CFD traders know only too well that market volatility presents many opportunities from which to profit.
With the more recent market turmoils, short selling has come back into the spotlight, however the concept of selling an asset that you don’t actually own may at first appear a little strange. In times of volatile or downwards market activity, how can short selling enable CFD traders to profit?
Finding opportunities
Many economic factors can cause markets to fall. Historically they do not react well to uncertainty, even if underlying fundamentals appear solid. If we look at last week for example, the ASX 200 closed down 6.6% at 4305 and continued its huge underperformance against global markets. If we look in particular at the resources market, the recent Government proposal to introduce a Resources Super Profits Tax (RSPT) has added an element of the unknown to the future profitability of resources companies. With the RSPT expected to lift the effective tax rate paid by our major miners from in the region of 43% to around 57%, there is a very real prospect that expansion projects will be either delayed or shelved entirely.
The sector also has been impacted by other global macroeconomic factors, such as the ongoing European debt concerns; prospects China may still attempt to slowdown their growth; and the clear mass exodus of both domestic and offshore investors from Australian equities. The current headwinds faced by the resources sector have seen a marked correction in the share prices of resource stocks, particularly BHP. In anticipation of the tax being introduced BHP has fallen from $41.21 on 26 April to a low on 21 May of $36.77, equating to a pull back of 10.8%.
The widespread pessimism need not be bad news for all. The decline opened up opportunities for CFD trading on the stock. Had traders taken the plunge and gone short on BHP back on 26 April they would have profited handsomely had they held their position open over the ensuing 3 weeks.
Obviously, when share prices are rising, a short position will be losing money, or reversing earlier gains, so it is important that traders have a sensible risk management strategy that will enable them to either lock in gains or minimise losses.
How to short sell using CFDs
By identifying the factors that will cause a market to fall, CFD traders can be perfectly positioned to capitalise when the decline occurs.
Using short selling as a strategy, you can position yourself to profit if you feel a market is going to fall. Unlike conventional trading, with CFDs it’s just as easy to go short as it is to go long. You simply ‘sell’ to open your CFD position and ‘buy’ to close. If the market has fallen as you predicted, you will realise a profit.
To find out more how to apply this simple technique to make the most out of falling markets, watch our free online short-selling seminar.
Take a CFD position
If you have a view on the current or future prospects of a particular market, whether you think it will rise or fall, CFD trading offers a convenient way to profit market volatility.
At IG Markets, you can go short on a wide range of Australian and global shares. In addition, you can also short indices, forex and commodities, all from the one account.
Start realising the opportunities from falling markets by applying for a CFD trading account.
Updated: 26/05/10
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