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Trading Rising and Falling Markets
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As we all know, the COVID-19 pandemic has had a major impact not only on public health but also on the global financial markets. Since the coronavirus-inspired storm that began in February 2020, we’ve seen the market react with large drops, often followed by large increases, which together have created high levels of market movement as investors attempt to understand the new situation. So, what is a trader to do when faced with this kind of global event?
Unlike buying stocks on the stock market, where you can only make a profit when markets are rising, trading CFDs (Contracts for Difference) allows investors to work with price movements in either direction, and as a result, to potentially benefit from both rising and falling markets. That’s why today, we wanted to focus on one of the main advantages that trading CFDs offers: the opportunity to open either ‘long’ or ‘short’ positions, according to the market conditions and your trading strategy. In a nutshell, CFDs offer traders an opportunity to profit (but also to lose) from price movements in the financial markets without owning the underlying asset.
Usually, when trading stocks, commodities, currency pairs, or other instruments, the goal is to generate returns that outperform buy-and-hold investing. Trading profits and losses can be generated as investors attempt to buy at a lower price and sell at a higher price, usually within a relatively short period of time. But the reverse is also true: profits and losses can be made by selling the instrument and then trying to buy it back at a lower price if the market falls. CFD trading is an investing method that offers a wide variety of approaches and strategies based on each trader’s individual market expectations in both rising and falling markets. Let’s take a closer look at two of the most common trading methods to trade either rising or falling markets: Long vs. Short
Going Long: Trading Rising Markets
Taking a long position is a bullish view, where a trade is initiated by a Buy order. When going long, the trader expects the value of an asset to increase over time, planning to sell it back at a higher price in the future in order to realise a profit. In other words, profits or losses in online CFD trading are calculated by the difference between the opening and closing price of the traded asset over the life of the contract.
Going Short: Trading Falling Markets
Taking a short position is a bearish view. A short position in trading CFDs is when a trade is initiated by a Sell order, which is considered more complex than going long. When short selling, the trader expects the value of an asset to decrease over time, and plans to buy it back at a lower price in the future in order to realise a profit. When executing a short position, if the trader’s prediction is wrong and the price of the asset begins to rise, the open trade will sustain a loss. The loss is calculated by the difference between the opening and closing price of the traded asset over the life of the contract.
Trading CFDs offers flexible options to trade long or short with equal ease, by this allowing anyone to work with either rising or falling prices. Having said that, please note that CFD trading is fast-moving and requires close monitoring. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your broker may close your position, meaning that you will have to meet the loss no matter what subsequently happens to the underlying asset.
In addition, when trading CFDs, it’s important to remember to always make smart use of protective stop orders so mistaken speculations do not result in significant trading losses (especially when applying leverage), or hedge you positions via options trading. We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.
Trading Rising and Falling Markets FAQ
- How do you trade a falling market?
In the traditional financial markets it can be very difficult to trade a falling market due to regulations that try to prohibit this behaviour. There is also a bias among some investors that betting on a falling price is somehow unethical. That’s simply not true. Prices will rise and fall with no regard to your ethics and profiting from a falling price is still a profit at the end of the day and the asset is not going to care or be affected in any way by your short trade. For the first case of regulations there is a simple way to avoid these, and that’s by trading CFDs on the asset rather than the actual asset.
- How can you tell if a market is bullish or bearish?
The easiest way is to simply look at the price action in the market or asset. If there are higher highs and higher lows the market is bullish. If there are lower highs and lower lows the market is bearish. It’s really as simple as that. If the price seems to be moving sideways in a range then there is neither a bullish or bearish bias. Profits can be made under any of these conditions if the trader has the right strategy to match the market conditions and price action. It’s your job to learn what these strategies are and when to apply them.
- How do you profit from a market crash?
Markets do not go up forever and after an extended uptrend the most usual move the market takes next is to crash. The crash can be caused by any number of factors, from excessive speculation, to excessive lending or money printing, to black swan events like a global pandemic. The good news is that profits can be made from market crashes. This is done by keeping your cool while everyone else is panic selling. Watch and see when prices begin to stabilize, whether that’s 20%, 30% or even more below prior levels. Once the stabilization begins you can begin to look for opportunities in the market. You’ll be able to buy at bargain prices, and once others begin to buy too prices will rapidly escalate higher.
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