Since 21 Feb 2020, there’s not been a day that the VIX, or volatility index, has seen values below 20 — an indication that the market situation has been rather volatile. The VIX is a real-time market index that’s derived from the price inputs of the S&P 500 index options.
During a volatile period we have also seen currency pairs deviating from their historical correlations, with the additional added risks, and additional emotional stress.
However, one may see such periods of higher volatility as one filled with opportunities; albeit higher risks, which can still be managed, with the right measures in place. And with FX being one of the largest and most liquid asset market globally, it is not a surprise why traders are using FX to add into their portfolio to diversify and hedge such market conditions.
If you’re looking to trade Forex right now, this article will give you the breakdown of the difference between FX trading and leverage trading on derivatives such as Contract for Difference (CFDs).
With a leveraged product like CFD, successful trades will multiply your profits. But that also means if your trades go south, it would magnify your losses.
These are reasons why trading FX CFDs on IG could be a good addition to your portfolio.
1) Able to long or short the market
As CFDs are financial derivatives based on the movement of FX pairs (but not the actual currencies themselves), traders are able to take both long and short positions on an FX CFD trade.
This can be helpful in a volatile market situation. For example, traders can hedge the market by taking short positions (i.e. they make a successful trade and earn profits if the value of the currency pair drops) if the market is following a downward trend due to global uncertainty. If a market recovery is on the horizon, the trader can take a long position and profit from the impending market rally.
However, do note that periods of volatility tend to have more dramatic market movements. While advanced traders with a good market sense can turn this short-term trading strategy to their advantage, those new to CFDs should tread carefully and implement IG’s arsenal of risk management tools where possible to mitigate losses in case the market doesn’t move in their favour.
2) Ability to trade larger positions than the cash in your account
Oftentimes, I find myself experiencing FOMO (fear of missing out) when there are opportunities in the market, but I’m limited by the cash in my trading account.
With FX CFDs, you trade on margin, which creates leverage. This means you can trade positions much larger than the amount of cash in your trading account. When used correctly, FX CFD traders can potentially increase their profit margin on successful trades at no extra investment cost. However, with leverage, the risk is that if markets go against you, your losses would also be magnified.
Here’s an example, taking a long position on a spot GBP/USD FX CFD where the margin requirement is 5%, and leverage is 20:1.
|Trading spot GBP/USD FX CFD on IG
Day 1 — open
Day 2 — close
However, as mentioned, a trader could also have lost money from the required margin paid if the spot FX pair didn’t move in a favourable direction. Thankfully, with IG’s risk management tools, this loss can be managed by adding stops. In the case of a volatile market situation, adding a limit helps to lock-in profits, for instance, in the event of intra-day swings.
3) Use of a variety of risk management tools
The risk of slippage — the difference between the expected price of a trade and the actual price at which the trade is executed — is higher in volatile market conditions akin to the market condition seen in the first quarter of 2020. It is important to attach your trades with risk management tools to mitigate loss.
Stops and limits
When trading FX CFDs, use IG’s guaranteed stops (or G-stops) to manage risk by setting a maximum loss amount. This provides watertight protection against any market slippage so that you can have peace of mind knowing that your trade will close at the exact price that you set it to be.
G-stops are free to place, and traders are only charged a small premium if the G-stop is triggered.
G-stops are also flexible, as the G-stop levels can be changed whenever the trader deems fit. However, for beginner traders who need more rigour, IG also offers another type of CFD product, called Knock-Outs, that has an in-built G-stop with an immovable stop level instilling discipline so you do not get swayed by market movements.
Traders can also specify automatic limits, to lock-in their profits — something that’s key in this volatile market situation.
It’s free to open a trading account with IG, and spread charges are competitive, which helps to maximise your potential earnings. As mentioned above, traders can also trade FX with Knock-Outs CFDs, which comes with a built-in guaranteed stop to mitigate loss.
4) Charges of FX vs FX CFD
For a usual FX trading, you are concerned with a forex pair’s maximum or minimum value, and the value of the second currency. However with FX CFDs, you need to be mindful of the spread — the difference in the buy and sell price — when you are trading.
Secondly, FX CFDs lets you trade on a margin which allows you to make much bigger trades than you are putting up the cash for.
IG — a good platform to get started with FX CFDs
If you’re looking to navigate market volatility and take advantage of different market conditions with FX CFDs (or CFD trading in general), IG is a good platform to begin. As a leading CFD provider, IG gives you exposure to over 17,000 markets, along their award-winning trading platform to help traders along the way.
To supplement your trading strategies, IG also has a range of risk management tools, and, in addition to CFDs, offers a new product called Knock-Outs CFDs that can help you further mitigate risk with a built-in guaranteed stop.
In addition to competitive spreads, traders can also be rewarded with KrisFlyer miles when they trade with IG.
|For a limited time, IG is running a promotion from now till 31 December 2020 in celebration of their 15 anniversary. Open an account, make a funding of S$15,000 and place your first trade to receive S$288.
Find out more about this offer here: https://www.ig.com/sg/SG15
To find out more about alternatives to FX trading, check out IG’s free ebook, which also includes a chapter on Knock-Outs.
The information in this article is meant for informational purposes only and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided by the website to make any decision to buy, sell or hold any investment product. Contracts for Difference (CFDs) are speculative products. The leveraged nature of CFDs involves the risk of losing substantially more than your initial investment.
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