With contract for difference (CFD) trading still seen by some as a disruptive newcomer to the markets, many are asking how CFD traders might use older, more established techniques to make successful investments. As a relatively new form of derivative trading when compared to mature products such as futures and options, CFDs offer many advantages, and this begs the question as to whether these apply to areas in which established trading lore has long been set down.
CFD trading enables traders to take positions on the rising or falling prices of fast-moving markets but also covers just about every other type of market, and these include the major stock exchanges. So-called “blue chip” stocks have a reputation for beating bull and bear market upheavals. Does this mean that there is a way for CFD traders to use them to their own best advantage?
The longest Wall Street bull market in history has been sending out warning signs recently, and some investors are starting to wonder how long it can continue. This type of market turbulence always leads to open discussion as to whether a bear market is just around the corner, which results in a move towards “quality stocks” with a reputation for being a safe harbour.
These blue chips are the kind of stocks that are less reliant on macroeconomic data and environment changes, and they usually have a long history based on a robust and dependable business model. For some CFD traders, they might seem like an underlying asset to avoid, as there is little chance of major turnarounds bringing big rewards. However, even blue chips see their prices go up and down, and looking at the history and charts of companies such as Walmart Inc and McDonald’s Corp can provide information on whether taking a CFD position on them at the right time could be worthwhile.
Warnings and risks
When investors start reading signs that stock markets are likely to fall in a big way, a move to blue chip stocks always happens. This information alone can be of great interest to CFD traders who are looking for an edge. It means that popular tools such as technical analysis, charting and even a news strategy can all play a part in working out when to go long in anticipation of a move towards blue chip stocks.
How to choose a chip
At the bottom line, any company that has well-established products provides household name brands or offers services that are unlikely to see negative effects from a general economic slowdown can be a blue chip stock. Of course, as investors will be looking for stability, such a target company needs to have a continuing ethos carried out by long-serving top-level management. A tried-and-tested approach to its own trading, whichever area that it might be involved in, is also a factor that sets this kind of business apart from others.
Many of the blue chip stocks outperformed the S&P 500 last year, and as some confidence falters in big-name tech and communications stocks, it seems highly likely that they will continue to attract risk-averse investors in 2019.
Of course, one of the main factors that a CFD trader will wonder about is how blue chip investments, which are usually long-term moves, can apply to the fast-moving world of CFD trades.
Important markers such as dependable products and good quarterly reports often set out the kind of risk-to-reward ratio that is more interesting for a “buy and forget” investor than it is for a day trader or someone looking for short-term movements based on volatility. However, as traders take CFD positions on price fluctuations that can often be very profitable without having huge changes in value, there is really no reason why a blue chip stock should receive different treatment than any other type of underlying asset.
Choosing the right sources of information is vital for success in any CFD trading scenario, and this also applies to blue chips. Solid and reliable economic data is readily available to all via many different real-time platforms, and blue chip stocks usually have a wealth of data going back many years.
Technical analysis and fundamental analysis both rely on good data, and when used properly, the results can be extremely effective for CFD trading. In fact, a large appeal for CFD traders is that everyone can benefit from information that is widely available, so not just professionals and those with access to insider industry data can put themselves one step ahead.
In essence, the only conclusion that traders can draw from asking if blue chip stocks are good for CFD trades is that it all comes down to how each investor sees his or her own business plan working. How traders come to the decisions that they make about how and when to make a trade will vary from one individual to the next. Although blue chip companies may seem to be geared towards investors who are more interested in taking a longer overview, there is absolutely no reason why they cannot also play a role in a CFD trader’s portfolio.