Using CFDs to Hedge Share Positions

Hedging. http://www.contracts-for-difference.com/strategies/CFDs-hedge.html A common trading strategy, and a useful one in times of market turmoil makes use of a hedge to protect a single share position with a contract for difference. CFDs are especially useful as a hedging tool because a short position can be replicated to hedge the exact position size required.

For example, you may have a long term share portfolio that you know you want to keep hold of, but you are worried that it may lose value in the short term, because you think the markets are heading down. You can take out a CFD that could profit on a drop in the share price and help offset the loss on the physical holding.

When to get involved -:
• when the wider market or a particular stock you are invested in is moving against you.
• when a market position has already moved sharply in the direction of your trade and additional gains may be marginal.
• when the wider market looks weak and doesn't react to positive or negative news.

When to avoid CFD hedges -:
• when a trade has moved sharply against you the market is prone to reversing and where hedging near these levels all you would be doing would be locking yourself into a large loss.
• avoid hedging in general raging bullish markets when everything seems to be going up.

Category:

Education

Tags:

• cfds hedging
• cfd trading
• cfd hedge
• shares trading
• share hedge
• financial trading
• stock markets