Trading CFDs around a Bid

 Go back to CFD Trading Strategies

How To Trade CFDs around a Bid

(written by Nathan Smith at JN Financial CFDs)

There is no more exciting event in trading as when a stock you are holding rallies because of a bid approach. In the UK, rumours of takeovers are rife, so how do you distinguish between fact and fiction? How can you maximise your profits using CFDs?

In truth, rarely can one predict the exact timing of a bid. However, there are several strategies that can be adopted by the CFD trader to make sure they have the best chance of making money from bid scenarios.

The first point is portfolio management. If you trade CFDs specifically for the big winners from bids, then a basket of stocks in the FTSE 100 and 250 that are perennially touted as being taken over are needed. Different sectors should be selected, as there is often a rotation of sectors consolidating from one month to the next.

As movements in prices magnify profits and losses, timing is crucial. Ideally, you should enter a stock that is seen as a bid target but when there is no news about it at that time. Technical analysis is vital for support levels and should also be used when the stock has subsided.

Stop-losses are also important, as being disciplined in this area is as important as picking the winners. There are a number of factors in choosing the right price for the stop loss. Where would the stock trade before the premium of the bid story? What are the lows of the last 3-6 months? Where are the 200MA, 50MA and the RSI?

However, some CFD traders make money after stocks have rallied up from the initial bid. Again, the CFD trader can utilise different techniques when looking at this area.

If there is a chance of a counterbid, it may be worth placing a buy order with a tight stop loss. Are there many players in the sector who could buy the company? Is there hidden value on the balance sheet? Is the stock trading above where the bid was offered and therefore the market is expecting a higher offer?

Some clients at JN Financial have also shorted stocks after a rally up. For example, many stocks in the banking sector have been perennial bid targets yet no bid has taken place. Do you think the stock is overvalued at the potential bid price? Has the stock reached this price in the past and then come back?

What is clear is that if played correctly, trading CFDs around bids can be a profitable experience.

JN Financial CFDs are an advisory City broker that advises clients on takeovers.