2016 has already seen its fair share of market volatility and the year is not over yet. Such drastic movements and changes in predominant interest rates leave many investors wondering what 2016 may have in store. As the effects of the Brexit are just beginning to take hold and with a hint of an interest rate rise from the United States Federal reserve, many are considering CFD trades as more of a safe haven when compared to other assets. How can these platforms be utilised and perhaps more importantly, will a bearish 2017 market have any effect upon potential profit margins?
Taking Volatility Out of the Equation
By their very definition, contracts for difference are less concerned with market fluctuations when compared to shares and other options. The main reason for this is that CFD holders can turn a profit even if the market falls. The trader will simply have to predict such movements correctly. Succinctly, CFDs can be employed even when markets are falling in aggregate value.
Why could this be a useful strategy in 2017? Although the verdict is still out whether or not we are in for another bearish period, many investors are already worried in regards to how the Brexit will affect global markets (particularly those out of Europe and the United Kingdom). If we embrace a conservative approach for a moment, CFDs could prove very useful in the event of prolonged negative financial sentiment.
Another pronounced advantage of CFDs during bearish market conditions is that they can be traded on margin. Thus, the temporary owner can commit to only a fraction of the cost of the total holding and still turn a profit. This could be very applicable in the coming months.
Let us assume for a moment that the hints being provided by the United States Federal Reserve in regards to rising interest rates and positive inflation are merely hints alone. This could (in theory) cause a drop in the dollar and other US-based holdings within a relatively short period of time. Should an investor have opted for a leveraged CFD trade and if he or she correctly predicted such an outcome, very real profits may be accrued.
However, a word of caution needs to be mentioned here. Leveraged trades open up a great deal of exposure to the investor. Just as massive gains can be enjoyed, the converse is also true. Losses could very well exceed any initial capital outlay. Therefore, leveraged CFDs should only be utilised once one has a sound understanding of their underlying principles.
A Downturn in the European Sector
The European Economic Community has seen some troubled months. Analysts are still not certain what impact the Brexit will have upon this decidedly delicate atmosphere. Thus, the value of the euro and many European companies has fallen in recent times. If we are to extrapolate these conditions into the future, the bears might be waking from their hibernation once again. As before, CFD trades will have the ability to negate such a downward trend. As opposed to sitting on the proverbial sidelines, traders can employ tools such as those offered at CMC Markets to enter into this sector.
Contracts for difference are interesting vehicles to employ during volatile times. When we analyse market movements over the last nine months, it is clear to understand why some traders are keeping one eye on the latest news and the other eye on their CFD holdings. Still, watching for any upcoming announcements from the Federal Reserve and analysing the continued impact of the Brexit are the best ways to make the most efficient decisions.