September 1, 2014

Broaden your horizons

This CFD tip has been provided in association with Michael van Dulken, Market Analyst from Accendo Markets.

Broaden your horizons

Knowing what a company does can be helpful, but shunning unfamiliar names can also mean missing profitable trading opportunities. CFD/Spread Betting is designed for the short-term, with the leverage element doing the hard work. If the best identifiable trading opportunity is in what most might consider a less exciting low-beta defensive household goods stock such as Reckitt Benckiser (RB), rather than a high-beta, fast-moving, dollar-sensitive miner such as Kazakhmys (KAZ), it should make no difference. Both stocks have offered interesting trading opportunities over the last 12 months.

Trading only a handful of stocks can be very profitable, allowing one to learn how stocks are traded, how they react to news, etc. Unfortunately, for the majority, the results are less than brilliant. Traders usually end up emotionally attached to the same names. Whether making gains or losses, they believe the next trade needs to be in the same stock (”because they know it better”), to either make more profits or, more likely, to generate the profits required to offset the prior losses from unsuccessful trades in that same name.

Being narrow minded – a real risk

Real risks exist in becoming too narrow-minded. Some trade too large in the same name, trying to clear earlier losses is one go. Others over-trade, dealing when no clear trading opportunity can be identified, feeling the need to do something out of either boredom or a feeling of obligation to recoup earlier losses. The best thing could be to get out and do nothing. Is it not easier to think when you are risking nothing?

If you feel you have to keep trading when things are tough why not look further afield. When no clear technical signals (price patterns, indicator moves, moving-average crosses, etc) can be found amongst the stocks you like trading, it’s surely most prudent to either do nothing or look to other stocks in your ‘preferred‘ sector. Failing that, delve deeper. The UK’s flagship index comprises 100 large cap stocks, and beyond that you have the FTSE 250 still offering plenty of liquidity. If still you find nothing, don’t scrape the equities barrel wasting a trade on a poor idea. Great opportunities may be available in one of the precious metals or major currency pairs.

A profit is a profit

Short-term CFD/Spread Betting trading lends itself well to charting/technical analysis. With an asset’s price supposedly factoring in all existing and anticipated news, it can therefore be assumed that graphs display the psychology of traders. If something (equity, index, commodity, currency pair) has traded for 12 months in a tight range, bouncing off upper and lower trendlines multiple times, the chances are this could keep happening, bar any extreme news. Should the risk/reward ratio on the trade be attractive, who cares whether it’s a bank, utilities company, metal or the USD/JPY currency pair.

A profit is a profit, and a profitable opportunity is a profitable opportunity. Being too picky might just hold you back.