Day Trading – The Ultimate Work-From-Home Job? |
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Ever dreamt of giving up the daily grind? Want to strike out on your own and work from home, but don’t know what you could possibly do to make a living? Full time Nasdaq trader Harvey Walsh wondered just that, and now he asks “Is day trading the ultimate work from home job”?
We’ve probably all had the same thought at some time or another, as we trudge off towards another day at work – the same work we’ve been doing day in day out for years – “surely there has to be a better way?” Slaving away to make somebody else rich just doesn’t seem right somehow, but what alternative? Setting up a new business, or buying an established one, are both expensive and risky prospects. So how can the disenchanted employee ever hope to make the switch from wage-slave to total independence?
Those are thoughts I had almost every day, before I quit the safety of full time employment and decided to strike out on my own. I asked myself the same question day in and day out; surely there has to be a better way. What about the internet, I wondered, isn’t that supposed to be bringing new and exciting opportunities to all? I researched a lot of so-called work-from-home opportunities that promised untold riches, apparently mine for the taking just by sitting in front of my PC. Needless to say, in reality those schemes turned out to be about as fulfilling as, well, filling envelopes for a living. No, I knew there had to be another way – something real – something where I could be in control of my own destiny.
And then one morning on the train to work, I read about a couple of Wall Street boys who had struck it rich thanks to some huge bonuses, and were now going it alone setting up their own day trading shop. That was when I discovered day trading, and I realised that this was exactly the opportunity I had been searching for. I decided there and then that I was going to make a full time living from the stock markets, whatever it took to succeed.
The advantages of day trading as a job are numerous to say the least; there is no boss to answer to, no customers to satisfy, no suppliers to let you down, no waiting for invoices to be paid, I could go on. In fact, I will: trading is a location-independent activity – I can work from anywhere with an internet connection, which effectively means anywhere in the world with a telephone line. I regularly trade from my laptop whilst travelling. I can trade when I feel like it, and take time off when I like, which means I can spend quality time with my family.
Now let’s get this straight, trading can be a risky activity, there is no doubt about that. So is driving a car to work, but the risks of getting from A to B on four wheels are well understood and are managed accordingly, to the point where we don’t think twice about getting behind the wheel. And in the same way, provided a trader is disciplined in their approach to the job at hand, and understands the associated risks of the work, so those risks can be managed.
On the subject of risk, day trading is almost unique in that it can be learnt and practised with absolutely no financial risk at all, by means of paper-trading – that is - trading using freely available simulation software. Thus in the same way a trainee airline pilot won’t be let loose into the skies without having learnt and rehearsed their skills in a simulator, so a new trader can employ the same technique before they start trading real money. I “sim-traded” before I gave up the day-job; it made it easy to leave the safety-net of a monthly pay check knowing from my simulated trading sessions that I could already make money in the markets.
And that brings me to the most satisfying aspect of trading for a living; money. On an average day trading the Nasdaq, it is not unusual to make more money in a couple of hours than I used to make in a whole month working full time as a wage-slave. There are bad days of course, days where things just don’t work out, but they pale into insignificance over the course of a week or a month. It certainly took some intensive studying and a lot of practise before becoming a consistently profitable trader. But the end result of that hard work is an immensely valuable life skill that nobody can take away, and which allows for incredible freedom.
Since I first started trading, the learning curve has become even easier for the aspiring day trader, with a multitude of new websites, training courses, and books all covering the subject. I envy anyone starting out in this business today – they certainly have many more learning aids available to them than I had at the same point in my own career.
So is day trading the ultimate work-from-home job? No. I firmly believe it’s the ultimate work-from ANYWHERE job!
About the author:
Harvey Walsh is a full time Nasdaq day trader, and part time trading tutor. He trades from his home, or indeed wherever he happens to be when travelling. He can be contacted via his website: http://www.day-trading-freedom.com
Investing Stock Market ABC’s |
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While most folks today trust mutual funds and their professional managers with their investments, it’s still important to understand the basics of the stock market. Although investing in individual stocks may not be right for everyone, a basic understanding of the stock market is essential to understanding the workings of our economy and business sector.
A stock is a portion of ownership in a company. Commonly referred to as a share, it is a small percentage of the total ownership pool for the corporation. Shareholders are stock owners, or people who have an ownership interest in the corporation. Today, shares are usually tracked electronically, but in previous decades shareholders would actually receive a certificate stating their ownership.
Why own stocks? First, you are sharing in the company’s profits. When a corporation shows a profit, they will sometimes distribute these profits to each shareholder, based on how much stock they own. This distribution is called a dividend. Company’s can elect to pay out their profits or reinvest them in the company, but as a shareholder, each time a payout is made you will receive your proportionate share.
Also, the value of your stock will rise and fall based on the company’s perceived value in the stock market. If you buy a share at $10.00 and it rises to $11.00 a share, you’ve made a dollar for each share you own, and subsequently sell. However, with this opportunity comes risk as well. If the share price falls and you sell, you’ll lose money. The more volatile the stock, the more opportunity for risk or profit.
Most shareholders track their stocks using the stock table. These appear confusing and difficult to read, but they are actually easy to understand with a little practice.
Ticker symbol is listed first. This is the abbreviated symbol that the stock market uses to identify your company. For example, GE is General Electric, WMT is Walmart. Once you select a company, you’ll need to know it’s shorthand name to track its progress.
Second, the company’s name may be listed. Some tables omit the name to save space, others list it to make tracking stocks easier.
The third item is the number of sales in the last trading day. This is listed in the 100,000’s, so 256 means 256,000 shares were bought and sold on the last day that the market was open.
Next are the high and low price, in that order. The high price is the highest per share price that the stock sold for on the previous trading day. The low price is the lowest price for that day. Since the price of the shares moves all day long, this is a good reference to see how much the stock is changing in a day.
Next, the closing price is listed. This is the last price that the stock traded for as the market closed. This will also be the beginning price for the next trading day.
After the closing price, the table will list the change, or the amount that the stock changed when you compare yesterday’s closing price with the closing price for the day before. This will be listed as a positive number (the stock went up) or a negative number (the stock sold for less yesterday than the day before).
Stock tables are found in many places, but most people check their daily paper or the Wall Street Journal. There are many internet sites that track stocks as well.
Of course, you’ll have to select a stock. Choose carefully or consult a professional, and good luck!
About the author:
Jay Moncliff is the founder of http://www.investingreviews.infoa website specialized on Investing, resources and articles. This site provides updated information on Investing. For more info on Investing visit: http://www.investingreviews.info
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by: Mark Crisp |
that discipline contributed more to their success than their trading philosophy itself. Remember that the key to any plan is how well it holds over time.
2. There is no "sure thing", and there is no trading system that is 100% accurate. Your goal, as a trader, is to usethe tools available and try to develop an edge. Base your trades on sound fundamental and technical reasoning,
rather than on hunches and long shots. If you can develop an edge, however small, over time you will be successful.
3. A trader must be able to admit they have made a mistake. Do not become emotionally or financially committed to a losing trade. Avoid the pitfall of becoming emotionally involved with any trade.
4. An investing edge is only part of the equation. A trader should diversify sufficiently so that the growth in equity can be consistent and the likelihood of a catastrophic loss can be diminished. The lower the percentage of a traders' account dedicated to any one trade the greater the chance of the trader being successful.
Even if the trader has a perceived investing edge, it is unwise to run the risk of ruin, and bet it all on one trade. The goal is not only to make money, but also to be able to continue to make money consistently for an
extended period of time. A trader must learn the basic concepts and the importance of money management.
5. Lack of experience in the market causes many traders to make the mistake of taking small profits and letting losses run.
Fundamental trading wisdom dictates the exact opposite. When in a winning trade, be patient and fully capitalize on the success. The trading axiom is, "cut your losses short and let your profits run".
6. A trading system does not have to be difficult, time consuming, complicated and stressful in order to be profitable.
In trading systems, as in many other things in life, simple can be better
7. As a trader, be cautious, and never let greed take control of a winning position.
8. Be aware that declining volume usually indicates the market is not accepting higher or lower prices, and this could indicate a market turn.
9. Learn from your trading mistakes. Never make a trading mistake without asking yourself why.
10. Do not make trading decision based solely on margin requirements, and always trade within your capabilities.
Remain true to your trading plan and follow the trading style that works best for you.
11. Do not trade markets that you don't understand. Trade with confidence and conviction. Trade only with risk capital and be aware of the risk of losing. Divide your capital into 6 equal parts and never risk more than one-tenth of your capital on any one trade.
12. After a long period of success or a period of profitable trades, try to avoid the natural tendency toward increasing your trading activity. Conversely, use self-discipline when a trade goes against your position. Take your loss and wait for another opportunity. Never increase your trading after a loss.
13. Avoid getting into the market because you are anxious from waiting and/or out of the market because you have lost your patience. Never over trade and adhere to your risk management rules
14. Do not make a trading decision to buy just because the price of the stock is low or sell just because the price is high. Never change your position in the market without a good reason that is based on a fundamental or technical rule indicating a change in trend.
15. Trade the most active stocks and refrain from trading the slow moving markets. Trade "at the market" whenever possible and try to avoid a fixed buying and selling price.
16. When the market is moving with your position and you are using a stop loss order, then raise your stop loss so as to lock in your profit. Protect yourself against the possibility of turning a profit into a loss.
17. The "trend is your friend," and never buy and sell if you are insecure of the trend according to your fundamentals and technical rules. If you are in doubt, then exit the market. Only trade when you feel confident with your trading strategies.
18. Trade in five or six different stocks at a time, so as to avoid tying up all of your capital in any single stock.
19. A trader should establish a "surplus account" after a series of successful or winning trades. The goal is to retain the "surplus account" for times of emergency or panic 20. It is difficult to try and guess where the top and bottom of the market is, instead let the market prove its top and bottom.
About the author:
Mark Crisp
The Momentum Stock Trader
http://www.stressfreetrading.com |
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Boost Your Income With Financial Spread Betting
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About 6 years ago I started to notice that certain friends of mine had quit their jobs but continued to live very luxurious lifestyles - seemingly without doing very much. I thought they must just be using up their savings until I discovered they were all making a fantastic living by spending just a few hours a week doing something I had never heard of before - 'financial spread betting'
More and more people are now becoming familiar with the phrase �financial spread betting�. Once, the sole preserve of City Whiz kids or sophisticated gamblers, financial spread betting is now gaining in popularity as a great way to earn a very sizeable tax-free income without the risk of losing the shirt off your back!
So why is financial spread betting becoming so popular. Well, with a bit of understanding and practice, ordinary people, with no prior experience, can earn enormous sums whilst controlling their risks and limiting their losses. You do not even need a stockbroker or a city dealing account to do get involved. An on-line account is very simple to open and anyone with web access can do it.
Spread betting, aka futures trading, is easy to understand if you stick to a simple index like the FTSE 100 or the DOW JONES.
In basic terms, this is how it works:
When you buy a 'future' you take a position on what you think the index (e.g. the FTSE 100, or the DOW ) will be at some future date - e.g. June 2005. Let�s say the FTSE is currently at 5200 and you think it will rise over the next three months as 'terrorist fever' abates. You would buy the June FTSE at (say) ï$10 per point. For every point it rises, you make $10. If it goes up 100 points, you make $1000. Of course, if you get it wrong and the index falls by fifty points (say), you lose $500.00.
You need of course to be very aware of the risks before you get involved. As with any investment or business, you can lose money. If, by nature, you are a timid, cautious person, then it is definitely not for you. But if you have some money to play with, and aren�t risk adverse, then financial spread betting is the one of the best possible ways you can make a great deal of money completely tax free� and there are clever ways of limiting your losses so you never lose more than you can afford.
Unlike most businesses, it is possible to get involved with an absolute minimal outlay and take a position without buying a single thing. You do have to 'back' your position with a certain amount of cash, but this is 'insurance' money, NOT stake money.
The best thing is you can try it for free without any risk at all. You can 'dry trade' with 'monopoly' money until you get a feel for how it works and are confident enough to start using real money.
Financial spread betting has become so popular primarily because of the relationship between risk and capital. It is highly leveraged and you can make huge profits with only a limited amount of capital and risk. The fact that there is (unlike with most investments) no stamp duty or tax also helps make it extremely attractive.
So if you are of the right temperament, spread betting can be a very lucrative way of making an amazing income in your spare time. But be warned, if used recklessly or without the correct knowledge it can result in large losses.
About the author:
Gary Anderson.
http://www.spreadbettingsecrets.com
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A stock market simulation game is a great way to practice your investment skills before actually investing any "real" money in the stock market.
Simulation games are usually played on the internet, where people can experience the thrill of investing in the stock market without any risks, costs or any fear of losing money when and if they make a poor investment decision.
Many teachers and professors of banking and finance are now using stock market simulation games to teach their students about the rudiments of investing in stocks. Most stock market simulation games come with a fee to get started, but there are some that are free of any charge. One does not need have prior knowledge about the stock market to join.
This is how stock market simulation games usually work:
First, players must register. After registration, players are given an initial sum of "virtual" money to invest in companies of their choice. Players build a portfolio of stocks by buying and selling shares in companies. Most stock market simulation games use real-time market data.
The objective of most stock market simulation games is simple:
To increase the value of your portfolio of stocks so that it is greater than that of the other game players.
Below are some tips on choosing a stock market simulation game:
• Choose a stock market simulation game that is used and recommended by reputable colleges, high schools, middle school, investment clubs, brokers in training, corporate education courses and any other group of individuals studying markets in the U.S. and worldwide.
• Choose a stock market simulation game that is comprehensive and easy to implement in any Finance, Economics, or Investments class. A good stock market simulation game should feature trading of stocks, options, futures, mutual funds, bonds from the U.S. and many of the world's major markets.
• Choose a stock market simulation game that provides a valuable, reliable, and realistic trading simulation at a reasonable price to members and other individuals who are interested in learning more about investing and trading. The simulation game should also have some capability for testing a variety for investment strategies.
• Choose a stock market simulation game that has a toll-free customer service phone number and excellent e-mail support for members. The support function should be able to quickly answer any questions that members/players may have.
• Choose a stock market simulation game that is easy to use and easy to teach even to those who have never had any real hands-on investment experience.
About the author:
Morris gathers information about simple trading systemsimple trading system.
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Financial Trading – so many markets, so little time |
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Would you like to make money from trading but don't know how to trade?
Have you heard of others making a killing on the markets and wished yourself in their position?
Trading covers a multitude of sins, or at least a multitude of markets. Mention “trading” to a non-trader and they’ll probably think of stock and shares but there are many other markets you can trade in. These include commodities, futures, indices, CFDs and options. They all have their pros and cons and some require specialized knowledge.
The most popular markets used by traders are stocks, commodities, futures, indices and forex. Some traders switch between markets, others stick to just one. Let’s highlight some of the similarities and differences between them.
Shares
In the USA there are over 40,000 shares so you have a lot of markets to choose from. You can’t deal in all of them so you need to home in on those that offer good trading opportunities using whatever trading methods you decide to use.
When buying shares you usually have to put up all the money at the time of sale. That might seem obvious but it’s not so with all markets. Some brokers offer a 50% margin with shares which means you can trade to the value of twice the amount in your account. This seems like a good deal but if your shares start to go down you’ll get a “margin call” and will either have to put more money in your account or sell the shares at a loss.
Shares are normally traded in lots of 100. If you want to trade an expensive share – and some shares are very expensive, particularly in the US markets – you need a considerable amount of money in your account.
It’s not easy to sell shares short. Selling short is a strange concept to many people who think of buying shares at a low price and selling then at a higher price. But it’s often easier to predict that a share will fall rather than rise so what you’d like to do is to sell it at a high price and then buy it back later at a low price. The net result is the same whatever the order of the deals – buy low, sell high.
However, you can’t sell something you don’t own so in order to sell shares short you must “borrow” them from your broker. This is not quite as straightforward as buying and not all shares are available for selling short.
Finally, share dealing takes place during market hours so if you don’t live in the country where they are being traded you must adjust your trading hours to suit.
Futures, commodities and indices
Commodities are goods such as corn, copper, crude oil, orange juice, oats, gold and wheat.
Technically, a futures contract is an agreement to make or accept delivery of a commodity on a certain day at a certain price. In practice this rarely happens unless you’re a manufacturer who actually wants the goods. The vast majority of futures traders are simply speculating on whether the price will go up or down and never take delivery of an item.
Futures contacts include commodities and also stock market indices such as the S&P 500, Dow Jones and the Russell. Indices are simply a composite of securities that provide an overall reading of the market or some section of it.
The S&P 500 (Standard & Poor’s 500) tracks 500 of the largest companies in the US market. The Dow Jones Industrial Average tracks only 30 of the largest and longest-established companies while the Russell 2000 is an index of smaller stocks.
Essentially, commodities and indices are futures and traded in much the same way although traders may use the terms interchangeably.
Unlike shares, futures can be sold short just as easily as they can be bought. Each futures contract has its own fluctuating price and many traders deal in just one lot contracts.
Brokers usually charge a flat fee commission per contract, often expressed as a “round turn” which is one buy and one sell transaction. This may be a few dollars, often less than the value of a point or two on the contract. If you’re trading a long time frame the commission is negligible but if you’re day trading and scalping for a few points here and there it becomes a considerable part of the cost.
Futures brokers usually offer a margin of around 20% of the value of the underlying instrument so you can control $10,000’s worth of a contract for maybe $2,000. However, the same rules apply – if you over-leverage your account you’ll receive a margin call or your positions will be closed at a loss. Margin and leverage are a two-edged sword.
Many brokers offer a demo account so you can get used to the trading platform and test your trading strategies before you put real money on the line.
Forex Currency Trading
Currency trading, foreign exchange or forex as it’s more commonly known, has fast become one of the most popular markets for private traders in recent years.
As its name suggests, it involves buying and selling foreign currency. The most commonly traded currencies are referenced against the US Dollar and are sometimes referred to as a “currency pair” even though you are only trading one instrument. For example, the GBPUSD is the UK Pound/US Dollar pair. A value of 1.7625 would mean that the one Pound is worth 1.7625 Dollars. Other popular pairs include the Euro (EURUSD), the Swiss Franc (USDCHF) and the Japanese Yen (USDJPY) although there are others.
So unlike shares and futures, you don’t have a mass of markets to choose from, but there is variety within forex currency trading to give you a range of markets to trade.
The value of each pair differs slightly but the minimum movement – called a “pip” – is worth approximately $10. The GBPUSD has been averaging 100-150 pips per day which would be $1000-1500. Many brokers let you trade half or even quarter-size lots which are useful when you’re starting out. Also, many brokers offer a demo account so you can practice before risking real money.
The total value of the forex market is worth trillions of dollars per day, far larger than shares or futures. It is also a truly international market with dealing taking place all around the globe 24 hours per day from Monday to Friday. You can, therefore, trade at any time of the day or night at times to suit you. It’s worth noting, however, that the bigger moves generally occur during the US and European trading sessions.
You can sell short forex just as easily as you can buy and brokers offer highly-leveraged accounts too – but the same warning regarding margins apply here as well.
Brokers tend not to charge a commission for trading forex and you will often see adverts for “commission free” trading. However, they make their money on the spread which is the difference between the buying price and the selling price. The spread is usually between 3 and 5 pips although some brokers may offer a 2 pip spread on some pairs, and some less-popular pairs may have a larger spread.
Paying on the spread is particularly useful when trading mini lots. A 3-pip spread on a quarter lot will be about $7.50 whereas on a full-size lot it would be $30. Again, the spread is more important when trading short time frames where you’re only aiming to make a few pips per trade. You need to build the spread into your trading system so you don’t overestimate the amount you might make per trade.
One interesting aspect of forex currency trading is that there is no central clearing house where absolute prices are quoted, unlike shares and futures. So it’s quite possible to see different brokers quoting slightly different prices for the same pair. As the market has become more efficient, this difference has reduced, in most cases, to a few pips but it highlights the importance of checking that the data you are using for analysis is the same – or close to – that used by your broker for placing your orders.
The market you decide to trade will depend on many things, not least of all, your budget, but also how many markets you want to look at and what hours you want to trade. There are trading vehicles to suit all preferences and pockets.
About the author:
Amin's new teaching manual "The Affluent Desktop Currency Trader" provides an alternative for people looking for online business opportunities.
Amin teaches the method he uses to download $1000+ every week.
For more information, visit www.Webkept.com
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Invest Now for Dividends Later |
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No matter what age you are or even your level of employment or economic position, it may be a good idea to start preparing now, even in a meager way, for eventual financial security. Some people feel they need every dollar they make to get by from one paycheck to the next. While this may be true for some, there are others who squander significant sums on insignificant things. They could be socking that money away into an investment account that, over time, could lead to huge savings and a comfortable retirement.
It isn’t hard to get started. All you need is $100 to $500 to open an account, and anywhere from $25 to $50 monthly to continue building your stock or mutual fund portfolio. In fact, a young person aged 20 could deposit $2,000 and then not another dime. In forty years he or she might have tens of thousands of dollars. The stock market has followed fairly predictable patterns since its inception in the 1800s in New York City. Although historic events like the Great Depression and several global wars have impacted its activity, the gains and losses remain fairly consistent, with most investors earning a predictable return on their investment.
Of course, no one can predict what the future holds, or whether the pattern will continue. And none of us should invest more money than we can afford to lose—just in case the world economy crashes one of these days. But with steady deposits that continue to compound and earn interest over time, a sensible and prudent investor can substantially increase the amount of money going for retirement or a dream vacation at some future point.
If you are thinking about opening an investment account, do a little online browsing for more information. Visit sites like E-trade or Scott’s Trades to see how the process works. Start reading your newspaper’s financial pages for details about the latest stock prices and market trends. Do a little paper trading by following the daily stock news. Instead of actually purchasing stock, however, work it out on a piece of paper by pretending to buy a certain amount of stock for the specified price and then watching to see how it performs over the following week. Chart your gains or losses to figure out whether your stock deal was successful. If you do this for several months, you will soon learn to understand more about the stock market and how to buy and sell like the pros.
Even if your budget is tight, try to set aside a little money to open an investment account from any windfalls that come your way from job bonuses, inheritances, or cash gifts. Some people set aside their annual job raise, or part of it, as part of their investment strategy. Then, as your budget becomes looser with paid-off bills or grown-up kids, you may be able to start having a standard monthly amount deducted automatically from your paycheck and deposited into your investment account. This could take the form of a Roth IRA (individual retirement account), a money market fund, a mutual fund portfolio, or individual stock shares.
It probably is a good idea to take an investment class at the community college or sign up for a financial planning seminar. Success may be just a few years away if you start now and plan right.
About the author:
You can find more great investment information at http://www.investmentcentral.com
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Playing a Game You Can Win |
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Imagine a simple coin-tossing game where you win whatever you stake if heads comes up, lose what you stake if tails comes up, and you are charged 1% of your stake each turn to play. Can you win money at this game? If you are familiar
with the concept of expectancy, then you will probably answer ‘No’ since over many turns the amount won will be equal to the amount lost (assuming the coin is a fair one) and after factoring in the 1% cost of playing you will lose money overall.
In fact, there is a way to win this game, and that is to understand that the longer you play, the more you will lose, so the optimum strategy is to bet everything you have on just one toss of the coin; just like Ashley Revell did when he sold everything he owned, took the $135,300 to Las Vegas, and bet it all on ‘Red’ on one spin of the roulette wheel. Mr. Revell was fortunate and he won, but I am not recommending that you bet everything you have on one trade!
Obviously risking everything on one trade is not a useful strategy since we want a game we can play for long periods of time to generate a consistent income. So how can we change the game so that we can win? There are three aspects to the game which can be adjusted to increase our chances of winning consistently:
• We can tip the chance of a winner in our favor from 50/50
• We can increase the size of the payout from 1:1
• We can reduce the cost of playing the game
Tipping the chances of a winner is not possible in a fair coin toss game, but it is possible in trading. There are two ways to approach this: identify conditions that are more favorable to your winners and include them in your system definition, or identify circumstances where a loser is more likely, and skip those trades. For example, if you notice that most of your winners are entered on days where the overall market has moved in the same direction as your trade, then only enter trades when the overall market is moving in the correct direction. This means that your trade is in the same direction of the overall market, rather than against it.
Another example might be that trades that are entered just before major news announcements, like earnings calls, often get stopped out as losers due to increased volatility, so you should skip those trades.
There may be many patterns of winners and losers that you can identify for your own systems and careful study of past trades is definitely worthwhile. Note that we do not want to increase our win percentage too significantly (i.e. to greater than 60%) since this would indicate that we have ‘curve-fitted’ our system to historical results that are unlikely to continue into the future.
It is also important to note that for some types of trading (i.e. long-term trend following strategies) it may not be possible to have a win percentage that is greater than 50% (and it may be much lower) and that is where the second aspect of improving your system comes into play: the average size of winners versus losers.
Increasing the size of the payout so that the winners win more on average than the losers lose depends on the way you handle your stops. Having large winners in relation to losers can make up for a low win percentage, and mean that you will still make money playing the game. One method is to have a trailing stop that moves up as a trade becomes a winner. If you have fixed stops for losing trades that limit losses, but trailing stops for winning ones that allow winners to grow, then you are increasing your chances of your average winner being larger than your average loser. Generally it is better to be strict on losers by having tighter stops that keep losses to a minimum and generous with winners by having stops that allow profits to grow. In any case you want to make losers small and winners large, so never add to a losing trade – that would be doing the opposite of what you want to achieve.
Lastly, reducing the costs of trading is probably the simplest change you can make, and can mean the difference between winning and losing overall – especially for systems that have lower expectancy. There are many online brokers now that charge 1c per share for equity trades (and comparably low fees for other instrument types) and there is no reason why you should be paying more than this if you are trading electronically.
Every trader should do whatever they can to maximize the expectancy of their trading system or method by considering each of the 3 aspects just described. If we do some, or all, of these things then the amount we win now becomes a
factor of how much we stake, and how often we play because we have created a true ‘edge’ where we know that the system we are trading should make money (if traded accurately). Calculating the expectancy of your trading system or method
tells you whether you are playing a game you can win, and is a very important piece of information that every trader should know before they risk real money.
If the game is rigged against you because your trading methods lose money regardless of how accurately you implement them, how can you ever be a successful trader?
About the author:
Paul King is owner and head trader of PMKing Trading LLC, a Vermont-based proprietary trading company founded in May 2002. Paul has published a series of eBooks and articles about what he considers to be the important aspects of trading.
Visit www.pmkingtrading.comfor more details.
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Red, Green, Yellow - or - Stop, Go, Go Very Fast: Which Describes Your Online Trading? |
by: Jonathan van Clute |
Ever notice how behavior in one area of life can apply to behavior in other areas of life? For example, I've noticed a number of things while driving that apply to online trading. One of them is regarding how people behave toward traffic signals.
In the USA, where I live, all the traffic lights are red, yellow, green - red for stop, yellow for slow down or caution and green for go. The lights always change in order from red to yellow to green and back again to red after a time.
How drivers relate to the changing lights is NOT always the same. There are three types of drivers and responses to seeing a green light:
Type one drivers believe the light will change to red at any moment. In anticipation of the change, they begin to slow down far in advance. I call them "Red Lighters."
Type two drivers know green means it's ok to go. They continue on their present course and speed, making no changes at all as they approach the light. I call them "Green Lighters."
Type three drivers know the light could turn yellow at any moment, so they step on the accelerator to catch up to the light as quickly as possible, not wanting to miss it. I call them the "Yellow Lighters."
Many people apply these same approaches to most of life's opportunities, including online trading. Maybe you do the same thing.
If you see an opportunity approaching, do you slow down, believing that since it won't last you shouldn't be too hasty or you could be stuck in a bad deal? "Red Lighter."
Or, do you see the opportunity coming, and just let it come at its own pace, taking your time and accepting whatever happens when it reaches you? "Green Lighter."
Or, do you rush to it, knowing that it could be gone at any moment so best to jump on it immediately so you don't miss out? "Yellow Lighter."
Each of these approaches has its risks, and its rewards. Red Lighters take no risks, and therefore never "push their luck" by hurrying into anything. On the other hand, what risks are they actually taking by potentially missing out on opportunity?
Green Lighters just want to travel safely and smoothly. They don't mind what happens along the way so they just keep going with the flow of traffic. Sounds smart, doesn't it? Yet, what real gain is there in being "just like everyone else"?
Yellow Lighters don't want to miss any opportunity so will do whatever is needed to capture the potential reward. But how big is their risk in being first?
Each is going the same direction, and could even be in the exact same type of vehicle, but none is actually any more guaranteed to arrive at their destination than the other. The Yellow Lighter will probably get there the fastest, but could also get into an accident along the way from so much speeding. The Green Lighter will arrive safely in a reasonable time, but will likely arrive with the rest of the crowd and never be early. The Red Lighter will probably always be late, and will typically spend so much time on the road that they never get to fully enjoy their destination.
Which are you? Which do you want to be? How do you assess risk and reward in your financial decisions, your daily activities, your life? Like it or not, everything we do every day has a risk and an associated reward.
Getting in a car each day and driving to work carries with it the very real risk of death from a traffic accident, with the reward on the other side of the commute being a paycheck. Everyone must assess the risks and rewards in their life for themselves on an ongoing basis, something that I myself do constantly every day and that I encourage you to do as well. You just might be surprised at the trades you find yourself making unconsciously.
I invite you to notice your trading style and adjust it according to the results you wish to achieve. Being conscious of our behavior patterns and changing them when appropriate can make all the difference in online trading success.
About the author:
Jonathan van Clute is a full time investor, educator, speaker, and online options and sports arbitrage trader. In addition to his business activities, he is also a musician, video editor/animator, and one of the world's greatest Segway Polo athletes. He can be reached via email at jonathan@PMLinvestments.com and is speaking at an upcoming teleseminar, visit http://snurl.com/vclightsfor details.
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The 10 Golden Rules of Trading |
by: Paul King |
1 Introduction
In this article we cover the few important rules that should never be broken in trading. If you can apply these rules consistently, and with discipline, you will be well on the way to being a profitable trader.
The rules we cover are:
• Have specific goals and objectives
• Be consistent and disciplined
• Let profits run
• Cut losses short
• Never add to a losing trade
• Don’t take too much risk
• Only trade positive expectancy systems
• Minimize all trading business costs
• Be well educated
• Don’t trade scared money
Each of the rules will now be discussed.
2 The Golden Rules of Trading
The following sections outline a set of rules that can significantly improve your chances of success if they are understood, practiced, and implemented consistently in your trading. These rules have been learned the hard way, by study, research, trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.
We hope that you can learn from the work we have done, and benefit from our experience. The rules will now be discussed.
2.1 Have specific goals and objectives
Few things are more important to your trading success than having set (i.e. written) goals and objective for what you are aiming to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals only when we articulate them and write them down.
For any business to be successful it must have measurable objectives that are actually achievable. In trading (obviously) the primary objective is to make money, but it is important to have other objectives that are not purely cash-related. We must always remember that reward and risk go hand-in-hand in trading and that we cannot expect to achieve high returns without planning for high risk (i.e. draw-downs).
Your objectives and goals will be very specific to you, but they must have the following characteristics to be useful:
• Be measurable (in completion and timeframe)
• Be achievable
• Be worthwhile
• Be positive
As an example, here are some of our current objectives (this is only a partial list):
• Develop 2 new positive-expectancy trading systems each year
• Make fewer errors implementing our trading systems each year
• Achieve a return to maximum draw-down ratio of 1.5:1
• Take 2 weeks vacation each year
Note that only one of them is about making money, and that has a measurable objective that is relative to draw-down, not absolute (i.e. make 100% per year). If you know what you are trying to achieve, and when you are trying to achieve it, the whole business will be focused on meeting
your objectives and help guide you to only pay attention to things you really want to achieve with your limited time and resources. This will also give you a way to measure the success and progress of your trading. Generally traders with well-defined objectives will be much more successful than those that do not have pre-defined goals.
2.2 Be consistent and disciplined
In order to realize the full potential of your trading systems it is critical that you take every trading entry, adjust every stop, and close out every trade as and when your system says you should do. This takes extreme confidence in your trading systems, good robust reliable technology, and the mental discipline to stick to your trading plan whatever happens (assuming it is complete).
An underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation you may face in your trading, so that you know how you are defining what being consistent is. Your plan needs to include at least the following items:
• All your trading rules for entering, adding to, and exiting positions
• What you will do if your trading computer, internet connection, broker, power, telephone
etc. fails
• What you will do if you are unable to trade
• What you will do if you lose X% of your account
• What you will do if all the markets are closed and you can’t exit your positions
Unless you write the answers down to all these issues, you cannot be consistent and disciplined in your approach to trading and if you lose money you will not know whether it is because you didn’t follow your plan, because your plan is incomplete, because your systems do not work, or simply because you are going through a losing period.
2.3 Let profits run
This simple rule is the key to being a successful trader. It is three simple words that are very hard to actually implement. When we get a profitable trade our natural fear of losing the unrealized cash kicks in and we truly want to close it out now and take the money. Most trading consists of long periods of small winners and losers followed by a few huge winners that make the difference between overall profitability and simply breaking even or losing due to trading costs(commissions, spread, and slippage).
It is our ability to let the huge winners become just that - huge - that determines how we will perform overall during the year. The key to letting winners run is to have trailing stops that are outside the daily noise of the market so that they are not tight enough to get stopped out during ‘normal’ trading. This means being prepared to give up a significant portion of a winning trade’s open profit and is the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than working out how tight our stops can be to capture maximum profit. The trade has already shown you that it intends to be a winner, and the chances are it is a low-risk idea to add to the position now rather than ‘strangle it’ with stops that are too tight.
It is very important that your position management rules allow for large winning trades, and that the rules are pre-defined and understood before you place the trade. This will allow you (if you have confidence in your method and discipline) to stick to your rules when you do get the big
winner.
2.4 Cut losses short
This is the sister rule to the previous one, and is usually just as difficult to implement (although it
is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation comes from avoiding the few large losers that the market will toss your way each year. Setting a maximum loss point before you enter the trade so you know before-hand approximately how much you are risking on this particular position is relatively straightforward. You simply need to have a exit price that says to you ‘this trade is a loser and I will exit before it gets any bigger’. Due to gaps at the open, or limit moves in futures we can never be 100%
certain that we can get out with our maximum loss, but simply having the rules, and always sticking to it will save us from the nasty trades that just keep on going and going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at you maximum loss point, just get out. Do not hope that it will turn around. Given that trades are either winners or losers, and this one is shouting ‘Loser’ at you, the chances that it will turn around and become a large winner is tiny. Why risk any more money on this losing trade, when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding the position and hoping it will go back your way. Even if it did do this, the mental energy and negative feelings from holding the losing position are not worth it. Always stick to your rules and exit a position if it hits your stop point.
2.5 Never add to a losing trade
One of the few trade management rules that we can state we never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small to risk more money on. If indeed it is a winner disguised as a loser, why not wait until it shows it’s true colors (and becomes a winner)before you add to it.
If you do this you will notice that nearly always the trade ends up hitting your stop loss and does not look back. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very fortunate. Sometimes the trade hits your stop loss and then
turns around and becomes a winner and you can count yourself unlucky. Whatever the result, it is never worth adding to a loser, hoping that it will become a winner. The odds of success are just too low to risk more capital in addition to the initial risk.
2.6 Don’t take too much risk
One of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in
poker than going all-in (risking all your chips) works every time but once. This is true of trading.
If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point – it is only a question of time.
In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability
and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny.
All trades should be of a size that almost seems insignificant. If you are worried about the size of a trade then it is too big and you should reduce the size immediately. Remember that longevity is the key to making money by trading – slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.
2.7 Only trade positive expectancy systems
If you have a positive expectancy trading system, the only factors that determine how much money you will make per year are the number of trades the system generates, how much capital you allocate to the system, and how accurately you implement the trading signals. If you do not know whether your trading system is positive expectancy then why are you trading it? Expectancy is calculated using the profit or loss on each trade (net of trading implementation
costs) divided by the initial risk (using your stop loss) and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money on average and those with negative expectancy will lose money.
Successful traders only trade systems where the odds of success are in their favor (i.e. the system is positive expectancy) so they know that making money is the result of accurately implementing the system and not just pure luck.
2.8 Minimize all trading business costs
Some trading systems have only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between profitability and making a loss. With the easy availability of modern electronic brokers, and fully-automated trade processing and
execution, it is definitely worthwhile looking for a very low cost way to implement your trading system. High commission, wide spreads, and large amount of slippage can be reduced considerably simply by carefully choosing a broker. This can be the difference between a system
(especially a high frequency one) being useable or not. Paying too much for trade implementation is an avoidable way to lose money.
2.9 Be educated
In order to compete at the highest level in the trading business and be one of the few truly successful participants you must be well-educated about what you are doing. This does not mean having a degree from a well-respected university – the market doesn’t care where you were educated.
Being well-educated means that you have thoroughly researched and tested your trading ideas and know why your trading system worked in the past and is continuing to work now. It means understanding all the technology and applications that your system needs to perform accurately.
It means understanding your goal and objectives and how trading will achieve these. It means understanding yourself and how your personality affects your results. It means understanding the markets and instruments you trade.
In order to succeed you really need to become an expert in your own trading business to understand how it all fits together, when it is broken, and how it can be improved. As with all worthwhile endeavors, this takes commitment, hard work, dedication, and more hard work.
2.10 Don’t trade scared money
Lastly, no one ever made any money trading when they had to do it to pay the mortgage at the end of the month. Having a requirement to make X dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and
leads quickly to disaster.
Trading is about taking a reasonable risk in order to achieve a good reward. The markets and how and when they give up their profits is not under your control. Do not trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by
another income stream or cash reserve. This will only lead to additional unmanageable stress and be very detrimental to your trading performance.
3 Summary
In this article we have covered the rules that we believe should never be broken in trading. If you work on never breaking them, your trading should improve dramatically.
We sincerely hope this information has helped you to improve your trading performance.
Good luck in yout trading.
About the author:
Paul King is owner and head trader of PMKing Trading LLC, a Vermont-based proprietary trading company founded in May 2002. Paul has published a series of eBooks and articles about what he considers to be the important aspects of trading.
Visit www.pmkingtrading.comfor more details.
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What Part Do Commodities Play in the Market and in our Shopping? |
by: David Arnold Livingston
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Commodities are any goods or wares that are up for sale or trade. These things include such things as food, furniture, cars, or anything that is generally manufactured, sold or traded.
Commodities are a part of life! We use them all the time! The coffee on your cupboard, the cereals, the soap, the shampoo, the toothpaste – all of these constitute everyday commodities.
The word commodity comes from the French word commodité. This means ‘benefit’ or ‘profit.’ This too comes from the earlier Latin word commoditas which refers to good quality or propriety. The word commodité is related in meaning to the French word biens. Biens means goods. Many people use goods and commodities interchangeably.
Definition
As a business word, commodities are products that can in fact be worth more to their owner if sold instead of used. For example, you might have a large stock of canned goods that you won’t be able to consume before it expires. It would be better to sell them off instead, since you would benefit more from the sale than from just eating all of them.
In the business world, the most common examples of commodities are oil, chemicals, raw materials, canned goods and other consumer goods that are often bought or sold.
Originally commodities were things that had value. Commodities had to be uniform in their quality and mass produced by different entities to be considered as such. There is an unwritten contract among these producers that their products must be of such standard that they can be at least interchangeably used to some degree. This allows the consumers to, for example, to switch brands of flour when baking without having to agonize too much over the brand of the flour product.
Let us take, for example, producers of powdered milk. Although they belong to different brands with different organizations and process management, they will still be expected to produce a powdered milk brand that is similar, in category. There will be differences in quality, taste and some other attributes. However, when you think of powdered milk, these products will have to fit the bill.
Strictly speaking, commodities will often refer to wholesale or brandless goods. This means that the commodities will come from direct suppliers of these goods and do not go through the process of marketing, and branding.
A good example of this is oil. The supplier in this case does not matter. Oil is assumed to be oil, and that the use of such should not depend on the supplier. That is why, in commodities trading, once you’ve seen one barrel of oil, you’ve seen them all.
Branding
Producers may want to have their products distinguishable from other products. To do this, they employ branding. Branding is the activities engaged to make a product, from a certain producer, stand out from other products of the same kind. Taking the milk example from earlier, we could give one of the producers the name, Moo Milk. It could be told apart from others because of its label, marketing, and container. It might differ a bit from other products in quality.
This will most definitely increase the price of the goods. The upside to this is that the particular product with the best brand name and brand recognition is sure to get a better portion of the market.
About the author:
David Arnold Livingston is a successful business owner
and entrepreneur. He recommends the resource:
For Commodities
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A Stock Market Investment Plan that never lets you down |
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The bulls and bears of the stock market are both tempting and scary to the investors. Speculators are enchanted by the stock market’s potential to help them in making quick money with a big M. While those who tread with care and caution, often shy away for fear of losing. However, the stock market is not all about speculative gains or black Tuesdays. It is a place where committed companies look for raising money to fund their activities. Serious investors can actually create wealth not only for themselves, but also for the companies and the nation. A wise way to invest in the stock market is to empower your self with information. You have to know and learn about the company you invest in, from past records and future plans.
Irrespective of what the Wall Street Gurus predict or what the economic indicators like Dow Jones Average say, a simple and foolproof way of knowing that a company is doing well is to keep a track of how much dividend income does it pay to its share holders every year. If the dividend rates have been rising steadily every year, you know you have a safe bet. To benefit from the future prospects of such companies, it is a good idea to rollback the returns into the company. Which means, instead of adding the dividends to your savings, you can invest them in the shares of the same company. That way, you can ensure that the dividends you receive are always higher than what you got last, with a larger number of shares getting added to your investment portfolio every time.
With this kind of an assured investment plan in place, investors with a gambling streak begin to think beyond making a quick gain. While those who were afraid to take risks get wiser.
Let us find out why companies that give ever-increasing cash dividend income are a good choice for investment:
Your Share Holding Goes Up And So does Your Dividend Income.
Your income begins to escalate with your owning more shares every year and the dividend income rising correspondingly.
Your Dividend Income Increases Even If Stock Prices don’t.
You are no more at the mercy of the market. Irrespective of what your shares are worth, you keep earning additional cash dividends. In fact, even if the market price dips, you are still at an advantage, as that allows you to reinvest to purchase more shares.
You are not hit by Inflation.
With the dividend income rising every year, you offset the effects of a rising inflation. This particularly provides relief to people who have retired and depend on a regular cash inflow to help them meet their expenses. At this stage one need not rollback the investment into further shares, instead, the cash dividend can be used as a kind of regular pension money.
Start Young
The ingenuity behind this investment strategy is that it protects you from the fluctuations that generally occur in the market. A lower stock market rate only means you buy more to increase your dividends more. It is advisable to start this strategy early in life while you are still working, so that your wealth builds up gradually and constantly over the years. And you are assured of a regular income, as you grow older.
Remember, the success of this proven investment plan depends significantly on the track record of the company you invest in. It should be one that declares a higher dividend at the end of each financial period. A simple way to find that out would be to calculate the dividend yield. You can do that by dividing the annual dividend per share by the price per share. Of course, no investment can be totally free of risks, neither is this one. Keep an eye on the dividend yield, and if that dips, it’s a signal for you to opt out of the investment.
About the author:
James Marriott is a finance writer with more than 15 years of experience in writing financial content, including those related to credit cards, mortgages, stocks, investments, and funds. He has been with RNCOS, a premier financial writing services company, for 2 years as head of financial writing. He is also a regular financial columnist with renowned business journals. For your comments on the article and further financial assistance, please contact our staff writer at info@rncos.com
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How to Start an Investment Club - Business Model |
by: chris hickman |
Your investment club will need to decide what type of entity you're going to adopt for business purposes. You'll have to decide whether you're going to be a corporation, a general partnership, or limited liability partnership.
Each of these business models has their own advantages and disadvantages.
· Corporation. Most investment clubs will avoid becoming a corporation. This is because corporations are taxable business entities that require knowledgeable accounting skills to make them run smoothly and in accord with government regulations. A corporation generally means a lot of paperwork. This paperwork can be avoided by choosing another business model for your purpose of running an investment club.
· General partnership. This type of business model requires less paperwork and knowledge about taxes and other financial issues. Most investment clubs choose a general partnership as their choice of a business entity. A general partnership has nominal paperwork and costs associated with it because the taxes are passed to each partner's tax returns. This type of business model will let you accomplish what you need to do to run your investment club with the least amount of tax influence.
· Limited liability corporations. This type of a business model is much like the general partnership but it gives individual members of your investment group a bit more liability protection. Keep in mind that this type of business entity can be expensive and will need more paperwork.
Members of your investment group will have to decide which of the above business models works best for your club.
You will have to make a decision one way or the other since establishing a business entity is a requirement for tax purposes.
About the author:
Chris Hickman owns a full info site about investment clubs. Check Out his site at http://www.ez-investment-clubs.com
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Risk Management for trading Stocks, Shares and CFD using Position Sizing.
One of the most critical things to consider when trading Contracts for Difference [CFD's], stocks and shares is the management of risk. Given that risk is magnified in proportion to the amount of leverage or deposit used, we need to tread very carefully.
First let's look at a traditional trade of shares or stocks
Let's say we identify an opportunity to buy company ZYX at $10 as it has satisfied the rules of our 'trading system', the stop loss for the trade is $9.50 if the trade does not turn out as expected - this equates to a risk of .50 cents per trade. This is step one.
Step ONE
Identify Buy price $10.00
Identify Stop Loss $09.50
Map Risk $00.50
The next thing we do is to work out our position size based on the AMOUNT OF RISK we are willing to accept.
If you have a trading system that you have historically tested to be accurate and you are VERY confident of it performing well into the future then you could consider using 10% of your account per trade. This means you would have in the worst case scenario 7 to 9 losing trades before all your money disappears.
Professional traders, fund managers and floor traders are well aware of the road kill left over after new traders come out with all guns blazing and and are crushed by the juggernaut of the real world of trading, meanwhile the professionals just keep plodding along.... risking their 1% to 2% of account and steadily building profits over time. If one to two percent sounds boring let me let you in on a little secret.... if you are trading for excitement you're not going to last long! In my experience profits that come fast also go fast, until you get your mindset right about money.
Let's assume we have $10,000 in our trading account, if you didn't know any better you might think $10,000, great! Let's buy $10,000 worth of stock - WRONG - this is GAMBLING which is significantly different to TRADING.
Using the previous example let's say we are willing to lose a maximum of 10% of our trading capital - we could equate this to having $100 in your pocket in $10 dollar bills and losing one $10 bill. You wouldn't mind so much I imagine, but if you had a single hundred dollar bill and lost that you'd be 'feeling' pretty annoyed wouldn't you, so for the sake of sanity we'll assume we are 'OK' with losing 10% of our trading capital.
POSITION SIZE
So, here's the equation for working out how many shares to buy-
POSITION SIZE = RISK CAPITAL/ RISK
so our $1000 is divided by $0.50 to give us a figure of 2000.
2000 shares X $0.50 = $1000 which is our 'agreed' risk.
So we can purchase 2000 shares of Stock ZYX, but in this example we are limited by our account size - $10,000.
Were we to buy the full 2000 shares we would need to find $20,000 in capital.... this is where CFD's or margin accounts are VERY useful.
IF we buy 2000 CFD's of the stock ZYX we would only need to put down a deposit of 5% of the $20,000 stock value
(2000 X $0.50) X $10 / 5%
Deposit to HOLD $20,000 CFD's of stock ZYX = $1000
Now we just need to sit with the trade to see if it turns out as we EXPECT or lose the 'agreed' amount.
Let's say that our target - because any good 'Trading system' should have exit targets to sharpen the mind- let's say an exit was signalled at $10.30 - we would make $0.30 on each share , so:
A profit of $0.30 per share on 2000 shares of ZYX = $600 profit. 2000 X $0.30 = $600
If the trade had not turned out as planned the equation would be as follows:
A loss of $0.50 per share on 2000 shares of ZYX = $1000 loss. 2000 X -$0.50 = -$1000
So there you have it let's recap:
Step ONE
Identify Buy price $10.00
Identify Stop Loss $09.50
Map Risk $00.50
Step Two
Identify how much of your trading account you are willing to put at risk in our example
a 10% risk on a $10,000 account = $1000
Step THREE
IDENTIFY POSITION SIZE = RISK CAPITAL/ Mapped RISK
So our $1000 [10% 0f $10,000] is divided by $0.50 [STEP ONE] to give us a figure of 2000 shares.
If you cannot trade CFD's but have access to margin lending you can apply the same principles, though of course you would also need to be aware of the 'leverage ratio' as required by your lender.
Leveraged Instruments Explained
What is a CFD
A CFD is a leveraged trading instrument that allows you to trade a large numbers of shares for a smaller outlay than buying the actual stock or contract. In doing so your gains OR losses can be magnified compared to holding ‘traditional’ positions. You can trade LONG [UP] or short [DOWN- selling something and buying it back for less in the future].
Lets look at an example of trading stock ZYX….We will buy 1000 shares of ZYX at a value of $10
To purchase the real thing will cost us $10000, plus commission at around .4%.
To purchase 1000 CFDs of the same stock will only cost us $500 in ‘margin’- which we get back at the end of the trade IF we are right, Plus commission at around 1%.
This means that our R.O.I. [return on investment] is amplified much more when trading a CFD- and a WARNING- our losses can also be greater if we do not engage in sensible risk management.
Let's assume we hold the position for 10 days and that the best brokerage rate we get is around .04% for traditional online broking and .01% with most CFD providers.
To ‘trade’ 1000 CFD’s will cost us a deposit of $500- deposits will vary anywhere from 3-20% depending on the stock and the provider, as a general rule count on 5% for the top 100 stocks.
When we ‘buy’ a CFD the provider is essentially lending us money to purchase our position. For the privilege they charge us the standard bank rate [RBA in Australia] which at time of writing is 5.75% + a ‘haircut’ of between 2 and 4%. This is a financing charge made by the provider let's assume in our example the provider is adding 3.25% to take the interest rate to 9%. this equates to a charge of around $2.46 per day on a position size of 1000 shares.
Note when we sell short a stock the provider will PAY us interest. Though not at the same rate as when we buy usually the ‘haircut is in the 1 to 2% range so you would receive 5.75% -2%, or 3.75% on your short trade.
Dividends and adjustments:
CFD’s receive the full dividends that the normal stock does as well as any share splits or special payments. If in a short position you must pay the provider.
If we are taking a long position [planning that our share will rise] then CFD’s are a great short term option. If we bought a $10000 position and held it for a year we would need to pay $900 of interest. Similarly a Margin loan from a bank or other lending institution would charge you around 7 to 12% for the same privilege, but only lend you a maximum of 70% of the value of some shares.
FUTURES
A Futures contract is an agreement to buy or sell something at a set price on a FUTURE date.
I might agree to pay farmer Fred $25 for a bushel of wheat in August and it is now January… between now and January a hailstorm wipes most of the grain crop… A bushel of wheat is now worth $50, but Farmer Fred now has to sell it to me for the agreed ‘FUTURE’ we agreed on in August of $25. Similarly if there had been an over supply of wheat and it was selling for $13 a bushel to have harvested and delivered. I would still have to pay Farmer Fred $25.
A Futures contract is an AGREEMENT for payment at a set price on a future date.
Some futures contracts are DELIVERABLE. This means you do not want to be holding a contract for oil beyond the expiry date.
For example… in the first place you need to cough up the cash for a barrel of oil--- value $50000+, then they will come and pump it into your lounge room, unless you have a nearby oil storage facility!
Most contracts are NOT exercised, but just be aware of the time your contract terminates. Most brokers will be on the phone to you the week before- asking if you want to ‘roll’ your contract- that means getting out of the contract that is set to expire and taking up the next contract… In some cases this is monthly. Oil trades this way - expiring around the 20th of the month.
Others are bi-monthly or quarterly. The Australian Share Price Index contract or S.P.I is quarterly, March, June, September and December with expiry around the 15th of the month… you will need to KNOW these dates. Things can get volatile as contracts are ‘rolled over’ from one month to the next contract.
In Australia futures contracts are traded through the Sydney Futures Exchange- which recently merged with the Australian Stock Exchange to becomne the Australian Securities Exchange.
A number of Futures exchanges operate In the United States; from the East Coast to the West coast. Some of the ones you will be familiar with would be;
NYMX [New York Mercantile Exchange] this is the place where the Crude oil price you see on the news comes from- NYMX light sweet crude is the benchmark. It is traded in an open ’pit’ session - yep, all those guys wearing funny jackets and doing funny hand signals…… trading takes place between 1000 & 1430 New York time and it then trades electronically for most of the rest of the day. We can also find Comex Gold and silver at the NYMX.
CME Chicago Mercantile exchange- home of the E-mini on the S&P 500. You can also trade Pork bellies here!
CBOT [Chicago Board of Trade] Here you can trade anything from Soybeans to Wheat and Dow futures to 10 Year Bonds
To trade coffee or sugar or frozen orange juice concentrate you need to go to NYBOT-The New York Board of Trade http://www.nybot.com
Euronext is the home of London Sugar, currencies and European interest futures contracts.
To trade a futures contract you will need to open an account with a broker- this will mean a lot of form filling and declaration. After this you will deposit funds to your account. You need to make sure you have enough money to trade the ‘instrument’ you are interested in.
For example to trade corn your may need a deposit of $1000 per contract. But to trade one contract of oil requires a deposit of U.S. $5500, and the range in a trading day might be up to $3000 at $50 a point….. tread carefully.
The Contract on the share price index in Australia is the S.P.I. and currently requires a deposit of AUD $6200- and each point of movement is equivalent to AUD $25.
The S&P 500 has a big contract valued at $250 a point and a ‘mini’ otherwise known as an E-mini contract. This is one of the most liquid futures contracts in the world and is traded ONLY online.
The deposit is U.S. $$3,563 and each 100 point move = $50 so a move from 1498 to 1500 = 200 points or $100. Often the S&P can move five to ten points in a night. Sometimes an astonishing 20! That’s on just one contract.
Currencies
Some CFD providers allow you to trade currencies, but when the trading is thick and fast their platforms cannot keep up to dedicated forex providers…. In my experience.
Once again it’s the leverage equation. Most Forex providers give leverage at 100:1 some at 200 to 1 and a few at 400 to 1
This means that with $1000- you can CONTROL
$100000 at 100:1
$200000 at 200:1
or $400000 worth of a currency ‘pair’ at 400:1.
Scary if it goes it wrong way!
All FOREX currencies are traded as a pair- I will stick to what are known as the 4 MAJORS these are
GBP/USD- the British pound Versus the U.S. Dollar
EUR/USD- the Euro versus the U.S. Dollar- this is the most highly traded currency pair accounting for 70% of all volume and can have a ‘spread’ [buy sell difference] of only 2 pips or points
USD/CHF The U.S. Dollar versus the Swiss Franc
USD/JPY The U.S. Dollar versus the Japanese Yen
In FOREX we Buy one currency and sell another against it… lets look at GBP/USD for instance
The Standard contract size is 100K or $100,000 of the currency You are trading
If I go ‘LONG’ 1 STANDARD contract of the GBP/USD it means I am buying $100,000 worth of US Dollars and simultaneously selling $100,000 worth of British pounds. We pay a small spread- but NO commission.
If the GBP rose in value against the US dollar then to terminate our trade we would have more POUNDS- the one we bought and less DOLLARS the one we sold- so we have made a profit. That’s the basics.
The FOREX market turns over almost 2 Trillion dollars a day, this is five times the money turned over in aLL the stock markets and futures exchanges in the WORLD!. Now that’s liquidity- you will always be able to buy or sell the four majors.
Trading begins at 6am Monday in New Zealand and goes through to 0700 GMT this is known as the “Asian session”, London- which is the ‘center’ of the financial universe then comes on board until around the United states session begins around 7.30 Am New York time…….. Some interesting trading takes place at this change-over time. So the week progresses until 5pm Friday New York time when the action ceases for the weekend and resumes at 6 am New Zealand time…….
One thing to be Very aware of is the wild ranges that can occur in FOREX; these are driven by ‘news’ events- GDP figures, employment figures, Interest rate rises or announcements can all provide phenomenal spikes on 15 minute and hourly charts, which are all very trade-able and profitable…. If you have the right strategy.
There are many websites that will give you a list of events happening on the day. It helps to be aware of these things .
GFT forex have an excellent news ‘calendar’ at http://www.gftforex.com/resources/calendar/calendar.asp
In summary leveraged instruments can magnify both your profits AND your losses. Risk management is the key to longevity in any markets trading leveraged instruments.
Paul J Penton is a Private Trader, Wealth Educator and author of 'RSI-X : Trading with RSI crossovers' . Free Wealth creation Resources are available from his website http://mymillionairebuddy.com
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