5 things to know about trading CFDs during market volatility
Wider world events are contributing to increased volatility in markets commonly traded via CFDs. We take a look at some of the next steps for traders.
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When you're a CFD trader, market volatility is to be expected.
But certain wider world events can encourage more volatility than usual. Prices can shift to extremes, liquidity can be reduced and trading can become more problematic.
So what steps can traders take to weather the storm? Let's take a closer look.
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1. Consider your strategies carefully
Specific plans and goals are important for maintaining an even keel as a trader.
But the strategies used to execute these can (and should) evolve over time.
With this in mind, there are three key strategies that many investors use in times of uncertainty.
- Breakout trading: Breakout trading looks to deliberately identify assets that have "broken out"; that is, grown beyond a defined support or resistance level, while maintaining momentum. These traits can indicate an upcoming shift in consumer sentiment and significant price fluctuations.
- Mean reversion: In contrast, mean reversion operates on the principle that over time, assets will traditionally bounce back to their "average" price. Both extreme highs and extreme lows are tricky to maintain for a long period of time, so playing a comparative long game can yield results.
- Momentum trading: As the name suggests, momentum trading looks to take advantage of both upward and downward trends in pricing as they occur. This approach is typically used over shorter timeframes by some traders.
Using analytical tools from platforms like Pepperstone can help you identify trading opportunities across each of these strategies. We'll talk a bit more about how this can work in a moment.
2. Risk management is essential
Risk management is a fundamental part of CFD trading.
Irrespective of market conditions, it's something that needs to be heavily considered by any trader. CFDs are always high risk, but that doesn't mean you need to take unnecessary risks.
This is even more important during a volatile period globally. It may mean that you need to take a closer look at your tools and also take advantage of ones that you haven't used previously.
For example, Pepperstone's platform features stop-loss tools, allowing you to define parameters on your trades.
Typically, traders set stop-loss orders at a specific price level that reflects the maximum loss they are willing to accept on a trade. If this does occur, the stop-loss will automatically exit this trade before it gets worse.
During volatile conditions, however, price swings can often be larger. This may require setting the stop-loss further from the entry price to avoid being stopped out too early. A wider stop-loss increases the amount of risk being taken on and, therefore, the potential loss. To compensate for this additional risk, the trader would reduce the position size to keep overall risk at a consistent level.
Note that stop-loss orders are not guaranteed to be filled at the exact price or level attached to the open position. During fast-moving, illiquid market conditions or when price gaps on the re-opening of a market, the actual fill may occur at a worse price - a concept in trading known as "slippage".
Tools like this help minimise risk and capital losses; although every long-term trader will have some losses, making sure they're kept to a minimum is a crucial part of long-term success.
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3. Test new approaches before risking real funds
Of course, re-strategising is all well and good. But it's also still important to test your strategies before you put any of your capital at risk.
Pepperstone offers a demo account for traders, providing unlimited virtual funds for experimentation.
It's also pegged to real-world values, so you're able to see how a strategy you're considering could perform in the market.
Taking this approach can help you make more informed trading decisions prior to using your real capital.
Remember that performance in a demo environment is not indicative of real trading results.
4. Be cautious with using leverage
One of the big advantages of trading CFDs is that you're able to use leverage. With Pepperstone, for example, you're able to use leverage of up to 30:1 on major forex pairs.
This can enhance your gains -- but it can also increase your losses!
During times of volatility, it can be helpful to adjust how much leverage you use.
Lowering the amount of leverage you use means that you can still invest, but are also reducing the potential capital loss, too.
5. Use your trading tools
Much like a pilot needs to learn to trust their instruments more than their eyes, a trader needs to learn to trust their analysis tools more than their gut.
With this in mind, a good trading platform will offer a range of tools to help you make more informed trading decisions.
Pepperstone offers a range of trading tools to enable you to look at historical pricing, market analysis and thought leadership within the field.
These can help you identify current trends, and in tandem with the demo account, work towards better trading outcomes.
You can also learn more about Pepperstone's trading platforms right here on Finder.
Learn more about trading with Pepperstone today
Pepperstone does not require a minimum opening deposit. Commissions vary according to the asset being traded but start at $5 or 0.07% on AU Share CFDs or $3.50 per 1 lot on FX.
