Volatility Trading

With markets in turmoil following recent developments in the US and Europe , it helps to know how to earn from falling markets, trade on volatility itself, and limit the risk of significant market movements.

Volatility creates a climate which can suit CFD traders; short-term traders can profit significantly from market turbulence. Discipline remains crucial, however, so we offer a suite of mechanisms to limit losses without capping profits.

Profit from falling markets

Short-selling - or shorting a market - lets you profit when financial assets fall in value, by allowing you to sell first and buy later, at a lower price. This significantly broadens your opportunities when trading not only shares, but also commodities, indices, forex and more. Our example of shorting illustrates an approach which can prove a useful weapon in a trader’s armoury.

Options and binaries for trading on volatility

While shorting is a basic CFD trading strategy, a more advanced approach involves ‘buying volatility’ through binary or options CFDs.

With options CFDs, buying both a put and a call lets you profit from considerable movement in the market - up or down - with limited risk but uncapped profit potential.

Binary CFDs let you profit from markets fluctuating up or down past pre-determined thresholds. As with buying options, your risk is limited, but with binaries your profit potential is also pre-determined, due to the ‘yes/no’ nature of the product.

Limiting your risk

As risk increases through periods of heightened volatility, it can be prudent to limit your exposure to adverse market movements. We provide a number of orders to help you do this.

Guaranteed Stop orders offer most protection, limiting your liability exactly. A feature for which you pay a premium, these even protect against sharp overnight movements. These Stops can only be applied to positions at the time when they are opened.

Non-Guaranteed Stop and Limit orders are available - usually at no extra cost - which can be applied to open positions. Trailing Stops, for example, can allow you to lock in profits without limiting profit potential, as the Stop level increases with market shifts in your favour. Only Guaranteed Stops, however, offer protection against markets moving sharply through your Stop or Limit.

We provide a number of Risk Management tools.

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* Investment Trends 2010 CFD & FX Report shows that IG had the highest average overall client satisfaction among CFD providers in Singapore. Note: Only CFD providers with a sample size of 30 or more were included in this analysis.

Updated: 09/08/11

IG provides an execution-only service. The above material does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your specific investment objectives, financial situation or investment needs. You should assess whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.