10 - Innovation
Transcript of 10 - Innovation
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Golden
RulesofInvestInG
lesson:InnovatIon:
How tradings becoming easierIn association with
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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.
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Golden Rules of InvestInG:LESSON 10
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
Golden Rules of InvestInG:LESSON 10
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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ThE NuMbER Of ACTIVE
SPREAD-bETTORS whOChANgED PROVIDERS LAST yEAR1IN3
Golden Rules of InvestInG:LESSON 10
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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7
Golden Rules of InvestInG:LESSON 10
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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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
Golden Rules of InvestInG:LESSON 10
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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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.
Golden Rules of InvestInG:LESSON 10
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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Golden Rules of InvestInG:LESSON 10
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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Golden Rules of InvestInG:LESSON 10
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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Golden Rules of InvestInG:LESSON 10
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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Golden Rules of InvestInG:LESSON 10
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?
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Golden Rules of InvestInG:LESSON 10
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
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