Why CFD traders should take positions on indices

CONTRACTS  for difference (CFD) lend themselves to trading on indices. Where investors would usually be restricted to taking a position on one particular asset, index trading through CFDs enables you to invest in segments of the market, or even the health of the broader national market.

And with the current volatility in the markets, traders will be looking to take a view on the outcome of the current economic instability. According to David Jones, chief market strategist for IG Markets: “We are seeing some scrappy trading day to day because of the uncertainty surrounding European debt and the US debt ceiling in recent weeks. But there are still opportunities with clients focusing on the major indices: FTSE, Dow, S&P 500 and the Dax.”

Last week, all was doom and gloom at the US federal level as Democrats and Republicans bickered over the raising of the US debt ceiling and over the US approach to addressing its enormous deficit. But as the bond market police threatened to kick the door down and hit the US with a downgrade, things on Wall Street were considerably more upbeat. Investors were more willing to dip their toes into equity markets – though perhaps through fear of being bitten if they dipped them anywhere else.

Taking a position on a commodities index also enables you to take a view on commodities without the inherent currency risk. As Yoni Assia, chief executive of eToro, points out: “The price ratio of gold to silver is currently 40 times greater than it was back in the 1980s. This means that silver is extremely overvalued against gold, and so we need to be aware of the narrowing gap between the buying of gold and the shorting of silver.” He adds: “By monitoring this movement it allows us to determine when gold outperforms silver and therefore begin to close the gap.”

Traders taking this approach are left with no exposure to the turmoil in the forex markets and instead are able to focus directly on the movements between gold and silver.

Given the current volatility in the indices, rather than looking for a definite medium term trend another strategy could be to play the ranges – selling into strength and buying weakness. According to Jones: “We are seeing some quite extreme moves. For example on Sunday night when markets opened, indices were heavily down because of the lack of resolution to the US debt crisis, but for the FTSE 100 much of these losses were clawed back in the Monday morning session, a rally of around 40 points or so.” Due to the relatively tight ranges, you have to be on your toes as you jump in and out of your trades, but given the jitteriness of the markets, this could be the most sensible approach at the moment.