Contract for Difference (CFD) trading is complicated enough, so what more if you trade CFD in high volatility? While trading on high volatility isn’t always a bad idea, it can still be risky enough that traders may lose all their hard work.
When trading, volatility can either be low or high based on the changes in frequency and magnitude of the market price. But what worries many traders is the high volatility, especially the beginners.
In this article, we’ll give you some tips on how you can handle CFD trading during high market volatility.
1. Understand Market Volatility
Volatility is the increase and decrease of the value of an underlying asset for a specific time. If there’s high market volatility, the price of an asset can significantly increase or decrease in just a short time. Usually, high volatility is caused by many factors, such as geopolitical and economic events.
Technical indicators, such as the Average True Range (ATR), are used to measure volatility. Therefore, in CFD trading, you should understand how volatility works since it can significantly impact your trades.
2. Stay Updated on Market News
Another thing you should keep in mind is to stay updated on the market news. As you know, many economic events can drive the market price, so it’s best to be aware. Once you’re aware of the current news, you can analyse whether there’ll be high volatility, and you can make adjustments to your trades.
Make it a habit to check the news first before opening or closing a trade, so that you can make an informed decision.
3. Use Stop-Loss Orders
During high market volatility, one of the things that can help when trading CFDs is the use of stop-loss orders. Although the use of stop-loss orders is generally a risk management tool, you shouldn’t forget it, especially when placing CFD orders.
The stop-loss order is a tool to limit your losses. In doing so, you need to add a predetermined value that can be the basis of your trading account as to when it should close the trade.
4. Manage Your Leverage
Leverage can either magnify your gains or your losses. So, during high volatility, it’s recommended to lower your leverage to reduce your exposure to risks. As you know, CFD is one of the things that is mostly involved in leverage.
CFD is a contract between the buyer and the seller wherein the former must pay the latter the amount of an underlying asset based on the difference in its current price and its amount when the contract ends.
5. Control Position Sizing
Another thing you should try when training CFDs during high market volatility is to adjust the position size. If the market goes completely against you, the losses can still be manageable. On the other hand, if you don’t limit your position size, you might regret it later, and there’s also a chance that you lose your trading account.
6. Keep Emotions in Check
Emotions can cloud your judgements, especially during high market volatility. So before making any decisions during this day, you should check if you’re not emotional enough to make poor decisions.
Once you’re sure that your emotions are stable enough, you should stick to your trading plan. On the other hand, if you’re unsure whether you should trust your emotions at the moment, try to take a break, even for a few minutes, and continue by following your plan.
7. Trade Less Often
During high volatility, it’s safer to trade less frequently to also lessen the risks of losing. Although it’s possible to encounter trading opportunities, the risks can be higher during this time.
Meanwhile, if you trade less, you can still encounter trading opportunities in the future that don’t have as many risks as what you can experience during times of high volatility.
8. Try Hedging Strategies
Do you want to minimise your risks of uncertainty? Hedging can also be a good idea during high volatility. It’s a risk management strategy when you open a trade opposite to your main trade to minimise your losses. It’s like betting on both sides so that you won’t lose everything you’ve worked hard for.
9. Consider Spreads and Liquidity
Another thing you can encounter during high market volatility is the threat of wider spread and change in liquidity. If the spreads are wider, there’s a higher chance that it’s more expensive. As for the high liquidity in CFD trading, there’s a smooth transition with the trading execution, while when there’s low liquidity, you can encounter issues along the way.
10. Stick to Your Risk Management Plan
No matter what happens, you should stick with your risk management plan. Ask yourself how much you are willing to risk for every trade you execute during high market volatility. Once you come up with a logical amount, you should stick to it, and avoid exceeding. When you do, it can greatly affect your future trade and capital.
Final Thoughts
If you want to continue trading CFDs during high volatility, you should be aware of the risks you’re about to take. In addition, by incorporating these tips into your trades, you can navigate your trade better than you used to.
We hope these tips can help you get started with CFD trading during high market volatility. If you want to share more tips, don’t hesitate to leave a comment below!
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specialises in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.