CFDs and spread bets allow you to make money from short-term trading opportunities, without requiring much research or tying up the same capital as a big long-term investment
Knowing a lot about the companies you trade (products, geographical exposure, name of CEO) might be helpful when discussing them and their prospects; however when trading over short time frames (like minutes, hours, days) ignoring names less familiar to you might mean depriving yourself of many interesting trading opportunities. Trading via CFDs and spread bets allows you to identify small trading opportunities and use the leverage embedded in these instruments to magnify the moves.
If the best opportunity you can identify happens to be in what you view as a boring defensive utility rather than a volatile, fast-moving dollar-sensitive miner, this shouldn’t be an issue. An opportunity is an opportunity (you can always use a stop-loss to minimise the risk).
People very often focus on a select few stocks. For some, this can be highly profitable, with the individual developing an understanding of how the shares trade and react to varying news-flow. For many though, things don’t always work out so well as emotional attachment can prevail. Whether booking profits or losses, it can lead to a feeling of compulsion that the next trade should be in the same shares because they ‘know them better’, either to make additional profits or, as is more often the case, generate enough hits to make up for prior misses. (BullBearings Ed's note: I do this! Must stop.)
Another danger with the above is that it doesn’t end there. Narrow-mindedness can lead to trading in inappropriate size in an attempt to clear losses quickly. There is also the likelihood that trading frequency accelerates and positions taken despite the trader not being 100% convinced about the trade - feeling obliged to do something either out of boredom or a need to recoup losses fast.
It could well be that the best thing is to close out of all your concurrent trades and for a period of reflection. It is well documented that one can think much more clearly when there is no risk on the table.
Look further afield for more opportunities
If the feeling of obligation remains strong, another possibility is to look further afield. When no clear signals are visible in what you usually trade, it makes sense to either sit on your hands or look to other stocks in your preferred sector. Thereafter, look further afield again.
The UK flagship equity index (FTSE 100) comprises 100 stocks, of which most are extremely liquid. In fact, there is plenty of liquidity well into the next biggest stocks (FTSE 250). If still you are struggling, why scrape the barrel in equities, wasting capital and commission on a poor idea when you could well be missing out on what is available within Indices, commodities and major currencies. CFDs and Spread Betting allows you to trade all of these.
With CFD trading and spread betting designed especially for the short-term, they also lend themselves well to technical analysis, or charting. If the price of something is supposed to factor in all existing and anticipated news-flow, we can assume that graphs display the underlying psychology (bullish/bearish/neutral) of all those trading it.
If something has traded within a certain range for a whole year, the chances are that the trend will continue in this range. This offers the opportunity to trade Long and Short within the range. Whether it’s a bank, food retailer, precious metal or the US Dollar versus the Japanese Yen shouldn’t make a difference.
As long as you remain disciplined, use protection and stick to some rules, opportunities should never be too thin on the ground. After all, profits are profits. Once banked, it doesn’t matter how they were generated.
Michael is head of research at Accendo Markets. After a decade in equity and hedge fund research, he now focuses on market observations and trade ideas for execution-only clients. Tweet @Accendo_Mike
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Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.