Derivatives Trading in Bear Markets

  • Post author:

James Blawn

How can CFD trading techniques assist when markets are getting ‘bear-mauled’ from every direction? Find out which trading strategies can assist in down markets.

Maximizing Downside Trends with Effective Trading Strategies

Source: Pixabay No Attribution Required

 

Preface: Global stock markets are in a pitiful state. The Dow Jones Industrial Average, the S&P 500 Index, the NASDAQ Composite Index, the New York Stock Exchange Composite Index, and the S&P/TSX Composite Index are all markedly down for 2020. From multigenerational highs, the Dow Jones has sunk to the 20,900 level, the NASDAQ to 7300, and the S&P 500 index to 2470 and thereabouts. These levels are double-digit points down for Q1 2020, and the prognosis heading into Q2 2020 is equally grim.

 

CNN reported a 3000% jump in jobless claims to date this year. Dubbed ‘…one of the most devastating periods in the history of the country,’ businesses in every major industry are shedding workers at a furious pace. For the week ending March 28, 2020, some 6.648 million workers filed for unemployment benefits (Dept. of Labor), accelerating rampant declines in demand, discretionary spending, productivity, and general economic activity.

The last 14 days of March resulted in some 10 million Americans out of jobs, or 6% of the workforce. This has pushed the unemployment rate towards 10%, and rising fast. With such a grim prognosis, it’s only natural to ask how traders and investors are working the markets to prevent further degradation of their financial holdings, investments, and retirement funds.

 

Source: US Dept of Labor graphic by CNN (Annalyn Kurtz and Tal Yellin)

 

These figures paint a dark picture of what the economy is likely to endure as the pandemic worsens. While New York bears the brunt of the coronavirus, with thousands dead and countless others infected, each of the other states is readying for an Armageddon-style scenario as the virus sweeps across the nation. Companies across the country are shuttering operations, either by way of governors’ decrees, or national lockdown orders.

 

Economic activity has cratered. The oil price has collapsed to $20 per barrel for WTI crude oil and $25 per barrel for Brent crude oil, with no end in sight. The Fed has injected a $2 trillion plus stimulus into the economy, hoping to reignite economic activity, but this will take a substantial amount of time to get going. For now, the short-term focus is on salvaging whatever is left of financial portfolios, preventing further degradation thereof, and making smart decisions via effective trading strategies.

 

Short-Selling as a Viable Trading Strategy?

 

When markets start tanking, short sellers start cashing in. Falling prices are just as common as rising prices vis-a-vis financial instruments like stocks, commodities, indices, currencies, and contrarian asset categories. Bear markets now characterize the trading landscape. A bear market is official when there has been a 20% + decline from a previous high, lasting for a period of 2+ months. While the coronavirus has not impacted global financial markets for much more than 2 months to date, the fallout from the pandemic will last many months more than that. We are already 30% down from the Dow’s high in 2020, and a few more weeks of the status quo will validate the definition of a bear market.

 

It is clear that sellers outweigh buyers by a long margin. Only the institutional buyers and a handful of savvy investors are buying on the dip, everyone else is too scared to move. The current state of the market is significantly different to a correction, a reversal, or a pullback. What we are seeing now is a global short-to-medium-term selloff. It is a collapse in supply and a collapse in demand. Companies are closing up their doors from China to Hawaii, from Australia to South Africa, as government lockdowns take effect. These short-term initiatives are designed to slow the spread of the pandemic, but the effect on economic activity will linger for a long time. In fact, there are real concerns that COVID-19 will lead to recession or depression.

 

Trading experts advise against following the herd. When everybody is selling, there is little to be gained by selling along with them. Investors believe that if they don’t sell when everyone else is selling, the price of their investments will drop further. This results in an accelerated sell-off of equities, indices, commodities, and even currencies, much to the detriment of the seller. Then there are the buy and hold investors who are not perturbed by the sudden and dramatic turbulence that hits the markets. Fortunately, there are trading strategies to employ that can mitigate the effects. These include diversifying your portfolio away from high-risk, high volatile stocks towards low-risk, low volatility asset holdings.

 

It Is Possible To Profit When Markets Are Upside down

Source: Dow Jones Industrial Average

 

During a bear market, there are a variety of tools at your disposal to lessen the overall risk to your portfolio. These include shifting from stocks to safe-haven assets such as gold. It should be borne in mind that there isn’t necessarily a direct correlation between a poorly performing stock market, and a rampant run on gold. Gold stocks such as SPDR are managed by companies, notably big banks, whose interest is maximizing their own profitability and not those of investors. SPDR is the world’s largest exchange traded gold fund with massive holdings of physical gold bullion. A switch to an alternative asset class with the express objective of mitigating downside risk is known as hedging. SPDR has risen much more conservatively than the general stock market has plunged.

 

Most of the strategies that traders use during bear markets are short-sell orders. There are short ETFs, short-selling of financial instruments, and buying on the dip. These and many other strategies are employed to great effect by strategic traders around the world. While every trader seeks that panacea to the ill-fated bear market, there really is no effective strategy to guarantee favorable returns in any market. Some of the best strategies employed by traders are simply known as risk-mitigation or damage control.

 

Traders understand that markets cannot rise indefinitely; upturns and downturns are part of the free market system. Even in a market downturn, the path is never linear – there are upswings and downswings in bear markets too. By analyzing the market, it is possible to implement bear market plans. Short-selling is a powerful tool in your arsenal when combating bear markets. Contracts for difference, or CFDs, allow you to trade assets based on price movements alone – without taking ownership of the underlying asset. Since leverage is a play, it is possible to bet against a financial instrument and profit to the upside, even in a down-market.

 

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CFD Trading Tips: How to Achieve Market Success

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Guest Post

CFD’s (contracts for difference) stand as one of the most popular derivative products on the financial market, primarily because they enable traders to profit within volatile and variable environments. Used to speculate on a number of underlying financial instruments, CFD’s give traders the opportunity to take both long and short positions in the market according to their needs.

While trading CFD’s is renowned as a flexible and potentially lucrative method of investment, however, it also poses significant risk. If you wish to trade CFD’s as a way of seeking an advantage in changeable markets such as the foreign exchange, then it is necessary to build a core base of knowledge and develop a viable strategy.

Trading CFD’s: 3 Points to Bear in Mind

Before striking the delicate balance between risk and reward as a CFD trader, however, there are several key considerations to keep in mind. Consider the following: –

Establish Achievable and Considered Trading Goals

Before you commit money towards the delicate art of CFD trading, it is crucial that you develop a set of clearly defined and achievable goals. This not only helps you to determine a viable amount of starting capital and an understanding of how best to use it, but it also plots a path along which you can scale your efforts as you begin to gain financial returns. The majority of successful CFD traders have been content simply to remain in profit during the first year of trading, before using heir hard earned experience and long term goals to steadily improve their performance. This is especially important if you intend to forge a career as a CFD trader, and hope to achieve an acceptable annual remuneration.

Take Control of your CFD Leverage

The potential for a margin based return is something that generally appeals to traders, as this leverage enables them to generate profit far in excess of their initial outlay. This also brings inherent risk, however, as it is also possible to incur losses far beyond your financial means. Controlling such powerful leverage is critical if you are to succeed when trading CFD’s, as sudden market shifts can leave you vulnerable and exposed to hostile conditions. If you continue to increase your position out of proportion to your capital base, for example, then you can easily lose far more than you can realistically afford. To negate this, ensure that you start small and keep your level of exposure in line with the tangible wealth that you have at your disposal.

Use CFD Stops to Minimize Risk

Regardless of your trading strategy and level of risk aversion, it is important to minimise your potential losses when investing in CFD’s. Even cautious investors can find themselves cut adrift in a volatile market space, especially if they fail to implement stop losses on their trading account. Stop losses can help you to retain a higher degree of your capital when trading, as they automatically trigger the sale of a security once it reaches a predetermined price. With this in mind, take care to ensure that every individual trade has a well defined CFD stop assigned to it. In addition to offsetting risk, stop losses also remove a great deal of human emotion from your trades and allow you to execute more financially sound transactions.

The Last Word

While CFD trading can be rewarding, it is also an exercise that remains fraught with risk and the potential for loss. As a general rule, it is important that you strive to learn about the art and the market in which you intend to operate, while also developing a core strategy and risk management process. As a starting point, you may wish to make use of free resources on the Internet to build your understanding, visiting pages such as www.alpari.co.uk/en/cfd-trading.html with a view to refining your trading technique.

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Intermarket Strategies and Understanding Cross Currency Flows

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Guest Post: Rebecca Goh

I will like to invite you to the above seminar (scroll down for the details of the seminar), we have specially flown in our Chief Global Ashraf Laidi from London this month. We have 2 timeslots to make things more convenient for you, do let me know if you will like to come as seats are limited!! Please indicate which timeslot you will like.  Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal, Barrons, the New York Times, Marketwatch, TheStreet.com, Futures, and a host of other international publications. Besides his habitual media appearances and seminars in English, Laidi has given numerous interviews in Arabic, French, and Spanish to audiences spanning from Canada, Central America and Asia/Pacific.

Draghi Buys Bonds, Fed Buys Time (September 6, 2012 by Ashraf Laidi)

Ashraf Laidi on CNBC Squawk Box Sep 18, 2012

 

Charting Market Dynamics Through Noise & Action (Client Only, First Come First Served as Seats are Limited)

  • Date: 29 September 2012
  • Time: 9:30 am – 1:30 PM
  • Venue: York Hotel,  Level 2, Carlton Hall,  21 Mount Elizabeth, Singapore 228156

Charting the Final Quarter of the Year·   

  • Both the ECB & the Fed have supported markets by “talking” about “doing more” without actually delivering.
  • Will markets force their hands as China cools off & the US nears its presidential Elections?·         Where is EURUSD in its cycle? Has Aussie finally topped out? ·
  • Gold attempts its 4th straight monthly gain. The last time this happened nearly 2 years ago. What has changed?

Understanding Intermarket Correlations & Risk Appetite·  

  •  Integrating Equity Indices with Forex to improve confidence·
  • Which currencies outperform during the changing fortunes of risk appetite?

 

Top Down Approach of Multi-Time Frame Analysis· 

  • The importance of dissecting hourly, daily and weekly time perspectives in order to stay ahead of the market instead of chasing it·
  • Combining Multi-time frame analysis with Intermarket dynamics

 

Intermarket Strategies and Understanding Cross Currency Flows

Laidi will discuss Top-Down vs. Bottom Up Intermarket Strategies How to obtain the signal from equities down to various currency pairs; & when to start from the currency base and onto equities and oil. He will also discuss understanding cross-currency flows via equity indices, gold, oil and bonds to gain better results than merely focusing on FX.

VENUE: CITY INDEX ASIA PTE LTD, 6 Battery Road, Standard Chartered Building, #20-01 , Singapore 049909 ( Nearest MRT Raffles Place)

DATE: 18th September and 20th September (same topic)

Time : 7 pm – 9 pm

Rebecca Goh
Relationship Manager
City Index Asia Pte Ltd

6 Battery Road, #20-01
Singapore 049909

Telephone: +65 6826 9988
DID: +65 6826 9951

Email: Rebecca.goh@cityindexasia.com

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