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The information on this page is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
It’s nice to know a bit about the companies one trades, however, shunning names unfamiliar to you can mean missing out on profitable trading opportunities. CFD trading is just that – trading, and by default short-term. The idea is to look for near-term opportunities and let the leverage element of the CFD product do the majority of the work. If the best opportunity you can find is in what most might consider unexciting low beta defensive food-related stocks such as Associated British Foods* (ABF) or Tate & Lyle* (TATE), rather than high beta, fast-moving, dollarsensitive miners/commodity-linked companies such as Kazakhmys* (KAZ) or Antofagasta* (ANTO), this should make no difference. An opportunity is an opportunity.
Focusing on trading only a handful of stocks can result in very profitable outcomes for some, with the trader gaining an in-depth appreciation of how the stocks are traded, how they react to news etc. Unfortunately, for the majority, this strategy produces results which are less than brilliant. More often than not, traders picking from a select few stocks become emotionally attached to them. Whether they make gains or losses, they feel that the next trade needs to be in the same stock (”because they know it better”) to either make further profits, or more likely, to deliver the profits necessary to offset earlier losses from unsuccessful trades in those same stocks.
The real risk from the above is that the trader gets so narrow-minded that he tries to trade too big in order to clear the losses in one go or begins to over-trade, placing trades in the same stocks when no clear opportunities can be identified, feeling the need to do something out of either boredom or the obligation to recoup the earlier losses. The best thing would actually be to get out entirely. One is more likely to think more clearly when risk is reduced.
If, however, one feels the obligation to keep trading, we would recommend looking further afield and broadening your horizons. When no clear signals can be found amongst the things you like trading, it’s surely most prudent to either do nothing or look to other stocks in your ‘preferred‘ sector. Failing that, look even further afield. The UK’s flagship index is made up of 100 components most of which are highly liquid. In fact, there is still plenty of liquidity to be had down through the FTSE 250. If still you find nothing, there’s no point in scraping the barrel in equities and wasting a trade on a poor idea, when great opportunities may be available in one of the precious metals or major currency pairs.
The short-term nature of CFD trading means it lends itself well to technical analysis. With the price of any asset supposedly pricing in all existing and anticipated news, we can therefore assume that price graphs finish up displaying the psychology of those trading. If an asset (equity, index, commodity, currency pair) has traded for 12 months in a range of 100p to 125p, hitting the upper and lower trendlines multiple times, the chances are that the next time it hits the support or resistance that it will rebound in the other direction as it has done several already times (for more on Support/Resistance click on the link below for our Education Summary). If it does rebound, there is a clear possibility that it returns to the opposite end of the range. Should the risk/reward relationship on this trade be attractive, it should not matter whether the asset is a bank, a utilities company a metal or the USD/JPY currency pair.