“Buy on fear, sell on greed” – Alan Greenspan
If you want to make fat bundles of extra cash, financial trading is the way to go.
It’s also extremely fun and exhilarating to engage in. It’s been said that it is the last profession that embodies the thrill of hunting: the all or nothing situations, the stalking your prey and keeping your eyes fixated on it, the adrenalin rush as it skips away from you and then comes back into sight – all the fun stuff!
There is a pervasive myth in our Western culture (partly because of the multiple absolute cock ups by bankers who should know better) that financial trading is dangerous and a quick way to lose all of your money.
Nothing could be further from the truth. In fact, if you use the risk management tools available and only trade when real opportunity strikes you will make money on a regular basis.
You don’t have to be right every time in order to make money. You just have to limit your losses to the extent that they are dwarfed by the times you are right and make a killing. 10 small losses of $20 and one profit of $2000 is still $1800 profit for you.
As the only saying goes, you only need to be right once.
The different instruments of the trade.
All trades have different tools for different jobs. Financial trading is no different.
There are many different ways you can access the global markets and get a piece of the pie. I’ll cover the most common types in this article. In all cases you will need a trading account to get started.
Before you proceed, however, I suggest you take time to read this article to familiarize yourself with some of the terminology. I’ll make this article as jargon free as I can, but a good basic understanding of trading terms is still a must.
Owning an individual stock in a company is perhaps the simplest way to invest. By giving the company your money you are in effect buying into the company and will share in the profits it makes every quarter.
You can make money in two different ways. First as the company grows your stock will increase in worth. If you bought in at $15 a share and the company grows 100% over two years your shares will now be worth $30 each. That’s about as simple to understand as can be.
You can also make money by receiving dividends. In short, this is your share of the companies profits which are usually released quarterly. You can either take these dividends and spend them on whatever you like or you can reinvest them and grow your share of the company, getting even more dividends in return.
Depending on your investment style different stocks will be appealing for different reasons. Start up companies have the largest growth potential, whereas some of the Goliath companies like Microsoft or Coca Cola probably won’t grow so much, but will deliver consistent dividends over the years.
You decide what is right for you. If you are new to investing I suggest you try a stock simulator before playing with any real money. It’s best to learn the ropes before playing with your hard-earned cash.
Exchange Traded Funds are becoming wildly popular around the world. To sum it up simply they basically work in the same ways stocks do, except the underlying asset can be anything from gold bullion to the S&P 500 stock index.
You buy into an ETF the same way you buy a stock, and as the underlying asset appreciates or depreciates in value so does your share in the ETF.
For example, a good ETF reflecting the price of silver is the ishares silver trust (SLV). If you bought into this ETF today at $16.08 which is the current price of silver, then silver went up to $20.90, each share in the ETF you own would now be worth $20.90 and you could cash out at a decent profit.
The appeal of ETF’s are in having access to a wide range of assets and not having to actually buy and store them.
Always be sure to check out the associated fees and never trade on margin unless you absolutely understand what you are doing. ‘Nuff said.
Trading currencies involves capitalizing on the fractional differences between various currencies.
Currencies are traded on a Forex platform and are traded to the 6th decimal place. Anything after the decimal point is known as a pip.
Currencies are constantly fluctuating at these fractional levels in a way that a man and woman in the street cannot readily see. If you go down to your local money changer and have a look at any currency again the USD you will see changes perhaps in the second decimal place on a regular basis. Changes to the sixth decimal place, however, are much more common.
I don’t talk too much about things I don’t know enough about. Forex trading is one of those things. I don’t do it and so I am not fit to teach you about it. I just felt that it should be included in any post related to different trading methods so you can investigate further if it floats your boat.
If you want to learn more about Forex trading and the various ins and outs I recommend you read up on www.babypips.com
Futures contracts used to be the mac daddy of trading.
I personally knew a man who made and lost twenty million pounds sterling trading futures contracts. He worked the rest of his life in a shitty little office at my dads furniture company and developed throat cancer through smoking himself to death. Let that be your first warning about futures contracts.
How they work is simple in theory: A farmer, miner, or whatever kind of businessman wants to make sure he can sell his commodity at a stable price. This is also in the interest of the consumer since you don’t want to be going down to the supermarket and buying a bag of rice at $4 one week and $400 the next because of a flood which wiped out rice crops in Thailand.
Futures traders therefore buy his product ahead of time, lets say 30 days ahead of time. They agree to buy x metric tons of pork bellies at the current market price and take delivery at a date in the future. They are betting that when the contract comes due the price will have increased and therefore they will be able to sell and make a healthy profit.
Like spread betting it is also possible to place an order to sell at x price in the future, hoping the price will fall and you will make a profit.
Personally I find futures contracts to be batshit crazy since it requires you to have a crystal ball enabling you to predict the future in order to be successful at it. Perhaps I am jaded by the early childhood experience of knowing the man who worked for my dad and lost everything at it, but I can’t see how anyone can know what is going to happen in the next 30 hours let alone 30 days or longer.
It is also possible to borrow up to 100x what you have deposited in your account to trade these contracts, meaning if you have $10,000 you could trade with $1,000,000. Just be ready to pay the bill when it comes due if you are incorrect! Small movements in price at this kind of leverage could leave you with a margin call you can’t make or the trade will automatically close out.
My advice to you is to stay the hell away from futures contracts. If you decide to go ahead and play big to win big, don’t say I didn’t tell you when you end up working in a furniture store for the rest of your life to make ends meat.
If you do succeed, however, remember your uncle G and feel free to treat me to a week in The Bahamas with the wife.
My favourite trading method by a country mile! Spread betting is fun, easy and the profits are all tax-free.
Sadly at this date spread betting is not available to residents of the USA. I cannot understand why since this is the biggest market in the world and Spread Betting firms would make a killing by selling the service, but I do know that it is simply not an option for Americans as of today.
How spread betting works is that you trade on the back of an asset, index, currency, commodity or stock. You nominate a value per cent, for example lets say I buy Coca Cola at $1 per cent, and for every cent the stock moves in the direction you have chosen you will profit to the tune of your nominated amount.
In my example if I bought Coca Cola at $1 a cent and the share price increased by $4, I would make $400 profit since there are 400 cents in $4. It’s that simple.
However, the downside is that for every cent the share price falls (if I was wrong in buying) then I lose a dollar. This risk is manageable by using a stop-loss to automatically close the trade when your losses hit a certain level.
If I bought Coca Cola at $1 a cent and it fell 20 cents, I could have a computer code automatically close the trade so I can’t lose any more money than the amount I decided before placing the trade. Always use the stop-loss, because it is your best friend in the world of trading.
It’s also worth noting that you can buy or sell in spread betting. If you buy you are guessing the price of the share will increase, whereas if you sell you are guessing it will fall in value. Which direction you choose is up to you. Buying and selling is sometimes called “going long” or “going short” respectively.
If you want a great video on how spread betting works, watch this.
Here in Asia and in much of the rest of the world people have gold fever. It is possible to buy gold at several locations in most decent sized Asian cities. You can either buy jewelry or bullion and coins. I only recommend the latter.
If you took $10k and bought s much gold as you could today (21/04/2015) you would come away with 8.36 ounces at the price of $1192.65 per ounce. If you waited a month and then sold that gold at $1230.00 per ounce you’d have a nice $282 stack of cash. This isn’t enough to make you rich at these amounts, but $282 cash is nothing to be sniffed at for walking yourself to a market, buying something and selling it a week or a month later.
You could also do the same with silver if you don’t have that much cash. Silver is a lot cheaper than gold and is equally readily available in most decent sized cities.
Note that when dealing with physical metals there will always be a difference between the buy and sell price an outlet is willing to deal in. Their buy price will always be slightly under the market value, so be sure to factor this in when you are looking at this option.
Ideas for How/What/When to trade
I’m not going to give you too many ideas for trading. You’ll have to figure it out for yourself and the instinct for spotting opportunities is something that will develop over time.
Instead of spoon-feeding you I will give you three events which occur from time to time and which are strong indicators you should absolutely place a trade. I have made money off of all two of these examples and missed my chance at the third because of doubting myself, so I’ll teach you three simple trades and let you figure out the rest for yourself.
A scenario in which you should almost always SELL heavily, provided the CEO is still in his position at the time of his death/indictment.
Almost any situation which involves the CEO of a well established company being involved in criminal activity (most commonly fraud) or dying will trigger a sell-off in the stock of his/her company.
A specific instance of this which I remember well is the Olympus scandal of 2011. In this case the CEO quit the company and came out publicly accusing the board of committing massive fraud and being in bed with organized crime. Predictably, the stock price tanked and short sellers who were quick enough to act made a fortune.
As you can see from the above chart, the price of this stock fell by over 50% in the space of eleven days. This would have been a massive gain for anyone who was quick enough to spot the opportunity when it arose and had held on long enough to ride it to the bottom.
Fraud and other such allegations create massive uncertainty in investors. They tend to have visions of Enron and other such historical calamities and get out FAST. For the short seller, such a situation is a pot of delicious, sweet honey ready for the taking.
These are much more common than CEO deaths thanks to the reckless egos of politicians the world over. It seems like every time you switch on the news another pair of heads of state are having a bitch fit at each other.
From time to time these disagreements lead to sanctions, suspension of trade agreements or all out war. While these events are indeed unfortunate for the people in the respective countries, they are also highly profitable opportunities for the short seller.
Take a look at this chart of what happened to the Russian Ruble when America slapped sanctions on Russia starting in March 2014. This took a few months to kick in, but as the US tightened the screws, the Russian Ruble began to give as investors lost confidence.
For the currency trader this would have been a wet dream. In fact, so many people jumped on this bandwagon that the FX platforms had to suspend Ruble trading for a while. If your conscience gives you any trouble about short selling, no problem, just buy Rubles when you feel progress is being made towards reconciliation and you should start to see an increase as the economy recovers and investors flood back into Russia, trading in Rubles and driving the demand back up. Personally, I could care less abut Vladimir Putin or his problems. I’m out for me and mine.
As you can see below, the Russian stock market (RTS.RS) began to give at the same time. You and I as average Joe traders, however, would not be able to trade this index directly.
Economic Recovery/Monetary Stimulus
Since short sellers are often seen as the spawn of Satan himself, it’s nice to also place a trade which helps the economy recover and possibly even creates jobs. Buying into a company or a stock index after an economic crash is just such an opportunity to be a good citizen and make healthy profits.
There are two kinds of economic setback: minor, like when the market just has a particularly bad day and loses 2-3% (a month or so later it will almost always be higher than it was before the crash during a bull run), and major, when the entire economy craps its briefs, bankers throw themselves out of top floor windows and hardworking men around the country lose their jobs.
Despite doomsday prophets never-ending trash talk about economic Armageddon, it does not and will not happen. I will perhaps write an article on why this thinking is flawed another time, but let’s just say that every time the economy crashes badly like the meltdown of ’08, it recovers. The immense power of government and their ability to intervene is one reason for this.
Look at the stock chart below. It reflects the S&P 500 stock index over the past ten years. As you will see, things crashed badly around the time of the great financial crisis, but after the federal reserve began quantitative easing and printing dollars like they were going out of fashion, the market is now WAY higher than it was even before the crisis. Pull up a 100 year chart and you will see that this is the norm after every crisis, despite what the doomsday prophets say.
So how do you take advantage? Just buy into an ETF or pick several stocks you think are fundamentally sound and will begin to recover when the economy starts to get back on its feet, which it will.
Most people cash out in a panic at the time of the crisis, which is a great buying opportunity for long-term thinkers like you and me.
As you can see from the above chart, if you had bought in 2010 when the market was at its lowest point your investment would now be worth more than three times what it was.
If all of the companies on the S&P 500 fail and go bankrupt, believe me when I tell you that losing your investment will be the least of your worries. You will be killing for food and clothing.
Take advantage of this opportunity the next time the irresponsible “irrational exuberance” of market mania takes over, which it will.
Those are just three examples of how to make easy pickings in the global financial markets. You have to understand that the risk here is minimal because people will always sell on panic and when big government spending is announced investors will pile in to ride the wave to the top. It’s all about market sentiment and investor confidence.
At the very least you have nothing to lose by getting an account and testing your abilities, and being prepared to dive in when opportunity knocks.
I don’t trade often, and I believe that is the biggest mistake anyone can make in this game. I just sit there, like a crocodile lurking under the murky waters, waiting for a gazelle to come to the riverside for a drink. When the opportunity arises, I STRIKE! When I have taken my profits and am satisfied, I sink back beneath the surface and wait for the next opportunity.
Will you be ready when the next gazelle comes along?
Desire. Decide. Persist.
*Disclaimer: I am not a qualified financial adviser or professional trader. This article is for educational and entertainment purposes only. I will not accept any responsibility for losses incurred as a result of acting on this advice. Trading always carries risk and you should do so only after consulting with a professional. You should always understand the risks associated with trading beforehand.