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Trading Lessons

Basic Parameters of Successful Day Trading and CFD's

InvestorEducation / Learn to Trade Jan 16, 2009 - 12:12 PM GMT

By: Christopher_Quigley

InvestorEducation Best Financial Markets Analysis ArticleDue to the lack of alternative employment opportunities, more folk than ever are turning to day trading to try to earn a living. Increasingly I am getting emails asking for advice and guidance. I have been teaching a course in investment and trading for the past 10 years and if there is one thing I try to communicate broadly is that before you embrace this arena you must become educated, informed and aware. As one of my students once quoted; "I now have come to realise that this is perhaps one of the hardest ways to make easy money".


I set out below some basic rules of engagement:

1. Study Dow Theory and Elliott wave theory. This material will prove to you that sentiment powers the markets more than fundamentals.

2. To enable you to work daily with this sentiment you will need a state of the art technical analysis platform. This system must be able to give you one minute, five minute, ten minute and daily ticker price movements, streaming in real time. I prefer the five minute ticker for trading.

3. The technical indicators I use are time segmented volume, moving average convergence/divergence (MACD) and stochastic's. I also like the candlestick price format. There are hundreds of such indicators. Learn as many as you can and discover the ones that work best for you.

4. Before you start risking your capital use a "real time" practice module (or at the very least paper trade) to find a strategy that succeeds. If you cannot find one then you do not know enough. Persevere; it is always better to be losing time rather than time and money.

5. Before you enter a position always know your exit point and place a sell stop. This mitigates the power of emotion.

6. Letting winners run and selling losses early makes more sense than letting losses run and cutting winners early, it's axiomatic. Unfortunately, believe it or not, most practice the latter until their capital runs out.

7. For a trader the best vehicle are contracts for difference (CFD's). As stated in an earlier article:

"Contracts for Difference were developed in London in the early 1990's. The innovation is accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg. They were then initially used by institutional investors and hedge funds to limit their exposure to volatility on the London Stock Exchange in a cost-effective way, for in addition to being traded on margin, they helped avoid stamp duty (a government tax on purchase and sale of securities).

A CFD is in essence a contract between two parties agreeing that the buyer will be paid by the seller the difference between the contract value of the underlying equity and its value at time of contract. This means that traders and investors can participate in the gains and losses (if shorting) of the market for a fraction of capital exposed if the equity was purchased outright. In This regard the CDS's operate like option contracts, but unlike calls and puts, there are no fixed expiration dates and contract amounts. However contract values are normally subject to interest and commission charges. For this reason they are not really suitable to investors with a long-term buy and hold strategies but ideal for day traders.

CFD's allow traders to invest long or short, using margin. This fixed margin is usually about 5-10% of the value of the underlying financial instrument. Once the contract is purchased there is a variable adjustment in the value of the clients account based on the "marked to market" valuation process that happens in real time when the market is open. Thus for example if a stock ABC Inc. is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If 1000 units were traded it would therefore cost the investor $10,000 to "control" $100,000 worth of stock. If the stock increased in value to $110 the "marked to market" process would add $10,000 to the client's account (110-100 by 1000). As we can see the situation works very similarly to options but for the fact that there are no standard option contract sizes and expiration dates and complicated strike levels. Their simplicity has added greatly to their popular appeal amount the retail public."

An added advantage of CFD's is that most companies offering the product have excellent trading platforms and offer you Dollar, Euro, Yen or Sterling accounts. Thus you avoid the issue of foreign exchange exposure. Another benefit is that you can trade commodities and currencies 24 hours in markets that are open.

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley is 46 years of age and holds a Batchelor Degree in Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in San Francisco, California where he lived for 6 years. Now based in Dublin, Mr. Quigley actively trades utilising the principles set out in the modules above. This Wealthbuilder course has been developed over the last 9 years as a result of research, study, experience and successful application.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

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