Think Bitcoin Is Volatile? Try Forex Trading!
What a ride 2018 has already been for Bitcoin and all the cryptocurrency family. Bitcoin alone rose 24% before falling 38%, movements that dwarf mainstream financial products such as shares.
The question though remains if Bitcoin is volatile enough for day traders who trade contracts for difference (CFDs)?
What Are CFDs?
A CFD mirrors a tradable instrument without actually owning it. This means you can trade Bitcoin easily without going through the hassle of buying and selling it through an exchange and holding it. The most popular CFD product is Forex with the ability to trade currency pairings such as the Euro to USD, speculating on future movements without buying the currency.
The biggest advanced a CFD is leverage. Leverage allows a trader to trade a multiple of their deposit. The example below shows an example of a 10:1 leverage scenario where $1,000 in equity (or a deposit) allows a $10,000 trade size. This multiplies any profits or losses by tenfold when movements occur.
What Leverage Do Brokers Offer For Bitcoin?
Cryptocurrency is highly volatile and brokers are only too aware of this.
An example broker is Pepperstone which offers a maximum of 5:1 on Bitcoin trading.
The table below shows how over the first 17 days of January 2018 a CFD trader on average would have made a 29% profit/loss each day if they have bought at midday and sold the following day.
What Leverage Do Brokers Offer For Forex?
Unlike Bitcoin, currency pairing rarely fluctuate more then a few percent in a day. This stability has allowed forex brokers to offer significantly more leverage.
The example broker ‘Pepperstone’ offers a maximum of 500:1 on currency trading.
Based on the same timeframe as the Bitcoin table above it was found that on average a traders would have made an average 64% profit/loss each day when trading the AUD to USD.
So What Is The Verdict?
In the first 17 days on average the forex pairing chosen moved 0.19% while Bitcoin moved 5.85% highlighting the real volatility of the cryptocurrency.
If your looking to physically buy/sell volatile product, then Bitcoin will provide great opportunity.
On the other hand, if trading CFDs with leverage then currency offers a greater opportunity with a daily profit/loss of:
- 64% when trading CFD Forex
- 29% when trading bitcoin
Overall, trading forex with maximum leverage through Pepperstone offered over 120% more volatility when CFD trading than bitcoin.
It’s Important To Understand The Risks Of CFDs
CFDs are designed for experiences traders with high risk profiles. Trading with high leverage increases the opportunities but also significantly increases the risks. It’s important traders understand the risks prior while trading with leverage.
To manage risks with CFDs there are a few options available:
1) Set A Lower Leverage Level
Most forex brokers offer a maximum leverage level but also the option to pick lower leverage. Those new to trading or with a low risk profile should consider setting a lower leverage level that they are comfortable with. Pepperstone are an Australian forex broker allowing leverage to be set below their 500:1 maximum.
2) Use Stop Loss Features
Trading platforms such as MetaTrader 4 offer stop loss facilities. This means when making a trade you can indicate the maximum amount you are willing to lose on a trade or when a position should be sold since the profit target is met.
A additional facility some forex brokers offer is a guaranteed stop loss. This guarantees you won’t lose more than the amount set in the stop-loss even when extreme market volatility may occur leading to slippage.
3) Consider A Broker With Negative Balance Protection
It has been known during extreme market events for traders losses to exceed their deposit. While most forex brokers have margin calls leading a forex trader to exit positions when their deposit near exhaustion, extreme market events can lead this not to work. As an added safety barrier some forex brokers offer negative balance protection, guaranteeing that a trader can’t lose more than their deposit.