Be a Trade King

When you think Investment Bankers such as Goldman Sachs, JP Morgan, Morgan Stanley etc have got over 200 Trillion Dollars tied up in derivatives alone, then it is time to think that as a "Full Time Trader" who possesses proven market experience, you should put your aims very high and should not simply be content with just making a day-to-day living from day-trading. This is more so, if you are trading via a margin account like CFDs or Spread-betting.

What made me write this article was I was chatting to a derivative trader last week who had made a fair amount of money a few years ago and had decided to cut down on his trading size and take things easy and become a Steady Eddie instead of going full throttle ahead and take on the big guys single-handedly!

Now, that may sound extremely arrogant and I bet a lot of you people out there may disagree with what I just said above. But think about it in a lot deeper terms.

Here, we happen to have a guy who has been trading over 15 years and has apparently increased his starting capital by 10 fold, he has seen and gone through everything that a trader needs to come across while involved in the stock market.... things like the bombing of London and Spain, the worldwide shock which was created by the late Osama Bin Laden, the Iraqi attack by the Western Governments and so on, and yet he is virtually throwing all that experience in the garbage bin and is going to be trading just like another trader who is happy with just putting bread on the table at the end of each trading day! This is the biggest injustice that any professional people could do to themselves.

So instead of playing this game defensively, he should have become a more attacking and ambitious trader and should have set himself up with a very high target to achieve. I would have personally gone after making a wealth as high as 2 or 3 Billions at least, after let's say a period of 5 to 6 years. This is definitely achievable when you have the funds, the instruments which the likes of CFD's have to offer, and most of all, the many years of experience, which our trader in this article happens to have possessed -- What he must have lacked I would say had to be self-belief that it was his skills which made him money in the first place and a hunger for being a Trade King.

Going on from my previous post when I mentioned "trading the indices using CFDs should be left to absolute professionals", this was further reiterated by losses overnight in two major world markets; the Tokyo market (Nikkei) lost nearly 200 points and the ASX200 of Australia fell despite the fact that the USA stocks performed well yesterday with all its major indices gained across the board.

When you are using CFDs, you just cannot afford to make too many mistakes because of the risks involved in losing far more than your intitial investment. In fact if you allow apathy to creep in and you are not on your toes at all times, you can easily lose all your capital or even more at times! Effectively, a CFD trader can never sit back and relax unlike a normal investor who is really not too bothered by the daily ups and downs in his/her equities or portfolio.

Later on today an hour before the US stock market opens, the Producers Prices Index firgures will be released. The figure to look for is the core PPI which is expected to be .2%, anything above that will affect the market negatively and a figure below that will have the reverse effect - NOTE: "the PPI is a real market mover specially the CORE FIGURE".

Sector Trading

I know lots of people trade the Forex market, some as amateures and some traders make a good living out of it doing it full-time as professional traders - at the same time there are a huge number of traders who only concentrate on trading the main Sotcks Indices, like the Dow Jones, SP500 of the USA, UK FTSE100, the German DAX30 and so on ... but if you have been watching the markets for a number of years, you may prefer to trade the SECTORS .....

In my experience trading a certain sector using CFDs is far more managable and rewarding than trading the FOREX market or the indices - some indices are very difficult instruments to trade; NIKKEI225 of Japan for instance has very wide trading ranges and it has been known to have fluctuated many 100's of points on the same day and if you happen not to play it professionally by not having used the correct STOP LOSSES or had a bad "Entry Point" to start with or did not apply a good "money mangement system", specifically if you are only a small trader, you could soon find yourself withdrawing more money out of your bank account to respond to your Broker's MARGIN CALLs; Whereas if you happen to pick a group of companies with the same nature of businesses like the BANKS (banking sector), the MINERS (mining sector), the RETAILERS (retailing sector) and so on ... and have done your financial studies correctly on them i.e. you know the PE ratios of the sector, dividend yeilds, the PEG factor or other fundamental factors which you normally use, and ... in addition to that you are also aware of the highs and lows of that particular sector, then as a trader you have made life a lot easier for yourself ... and the likelyhood that your CFD postion will give you a handsome profit is a lot higher.

Another attraction of trading the sectors on CFDs is that most brokers require only 1% margin for opening a new position, whereas if you just traded the stocks on their own you could be required to outlay a margin of anything from 3% to 20% depending on the broker's requirements.

Also, it is worth bearing in mind that sometimes when you trade a stock like for instance Vodafone or Sage Grp in the UK market, you may not have the necessary fluctuation in that stock to either day-trade the stock or scalp it often enough to give you a profit on the day, whereas in trading the sectors you will find, it will offer you more movements to enable you to take a profit at the end of your trading day. Hence, no need to roll over your position to the next trading day, which will in effect, save you additional costs and will eliminate the risk of your transaction.

Stock Markets recovery

It now seems that the major stock markets across the world have got their confidence back and 2 major markets have particularly performed better than others. For instance the DAX30 of Germany not only has recovered from the major losses we had a few weeks ago, it has even hit a new all-time high of 7100 and those who opened a Long CFD POSITION when it went below 6500 in mid March are showing a healthy profit now. In my experience, with the DAX you would be far better GOING LONG than shorting it when the TREND is up.

ASX200, of Australia, has had very much a similar story to the DAX30. Its strength has also been supported by the gains of the heavyweight mining companies Rio Tinto and BILLITON which exist within its index. As we know the metal prices have been very strong lately.

"Stop-Losses"

For those who are completely new to this game, Stop Losses, as the name implies, are used to limit a trade's loss. For instance let's say, you have opened a LONG position on BP @ 550 and you want to limit your liabilities by only 10 points or in other words, you want to have your position closed if BP goes down to 540, so in this case you instruct your broker to sell the stock when it reaches 540.

Using Stop Losses can have both their advantages or disadvantages:

It is a disadvantage in the case of market being over-volatile when an instrument can spike up or down by many points in a short space of time and the advantage is that you could save a lot of money if you have happened to have read the trend of your stock incorrectly. Normally, stocks on the Uptrend or Downtrend can move away from you by a long way if you have had a bad entry point. So putting a Stop Loss in this case will help a trader to save a lot of his/her Capital.

How CFDs Work

Let's take Microsoft as an example and we assume the price of Microsoft stock is $30.00:

First, we have to decide whether we want to sell (going short) or buy (going long) the stock:

We assume we will go LONG i.e. buy the stock. We also decide to stake $1.00 on each point of the fluctuation on Microsoft's share price. This means for every Cent that Microsoft share moves, we will gain or lose $1:00 depending on the direction of the movement.

Now to make it clear, we assume Microsoft share price has gone up by 10 Cents by the end of the day, if we wish we can now take profits, so let's assume we do this:

Therefore, our profit is:

10 x 1 = $10.00

What Are CFDs

In the last few years the Stock Market players have become more adventurous with their money in the sense that they are no longer happy with making 10 to 20 percent profit on their initial outlay by just simply buying the shares in the companies of their choice in the normal way which they used to.

Instead, what some of these people have been doing has been using a means which allows them to buy or sell Stocks, Indices or even Commodities on margins with high leverage. For instance, if one is trading the UK stocks with a UK broker, to enter into a deal, he or she will only need to have 3% of the total transaction available in the his/her account. For trading the indices, the leverage is even bigger; 1% only is needed to open a trade, which could be really great if you know what you are doing.

For those who are not familiar with this type of trading; this method of trading is called CFD, short for Contracts For Difference.

When using CFD you can actually SELL the instrument you do not own. They call this going SHORT and when a short position is taken, the trader is hoping for a fall in the price of the stock so he can close the position by buying the stock back in order to pocket the DIFFERENCE. Hence, the name CFD. Buying is termed as going LONG in CFDs.