Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Dynamic Trading: use multiple strategies within one account

Our chief market analyst, Michael Hewson, discusses the uses of Trading Books and the importance of strategy.

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Using Dynamic Trading

There are a number of ways to use Dynamic Trading and Trading Books, from a simple day trading or intraday strategy, to the types of longer-term strategies favoured by more sophisticated investors and hedge funds.

You can use Trading Books to create user-defined portfolios using weightings, to define a strategy accordingly towards higher or lower beta stocks.

Choose a strategy

Above everything else when looking at Trading Books, it’s important to have a strategy as well deciding on the timeframe of your trading, or investment horizon. One common mistake new as well as experienced traders or investors make, is not separating their mindset when it comes to creating a strategy.

Investors and traders may have differing views on how a particular asset moves, approaching an instrument with a variety of strategies on what position to take and when.

Using Dynamic Trading, you can implement multiple trading strategies within one trading account. As such, you can create a Trading Book for a day trading strategy or for intraday moves and create a separately funded book for more longer-term trading strategies.

Trading on forex

The books can also be split between asset class, with stocks in one book, and currencies in another, so that positions then don’t net each other out.

A common problem faced by a lot of FX traders is how to manage multiple currency positions at any one time. For example, you might have a multi-faceted view on how a currency move might start to play out, and devise a trading strategy to take advantage of that, but then find yourself limited by what is known as the netting effect.

On a long-term basis, you may have a view that the euro is overvalued and want to be short, but also acknowledge that it’s a crowded trade and be vulnerable to a squeeze higher first. In a normal account you can’t both be long and short of the same currency pair at the same time, so creating a sub-book within your main Trading Book would be a way to address that problem.

Pairs trading

Pairs trades are also popular when seeking to take advantage of divergences within specific sectors. For example, if you think that Sainsbury’s is undervalued compared to Tesco or vice versa, then a strategy to go short on one and long on the other might be appropriate, in anticipation that the gap will narrow.

The electric vehicle revolution has seen Tesla’s share price surge over the past few years, putting its value well in excess of the world’s biggest automotive manufacturer, Toyota. All the while the big global car makers are looking to play catchup, and have the scale to do so, which means that the gap between them and Tesla is likely to narrow. So you could go long on one automotive manufacturer and short the other, trading the convergence.

Dynamic Trading can help because you’re able to create a Trading Book for your short-term trading positions as well as your longer-term positions, which means you can carry both positions in one account.

Shares trading

For share traders, Dynamic Trading allows the user to create their own CFD portfolio of stocks, for example by sector or by country, enabling the creation of specific portfolios within a single trading account.

Disclaimer: CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. All examples are for illustrative purposes and should not be taken as investment advice.

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