Choosing a market for CFD trading

Lesson 6 of 6

Choosing a market

So now we’ve looked at the variety of markets you can trade CFDs on and how they all work. But how do you decide which ones to take a position on?

Most CFD providers offer a wide range of assets, with some giving access to as many as 17 000 individual markets. Choosing the right one for you is vital to ensure you’re comfortable with how much to trade and how it fits into your lifestyle.

We look at some of the major factors to consider below.

Focus on your interests

When you start trading CFDs it’s generally advisable to focus your attention on markets that you have a particular interest in or knowledge of.

Example

If you keep up with the latest trends in the technology sector, then you're more likely to have a relevant store of information that can be applied to to trading CFDs on stocks in that industry. This would be more logical than betting on the price of oil if you have no prior knowledge of what drives commodities markets.

Do your research

When choosing a market, it’s also crucial to consider these factors:

  • Dealing times – When is the market open? Are you free to deal at those times? Will you be able to react to any big price swings?
  • Volatility – On average, how many points does this market move in an hour/day/week? Are you comfortable with that range?
  • Costs – What is the spread, minimum position size and margin requirement for this market? Can you afford to deal on it, and how much will you gain or lose for every point of movement in the price?

You should also take into account the following information on the four major asset classes. If your chosen market doesn't fit with how you want to deal or your attitude to risk, then you should choose one that is more suitable.

Shares

You can only trade share CFDs during the opening hours of the stock exchange where they are listed (unless your provider offers out-of-hours markets). It’s also worth bearing in mind that, while share prices can stay relatively stable for months at a time, they can also move rapidly, and are especially volatile before or after a company announces its earnings.

Stock indices

Trading CFDs on stock indices might be suitable if you want to deal on the performance of a range of shares, as this can reduce the risk of betting on a single company. Because indices are made up of so many stocks, their value tends to be continually shifting and so could be even more volatile than individual shares.

Forex

Due to the sheer volume of currency dealers and the amount of money exchanged, forex markets are generally the most liquid. Currency pairs are an accessible, popular way to trade CFDs and spreads are often very tight. However, as FX dealing takes place around the clock, you’ll need to bear in mind that significant price moves can occur while you’re asleep, or unable to access your trading platform.

Commodities

As the production and consumption of commodities relies on so many different factors, their prices are known to fluctuate significantly. This makes them a popular market to trade CFDs on due to the opportunity to make money but, like forex, volatility brings increased risks.

Question

Which financial market's value would you expect to:

Move in direct correlation with a group of shares?
  • a Shares
  • b Stock indices
  • c Forex
  • d Commodities

Correct

Incorrect

Reveal answer

Question

Which financial market's value would you expect to:

Rise and fall according to environmental factors, as well as financial?
  • a Shares
  • b Stock indices
  • c Forex
  • d Commodities

Correct

Incorrect

Reveal answer

Question

Which financial market's value would you expect to:

Move following a profit warning?
  • a Shares
  • b Stock indices
  • c Forex
  • d Commodities

Correct

Incorrect

Reveal answer

Question

Which financial market's value would you expect to:

Be the most volatile, most of the time?
  • a Shares
  • b Stock indices
  • c Forex
  • d Commodities

Correct

Incorrect

Reveal answer

Keep up to date

Once you've made a decision, make sure you continue to watch out for any news or developments that could affect your market. This will increase your chances of predicting future movements, and help to ensure you don't get caught out by any nasty surprises.

Lesson summary

  • It’s advisable to focus your CFD trading on markets you already know something about or have an interest in
  • When choosing a market, you should consider things like when it is available to deal, how volatile it is and how much it will cost
  • You can only trade share CFDs in the opening hours of their exchange, and their price can go from stable to volatile quickly after key announcements
  • Indices are made up of a number of shares, so their price tends to be more volatile than individual stocks
  • Forex dealing happens around the clock, so big moves could take place overnight or when you’re away from the platform
  • Like forex, commodities can be very volatile, as they are influenced by a broad range of external factors
  • When you’ve chosen your market, keep an eye out for any news which could affect you
Lesson complete