How to Exploit Volatility with CFDs in 2020

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How to Exploit Volatility with CFDs in 2020?

So far 2020 had been a historic year, with the fastest drop in the stock markets ever recorded. As CFD traders we should adjust the way we interact with the market and although the possibilities are endless, we would like to talk about three of the best ways to profit from the huge volatility with CFDs.

#1 Buying safe-haven assets

When economic prospects are depressed, gold and bonds are two asset classes that tend to perform better. In the case of gold, short-term traders should be cautious, though, since it could drop due to massive market liquidations. However, trading gold CFDs instead of stocks will be more efficient, given that liquidity in gold-related contracts is greater. Bonds are not so popular among retail traders, but if your broker offers bonds contracts with low spreads, you could find opportunities, as well.

#2 Using breakout strategies

Now is the time when all the analysts and macroeconomics fail to predict with high accuracy how the market will move forward. With so uncertain fundamentals, technicals are the ones we should stick to. CFD traders should carefully monitor support/resistance areas and how price reacts to them. Breakout strategies work really well in this kind of environment and traders should lever them to the max. It’s important to remain detached of what you think and instead focus on market behavior. Keep a high level of flexibility in order to adapt quickly when technical conditions change.

#3 Adjusting risk parameters

In less than 4 weeks, the US stock market tanked 30%, showing how great volatility we traders have to deal with. Considering that prices move so impulsively, this is not the time to double up on your risk. Instead, reduce your exposure by adjusting several risk parameters. Your trade size should be smaller, as well as your risk per trade. At the same time, you should place larger stop losses and target higher take profits, in order to have an optimal ratio between the potential risk and reward.

At the same time, this is one of the periods when monitoring the risk is the most important aspect. Don’t think you’ll be making a fortune in a few weeks. Trading will still be a long-term process and markets will continue to exist, no matter what the outcome of the coronavirus outbreak will be. The world had gone through a lot bigger hardships and this one will go away, same as the others.

Building an Optimal CFD Portfolio During a Crisis

A lot of financial and economic uncertainty lies ahead and as CFD traders, we must find solutions on how to optimize our trading regime. It’s almost certain that we’ll have an economic downturn in 2020 and with that in mind, how can we build the most optimized CFD portfolio?

#1 Trade liquid instruments

Liquidity is one of the main issues when an economic downturn occurs. If you want to exploit volatility, then it will be better to trade some of the most liquid instruments. Currencies, indices, and ETFs are some of the most popular examples. Although the temptation will be high to jump into stocks or commodities, be aware that due to lower liquidity, daily price variations will be high and you’ll have to trade with very high stop losses.

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As we’ve seen in the past few weeks, even the most liquid instrument can have wild swings, so keep a conservative approach. You won’t get rich quickly by exposing yourself to difficult trading situations.

#2 Don’t forget about gold

Issuing new debt and printing money are some of the common solutions of governments when the economy performs poorly. Even though in the short run, it could provide some relief, there are several long-term implications that should not be ignored. High inflation and a diminishing purchasing power of money will affect the lives of many people, especially those with fixed incomes.

Trading gold contracts is a common custom among professional CFD traders. That happens because gold becomes a safe place against high inflation. Liquidity in gold increases and a lot of trading opportunities arise. We must mention, though, that gold could perform poorly until the economy bottoms out. The same thing happened during 2007-2008, when it underperformed, only to start a major bull run in 2009, once economic activity started to improve.

#3 Stick to a small list of contracts

When markets are dominated by fear, financial assets will go through choppy periods. Since there could be so many variables that will impact market valuations, it will be better to trade a small list of instruments, at least until volatility settled. Decide on a maximum of 4-5 instruments and stick to them, no matter what happens in the market. It will be much easier to monitor the performance and find opportunities quickly. One thing’s certain – you will miss a lot of trading opportunities. But the question is: How will you be able to profit from those that you find?

Empower your trading with CFD options

Trade the volatility of the top 11 equity indexes with CFDs on future options. Having the risk limited to the premium, by buying call and/or put options you can benefit from both rising (with a call option) and falling markets (with a put option).

When the option is ITM, at the expiry you will receive a credit equal to the difference between the strike and the settlement price. However, you can decide to close the position any time before expiry.

ITM (In The Money)

A call option is said to be ITM when the settlement price is higher than the purchased strike; on the other hand a put option is said to be ITM when the settlement price is below the strike price.

Strike price

The strike price is the price at which the underlying asset is bought or sold when the option is exercised.

Trade in rising and falling markets with CFD Options

CFD Options enable you to trade in both rising and falling markets, turning to your advantage market uncertainty and volatility. CFD options, available in the Cornèrtrader Platforms, will enable you to increase your exposure by taking limited risk, as your loss can only be limited to your initial investment.

Discover the benefits:

Each Lot equals 1 index and can be traded in multiple of 1 x index.

Automatic cash settlement.

Take advantage of bearish/bullish markets with limited risk or to hedge

Can be traded even in high volatile markets in comparison to a stop loss order.

Available on all the devices: desktop, mobile and tablet.

No exchange fees.

No bid/ask markups.

Long positions only

When trading CFD options only long positions are supported, i.e. no shorting/sell-to-open is allowed. However, you can sell back anytime before expiry.

No margin requirements

As CFD options are tradable as long positions, no margin is required, therefore there is no risk of stop-out. The premium will have to be payed up front and will be deducted directly from the account’s cash balance.

Strikes, maturities and expiry

Available strikes at the money will be +/- 25% with 90 days of maturity. All expiries are cash settled, meaning that at the expiring the profit will be booked cash in the account. All CFD options are European-style, meaning that they can be exercised only at the expiry.

However, open positions kept overnight are subject to a holding fee calculated on a daily basis.

Limit orders

Only limit orders are supported, you can edit or cancel them via the order module.

Over-the-counter (OTC)

CFD options are traded over-the-counter (OTC), meaning that the bank/dealer is the counterpart.

Learn more with our practical trading scenarios

Bullish Market Scenario:

Are you expecting the market to rise but you are afraid that in the short term it could be subject to a drop? Buy a Call option to hedge the risk, by fixing it at the cost of the premium to enter into this position.

Bearish Market Scenario: �

You believe the market will go down but you think you can’t benefit from this trend without taking a high risk? By using CFD options now it is possible to limit this risk! Buy a Put option and start to benefit from falling a market having your maximum risk limited to the premium you pay.

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