It is high time that traders should consider hedging portfolios with Contracts for Difference (CFDs). For those who are always racing against actively managing positions and are already proverbial with the structure, CFDs are definitely worth considering.

For many investors, the idea of utilising hedging as a leverage is more than enough to put them off despite the dabbles and risks. With proper consideration of the risks, CFD hedges can surely make holdings a lot safer than traditional means.

Similarly with spread betting, you can hedge and place a bet regardless whether assets are swinging in both ends. Moreover, CFDs are marginal which means that traders can leverage even at short positions. Therefore a fraction of the actual cost is undertaken as a strategy for hedging. Subsequently, if combined with a precise stop-loss orders this can be an effective way to prevent severe loss of investments.

It is important to remember that hedging is only limited to just reducing the prospect for hitting more profits but a more transparent use is for it to cover positions. If you have a hunch that your existing portfolio is going to hit the mother lode, confidence will suggest that your desire to hedge your position by shorting against it. If on the other hand you are looking for a much safer way of overseeing things then it is better to go along with the volatility of the markets.

The question under this circumstance is does a CFD hedge make more sense? A hedge against an anticipated drop in the short-term will make more sense than holding onto a portfolio for a longer period. Considering the other side of the hedge is well in place, the individual will most benefit from the offsetting capital gains tax at the same time gaining the original position.

Given the everyday funding fees, not all instances reveal that CFDs can cope up as a long-term strategy. There are two instances that can be used in order to avoid CFD hedges. The first one is when a position has dropped significantly, the market often springs back and by hedging near the lows a trader is doing is allowing oneself to accumulate larger losses Secondly, when the market is showing signs of a bullish trend it is best to avoid them since it will be much worthwhile to retain one’s holdings from hedging so your portfolio can rise along with it.

For those who are relatively new to CFDs, there are some technicalities that you need to get before jumping in. Firstly, it must be noted that over leveraging is one of the most errors of novice traders. Consequently, taking a sound advice from retainers of credible companies is a good way to scourge available options on how to put up a successful hedge. Another point worth contemplating is although there is no expiry date for hedges, the daily funding charge applied to longer positions need to be tailored according to your predicted calculations.

Finally, it should be stressed out that CFDs are always subjected to erratic fluctuations especially in their underlying currency. In volatile times this can abruptly add to the intricacies of working of working out the possible costs and returns of the trade.

With due caution, the use of CFDs to hedge a position will definitely provide added protection against the obscurities of volatile market conditions.
Finally, this leaves us with the problem of being able to recognise when the conditions are ideal to hedge, when it is best to stay away, and when it is best to get out.

Last Updated: May 15th, 2013