With recent US and European developments causing upheaval in global markets, traders can benefit from learning how to take advantage of falling markets, trade on volatility, and manage their risk.
As the majority of CFD trades are short-term, volatility gives CFD traders the opportunity to profit from market turbulence. However, risk management is essential in such an environment, and IG Markets offers a number of risk management tools that enable traders to minimise their risk and maximise their profits.
Short selling
One of the great advantages of using CFDs is the capacity to short sell. By selling first and buying back at a lower price, traders can make profits in both rising and falling markets. This gives traders opportunities across a range of markets, including shares, commodities, indices and more.
View an example of shorting to learn more about this useful strategy.
Trading volatility on options and binaries
A more advanced strategy for potentially profiting from falling markets is ‘buying volatility’ on options or binary CFDs.
With options CFDs, buying both a call option and a put option on the same underlying asset enables a trader to profit on large movements in the market without knowing the direction the market will take. This is also a limited risk strategy, with your risk capped at the options premium multiplied by the price per point. Take a look at some more information and examples of volatility trading with options.
Binary trading also gives traders the opportunity to profit on volatility. As there are only two possible outcomes of every binary trade, ‘yes’ and ‘no’, binary CFDs are a limited-risk product, though your profit is also known at the outset of the trade. Find out more about volatility trading with binary CFDs.
Take some time to view our online webinar, Trading in Volatile Times, which provides advanced insight into volatility trading.
Risk management
Although volatile markets give traders the opportunity to make larger profits more quickly, they also create a higher-risk trading environment. Fortunately, IG Markets offers a range of risk management tools to help you limit your trading risk.
Guaranteed Stop orders offer the most protection. Available at a small premium, a guaranteed stop will automatically close your trade at the level you set when opening the trade, even protecting you from gaps in the market.
Non-Guaranteed Stops are also available, usually at no extra cost. These can be applied to open positions, as well as being changed when positions are opened. A popular stop is a Trailing Stop, which allows you to limit risk without limiting your potential profits, as the Stop follows the market when the market moves in your favour.
Meanwhile, a Limit Order is another useful profit-taking tool, where you set an automatic closing level on your trade when your profit target has been reached. This secures your profits, protecting you in the event that the market changes direction.
Click here for more information on IG Market’s suite of the Risk Management tools.
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Updated: 11/08/11
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