CFDs enable traders to sell short, meaning that traders can profit from falling market prices. For this reason, many investors use CFDs as a way to try and protect themselves from future losses in a share portfolio. They attempt this by using a trading technique known as ‘hedging’.
For example, if a trader has proceeded with a trade that anticipates upwards market movement, but then becomes worried that the market is going to decline in the short term, they can use CFDs to offset their potential losses by ‘going short’ on that same security for a period of time.
So, to continue that example, if that security’s market value does indeed decline, the profits earned from the CFD hedge would serve to some extent to offset the losses incurred from the original open position.
ETX Capital traders should note that CFDs can only be hedged using the ETX MT4 platform.