COVID-19 Volatility Hurts CFD Trading Strategiesby Fintech News Singapore May 18, 2020
While 2020 so far will been one to forget for investors, April as a stand-alone was actually historically one of the strongest months of all time. As this chart from Nasdaq below shows, more indices increased between 11% to 15%. Once more, the volatility of shares, currencies and commodities were between 2 to 5 times above their historical average.
How Did CFD Retail Traders Perform In These Volatile Times?
The first indication that volatility may hurt (not help) retail traders came from ASIC. On the 6th of May they published a retail investor COVID paper that looked at March the 16th to 22nd. It found that client retail losses were just over $428 million gross (or $234 million net). This was based on the top 14 ASIC regulated forex brokers by market share.
UK forex brokers which are regulated by the FCA are required to published what percentage of retail investor accounts lose money. As recently release on this forex statistic page some of the largest CFD providers showed an increase in trading accounts experiencing losses. eToro had the largest increase from 62% of accounts losing money to 75%. This may show the difficulty of trying to make money from CFD trading in turbulent times
Ways To Retail Traders Can Manage Risk
Based on the data so far, extreme volatility caused by COVID doesn’t appear to be good news for traders. While no broad advice can be made to successful over these periods there are three key ways to manage risk.
1) Select Suitable Leverage Levels
CFD brokers maximum leverage levels can range between 30:1 to 500:1. A trader should always pick leverage suitable for their risk appetite and experience but this can be adjusted anytime. Reducing the maximum leverage when market volatility increases may be advised to limit any potential losses.
2) Use Trading Tools Offered by The Broker
All forex trading platforms offer stop-loss tools where a trader can set the maximum loss for any trade. This will exit the trader automatically once this price point is reached. Some brokers offer guaranteed stop loss features which protects traders from extra losses due to slippage. Some other features such as DealCancellation can also limit exposure to markets.
3) Consider Choosing A Broker With Negative Protection
While COVID-19 has led to unpresented times, there has been other market events that have results in extreme volatility. One such example was called the Swiss shock when in 2015 the Swiss National Bank shocked currency markets by scrapping the franc’s peg to the euro. Events like this can lead extreme profits or losses with some traders losing more than their deposit. Only a broker with negative balance protection will cover the difference between losses and a traders balance.
CFD trading needs volatility but 2020 is telling the story that too much doesn’t help retail traders. Individuals should reconsider if they want to trade during turbulent times and if they do, should consider the forex broker and features used to limit exposure.