10 - Innovation

7/29/2019 10 - Innovation

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Golden

RulesofInvestInG

lesson:InnovatIon:

How tradings becoming easierIn association with


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3

DOMINIC PICARDA

aSSoCIatE EdItorinvestors chronicle

Dominic Picarda

Dominic Picarda is

an Associate Editor at

Investors Chronicle and is

in charge o its

trading coverage. As well

as writing the Trader

column every week in the

IC, he also writes regular

trading tips or the Moneysection o the weekend

Financial Times.

lesson 10INNOVATION

How investings becoming easier

Golden Rules of InvestInG:LESSON 10

Short-term trading has grown

enormously in popularity

in recent years. Once the

preserve o private investors

who were wealthy and sophisticated

enough to be able to access the

utures and options arena, today it is

possible to trade the worlds nan-

cial markets with just a ew hundredpounds in an account.

Although by tradition a pub-

lication or longer-term inves-

tors, Investors Chronicle has ully

embraced the trading revolution o

the last decade and more. As well as

promoting technical analysis the

inspiration behind many short-term

trading ideas the IC has regularly

recommended specic strategiesand kept readers up to date with

the latest innovations in the trading

industry.

O course, while we believe that

owning shares and other assets

should play a part in almost eve-

rybodys long-term nancial plan-

ning, wed never say the same

about trading. For all its benets,

short-term trading is raught with

risk and requires discipline and

skills that require time and efort toacquire.

In this supplement, well explore

some o the most basic but essen-

tial aspects o trading today. As

well as comparing it with main-

stream investment, we will explore

the vital question o whether trad-

ing is suitable or you. We will also

consider key themes such as the

use o leverage, how to plan andmonitor your trades, the mentality

needed or trading and the possi-

bilities ofered by mobile trading.


4/16


4

tRAdInG vs InvestInG

rocket 10-old over the next ve years.

The passage o time can turn bad deci-

sions into great ones. As a trader, you

should never take this approach. The

name o the game is to get in and out

at the right time at the best possible

moments. And when you make a mis-

take, you need to admit it and cut your

losses immediately.

You dont have to choose between

investing and trading. In act, you

should do both. The bulk o yourwealth should be put into conven-

tional investments or the long haul,

such as shares, bonds, property and

so on. The last ew per cent the bit

you can aford to lose without causing

yoursel any hardship is your trad-

ing pot. Start of small and learn the

ropes.

In act, you might even want to

start out your trading career using a

virtual account, containing only pre-

tend money. That way, you can get a

eel or how the markets move in real-

time without risking even a penny o

your hard-earned cash.

Above all, ask yoursel why you

want to trade. I youre a get-rich-quick

type or have an addictive personality,

put this guide down and stick to the

long-term stuf. But i your answer is

that you are ascinated by nancialmarkets and want the satisaction that

comes rom predicting the next move,

read on.

Youve watched the FTSE 100

rising relentless over recent

days. Although youre bull-

ish about the long term, you

reckon the index is due a signicant

sell-of over the next ew days. So, you

sell it short and watch your prediction

come right as the market alls 5 per

cent over 10 days. Your return, how-

ever, is 50 per cent. Welcome to the

world o trading.

I youre reading this booklet,youre probably already an investor

o some description. Perhaps youve

established yoursel as a buy-and-hold

investor in shares and ancy some

o the excitement and rewards that

short-term speculation can deliver.

But, beore you take the plunge, you

need to understand the nature o trad-

ing and how it difers rom long-term

investing.

Just because youve made money

rom buying shares or unds, doesnt

mean youll automatically make a

good trader. The skills involved are

very diferent and have to be learned,

usually the hard way. And whereas

the average person who invests in a

UK stock market tracker over many

years can make great returns without

trying, the average trader loses money

over time.When investing, timing hardly

matters. You can buy a share, watch it

halve over six months, and then see it

AN ESTIMATE Of hOw

MANy TRADERS ENDuP LOSINg MONEy90%

Marketscan remain

irrational for

much longer

then you canremain

solvent.

John Maynard

KEynES, LIfELONgECONOMIST ANDSOMETIME TRADER


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5


PROPORTION Of MONThLy

VOLuMES PLACED VIA MObILEAT MARkET LEADER Ig INDEx5%

MoBIletRAdIn

G

Havingdownloadedoneothesea

ppsto

yourphone,youcanollowpricesi

nreal-

time,buyandsell,aswellasmon

itoryour

openpositionsandcheckwhatyo

uvedone

inthepast.Youcanevenresearchpotential

tradesbycallingupchartsothep

ricesthat

youollow.

Initially,mobiletradingwasseena

sabit

oagimmick,andtradingfrmssup

pliedit

thinkingclientswoulddolittlemo

rethan

useitortrackingprices.Butthey

havebeen

surprisedbythestrengthotheu

ptake,with

onespread-bettingfrmrecentlyr

eportinga

fveoldincreaseintradesp

lacedviamobile

within10months.

So,howbesttotakeadvantageo

mobile

trading?Itisimportantnottomisu

sethe

increasedreedomthatcomesrom

being

abletodealromyourhandset.Th

ismeans

nottradingwhenyouwouldnotha

vedone

soromyourcomputer.Onepossib

ilityis

toreceivetextmessagealertswhe

ncertain

chartingconditionsaremet.www.

time

totrade.euoersanexcellentservicehere.

T

heutureotradingisinyourhands

literally.Moreandmorespeculation

is

beingdonenotthroughlumpydeskt

op

orlaptopcomputersbutthroughsmartphones.

Nowadays,youcandoalmosteveryth

ingyou

canromyourPCthroughagoodmo

bileand

soonyoushouldbeabletodoeveryt

hing

Thegreatthingabouttradingroma

mobile

phoneisthatitreesyouromhavin

gtosit

inrontoascreenorextendedpe

riods.

Onceyouvedoneyourhomeworka

boutthe

marketyouwanttotraderomyour

PC,you

canexecuteorderstobuyands

ellromyour

handsetwhereveryouhappentobeatthe

timesolongasyouvegotrecept

ion.Soyou

needntmissanytradingopportuni

ties.

Mobiletradinghasbecomethatmuch

easier

thankstothecomingoageosmart

phones,

suchasApplesubiquitousiPhone,b

utalso

androidmodelssuchasthoserom

Google

andHTC,aswellasBlackBerry.Spre

adbetting

andothertradingfrmshavetakena

dvantageo

thevastlyincreasedabilityothesedevicesto

launchspecialtradingapplications.


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6

ThE NuMbER Of ACTIVE

SPREAD-bETTORS whOChANgED PROVIDERS LAST yEAR1IN3


WhIch kInd of tRAdInG

Is RIGht foR you?

markets you want to trade, how long

you want to trade or, and what your

tax priorities are.

Despite all the diferent names, the

various instruments all have commoneatures. They all involve leverage, are

designed or shorter-term holding peri-

ods, allow you to make money rom

price alls as easily as rom price rises,

and trade a wide array o markets rom

one single account.

The main reason or trading is

H

aving decided that you want

to trade nancial markets,

youve got to pick what trad-

ing instrument youre going

to use. And youre spoilt or choicethese days: spread bets, contracts-or-

diference, utures, options, covered

warrants, accelerated trackers, geared

ETFs, xed-odds bets...

Your choice o trading instrument

will depend mainly on how much risk

and return you want to seek, what

spReAdBets cfds coveRedWARRAnts fIxed-oddsBetsMaxIMuMrISK

KnownupfrontCapItalgaInStax

onprofItS

ElIgIblEfor uSE

InSIppSCurrEnCyrISK

6


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leverage, the ability to turn small

moves in the market into much bigger

returns. You have to want to use lever-

age i you want to trade. There is no

point doing so i you dont. As to how

much leverage you want to use and

the type o leverage this depends on

your goals and your appetite or risk

see our diagram on page 8 or more.

One key diference between the vari-

ous trading instruments is taxability.

Prots on all instruments that are clas-

sied as investments could be liable to

capital gains tax, whereas prots on

those that are classied as betting are

entirely ree rom tax o any kind.

The main tax-ree trading instru-ments are spread bets and xed-odds

nancial bets. Although their status

might appear to give them an unbeat-

able advantage over taxable rival

products, there are good reasons

why you might want to trade taxable

instruments. For example, i you make

losses on CFDs, utures and the like

which many traders do you may be

able to write those losses of against

other capital gains you have made

elsewhere.

Trading products generally ofer a

good way to spice up returns within a

wider portolio o investments or to lay

of the risks in such a portolio. I your

portolio is a sel-invested personal

pension (Sipp), however, the rules pre-

vent you rom using gambling prod-

ucts such as spread bets. By contrast,

covered warrants or CFDs would beallowed subject to your Sipp provid-

ers willingness and own rules on this.

NuMbER Of

ACTIVE ukSPREAD bETTORS83,000

whatS what

futurES, CfdS, and

SprEad bEtS

are all essentially the sameproduct, with a CFD being

little more than a mini-utures

contract and a spread bet being

a mini-CFD. I you buy an asset

via one o these instruments

and its price goes up or down,

your proft or loss is basically

the dierence between the

starting and ending price, mul-

tiplied by your position size.The same is true or a short

position, where you gain i the

price alls and lose i it rises.

CovErEd warrantS

take a bit more thought than

the more straightorward

instruments mentioned above.

They are specially designed

products made out o tradedoptions. But you have to take

more into account than simply

whether you expect the asset

youre trading to go up or

down. Specifcally, you have to

consider the amount o time

let until the fxed date when

the covered warrant is due to

expire, as well as likely volatil-

ity in the market. RBS and SGare the two big issuers o UK

covered warrants.


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8

the poWeR of leveRAGe

your StaKE = 10tradIng fIrM putS up = 90

prICE ChangES = 10%

10/10 = 100%

ThE AVERAgE

LEVERAgE ON fTSE 100COVERED wARRANTS7.2


leveRAGe:fRIend And foe

o how this process works is show below.

O course, we use leverage com-

monly in everyday lie, perhaps

without realising it. For example,

you might buy a house or 200,000

by putting down a 20,000 deposit.

The houses value then goes up to

250,000, making a handsome return

on your original equity.

The golden rule o using leverage

in trading is to use onlyas much as you

can respon-

sibly take

Leverage is what makes trad-

ing worthwhile. Its the orce

that turns small changes in

a price into a much bigger

return. It has created many million-

aires and even more paupers. So what

is leverage and how can it be used to

make you rich rather than poor?

Leverage also known as gearing

simply means borrowing money to

nance your trading. By using moreo the trading rms money

and less o your own,

you generate much

bigger returns

either positive

or negative.

A diagram

2x - 3xGeared exchange-

traded und (ETF)

2x - 10xFixed-odds fnancial bet

3x - 20xFTSE 100 Covered

Warrant

5x - 50xSpread bet or CFD

10x - 500xForeign exchange

trading

typICal lEvEragE

avaIlablE froM:


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9

tenold increase in the warrant or

each 1 per cent move in the asset

that it is based upon. Or, you might

be quoted a 1,000 per cent return on

a xed-odds bet, which implies the

same sort o thing.

However, the maximum loss on

either o these two instruments is

either what you paid or the warrant

or the stake you placed on the xed-

odds bet. So you can sleep easy in

your bed knowing that even were the

market youre trading to move dra-

matically against you overnight, your

liability is completely capped.

Aside rom the risk o making out-

sized losses as a result o using lever-age, you also need to bear in mind the

ongoing cost o using it. When doing

a spread bet or CFD trade, there is a

daily nancing charge on the value

o your position. I it is a buy trade,

your trading rm will debit interest

rom your account based on the total

value o your position. In the case o a

sell trade, you might receive a credit.

The typical cost o running a long

position is based on the inter-bank

interest rate plus a couple o percent-

age points. In the current environment

o ultra-low interest rates, this means

the cost o holding a position over-

night could be as little as 0.008 per

cent o its total value. So, i you were

placing a buy bet on the FTSE 100

worth 50,000, you would pay just 4

a day to keep it open.

Nevertheless, it pays to keep an eyeon nancing costs, especially i you

are in a trade where the price is just

going sideways.


Give me alever longenough and Iwill move theworld

arChIMEdES

500-to-

1ThE LEVERAgE yOu

CAN gET TRADINgCuRRENCIES

on. Just because a lot o leverage is

available doesnt mean you should

use it. A good rule o thumb is that

the total value o each position you

take should never be more than what

youd take when buying actual shares.

Lets say youd normally buy

10,000 o shares at a time. So, when

trading, you should stick to a similar

total position size. The problems arise

when you use the 10,000 in your

trading account to take out a position

worth 100,000. I what youre specu-

lating on then moves 20 per cent

against you, youve now lost 10,000

more than you started out with.

However, you do not necessarilyhave to use borrowed money in order

to achieve leverage. Some instru-

ments have built-in gearing, such that

you can get exaggerated returns with-

out the risk o losing more than your

starting stake. Covered warrants are

one example o this, as are xed-odds

nancial bets.

With both o these instruments,

you are quoted at the outset a multi-

plied return that you will achieve i

the price youre trading does what you

think it will. For example, you might

be quoted 10x gearing on

a covered warrant,

implying a


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keep tRAck ofyouR tRAdInG

Writing out the logic or intended

positions will help you hold yoursel

to account. Sometimes jotting down

your idea can conrm whether it is

valid or not. And, later, you will have

something to come back to in order

to help understand your thinking at

the time, which should encourage

you to repeat good trades and avoid

mistakes.

An example o how a basic tradinglog might look is shown to the right.

Developing a standardised template

like this means you can quickly and

conveniently insert your ideas as they

come to you. It is also wise to take a

screen shot o the chart that inspired

your thinking, as this will make it

easier to reerence later on.

Theres no single correct way to

draw up a plan like this. The most

important things to note are your

logic or entering the position, your

entry level and targets, and the other

things that youre going to be watch-

ing or during the trade. Conducting

post-mortem ater each position

comparing the outcome o your trade

with your expectations is an integral

part o the process. It is just as neces-

sary ater a winning trade as a losing

one. Be as honest as you can whenappraising your results or example,

i the successes are down to good luck

more than judgement.

Record-keeping will never be

the most glamorous o tasks,

to say the least. But, as a

trader, you should always

keep detailed records o your activi-

ties, starting rom beore you enter

a position right up to when youre

totting up your prots and losses to

put on your tax return. Not only will

you will save yoursel time later on

by doing all this, but you may also beable to become a better trader in the

process.

Especially i you become a very

requent trader, you may have very

many transactions to report at the end

o the tax-year. It is, o course, one o

the advantages o spread betting and

xed-odds nancial betting that you

wont have to make any mention o

your prots or losses when it comes to

lling out your declaration to HMRC.

Fortunately, virtually every trading

rm makes this airly easy, by allow-

ing you to download precise records

o the trades youve done in the orm

o an excel spreadsheet rom the trad-

ing platorm. You should always do

this regularly, as well as getting your

spreadsheet to give running measure-

ments o your perormance, including

things such as volatility and time.Keeping a record o what trades

youre planning to do and why is

also an essential part o the process.

ThE APPLICAbLE RATE

Of CAPITAL gAINSTAx ON CfD PROfITS28%

There is the

plain fool who

does the wrong

thing at all times

anywhere, but

there is the Wall

Street fool who

thinks he must

trade all the

time.

JESSE lIvErMorE


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ThE APPLICAbLE RATE Of

CAPITAL gAINS TAx ONSPREAD bETTINg PROfITS0%

Tradingplan

Key chat levels

Suot1591 - 34-day exponential moving average1546 - 55-day exponential moving average1600 50% Fib retracement

resstance1713 lateral resistance dating from2006-2009 period1740 61.8% Fib retracement of bear market1764 Raff Regression channel line

Maket: Nasdaq 100pce now: 1638date: 24 August 2009

iea behn taeNasdaq is in a strong uptrend and its occa-sional dips tend to end around the 34-dayexponential moving average.

StategyGo long when Nasdaq pulls back to the 34-dayexponential average currently 1591)

Tae sze: 10-a-pointEnty taget: 34-day EMAExt taget: 120 pointsSto loss:40 pointsrewa/sk: 3:1

post-Trdeanlysis

Ordertogolongtriggered3Sep

temberat

1591.Tookproftsat174123

September.

1900

1800

1700

1600

1500

1400

Jun Jul Aug Sep Oct Nov Dec


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2


tRAdInG psycholoGy

MONThS IS ThE AVERAgE TIME

fOR A LOSINg NOVICE TRADERTO wIPE OuT hIS ACCOuNT6

The key

to becom-

ing a successul

trader isnt about being able

to read intricate meanings in

price charts or coming up with

high-tech automated strategies. Its

about mastering yoursel, your own

emotions and your own psyche. Once

youve learned how you tick and how

to control your reactions in a market sit-

uation, you stand a much better chanceo becoming a protable speculator.

The biggest emotional challenge you

will ace as a trader is how to cope with

losses. Doing a series o losing trades

doesnt just shrink the unds in your

account, it can also severely afect your

condence. You may nd yoursel asking

yoursel whether you are really cut out or

playing the markets. Even worse, you might

end up making even bigger losses i you

react desperately in an attempt to regain

money and pride.

In the rst place, you must accept

that losses are an occupational hazard

o trading. Even the worlds best traders

regularly make losses. I they are small

enough in relation to your wins, you

can still make a prot even i more o

your trades end up in the red than

in the black. Taking a short break

rom the markets is oten agood idea when youre

having a bad run.

There is


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3


no disgrace in making a tactical retreat.

Learning to admit when you are

wrong is a key element in keeping your

losses small. Too many traders hang

on to losing positions in the vain hope

that they will eventually come right.

The usual result o such stubbornness

is much bigger than necessary losses

are incurred. Taking a quick, early loss

and moving on to the next trade is the

best policy.

Aside rom encouraging you to

take silly risks in a bid to rebuild your

account balance, the other efect that

a losing streak can have on you is to

leave you paralysed with ear. Your

analysis identies a decent tradingopportunity but you are just unable

to pull the trigger, and end up miss-

ing out on a prot. Or, when you do

manage to enter a position, you close

it as soon as youve registered a tiny

prot, because youre so desperate to

prove you can win something.

There is a wealth o literature out

there to help you understand how your

trading brain works. As well as all the

books on charting and stop-losses,

make sure you read one o these. Brett

Steenbargers The Daily Trading Coach

is especially helpul.

Maintaining a log o your trading

is absolutely critical element within

developing the right mentality to the

markets. Unless youve got a record o

why you made past decisions good

and bad you will not be able to ana-

lyse your behaviour objectively at alater date, almost certainly condemn-

ing you to make urther and unneces-

sary mistakes.

PROPORTION Of wINNINg

TRADES NEEDED TO bREAkEVEN wITh A 3/1 REwARD/RISk33%

Theres a widespread belie that trading and

gambling are one and the same thing. And thats

not entirely untrue: many people do trade as i

they were indeed at a casino or betting shop. This

perception is encouraged by the name o the most

popular variety o retail trading: spread betting,

even though the latter is really just a junior orm

o utures or CFD trading. So what are the dier-

ences between trading and gambling?

fInanCIal MarKEtS arEnt

EntIrEly randoM.

Spins o a roulette wheel are down to pure chance.There is no way to predict outcomes successully.

However, many traders particularly within hedge

unds fnd money-making strategies that rely

on patterns repeating themselves in fnancial

markets.

your loSSES arEnt your

tradIng fIrMS gaInS.

When you place a wager at a betting shop or a

casino, your wins are the houses losses, while

your losses are their gains. Thereore, the house

has a vested interested in your losing. But your

losses are generally not a source o profts or

trading frms.

tradIng fIrMS wIll lEnd you

MonEy, gaMblIng onES wont.

Because gambling is a leisure activity, ofcial

gambling companies do not generally lend their

punters the means to place wagers. By contrast,

trading relies on the trading frm putting upmoney towards their customers positions.

JuSt gaMblIng

In dISguISE?


14/16

4


spreadthemselvesovertoomanymar-kets.Especiallyitradingshortterm,itsbesttoollowahandulopricesandreallygettoknowthem.Likewise,dontgetsuckedintothelatesthotsto-riesandwhenthingsgowrong,dontallowashort-termtradetobecomealong-termone.Oten,yourebestotakingasmallandearlyloss.

IC:hOwMuChDOyOuNEEDTObECOMEASPREAD-bETTOR?

DJ:Weallowpeopletobetatjust10papointorthefrstsixw

eeks,equivalenttoatotalpositionsizeworthjust500ortheFTSE100.Evenourull-sizedpositionscanworkoutbeingverysmall,asyoucantradecur-renciesromjust50papoint,aswellascertainsharesandtheDowJonesromjust1apoint.

IC:ThEREARELOADSOfSPREAD-bETTINgfIRMSOuTThERE,whyShOuLDTRADERSChOOSEIgINDEx?DJ:AspartoIGGroup,wereasecurecompany,listedonthe

LondonStockExchangewithan1.8bnmarketvalue.Weoergreatresourcestotraders,researchacilities,educationincludingseminars,aswellasourhighlyregardedtradingplatorm.

IC:hOwShOuLDANOVICETRADERAPPROAChSPREADbETTINg?DJ:Myadviceistoviewitasamarathon

,notasprint.Managingyourtradingaccountconservativelyiskey.Thinkcare-ullyabouthowmuchoyourwealthyoucommittoyourtradingaccount.Toomanynewcomersendupputtingabigchunkotheirresourcesonsurethingsthatturnouttobenothingothesort!Atthesametime,sometradersopenanaccountandspendmonthsdoingnothing.Youveactuallygottodosome

spreadbettingtolearnhowitworks!IC:whATAREThEMAINMISTAkESyOuSEENEwTRADERSMAkINg?DJ:Asideromtradingtoolarge,theycan

davId

JonES

4

podCaStavaIlablEnowDavidJonesexplainstoDominicPicardahowtothinklikeawinningtraderandhowtoavoidfallingintothepsycholo

gicaltrapsinashortpodcastavailableonlinenow.Download:investorschronicle/podcasts


15/16

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10 - Innovation

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Transcript of 10 - Innovation