Alan's Finance Blog

How to trade shares via contracts for differences

Share trading has always been around (at least during the last 150 years). Many institutional and retail investors spent their lives in trading financial instruments so I can say it is nearly a science. Today, any kind of trading is easily accessible and everybody with an internet access can start speculating on the markets. In this article I will explain how to take advantage of market movements by trading Contract for Differences for profit.

After you read this article please share how it contributed to your knowledge. Was it useful for you?

What are contracts for differences

Contract for differences (CFDs) constitute an agreement between two counterparties, usually called a buyer and a seller. Each party agrees to pay the other party the difference in a price of an asset between two moments in time. For example if you believe that the oil price will rise in the next two days you want to buy a CFD based on Oil and close the deal after two days. If you guessed right the result will be the difference between the price you bought at and the price you sold at multiplied by the number of contract you bought.

Contracts for differences are based on various assets such as shares of stock, metals, currency pairs, oil, commodities, stock exchange indexes and basically on everything that is traded. A good article of what contracts for differences are explains the major benefits of trading those instruments instead of traditional shares trading.

Why trading Contracts for Differences?

CFD trading has many advantages compared to traditional shares trading. Of course there are cons too. Here I will try to just outline the major ones.

CFDs are traded on leverage. This means that you can purchase significantly more than you would on a stock exchange. For example a leverage of 100:1 will allow you to buy Apple shares priced at 5000 US dollars with just 50 USD available in your account. It is a double-edged sword though because it is easier to lose money quickly as it is easy to earn. If the price rises with total of 150 USD you will have earned 150 in addition to your 50. Conversely a fall of 50 USD will wipe out your account. Some brokers offer to trade CFDs on a leverage of 1:1 meaning you pay the actual price of an asset and thus having almost the same conditions as if you were trading on a real stock exchange.

Another major advantage of CFD trading is the lowered costs as opposed to stock exchange trading. When you open an account with a CFD broker you can usually place orders with minimum amounts of 1 contract, which is not possible on a stock exchange. The spreads and commissions paid for CFDs are significantly lower too.

However, the big difference between CFDs and real stocks is your counterparty. At the stock exchange you buy if there is someone to sell. It is a regulated market, so you and everybody know who’s selling to whom. The CFD trading falls into the category of OTC (Over-the-counter) market and in this sense you “bet” against the broker rather than buying assets. Although the CFD gives you almost the same rights as a shareholder, you do not actually own the shares. If the broker disappears you are left with the position against him and not owning anything anymore. Of course, this is an extreme example but you get the idea.

To minimize the risk, you should always choose a well-regulated and reputed broker so your funds and positions receive maximum protection.

How to trade CFDs on shares?

The best thing about CFDs is that you can either profit from rising and falling markets. Suppose you are interested in trading Apple shares. The first thing you need to do is to get informed about the company you are trading as well as to know more about the global economic situation. When you get an idea of how the price has been moving over the time it is time to test your trading skills. Of course, you don’t want to test using your real money so first open a demo trading account and see if you are doing well. If you believe the price will rise place a long order, conversely place a short one.

It is also important to get familiar with the platform you are trading with because sometimes you will have to think and act fast. I recommend at least one month demo trading before opening an account. After you have decided for you start with a small amount and try to never risk more than 2% in a single trade.

Major economic events influence all economies; so for example if there are bad news in China, your CFD will certainly go down. Make sure you understand the charts very well – they reflect the market, i.e. buyers and sellers behavior. In fact some traders say that 90% of their trading is based on what they see on the charts. This is not surprising because there is no better source of information of what is actually happening than the charts themselves.

The 80/20 Trade: “Pounce Like a Cat”

Patience Can Be Rewarding

By Elliott Wave International

Copy the tiger when stalking and capturing a “pounce-ready” trade.

Tigers know the prey they covet is elusive: they show great patience and care when stalking the target.

I came across this description of the tiger’s technique:

“When hunting, this cat…may take twenty minutes to creep over ground which would be covered in under one minute at a normal walk…the tiger will sometimes pause…move closer and so lessen that critical attack distance…before finally raising its body and charging.

“…they wait until a victim comes close and spring up…This ambush method of hunting uses less energy and has a greater chance of success.”

You must “ambush” high confidence trades. Long-time professional trader and teacher Dick Diamond says patience is vital before the ambush.

I talked to Diamond about his famous 80/20 trade, which he means literally — he says it has at least an 80 percent chance of success. It’s the only trade set-up Diamond will take.

————

Q: Could you tell me about the 80/20 trade?

Diamond: The 80/20 trade is based on indicators that create a specific trading set-up. A trader must act on this set-up immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five minute chart, the 80/20 set up may come along a few times a day. If you’re trading a longer time frame, like off of a 120 minute or 240 minute chart, the 80/20 will come along less frequently, but when it does, the opportunity will be bigger. The 80/20 trade can be especially rewarding for position traders. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades.

Q: What emotional factors do students need to work on the most?

Diamond: Traders must be calm and confident. You can’t be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques.

Q: What’s different about trading today vs. when you started out in the 1960s?

Diamond: When I started trading, execution took up to five minutes — now it takes less than a second. Time is money, so computers provide a great advantage to today’s trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.

Get instant access to our FREE report from Veteran Trader Dick Diamond In this 12-page report, you will learn practical tips and tricks from veteran trader Dick Diamond. He and his assistant, Roberto Hernandez, share many of their time-tested techniques with you, with excerpts from interviews and course materials designed to accelerate your trading progress. Download your FREE 12-page report today >>

How to Handle an Economic Implosion

By Elliott Wave International

I came across some research on the subject of worry. Here’s how it was presented:

Things People Worry About:

• things that never happen – 40%
• things which did happen that worrying can’t undo – 30%
• needless health worries – 12%
• petty, miscellaneous worries – 10%
• real, legitimate worries – 8%

Of the legitimate worries, half are problems beyond our personal ability to solve. That leaves 4% in the realm of worries people can do something about.

I thought about our gigantic national debt and weak economy. These seem to fit into both subcategories of “real” worries. You can’t do much as an individual to solve the nation’s debt and economic problems, yet you can prepare for a worsening economic downtrend.

Do we see evidence for an economic turn for the worse?

Well, consider that the evidence is so overwhelming that it took 456 pages of the second edition of Robert Prechter’s book, Conquer the Crash, to cover it. And since that book published, Prechter has consistently devoted his monthly Elliott Wave Theorist to the facts and evidence behind his forecast.

Here’s a chart from the book that was updated by Elliott Wave International in March 2012:

The downturn from 2008 is critically important, as it shows that after an almost unbroken 60-year climb, the contraction is underway. It surely has much further to go, because it is still a third higher than it was at the outset of the last debt deflation in 1929.

– The Elliott Wave Financial Forecast, March 2012

The rating agencies are well aware of what the above chart means. You probably know that Standard & Poor’s downgraded U.S. debt from the nation’s long-standing triple-A to AA+. Now, another rating agency has taken their rating even lower:

Rating firm Egan-Jones cuts its credit rating on the U.S. government to “AA” from “AA+” with a negative watch, citing a lack of progress in cutting the mounting federal debt.

– CNBC.com, April 5

Robert Prechter’s bestseller, Conquer the Crash, provides practical information about what you can do to protect your finances in the coming economic implosion. And right now, Elliott Wave International is offering 8 lessons from Conquer the Crash in a free 42-page report that covers:

• What to do with your pension plan
• How to identify a safe haven
• What you should do if you run a business
• A Short List of Imperative “Dos” and Don’ts”
• And more

In every disaster, only a very few people prepare themselves beforehand. Discover the ways you can be financially prepared and safe.

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My 20 Rules for Trading

Asset Protection and Wealth Creation Strategies – Trading 101

I usually try to catch three or four trend changes a year, which might generate 50-100 trades, and often come in frenzied bursts.

Since I am one of the greatest tightwads that ever walked the planet, I only like to buy positions when we are at the height of despair and despondency, and traders are raining off the Golden Gate Bridge. Similarly, I only like to sell when the markets are tripping on steroids and ecstasy, and are convinced that they can live forever.

Some 99% of the time, the markets are in the middle, and there is nothing to do but deep research, looking for the next trade. That is the purpose of this letter. Over the four decades that I have been trading, I have learned a number of tried and true rules which have saved my bacon countless times. I will share them with you.

Don’t over trade. This is the number one reason why individual investors lose money. Look at your trades of the past year and apply the 90/10 rule. Dump the least profitable 90% and watch your performance skyrocket. Then aim for that 10%. Over trading is a great early retirement plan for your broker, not you.

Always use stops. Risk control is the measure of the good hedge fund trader. If you lose all your capital on the lemons, you can’t play when the great trades set up. Consider cash as having an option value.

Don’t forget to sell. Date, don’t marry your positions. Remember, pigs get slaughtered. Always leave the last 10% of a move for the next guy.

You don’t have to be a genius to play this came. If that was required, Wall Street would have run out of players a long time ago. If you employ risk control and stops, then you can be wrong 40% of the time, and still make a living. That’s little better than a coin toss. It you are wrong only 30% of the time, you can make millions. If you are wrong a scant 20% of the time, you are heading a trading desk at Goldman Sachs. If you are wrong a scant 10% of the time, you are running a $20 billion hedge fund that the public only hears about when you pay $100 million for a pickled shark at a modern art auction. If someone says they are never wrong, as is often claimed on the Internet, run a mile, because it is impossible.

This is hard work. Trading attracts a lot of wide eyed, naïve, but lazy people because it appears so easy from the outside. You buy a stock, watch it go up, and make money. How hard is that? The reality is that successful investing requires twice as much work as a normal job. The more research you put into a trade, the more comfortable you will become, and the more profitable it will be. That’s what this letter is for.

Don’t chase the market. If you do, it will turn back and bite you. Wait for it to come to you. If your miss the train, there will be another one along in hours, days, weeks, or months. Patience is a virtue.

When I put on a position, I calculate how much I am willing to lose to keep it. I then put a stop just below there. If I get triggered, I just walk away. Only enter a trade when the risk/ reward is in your favor. You can start at 3:1. That means only risk a dollar to potentially make three.

Don’t confuse a bull market with brilliance. I am not smart, just old as dirt.

Tape this quote from the great economist and early hedge fund trader of the thirties, John Maynard Keynes, to you computer monitor: “Markets can remain illogical longer than you can remain solvent.” Hang around long enough, and you will see this proven time and again (ten year Treasuries at 2.4%?!).

Don’t believe the media. I know, I used to be one of them. Look for the hard data, the numbers, and you’ll see that often the talking heads, the paid industry apologists, and politicians don’t know what they are talking about (the Gulf oil spill will create a dead zone for decades?).

When you are running a long/short portfolio, 80% of your time is spent managing the shorts. If you don’t want to do the work, then cash beats a short any day of the week.

Sometimes the conventional wisdom is right.

Invest like a fundamentalist, execute like a technical analyst.

Use technical analysis only, and you will buy every rally, sell every dip, and end up broke. That said, learn what an “outside reversal” is, and who the hell is Leonardo Fibonacci.

The simpler a market approach, the better it works. Everyone talks about “buy low and sell high”, but few actually do it. All black boxes eventually blow up, if they were ever there in the first place.

Markets are made up of people. Understand and anticipate how they think, and you will make a lot of money.

Understand what information is in the market and what isn’t and you will make more money.

Do the hard trade, the one that everyone tells you that you are “Mad” to do. If you add a position and then throw up afterwards, then you know you’ve done the right thing. This is why people started calling me “Mad” 40 years ago.

If you are trying to get out of a hole, the first thing to do is quit digging and throw away the shovel. A blank position sheet can be invigorating.

Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training. I am in the latter group.

by John Thomas, The Mad Hedge Fund Trader

A Four-Chart Lesson in Spotting Trade Setups

By Elliott Wave International

You can find low-risk, high-probability trading opportunities by trading with the trend. The trick is to find the end of market corrections, so you can position yourself for the next move in the direction of the trend.

This excerpt from Jeffrey Kennedy’s free 47-page eBook How to Spot Trading Opportunities explains where to find bullish and bearish trade setups in your charts and how to zero-in on these opportunities. If this lesson interests you, the full 47-page eBook is free through July 6.

On the left-hand side of the illustration below, there are two bullish trade setups. As traders, we want to wait for the wave (2) correction to be complete so we can catch the move up in wave (3) – this is the trade. What we are trying to do in this bullish trade setup is anticipate the potential for profits on the buy-side as prices move up in wave (3). Another bullish trade setup is at the end of wave (4).

As traders, we are looking to buy the pullback and position ourselves within the direction of the larger up-trend. Remember, three-wave moves are corrections, which means that they are countertrend structures. On the other hand, five-wave moves define the larger trend. As traders, we want to determine what the trend is and trade in the direction of the trend. Our buying opportunity to rejoin the trend is whenever the trend pauses and forms a correction.

Now, let’s look at the right-hand side of the illustration where we see two bearish setups. When a five-wave move is complete, it is retraced in three waves as a correction. The end of the five-wave move presents the first trading opportunity that we can take advantage of the short side (or the sell side) as the wave (A) down begins.

Notice the second bearish trade setup gives us another shorting opportunity as wave (B) tops.

So, within the classic wave pattern of five waves up and three waves down, we have four high-probability trading opportunities in which we are either positioning ourselves in the direction of the trend or identifying termination points of a trend. I want to share with you some tricks I have picked up over the years about how to analyze corrective waves and their termination points. The single most important thing I’ve learned from analyzing corrections is that corrective or countertrend price action is usually contained by parallel lines.

As shown above, draw the parallel lines by beginning at the origin of wave A and going to the extreme of wave B. You draw a parallel of that line off the extreme of wave A. So basically you have a small, slightly angled downward price channel. This will show you the containment region for wave C. It also shows you an area toward the bottom of the lower trend line where you can expect a reversal in price.

Here is another example. Again, you draw the parallel lines off the origin of wave A, the extreme of wave A and the extreme of wave B.

Toward the upper end of the upper trend line, you will usually see a reversal in price.

This example shows how countertrend price action is contained by parallel lines in the British pound, 60-minute, all sessions. Why is it important to know parallel lines contain the corrective or countertrend price action? Number one, it will increase your confidence that you are indeed labeling a countertrend move properly. Number two, it identifies areas where you will likely see prices reverse. For example, we see this reversal up near the top.

This brief trading lesson is just a small example of the opportunities you can find once you learn to identify key market patterns. Learn more in your free 47-page eBook, How to Spot Trading Opportunities. This valuable eBook is regularly $79, but you can get it free through July 6. Download your free copy of How to Spot Trading Opportunities now.

The Economic Crisis No One Saw Coming: A Convenient Untruth

The Economic Crisis No One Saw Coming: A Convenient Untruth

August 9, 2010

By Elliott Wave International

The single most convenient untruth about the 2008 (and counting)
financial crisis is that it was unforeseen. For two years policymakers
have insisted “There was no way to know ahead of time” that
the liquidity boom would come to a screeching halt. Back in November
2008, in fact, the usually tight-lipped Queen of England herself
publicly described the turmoil of international markets as “awful” and
openly asked a panel of experts from the London School of Economics “Why
did nobody notice?“

Her Majesty is right: Most financial authorities did
NOT notice the crisis before it was too late. Comedy Central’s “The
Daily Show with Jon Stewart” of all places provided the
most poignant evidence: A March 2009 video montage
shows executives and economists from the world’s leading financial
firms repeatedly forecasting continued upside strength in stocks,
plus renewed bull market growth in financials — right as debt
markets came unhinged and the US stock market headed into a 50%-plus
selloff.

Dubbed the “8-Minute Rap” (after the “18-Minute
Gap” of Nixon’s Watergate tapes), the Daily Show video feature
sent an equally powerful message, as the clip
below makes plain.

Yet even as the mainstream authorities failed to detect the
economic earthquake moving below their own feet, somebody did “notice” well
in advance. That person was EWI’s president Bob Prechter.

The clip below is from a 2007 Bloomberg interview.
Clear as PLAY, the foreseeable nature of the crisis emerges from
Bob’s October 19, 2007 interview.

As the historic trend change began to unfold, Bob issued this
timely insight:

“We’ve seen the first crack in the credit structure
with a huge drop in commercial paper… These are the harbingers
of a change toward the downside for the stock market, commodities
including oil, and the debt market itself.”

Don’t believe the convenient untruths. Get objective market
analysis today. Download
this free report that contains valuable market forecasts directly
from the desk of Bob Prechter.

Four best debt consolidation moves

You may be considering debt consolidation if you have accumulated a significant amount of debt and cannot afford to make the payments. Having huge amount of credit card debts with high interest rates can sometimes be very expensive and confusing. Consolidating them into a single monthly payment can create a streamlined process of repayment. There are several options of consolidating your debt. Have a look at the four best debt consolidation moves that you can take to successfully pay off your debts.

• Take a HELOC: A home equity line of credit (HELOC) is a loan taken against the amount of equity in your home. If you have built enough equity in your home, you can easily consolidate your debts by taking a loan against your home value. Your house will be used as a collateral and consider using this option as debt consolidation only if you think that you can make the payments on time. If you fail to pay on time, you may run the risk of losing your home to foreclosure. You can enjoy lower interest rate than on credit cards. The interest rate and some fees associated with HELOC will be tax deductible.
• Do “cash-out” refinancing: This can be considered another best way of debt consolidation. You can opt for “cash-out” refinancing. If you have enough equity in your home, than you can refinance your home for a value more than what you owe on your mortgage. This will help you access easy cash, which can be utilized to pay off debts. You get very low interest rates but make sure that you will be stretching your payments to over 15 or 30 years. This may increase the actual amount you are paying back due to the added interest rates over the term of the loan.
• Get your car loan refinanced: If you paying huge amounts on your car loan, then go for a car refinance. By refinancing your car loan, you can save the extra dollars every year. This money can be used to pay off your debts comfortably.
• Obtain personal loans: A personal loan can also be obtained to consolidate your debts. If you do not have enough equity in your home and if you do not qualify for a HELOC, then you can get personal debt consolidation loans. Such loans will offer you low interest rates than the outrageous rates of credit cards. Such personal loans are most often-unsecured debt.

Thus, there are different ways of consolidating your debts and paying them off. Consider the four best debt consolidation moves mentioned above before deciding to consolidate your debts.

Author bio: Neil R Williams is a financial consultant and writer. His niche of articles comprises some core financial subjects, such as debt consolidation, debt settlement, credit repair, credit counseling and so on. He also consults people in financial jeopardy.

How to ‘Fast Filter’ the best stocks daily (new)

Have you been keeping up with the new “Market Mastery” training
videos I sent you so far that reveal the 4 low-risk,
high-probability “profit pockets” that can occur on almost ANY
stock chart?

Well, I just got ANOTHER quick video update from the developer,
Bill Poulos, that shows a handful of GREAT trades you could’ve
gotten in on as a Market Mastery student over the past week or
two.

Watch as Bill shows you a great short trade using the “Profit
Pipeline” method that potentially pulled in 10% on the first
half & 13% on the second half in a matter of days…

…and then how his “Velocity Method” got right back in for
another great short trade which already hit the 10% target.

Trades like this can set up all the time, and when you know how
to grab them, it gives you a definite edge over most traders.

See the trades here:

http://www.marketmastery.com/z/?i=773362&l=f42

Pay careful attention to his comments about what most other
traders probably would have done in these markets, and see how,
using the Market Mastery methods, you have a leg up on them.

Good Trading,
Alan

Stock market mastery in action (video ‘dissection’)

Wow, it looks like the “Market Mastery” Discovery training video
I posted yesterday over here really “struck a cord” with folks.

The 35+ year market veteran, Bill Poulos, who recorded the video
has been receiving a lot of great feedback on his new training
website.

And from the comments received so far, it looks like most
people really “get it” and understand the importance and sheer
POWER of the 4 low-risk, high-probability stock trading methods
that help reveal the “profit pockets” you can find on nearly ANY
stock chart.

Naturally, traders are looking for more detail on these 4
specific methods.

Well, Bill’s working on some really cool materials for an
interactive online training session he’s going to be holding
next Tuesday. He’ll be showing you his thought process as he
trades each of the 4 methods against the “hard right edge”,
where you don’t know what the next day will bring. (Plus a ton
more.)

But in the meantime, he just recorded another quick new video
for you that “dissects” some of the trade examples in
yesterday’s video…

(PLUS, it shows you how he uses his “Fast Filter” technique to
quickly help select only the best stocks to consider on a daily
basis.)

See his “trade dissection” video here:

http://www.marketmastery.com/z/?i=773362&l=f41

Good Trading,
Alan

Raising The BAR: Bar Patterns & Trading Opportunities

How a 3-in-1 formation in cotton “triggered” the January selloff
April 17, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is (and always has been) a “trend” trader, meaning: he uses the Wave Principle as his primary tool, with a few secondary means of select technical studies. Such as: Bar Patterns. And Jeffrey counts one bar pattern in particular as his favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the last three bars. When prices penetrate above the high — or — below the low of the set-up bar, it often signals the resumption of the larger trend. Where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

Now, how about a real world example of the 3-1 formation in the recent history of a major commodity market? Well, that’s where the picture below comes in. It’s a close-up of Cotton from the February 5, 2010 Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the New Year. Within a few day the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

February arrived, and with it the end of cotton’s decline. In the same chart you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a reliable for impulse patterns. Since then a winning streak in cotton has carried prices to new contract highs.

This example shows the power of a fully-equipped technical analysis “toolbox.” By using the Wave Principle with Bar Patterns, one has a solid, objective chance of anticipating the trend in volatile markets.

And in a 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” Jeffrey Kennedy identifies the top SIX Bar Patterns included in his personal repertoire. They are Double Inside Days, Arrows, Popguns, 3-in-1, Reverse 3-in-1, and Outside-Inside Reversal.

In this comprehensive collection, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Best of all is, you can read the entire, 15-page report today at absolutely no cost. You read that right. The limited “How To Use Bar Patterns To Spot Trade Setups” is available with any free, Club EWI membership.