Investors don`t need to be told how volatile the markets are these days; anyone watching business bulletins can observe, on a regular basis, swings between 3% and 4% in both domestic and international stock markets in a matter of hours, let alone days. Spread trading in volatile markets can be the ideal way to reap rewards from a weak market.
David Butler, Chairman of Global Trader 247, the leading international Spread trading company, says, "In recent weeks these extreme movements have invariably resulted in weaker share prices which have generally lead to negativity and pessimism amongst the market commentators. However as with all significant change and chaos, opportunities present themselves".
Spread trading, unlike most types of trading available to private individuals, facilitates the investor speculating on a down movement in a share, otherwise known as going 'short`, as easily as an investor taking a "long" positions, buying shares. "If a private individual, for example, believed that Didata, trading at R55 per share was overpriced he could have speculated on a 'down` movement by selling a Didata CFD (Contract For Difference) via a Spread Trade. This would of course have been highly profitable. The advantage with Spread Trading is that you do not have to own shares or indices to sell them - you are speculating on the movement in the share price, not owning the share itself" says Butler.
Continues Butler, "There are five trading principles to consider when trading in such volatile markets. The first one is to remember that prices are just as likely to fall in the immediate future as they are to rise. Investors have a natural tendency to buy, looking for prices to rise, when in fact markets are just as likely to fall. Remember, going 'short` when spread trading can also be very profitable."
Explaining his second principle, Butler says, "Markets nearly always trade at the same price at least twice. For example the Dow rallies - breaking through a key level of 9000 on the upside. Whilst this may then lead to an extension of the rally to 9250, and you feel that you have missed the boat, it is essential to remember that you will get a second chance, and that the market will eventually come down again to where you initially placed a position. So remember, keep a cool head".
His third principle is the most basic rule of spread trading is - Plan your trade and then trade your plan.
Explaining this, Butler says, "This rule is the one that is most frequently broken by even the most experienced investors. Always remember to set your entry level and your target profit level before entering a trade. You must also set the level at which you will get out of your position if you get it wrong. This is called the 'stop loss level` - a mechanism that ensures investors should never lose more than the initial margin than they are willing to deposit, and when trading with Global Trader 247, can be placed online or by calling a trader at the company".
"The fourth principle of spread trading in such volatile markets is that investors must run their profits and take their losses, If you are looking for a R5000.00 profit, it is not acceptable to be prepared to run a R10 000.00 loss. Your exit level, if you get it wrong, should be nearer than your exit level if you get it right. So remember the second rule; run your profits, take your losses", say Butler.
The fifth and final principle Butler discusses as part of the skill of trading volatile markets is knowing when the market is going to turn, as often this turn is very extreme in nature and leaves very little opportunity to get into a position. "The essential theory behind this rule is that when investors get sceptical and warnings of accounting scandals are rampant, then the market is nearing a turning point. Whilst it is difficult to catch this turn, if your senses have been alerted by all the negative news and sentiment, you can at least do the preliminary stages of planning your trades. Then when the turn does come, you are ready to execute the trades immediately," says Butler.
Butler concludes, "While there is no guaranteed way to make money, these simple guidelines when spread trading will certainly give you more 'ammunition` with which to attack the markets. Whether you are trading stock indices, currencies, commodities or individual shares - these principles can be applied in any volatile market".
For more information on Global Trader 247 visit www.gt247.com or call 011 520 9000 and speak to a trader.
*David Butler is the Chairman of Global Trader 247
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