What do I trade ? Part Two

May 9, 2010 in Blog 3 Comments

Hi there ,

Lets dive right in. Like I said last time in the article found here , there are lots of possible instruments one can trade and this leads most beginners to be confused as to where to start and what to trade . In this post , I am going to give you a few pointers to consider when looking to learn how to trade an instrument.

There are a few questions you have to consider  first and you can use this post as a simple checklist.

1. Do you understand the product?
2. Do you understand the Risks associated with that product?
3. Are you financially able to trade the product?
4. Are you set up to trade the product ?

These questions above are the general questions. Firstly, understanding the product has to do with; Knowing in detail what it is ( s they say the Devil is in the details) , Its parameters, its payment structure , eg With Shares , you generally make money in one of two ways, Capital Gains, or Dividend payments. Whilst some investors  would be looking for capital gains through a host a methods such as buy and hold , value investing or  scalping , others may require the dividends only , and the considerations one would think of would differ , based on what you are looking to gain from trading these shares. Eg . The Dividend Cover Ratio , which tells the investor how many times a Company would still be able to meet their dividend payment obligation , would be critically important to an investor seeking to make gains from dividends. On the other hand , those who want to trade options , may be more interested in exploiting recent Volatility in a Company , rather than looking for Dividends or Capital Gains. All of these go towards the question “Do you understand the Product you are trying to trade? ”

The second question, which deals with the risks you are faced with when trying to trade a product , is one that most investors love to shy away from. Regardless of all the risk disclosures which are put in place , investors and traders  are frequently blinded by Greed and do not truly focus on risks. Eg .  A dividend paying company may go go bankrupt, An option could decay drastically causing a loss to your Capital , A penny Stock may go to zero , A Government or Company may default on paying it Bond obligation as we saw with with the Russian Default Crisis,  A Short CFD position , may EXPLODE significantly upward,  causing a MASSIVE LOSS to your account. Something as simple as the wrong wording on an order type may leave you trapped in a position you mean to be out of.

Traders and investors are constantly faced with risks, you cannot avoid it. So we seek to understand it and tame it. That is what the focus of any good Course in Trading or investing should be about ….Risk Mitigation ! Sure Strategies are great but controlled risk is even better.

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The TwoScrolls Equity Trading Course found here , teaches a disciplined approach to trading and mitigating risks

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The third question is in line with the risk concern above . Are you able to trade this product ? Is it too volatile for your account . i.e Are the swings it often encompasses so large that whatever trade you do , you are bound to get your position fluctuate so hard against you , that you close the position. Alternatively is the contract is so large, you cannot even afford the margin ? ( A Good faith deposit required on some derivative products to prove you are able to meet any future obligations arising from being involved in that position)

Finally , are you set up to trade that product. Some products cannot be traded on certain accounts. For example , you cannot trade an Equity option on an account setup to trade Forex. Or you cannot trade margin-able products on a Cash only account . These are questions which all need to first be answered before one delves into the more technical questions on strategies , finding opportunities , data mining , correlations , etc

Hopefully , you can begin to understand why the question What should I trade is not something which on can answer right away , because the answer requires a lot of solid inputs before it can be of any use to somebody asking the question.

If you are interested in learning more about how to trade , in a strcutured manner , then you may want to visit this link

to begin a structured approach to trading . This course allows you to get these questions answered methodically , and provides the means by which you can build your confidence to begin your investing career

Stay empowered,

Ty  Canning