May 30 2008
Your success increases when you know the terrain
What market(s) are you going to trade?
A lot of traders, especially those who have been trading a while without success, get trapped into thinking that if they change the market they are trading it will change their results. This is not entirely true, however there is some merit to it that most don’t realise.
Every trader has their own specific resources. Resources are things like capital, time, skills, hardware, software, strengths etc. Because everyone is different, it is safe to assume that no two traders will have the same list of resources.
Those that succeed the quickest in trading are the ones that find the right system to matches their resources. Put another way, every system out there being traded has it’s own mechanics, and unless those mechanics match a traders resources, the two struggle to gel.
Let me give you an example; If I only have $5000 to my name, and the minimum margin requirement to trade a particular commodity such as Crude Oil is around $4000, then for me to take one trade on Crude Oil means I now have 80% of my entire capital tied up in one trade. Now as a complete beginner you may not understand the implications of this, but what it essentially means is that you are limited to how many trades you can have open at one time (simply because the one trade of crude oil has tied up 80% of your account), you are limited to how much volatility you can absorb, and you risk having your entire account wiped out in one trade.
Another example would be that if you work a full time job and your only free time is in the evening, then you can’t be trading during the day, at least not any markets from your own region. This doesn’t mean you can’t trade short term such as intra-day, it just means you have to find a market from another region of the world that is open during your evening or find a suitable longer term trading system such as an ‘end of day’ stock trading system.
At the moment it’s important that you find out a little more about each of the markets available and a little more about you! (more on you later).
These are the main markets available that most people are reasonably familiar with.
Stocks, Options, CFD’s, Futures and Forex. What is important for you is to read up on each of these and get a feel for what they are.
Stocks
Options
Futures
CFD’s
Forex
What is most important for you is to find out what is required of you to trade each market. For example, to trade forex, you can basically start with a few hundred dollars. It used to be that to buy one lot of EURO and sell the equivalent of US Dollars required a margin of US$1000. Now this has reduced dramatically to the point where you can either buy one 1/10th of that amount (known as a mini-lot), thus requiring only $100 margin at 100:1, or you can expose your risk to 400:1. Pretty scary stuff to the trader who has no idea about margin and leverage! But don’t let the small start-up amount fool you; just because it only requires a few hundred dollars to open an account doesn’t make trading forex any easier than trading stocks or futures. In fact quite the opposite in many senses because starting with a small amount of capital reduces your flexibility to trade. It doesn’t allow you to absorb losses without them eating heavily into your capital.
Learn what each market is comprised of, how it operates and what you as a trader need by way of resources to trade it. Some of the best people to ask are brokers from each of the markets, but be vigilant. Find out the costs of trading and not just commissions and spreads, find out the margin requirements and any interest costs, and how these interest costs are calculated and where they are derived from. This is especially important for those trading stocks and forex on margin, and even more so CFD traders.
Exercise:
If you are not familiar with each of the markets mentioned above
visit each link to get a primer. Then do some more research on
them if need be.
If you are using a broker, read the product information documents
and get familiar with your markets from the broker’s perspective.
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