The Bull

Wednesday 22

October, 2014 2:09 PM

Industry Chart

TheBull PREMIUM

  • Trading
  • &
  • Technical
  • Analysis

CFD strategies for becalmed share markets

CFD strategies for becalmed share markets

By Stephen Calder 13.06.2011


There are times when even the keenest surfers stay out of the water. Tempestuous waters are too dangerous. Tiny waves aren’t worth the trouble. Leveraged traders who know when the market’s extremes are unlikely to give them the results they want are better off than those obsessed with being in the market to avoid missing out.

But whether you can extract gains from markets in a consolidation phase depends a little on your experience and the number of strategies you can use safely. A consolidation phase is one in which buyers and sellers tussle with each other to find a price balance, usually after a long rally or decline. Prices often trade within a narrow range and volatility drops.

That’s where we are now in the sharemarket. The Australian S&P ASX 200 share index so far this year has mostly stayed within 200 points of 4750, where it started. In the closing quarter of 2010 it was bound even more narrowly, unable to break above 4800 or below 4600.

Narrow ranges make for difficult trading conditions. CFD traders like long rallies, with regular pullbacks (downward corrections) that give them a chance to take profits and get back on board. So how do they respond to choppy markets that change direction often but don’t really go anywhere?

The obvious responses, the textbook ones, are to trade shorter term, tighten stops and increase position sizes. A tighter stop is a stop-loss order closer to the current price, getting you out on a smaller move, but enabling you to trade a bigger position so you still make a profit on a favourable small move.

Getting the exact level right is a matter of learning, and depends on your time horizon. Wider stops are for longer-term traders.  On a recent day in the Australian sharemarket, the index began by dropping 1.0 per cent on a negative lead from overseas, but later cut this loss to 0.3 per cent. A tight stop would have tipped traders out of their positions; longer term traders need to give their stops a little more room.

If you know the market is trading in a range, one strategy is to buy at the bottom of the range and sell at the top. Because it’s constantly changing direction, you may need to be more aware of the share’s price movements within a day, which means more time monitoring the market.

Another traditional strategy for sideways-moving markets is to sell or write options in order to earn premium. But this is for well-funded professionals who understand the complexities of options - it’s extremely risky unless you know what you’re doing.

Although options can help traders minimise or capitalise on volatility, they tend to be expensive and cumbersome to trade, even after the ASX’s decision to reduce the minimum contract size to 100 shares, down from 1,000 shares.

Some CFD providers, including IG Markets, offer options contracts on their platforms, traded as CFDs and settled in cash rather than by delivery. But traders looking to income generating strategies on specific stocks or a wider range of options contracts should consult a specialist options broker.

Ric Spooner, chief market analyst at CFD provider CMC Markets, has four suggestions for traders looking for rewards in a trendless share market.

1. Diversify across asset classes and sectors to maximise opportunity.

Spooner points out that one of the advantages of CFD trading platforms is their ability to access not only international shares but also foreign exchange and commodities. “I’m an advocate of looking at the big markets in our time zone, for example Hong Kong and Japan, and trading those via CFDs is no more difficult than trading Australian stocks.”

He says technical traders have an advantage in this regard because chart patterns and entry and exit signals learned in one market can be applied, with appropriate adjustment, to other markets. “You familiarise yourself with the methodology and then cast your net wider for suitable instruments.”

He points out that most share traders will have a beginning understanding of commodity markets from their study of resources stocks. “So to familiarise yourself with direct participation in the precious metals, base metals, and grain markets is not a big leap. Then there are the major foreign exchange (FX) markets. If you’re trading stocks on fundamentals, that may involve having a view on the economy, so it’s a stepping stone to trading currencies.”

2. Consider short selling.

Most methods of selecting trades will identify selling opportunities as well as buying ones, Spooner says. “Assuming you have good strategies, which is necessary for success, then increasing opportunity this way, with appropriate risk management, is the way to go. Why constrain yourself to trading long only? It’s something traders need to get used to against a background of experience in buying and holding. If a trader is there to make a profit, it [a preference for trading long] can be overcome."

3. Diversify your strategies.

“Strategies can be categorised as trend following or range trading. It’s a good idea is to have a mix, or at least one of each of those, to deal with situations where markets are range bound so that you’re not sitting on the sidelines. What that amounts to is to buy using support levels and to sell at resistance,” Spooner says. Support is at the bottom of the range, where the price is more likely to bounce off rather than break through, while resistance is the top, where the price has trouble rising.

“As a general observation, the range needs to be big enough in relation to potential losses to make it sensible. And again, you can apply that to all asset classes,” he says.

4. Know when to stay out.

There are times when traders must accept the fact that a market is so range bound and lacking in volatility that they need to avoid the temptation to trade for its own sake. “The rewards are too small compared to the risks and costs,” he says.

>>Back to the newsletter to view other articles - June 13th 2011

 



FROM THE NEWSLETTER

Seeking Safety in High Yield Stocks

We searched the ASX for dividend paying stocks... More

Abbott's G20 agenda: climate still the elephant in the room

To date, the Australian government has made it... More

The 10 Biggest Energy Company Bankruptcies

Here are the bankruptcies that will be etched... More

Stocks on a roll: ASX rolling 52-week highs

ASX rolling 52-week highs for the previous... More



WHAT’S ON THIS WEEK

week 24 October 2014
    • 20
    • Medibank Private prospectus Finance Minister Mathias Cormann and Medibank Private managing director George Savvides announce details of Medibank Private prospectus | 4:05 AM
    • RBA Speech by RBA assistant governor (Economic) Christopher Kent to the Leading Age Services Australia National Congress 2014 | 6:08 AM
    • SGH Slater & Gordon annual general meeting | 6:09 AM
    • Book launch Book launch of The Boy From Nowhere, the story of Kerry Stokes | 6:46 AM
    • 21
    • RBA Minutes of Reserve Bank of Australia October board meeting released | 2:18 AM
    • SXL Southern Cross Austereo annual general meeting | 2:18 AM
    • RBA Speech by RBA deputy governor Philip Lowe to the Commonwealth Bank's Australasian Fixed Income conference | 4:29 AM
    • NCM Newcrest Mining quarterly production report | 4:59 AM
    • International Investment Funds Association Annual Conference of the International Investment Funds Association | 5:13 AM
    • BKN Bradken annual general meeting | 5:16 AM
    • ABS Australian Bureau of Statistics (ABS) International merchandise imports for September | 5:41 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 5:42 AM
    • QAN Qantas chief executive Alan Joyce to unveil new A330 business suite | 5:42 AM
    • 22
    • Australia-Israel Chamber of Commerce lunch Former ACCC chairman Graeme Samuel speaking at Australia-Israel Chamber of Commerce lunch | 4:06 AM
    • SUL Super Retail Group annual general meeting | 5:13 AM
    • CBA Commonwealth Bank Business Sales Indicator for September | 5:35 AM
    • ORG Origin Energy annual general meeting | 5:40 AM
    • Westpac/Melbourne Institute Westpac-Melbourne Institute Leading Indexes of Economic Activity | 6:05 AM
    • ABS ABS Consumer Price Index for September quarter | 6:05 AM
    • BHP BHP Billiton quarterly production report | 6:06 AM
    • Northern Territory Major Projects Conference Northern Territory Major Projects Conference | 6:09 AM
    • AmCham lunch Twitter Australia managing director Karen Stocks speaking at AmCham lunch | 6:10 AM
    • 23
    • HIA Housing Industry Association-RP Data residential land report for the June quarter | 2:19 AM
    • AGL AGL annual general meeting | 4:23 AM
    • SKE Skilled Group annual general meeting | 4:24 AM
    • TOL Toll Holdings annual general meeting | 4:25 AM
    • AMC Amcor annual general meeting | 4:25 AM
    • BKL Blackmores annual general meeting | 4:26 AM
    • IOF Investa Office Fund annual general meeting | 4:26 AM
    • NAB National Australia Bank's business survey for the September quarter | 4:28 AM
    • BHP BHP Billiton annual general meeting | 4:29 AM
    • RBA RBA governor Glenn Stevens to address annual general meeting of the Australian Payments and Clearing Association | 6:07 AM
    • SUN Suncorp Group annual general meeting | 6:08 AM
    • 24
    • QAN Qantas annual general meeting | 4:26 AM
    • PPX PaperlinX annual general meeting | 4:27 AM
    • QFX Quickflix annual general meeting | 4:27 AM
    • CRZ Carsales.com annual general meeting | 4:27 AM
    • RMD Resmed first quarter results | 4:28 AM

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search

STOCK QUOTE

Don't know the company code? Click here



Featured Comment

Craig James, of CommSec points out that retail sales grew by 7.4 per cent during the past year, marking the best rolling 12-month period since January 2002

Festive season stocks handpicked by leading brokers

Broker buys

  • ASX Code
  • Company
  • Broker
  • TPMTPG TelecomCalibre
  • VEDVeda GroupCalibre
  • LLCLend LeaseAlpha Securities
  • MQGMacquarieAlpha Securities
  • OSHOil SearchPhillipCapital
  • CWNCrown ResortsPhillipCapital

Broker sells

  • ASX Code
  • Company
  • Broker
  • MINMineral ResourcesCalibre
  • AGOAtlas IronCalibre
  • MYRMyerAlpha Securities
  • CCLCoca-Cola AmatilAlpha Securities
  • QANQantasPhillipCapital
  • MINMineral ResourcesPhillipCapital

Central Banks Rates

  • RBA2.50%
  • FED0.25%
  • BOE0.50%
  • BOC1.00%
  • RBNZ3.25%
  • ECB0.15%
  • SNB0.00%
  • BOJ0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target
  • DOWDowner EDI Limited$5.78
  • FMGFortescue Metals Grp Ltd$6.89
  • ORAOrora Limited$1.51
  • RIORio Tinto Limited$81.22
  • CSLCSL Limited$73.30

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.