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Volatile markets in 2017 bring trading opportunities

Wednesday, April 19, 2017 - 05:50

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IG Asia market strategist Pan Jingyi.

GLOBAL financial markets have sprung into life in 2017, lifted by a wave of optimism around the world as well as a cyclical manufacturing upturn. In the first three months of the year, the US and Europe markets are up 6 per cent while Hong Kong and Singapore are both up 10 per cent.

One way investors can gain exposure to global markets is to invest in Index CFDs (Contracts for Difference). CFDs are leveraged investments. This means traders only have to put down a small deposit for a much larger market exposure.

IG, the market leader in CFD trading, allows investors in Singapore to gain an exposure on to a wide range of global indices, in Singapore dollars, 24 hours a day through its Index CFDs. Leverage trading can be risky, making risk management tools an essential part of any trading strategy. One useful tool IG offers is a guaranteed stop, which caps traders' absolute downside on any trade. IG Asia market strategist Pan Jingyi gives a rundown on Index CFDs trading.

If I trade CFDs, what should my time horizon be?

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A CFD allows you to open a contract for the difference in price of an asset, from the point of opening to when you close, participating in the market volatility. Traders get the flexibility in determining their holding period according to the objectives of their trade.

The time horizon for trading CFDs can vary. Some investors may utilise Index CFDs for hedging and the holding period would commensurate with the underlying security. Other investors may trade Index CFDs to take advantage of the macro movements in the markets and could find the holding period reflecting the cyclicity cyclicality of the related index. Investors may also want to take opportunistic positions based on prospective news or data releases, such as the monthly US non-farm payrolls data, and could do so with Index CFDs - In which case, their holding period may extend over the release of the news.

What is a minimum commitment for a typical Index CFD trade?

The margin requirement for CFDs in Singapore is governed by a regulatory regime. For Index CFDs, there can be two levels of leverage permitted - at either 5 per cent (or 20 times leverage of the investable amount) for broad based indices or 20 per cent (or five times leverage of the investable amount) for the remaining indices.

For example, one can open a long position on the Singapore Index CFD, on the IG platform with a 5 per cent margin. An investor gets exposure to a significantly large trade size, with the same initial capital as compared to a non-leverage product. See the table below:

Why trade Index CFDs, when I can just buy an ETF?

In an ETF, the investor is gaining exposure into a closed-ended fund that invests into the components of the index. However, the exposure is based on the demand and supply of the underlying unit value listed on the exchange. This may not reflect the true Net Asset Value (NAV) of the fund.

On the other hand, when an investor invests in an Index CFD, he is gaining exposure to the underlying index which is typically priced based on the discounted value of the related index futures contract.

Hence, the Index CFD would be a closer reflection of the true value of the index.

However, if the investor still wishes to have an exposure in the related index ETF, IG also offers a variety of CFDs on ETF on the platform. This would however be traded like a Share CFD.

What information should monitor while trading Index CFDs?

Most Index CFDs are priced based on the futures market. For Index CFDs trading, risk management is key. Given that the leverage ratios for certain Index CFDs can be as high as 20 times of the investable amount, investors can potentially profit (or losmake lossess) from small movements in the market. Therefore, one should always consider attaching a stop order to their positions, preferably a guaranteed stop, so as to limit one's downside risks.

What is the role of technical analysis for Index CFD trading?

Technical analysis is the study of investor behaviour and its effect on price movements in the markets. The up and down movements that you can see on market price charts reflect the fluctuations of supply and demand. Technical analysis draws all the information it needs directly from charts. It doesn't look at what's going on within the components of a market; rather, it looks only at the movement patterns of the market itself.

By examining the patterns forming on the charts, technical analysts can see how buyers and sellers are behaving. Since certain types of behaviour patterns have been seen repeatedly in the past, it's possible to identify them as they emerge. This helps with predicting the likely future trend for the market.

How do I plan a trade?

It is always a good practice to have a trading plan which acts as a roadmap for your intended trades. One should incorporate considerations of the holding period together with your return objectives and risk tolerance within the trading plan. Trading plans may differ according one's risk appetite. The key component of your trading plan should always be the risk management strategy which includes your stop loss levels.

Top traded Index CFDs

IG's trading platform offer products such as Germany 30, Wall Street, US500 and Hong Kong HS50 which provides exposure to popular indices such as DAX, US Dow Jones Industrial Average, the S&P500 and Hang Seng Index respectively.

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