Profiting From A Falling Market With CFds

Increased use of CFDs has been cited by Wall Street and City professionals as one potential reason for the extreme volatility sometimes witnessed in individual shares. Therefore, basic risk strategies need to be adhered to when trading any leveraged product.

Good risk strategies can help to prevent any adverse or unexpected market movements forcing your account into a margin call, i.e. the requirement for extra funds to be put into your CFD account to keep your CFD position open.

There are a few controls well worth bearing in mind.

Firstly, it is worth thinking about limiting an individual contract size so that it does not exceed the amount deposited into the CFD account. For example, if you deposit $100,000 you should consider ensuring that the maximum contract size does not exceed a value of $100,000, requiring a deposit of say, $10,000.

Secondly, it is worth limiting the account so that no more than 70% of funds deposited are committed to open CFD positions ensuring that, as per the example above, a $30,000 cash-buffer is always present on the account to protect it from any adverse market conditions.

Finally, each CFD should have an automatic stop-loss set on it and should have a target price.

Other points of good practice to consider include applying a staggered entry to the trade. For example, if you believe that XYZ stock is a 'buy', then if the intended size of the trade is $100,000 you should consider initially just buying 25% of your intended total. By doing this you have the opportunity to see the trade begin to go in the direction anticipated before buying the balance. Conversely, if the trade were to do the opposite of what had been expected then your potential loss would be reduced.

Also, if you intend to close a CFD it is also considered good practice to stagger your exit, initially selling perhaps 50% of the position in order to allow for the possibility that the share may bounce further into profitability before subsequently selling the balance.

Occasionally a target price might be hit ahead of your expectation possibly indicating a more profitable movement is available. In this situation a trailing stop-loss is a recognised technique for realizing a larger profit. A trailing stop-loss is a relatively simple strategy that enables more profit to be taken from a rising or falling share price. By way of illustration, the stop-loss level is simply raised to, say, five cents below the actual share price and for every subsequent one cent that the price moves up, the stop-loss level is moved up by a corresponding one cent until the share eventually dips and touches the new stop-loss, which represents the profit above the original target price.

You should also consider focusing on individual sectors or alternatively a limited number of shares as a good way of familiarizing yourself with the trading range of a stock. This will subsequently help you to decide the level at which to set your stop-loss and targets. Most experts would advocate that this level of focus is essential when dealing in CFDs as a small movement in a share price can swiftly result in a dramatic loss or profit.

Finally, the importance of monitoring your trades cannot be overstated. 'To make hay when the sun doesn't shine' you should monitor your positions from when the market opens until it closes.