TRADING CFDS. Learn how to make money with trading

Transcription

1 Learn how to make money with trading

2 Index Why trading? 2 The Basics 3 The Trend Strategy 7 Money Management 9 Closing Remarks 11 1

3 Why trading? Everyday financial products worth billions of dollars are swapped all over the world and millions in profits are made. A big part of all billionaires have made their money at Wall Street. Trading is basically what the people at Wall Street do, they try to foresee the future price for an asset. If you're not trading yourself yet you're missing out on a chance of hitting a big profit yourself. However you're on the right way and when you're done reading this ebook you'll have the know how to make your claim. I'm a trader myself and I want to share my knowledge and my strategy for trading CFDs with you. You can learn from my past mistakes and my now successful strategy. Now before you start reading I want to warn you that trading is not the right thing for everyone. You have to be emotianally stable and generally a risk-taker, because you can loose all (but only!) your invested capital. This should not stop you, trading is a great opportunity and if you use my tips correctly you will win money and don't loose it. At this point I still want to clarify that I will not take any responsibility for lost money. Now let's start learning! "The policy of being too cautious is the greatest risk of all."- J. Nehru 2

4 The Basics A contract for difference (CFD) is a contract between two parties, the buyer (you) and the seller (CFD-Broker). A CFD is a leveraged product, meaning that you can make high profits with a small investment. Robert Kiyosaki made it a point in his book "Rich Dad Poor Dad" that the key to becoming rich is that you have to buy assets. With CFD's you can buy more assets with less money, hence if you buy the right assets you can boost your way to wealth. To open a CFD position, the buyer has to deposit a safety margin. With CFDs you can either go short or long for an underlying asset, meaning if you know that an asset is going to fall you can still make money of it. How does it work? You open a position on any underlying asset like an index, a share, a forex or even a commodity. With a CFD you don't own any physical instrument, but you get to enjoy all the benefits. However, any voting rights available to the holder of an equity share are not available to the holder of an equivalent CFD. You enter into a contract at the quoted price. The difference between the opening and the closing price is your profit, that's why it is called contract for difference. Like is said, you can go long or short. If you go long your prediction is that the current rate is going to rise, if you go short your prediction is the contrary, so you would bet on falling rates. When you open your position you choose how much you want to invest, meaning how many contracts/shares you want to buy. Then you can set your conditions: Only Buy When Rate Is (Limit Order) Close at Profit (Limit) Close at Loss (Stop loss) Trailing stop Example Instead of buying 500 Apple shares from a traditional stockbroker, you buy instead 500 CFDs of Apple. A $6 per share rise would give you a profit of $3,000 respectively. 3

5 The Basics Leverage A leverage means that a small change in the price of the underlying asset the CFD is amplified into a bigger change. Therefore your profits or losses are accelerated. Spread There are two ways how the broker makes money. The first one and the obvious one is the spread. For every CFD there are two prices, the Bid and Ask price. The difference between those two prices are usually a few cents per contract, but always a factor to look at before opening a position. Sometimes you start with a $20 loss, just because of a high spread. So the buy-price is always higher than the sell-price, that's why you also call it Bid/Ask-spread. The second way how CFD-brokers make money (or in our case loose money) will be explained later in this ebook. Margin To open a position you have to pay an initial margin that varies from instrument to instrument. Usually it is less than 5% of the contract's value. If your equity falls below the initial margin, the CFD-broker will close your position so you won't fall below zero. Sometimes your broker allows you under some circumstances to fall below the maintenance margin level. 4

6 The Basics Instruments There are different instruments availabe as an underlying for CFDs. There are four different groups that I'm going to present you now. You can trade them all with my prefered CFD-broker, that I will introduce you later in this course. Basically all these instruments are traded in the same way, but for every type of instrument you have to adjust your strategy. Stocks/Shares One of the most common instruments to trade are stocks. The contract value of one Equity CFD equals the quoted price. The leverage is usually around 20, meaning the initial margin is 5%. Dividends are automatically added. The volatility (fluctuations) is mostly lower than the volatility of other instruments. e.g. Apple, Google, Disney Indices An index is a composite of different stocks. The DJIA for instance is a composite of the leading 30 exchange traded companies in the USA and the most popular one too. Due to legal issues the indices often have another name in the trading platform like "USA 30". The leverage for indices is very high and usually between 150 and 300. e.g. S&P 500, DJIA, DAX 30 Forex Forex (short for foreign exchange) are always traded as pairs. A forex pair can be USD/CHF for instance. The initial margin can be as low as 0.5%. e.g. USD/EUR, CHF/JPY, GBP/USD Commodity Commodities are another common underlying asset for CFDs. The contract value equals the price quoted in the currency of the commodity. The leverage is usually around 150. e.g. Gold, Silver, Brent Oil 5

7 The Basics Japanese Candlesticks There are two common chart types, the normal line that I assume you already know and the "Japanese Candlesticks". Candles? Yes, they look like candles in some cases, however I didn't name them. They were originally founded in Japan and are very important to understand. I recommend you to compare them with normal lines from time to time. The concept of those candlesticks is very simple. If the bar is red, the top of the bar is the opening price for the respective time period. If it is green (or sometimes blue), the bottom of the bar is the opening price and the top is the closing price respectively. The line in each bar tells you how much the price has fluctuated in the regarded time period. This type of chart is very useful and a must to understand for most trading strategies. High Close Upper shadow High Open Open Low Lower shadow Close Low 6

8 The Trend Strategy So now that you understand the basics, we are ready to dive into my strategy and start learning how to use CFDs to make profits. First I want to say that no strategy works in every case and will prevent you from making no losses at all. If someone's going to tell you that he has such a strategy he's trying to scam you. If there would be a 100% safe strategy that works every time, then this person either wouldn't tell you or every one would already know about it. But my strategy works in around 80% of all trades and I will show you how to evade the 20% left. My strategy is very simple and effective and works the best with indices as an underlying. First you need to learn something about trends and cycles. Most things in trading are cyclical and prices basically fluctuate around a "real price". But the real price can either rise, fall or stay where it is and they do this trend wise. There are three different trends: Long-trend The prices are climbing up and they also will in the future. Short-trend The prices are falling and they also will in the future. Range The prices aren't moving at stay where they are. A trend is always followed by another trend. Ranges are useless for our strategy, but if we can recognize the start of a long or short trend we can make profits. On the next page I will explain you how to identify a new trend. "Two rules for investing/trading: Rule number one : most things will prove to be cyclical Rule number two : some of the greatest opportunities for gain and loss come when other people forget rule number one." - Howard Marks 7

9 The Trend Strategy Now we know what trends are. But how can you identify them? The answer is Japanese yes candle sticks! First you have to know that normally a trend change comes after a Range and a Range comes after a trend hit the previous high or low. But that alone doesn't necessarily indicate a trend change. To identify a trend change we use the candle sticks. Specific patterns of the candle sticks tell us if the following trend will be short or long. Here is an overview of those patterns. Bullish Engulfing Indicates a long trend after a short trend Bearish Engulfing Indicates a short trend after a long trend Hammer Indicates a long trend after a short trend, the color doesn't matter Hanging man Indicates a short trend after a long trend, the color doesn't matter Bullish Harami Indicates a long trend after a short trend Bearish Harami Indicates a short trend after a long trend These are the indicators that work best for me, there are many more though. If you recognize a trend and one of these occurs it supports your prediction, but doesn't mean it will prevent you from a loss and secure you a profit. That's why you have to use a stop loss. Please note that this strategy is very basic and I had to explain it in an easy and understandable way for beginners. I still recommend you to consider some literature on that topic. 8

10 Money Management Investing & Profits If you want to trade I recommend you to start with an investment, although you could start completly without investing any of your own money. I'll explain that later. But why should you invest some of your own money if you didn't need to do that? It's simple, when I started trading I didn't invest any of my own money, so I started with a capital of $30. I turned those $30 into $600 in only one week which equals a profit of 2000%, cool right? The thing is I didn't appreciate the money because it wasn't really my own money that I have increased, so I regarded this money as something similair to points and got greedy. When you don't trade with your own money you loose the feeling for money, you forget that you're actually trading with money. So what happened? I lost the $600 the following day. Just like that. Don't think now "ok, thanks for sharing, I'll remember that, but I think I'm capable of keeping a feeling for money and won't copy your mistake " YOU WON'T! Greed will overcome you, you want to be faster and make even more money, but you won't. Please do not overestimate yourself, it will not have a happy ending. The second rule for investing is very important, it is the most important rule of all rules in this whole ebook. Whenever you make an investment in CFDs, only invest what you can afford to loose. You can loose your whole investment, so you should not rely on any invested capital. The good thing is, you can't loose more money than you have invested. Once you have made some profits the question is what are you going to do with them? Reinvest? Withdraw? The solution is the golden middle. I recommend you to withdraw at least 50% of your profits, but not more than 80% by the end of every week. Your account will still grow fast, but you save some of your hardearned winnings and no one can take them from you. Now what to do with the withdrawals? Reinvest them too, but just not in CFDs. Maybe stocks, maybe bonds, whatever you like, it's up to you. I won't tell you what to do with the money, you can also treat yourself to a Ferrari or a nice vacation. Summary Rule Nr.1 Rule Nr.2 Rule Nr.3 Invest some of your own money to keep a feeling for money. Invest only what you can afford to loose. Withdraw around 60% of your profits by the end of every week. 9

11 Money Management Know when to stop Like I said at the beginning of this ebook, trading is not the right thing for everyone. You should know when to quit. Even if you have lost quite some money, don't try to make up for it with some "last" desperate trades. Just quit, you have learned your lesson and a lot about trading and finance. You're richer for the experience. Therefore you should write down a maximum amount of money that you will invest for this project and if you should really loose it you will quit and get over it. The chances that you will loose your money after reading this ebook are low, but you never know. "Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money." - Ed Seykota Emotions A lot of people loose money with trading. The reason for this is not that their strategy doesn't work (at least in most cases), but that they change their strategy as soon as they have lost some money. Loosing money from time to time is completly normal and you have to get used to it, because your profits make up for that multiple times. Now the problem of changing a strategy is that you miss out on the profits of a strategy and switch to a new strategy as soon as you have lost money. Therefore you're basically keep loosing money because you miss out on the profits. This has to do with emotions. Emotions are your worst enemy in trading, so kill them whenever you're trading. Emotions always lead to losses and that's the opposite from what you want. That's why you never open a position when you're feeling enthusiastic about an underlying asset. Never listen to your emotions and stick to your strategy. 10

12 Closing Remarks You're done, congratulations! You're now ready for your own experience. Thank you very much for reading my ebook and feedback is very welcome. Before you start however I want to remind you that your capital is at risk and that you should follow my rules to prevent losses. Set yourself a maximum budget that you can afford to loose and don't exceed this budget. Remember that you're still a beginner and you still have a lot to learn. Now I wish you all the best and hope that you can bring my strategy successfully to bear. To help you find the best CFD broker I have created a full article on this topic on my website. Please follow this link to find out more about the best CFD broker and how to get started. This is the first version of my ebook and I will revise it from time to time until I come close to perfection, because that's what we strive for, isn't it? 11