might range from an hour-to-hour level down to a minute-by-minute one is obviously quite different from many other market investments.
Such ultra-short-term trading means that limited financing costs and a fast turnaround suits those who look for an intensely involved environment. However, as CFDs offer the chance for no set time length, the opportunity to extend them and hold on to longer-term positions is a fantastically flexible option for traders to have at their disposal.
While technical analysis focuses on short-term data, fundamental analysis looks at larger-scale price moves of the underlying assets, which can often cover periods from a month to a year or even longer.
Small reversals, or “swings,” are usually a feature of larger-scale price movements, and these can be particularly interesting to CFD traders. If, as many expect, the longest-running Bull Market in Wall Street history is ending, then 2019 may well see a Bear Market that will truly shake the world’s economic marketplaces.
The run-up to such a turnaround could already be underway, and as a full-blown crash does not usually come out of the blue, the volatility of both stocks and forex markets is highly likely to increase as the Bull runs out of steam.
Experienced traders know that this does not mean that a gentle slide down will take place, and a chaotic picture of falls and hikes will occur while the ground shifts. This is where swing trading could really come into its own for CFD investors next year.
The end of an underlying positive momentum for the markets will cause havoc in 2019 if the signs are correct, but opportunities for numerous short positions will proliferate
At a basic level, CFD trading can seem far more straightforward than other forms of engagement with stocks or forex markets. However, the necessary attention to detail and the application of the right mix of strategy and tactics means that investors have many decisions to make.
Whether traders are trying to figure out if they should go long or short, take a short-term position or extend it or look for swings or hedge against losses, these choices become much more important in the fluid trading environment that CFDs offer.
Of course, simply leaving money in a bank account or under the bed is also essentially taking a strategic approach to a financial position, but neither of those are likely to offer much in the way of potential reward for making the right decisions.