Saturday, December 12, 2009

The 'Where to Trade' Conundrum and How to Crack It

The 'where to trade' conundrum is a very hard one, especially in the current volatile climate. Broadly speaking there are five main areas where you can trade - stocks, options, futures, CFDs and Forex. Viewed all together can be a very daunting task and where to start is a hard conundrum for a novice trader. For that reason here's a simple breakdown of the different options available at your disposal.


Plain and simple, stocks represent a share in the ownership of a company. Stocks trade on a stock exchange, which is basically a venue to buy or sell a stock. In this arena, big players such as Warren Buffet, Merrill Lynch and other big banks dominate. That said, don't be scared off because, if you're new to trading, this is probably the best place to start.

It offers the lowest risk because it's unleveraged. There is a tendency for new traders to go for higher leveraged instruments because of the return, but you must remember that higher return the higher the risk. If you haven't traded stocks (and made a profit) you're probably not ready to look at leveraged instruments just yet. In short, start with stocks.


Options are a leveraged instrument that derives its price from an underlying security (such as stocks). They give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

So, unlike stocks, which represent equity in a company and can be held for a long time (if not indefinitely), options contracts have finite lives.

Options are the next step up from stocks in their complexity. They introduce the opportunity to leverage your money and increase profits.

A word of advice on options: make sure you are trading liquid options (those that are well traded). You never want to be dealing directly with the market maker because they will put the odds in their favour by setting a wide spread.


In a similar vein to options, futures contracts also have finite lives. They are primarily used for hedging commodity price fluctuation risks or for taking advantage of short-term price movements.

The buyer of the futures contract agrees on a fixed purchase price to buy the underlying commodity (wheat, gold or T-bills, etc.) from the seller at the expiration of the contract. This differs from options where the buyer has the right to purchase the underlying commodity but is not obligated to do so.

As time passes, the contract's price changes relative to the fixed price at which the trade was initiated. This creates profits or losses for the trader.

Futures trading is one of the more complex forms of trading, but along with the increase in the skill level required, there are greater rewards (in terms of return on investment). Commodities trading can be a great stepping stone towards trading more advanced markets.

Contract for difference (CFDs)

CFDs derive their price from an underlying security and can be placed on virtually anything. Nowadays, CFD providers allow people to trade almost whatever they want through their own (that is, the provider's) platform.

The CFD provider, in effect, ends up becoming the market, setting the buy and sell prices. They make their money in one of two ways: either (1) they'll set a wider spread - the difference between what you can buy and what you can sell (similar to exchanging foreign currency at the airport) - or (2) they will take equal and opposite transactions to whatever you do (in effect, 100% hedging themselves and making their money on the brokerage and lending rates).

CFDs are popular at the moment because they allow you to trade both sides of the market (long and short). In this case though, there are actually no shares involved; instead, the broker agrees to pay the difference between the starting share price and the price when the contract closes. This method of making or losing money based on a difference is where the name 'contract for difference' originates.


Forex - short for foreign exchange - is trading where the asset traded is currency. What makes it so unique is that, unlike other financial markets, the forex market trades 24 hours and its daily volume exceeds $1.4 trillion, making it the largest and most liquid market in the world.

This market is extremely attractive because of the high leverage potential. For example, if you put a dollar down, you can control of $100 (so, 1% down). It's obvious why this would be a very interesting proposition, but you must remember that leverage is great when you're making money, but it's tragic when you're losing (you'll lose your money a lot quicker!).

While this sounds exciting, it's not for the faint hearted. Forex trading can be fast and furious. If you're just starting out, unless you have your heart set on trading the forex, I recommend that you prove your trading plan can trade profitability in other non-leveraged markets (such as stocks) before entering this market.

I hope you now have some idea of where to trade.

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Wednesday, December 9, 2009

The "Death of the Dollar?" - Japanese Candlesticks Say "Not Yet"

It is the very height of fashion now to decry the continued loss of value of the dollar when compared with most other currencies, especially the euro. Very big names have joined the bandwagon in predicting that the dollar has no future. The mass of popular opinion seems to have fallen in line behind prominent folk in the propagation of the thesis. Some of the leaders of the pack are prominent because they have succeeded in business; some because they are in positions of influence in government, and still others are movie stars who, no doubt, have been deeply schooled in economics in earlier lives and are therefore qualified as experts on the subject. The herd follows right along, because people who are expected to know the answers (some of them, at least) are doing the talking.

And yet, it bears recalling that when the majority becomes such an overwhelming majority that it approaches the status of a monopoly, chattering among themselves and reinforcing each other in circular fashion, the overwhelming majority is often wrong.

Let us assume that the euro is roughly the counterpart of the dollar. With that in mind, let's examine recent "monthly" and "weekly" price charts of the euro and see what we find.

On the "monthly," we see a persistent and nearly continuous rise in the value of the euro (as against the dollar) all during 2006 and 2007, continuing in January, February, and March of 2008. The rise abruptly stopped short in April, when a modified "Shooting Star" Japanese Candlestick pattern emerged. This pattern is bearish, and warns of a possible change in trend, to the downside. The price bar for May has no particular meaning, since the month is only five days old as this is being written..

On the "weekly," we see something akin to a "rounded top" in prices in late March and in April, with progressively taller upper Candlestick "shadows" toward the end, then a bearish weekly bar which engulfed the "real bodies" of the preceding three weeks, followed by another weekly black bar and lower prices at the end of April. The "rounded top" signifies a gradual exhaustion of the fuel which drove the rise. The tall "shadows" indicate increasing resistance to attempts to drive prices higher. The bulls were losing strength. And then, late in April, the dam seems to have broken - or at least "the fever broke" - and prices turned down.

It is impossible to know whether the decline will continue. However, it is important to note that the free-and-easy, almost effortless and irresistible rise of the euro over a course of more than two years hit a ceiling in late April. The game is no longer the same as it was.

At the very least, we now know that there is strong resistance to a rise in the euro above the $1.58 level. Further, the recent signals are bearish, and impute the real possibility of a decline in the euro (and a corresponding advance in the dollar) over the next weeks. The dollar isn't dead yet.

The author is an experienced investor; a retired attorney and corporate CEO; the creator of the "Candelaabra" technical analysis system for use in the financial markets; and has passed the NASD Series 65 Investment Advisor exam. He publishes his investment advisory newsletter to help you keep your money safe and to guide you to profit in the financial markets regardless of the direction of price trend. Find out more about making money in any economic climate. Free information and sample investment newsletter are ready and waiting for you, without any cost or obligation, right here at ====> Go ahead! Click on me!

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