How to Manage Overshooting Markets with CFDs

Traders are frustrating nowadays seeing how markets continue to edge higher, even though underlying fundamentals had not been so depressed since a few decades ago. Aggressive actions from central banks had propped stocks higher, pushing multiples to the bubble levels. It’s impossible to have markets keeping on a straight line higher, but at the same time, one should not short the market and expect it to drop. Valuations will take us by surprise many times and there are a few ways to prevent unexpected losses.

#1 Hedging with volatility CFDs

Most of the CFD brokers had already included contracts based on volatility among the instruments supported. Volatility drops when markets are rallying and rises when prices drop. Due to this inverse correlation, VIX contracts are a great tool to hedge risk when the market is not performing as expected. Traders can sell volatility when they think markets will drop. That way, losses will be reduced in case valuations keep moving ahead. We can’t know for sure when could stock markets resume selling, which is why using such a safety measure can prevent us from facing big losses.

#2 Gold trading

Stocks, currencies, and commodities had been very volatile, which triggered more interest in gold. Supported by aggressive central banks’ intervention, gold had been steadily moving higher since August 2018 and so far, the trend does not seem to be affected, even though the price retraced some of the gains during the past few days. Gold is expected to be one of the best-performing assets, as long as massive liquidations won’t happen. It represents a hedge against the diminishing purchasing power of fiat money and investors all around the world will continue to invest in it.

#3 Place trades around key S/R levels

To avoid being trapped on the wrong side of the market, CFD traders should be more conservative when choosing trading opportunities. More specifically, they should place trades only around key support or resistance levels, and when the price action context is favorable. This is the worst time to try and outsmart the market. The level of uncertainty is unprecedented and the risk associated with such a move does not worth the effort. Volatility is high enough to generate enough returns even with a lower number of trades. The coronavirus is still not gone and the economic consequences will be felt for years to come. That means we will see risk resurgence along the way.

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