stock market trading methods

What can you Trade?

In an earlier paragraph I mentioned that you can pretty much trade in anything. The com-mon assumption is that you can only trade in Indices, but you can trade in virtually any-thing you wish. Over the next few paragraphs I shall be covering the main markets you can trade in and how these work.

Stock Index Futures:

We have covered these in some detail before, remember when I was talking about the FTSE100, the DJIA (Dow) and the Nikkei. Well all these and more listed below come under the umbrella of Stock Index Futures. Basically they are an easy way to trade in a whole group of shares, instead of just the one share.

One important point you should realise that the current quoted price of the Future may not correlate to that of the actual Index. There are reasons for this as follows:

The Index future tends have a natural premium built into it called a fair value premium which is above that of the Index you are wishing to trade. This is because there is a natural financial advantage to trading in the future than physically buying the underlying stocks for cash, this is based on the interest advantage of the future. Interest rates are usually higher than any dividend payable on most shares and this is reflected in the price of the Future in question.

Future prices react to news and events much quicker than the underlying In-dex in question. Therefore the live price of the Index you see on some sites and services may not tie directly with that of the Index Future.

Now I know the above was a bit heavy and like you, I sometimes have to reread the first one especially (and I wrote it LOL). I have taken the liberty to tell you the above so you know. You need not worry about it much at all. As we always trade from the quotes that we receive from the FB, and the prices we use more than most are those that are supplied by the FB.

We only use online services to research trading patterns and trends in charts or better still you have already become a member of Trade Focus where you can use my own proprie-tary charting program. We don't stress too much about the fact that the underlying price of the stock, indices or whatever it is were trading doesn't match perfectly with the REAL stock quote etc. So don't feel that you are being ripped off by the FB if the prices don't match. In fact some FB's now allow you to chose whether you wish the quote to be rela-tive to that of the actual Index or the FB's own book price.

At the current count there are 26 variants of Stock Indices that you can trade in. Now I know what you are thinking. I said that there was only 3-4 major league Indices out and that is true. However, many of the Indices break down the main index into parts, larger or smaller. For instance the FTSE can be traded in the following: FTSE100, Daily FTSE Index, Daily FTSE Futures, FTSE250 and so on. Essentially they are little difference, except the larger Footsie 250 is the top 250 companies and not 100. The Daily Futures can only be kept open for one day.

Daily Trades:

A quick word on DAILY FUTURES or simply known as Daily trades. These are trades that are designed to have a small spread, however, they only have a shelf life of 1 day of trad-ing. So for instance if you traded the Daily FTSE Index - this is a trade which is quoted on the actual figure or as close as of the underlying and not like that of the FTSE Future men-tioned above. You can open Daily Trades during any time on the day. You must remember though that they will be closed at the end of that Indices trading hours. So the FTSE DAILY INDEX will be open from 8am to 4.30pm GMT. The trade can be opened and closed at any point during those times, but will be closed automatically as the trade expires at 4.30 GMT that day or at 9.30pm GMT for US trades.

Before you trade DAILY Quotes. Make a note of the times of trading relative to your own time. For instance I find it difficult to trade DAILY Quotes on the Nikkei because of the massive time difference between the UK and Japan. However, I can trade the FTSE obvi-ously and the Dow as that opens mid afternoon and closes at night GMT. So look at the time differences when trading Daily Futures/Quotes.

You don't have to worry too much by trading contract months. Only trade a daily if you are sure that the money you will save in the spread is worth the risk of the trade expiring within hours rather than weeks or months. A great of what you will be doing is based on common sense, just takes a little thinking that’s all.

One thing I would like to add and will become more apparent when you begin trading for yourself. Is that most of the following trading products supplied by Financial Bookmakers tend to be Daily, Weekly, Monthly or the standard 3 month contracts. All FBs have the 3 month standard term contract, the same is true for the Daily contract. Some also offer a Weekly and Monthly contract. Others offer a Rolling contract, which to be honest I have never traded.

Rolling Trades:

Rolling bets mirror that of the underlying share price. Where as other trades tend to mirror that of the futures market. The price has a small spread built in which is usually much smaller than that of the daily and quarterly trades. Rolling bets are usually available on most of the common trades in the but mostly the FTSE100, NASDAQ 100 and the DOW 30.

A rolling share bet is a daily bet that is automatically rolled over the next trading day. The trade is closed at 4.30pm (UK time) for UK trades and 9pm for US trades and automati-cally re-opened at the market opening the next day. This will continue until you either close the trade yourself or you run out of margin.

Time for an example:

You get a quote on stock XYZ at 345.7 / 346.8

Now this time you believe that the stock is going to fall so you go Short and sell stock XYZ at 345.7 @ £10 per point on a Rolling bet.

In the place of a normal spread in this Sell example, you will be paid interest for everyday that you hold a position open.

The interest payable by the bookmaker varies but is around the following equation:

(LIBOR 1 month – 2%)/365 LIBOR is the current standard base interest rate.

X

The total underlying value of your position.

Using our current example we have the following equation applied to our trade:

((5% -2%)/365) x (£10 x 345.70)

= 0.0082% x 345.7p = 28p

Now it’s 4.30 on and market closes at 351 at the mid price. The stock didn’t fall as you an-ticipated and your current loss on your trading account is worked out as follows:

(£53 (351 – 345.7) x £10)

So in essence on that day of trading you have lost £53.00

The trade is automatically re-opened the next day at 351, with you trading Short at £10.00 per point.

Now say the stock falls to the mid price at close of this new trading day to 337.5 the profit you would make would be aprox £135.00 depending on the true mid price at close.

Rolling bets do have some advantages; namely smaller spreads. There is a premium to be paid in interest of course if you are making that trade, which sometimes equals more than the spread on a standard trade on quarterly and daily trades. Again it’s down to choice. I have students that only trade rolling and those that do both or just quarterly trades.

Hourly FTSE & Wall Street Bets

One of the newer trades that can be made, and as of writing only available with IGIndex – see list of brokers in a later section of the course.

The expiry on these trades are within the hour, that is essentially the only difference be-tween that and any other trade on the FTSE or Wall Street. You can only trade those two at present, but I am sure as they grow in popularity, so will the range of trades that be-come available for Hourly Bets.

They do tend to have smaller spreads than standard longer term trades on the same Indi-ces. Personally I can only see hourly bets becoming useful for when the stock is reaching a ‘bounce’ and it was obvious that this was about to happen. I do feel though that an hour for one trade to expire is too short and trading these is really entering the realms of gam-bling rather than being able to capitalise on analysis.

Binary Bets (‘yes’ or ‘no’)

Another one of the newer forms of trade that we can make is a Binary. These trades can be placed on Shares, or FX (Foreign Exchange – money to you and me) quotes.

They are similar in style to that of Fixed Odds with the ability to limit your risk with a fixed return on particular outcomes to that trade, such as the FTSE to be down on the day or the DJIA (Dow) to be lower at the close. As with most trades you can close the trade early whenever you like.

How Binary Bets Work.

It’s actually relatively simple as there are only ever two outcomes which are either ‘true’ or ‘false’ or depending on your way of thinking, ‘yes’ or ‘no’. Let me explain.

Say you open a Binary Bet for the FTSE to close up (be higher than its opening price) on the day (close of business at 4.30pm), there are two outcomes as follows:

1. The FTSE closes up on the day, the bet will settle at 100

2. The FTSE fails to close up on the day, the bet will settle at 0

You either win or lose, there is gray area of making a few points of profit or indeed a spread. The key difference between making a Binary bet as apposed to making a Fixed Odds bet, is that you can close the Binary Bet when YOU want. With Fixed Odds you do have to wait for that trade to expire. Which means you will be either able to cut your losses or take profit early without having to wait for the market to close. As the spread betting company (or broker or bookmaker – depends what you want to call them) tend to quote a continuous price, similar to that of Spreads.

As the prices are quoted continuously you can decide to go Long or Short on any price that is quoted. Binary bets tend to fluctuate quite a lot, especially prior to expiry but you are safe in the knowledge that you know you risk exposure and your possible reward.

The type of Binary Bet that you can place are as follows:

Up/Down

Quite simple really, you either decide if the market is going to be up or down on the close of business that day.

Range Forecast

Range bets simply have two prices that create a lower and an upper range which will cre-ate one out of two outcomes.

I have taken the following from IG Indexes website as it’s a good example of how a Binary works. Other sites have tended to make it sound too complex.

Example: ‘Buying’ a FTSE 0/–10 Binary

It is 4.17pm, and the FTSE 100 Index currently stands 11.6 points higher than the previous afternoon ís official closing level. You are not confident that the FTSE will be able to hold on to the days gains, and see that our price for a Binary bet on the FTSE finishing down by 0 to 10 index points is 6.6/9.2.

So you buy the FTSE 0/-10 Binary for £20 at 9.2.

At this point you know precisely your maximum potential loss: if you are wrong and the Bi-nary makes up at 0 you will lose 9.2 x £20 = £184. You also know that if you are right your return on the bet will be (100 x 9.2) x £20 = £1816. This represents nearly a 1000% return on your risk, decided in the next fifteen minutes.

Eight minutes later, the FTSE has dropped back slightly to 2.4 down on the day, and our quote for the FTSE 0/ñ10 Binary has risen by over 40 points. You think there may be some more market shifts to come, and decide to take your profit now. You close out your bet at our bid price of 48.8.

Your profit on the trade is:

Closing level 48.8

Opening level 9.2

Difference 39.6

Profit: 39.6 x £20 = £792

You were right to be concerned, as the FTSE returns to positive territory in the final min-utes of trading, closing 6 points up. The FTSE 0/+10 bet settles at 100 while all remaining Binary bets in this package settle at 0. By taking your profit early you have made a 430% return on your risk, and all in the space of a few minutes.

Binary bets do have a place in our trading arsenal and are a welcome addition to the prod-ucts that we can market.

Predominantly Binary trades are good for trading ‘bounces’, I will be explaining what a bounce is much later in the course, but for now, a bounce is simply where a stock reaches an excessive position whereby we can judge to a good degree when the stock will ‘bounce’ up from a position, or down from a position. This style of trading is best suited to volatile stocks, trading over a very short term period. Mostly less than a day.

I will be explaining more later in the course and showing you how to take advantage of all the differing tools that you have at your disposal. What’s more how to make the best use of the tools that you have with your membership to Trade Focus. As well of course, as covering our techniques that we use to spot the trades in the first place.

INDIVIDUAL SHARES

Trading in Individual shares must be the most favoured trading product available. Hasn't been around that long, seven years or so when IG Index realest that there was a great deal of demand for trading in Shares within the FTSE100.

The shares that you can trade now are vast and varied. All the FTSE100/250 is there, most major and some minor US shares including NASDAQ and Tech Shares.

The good news about being able to trade individual shares is that they are no different to trading the Indices. The gearing is the same throughout all the products available to you (options however differ but I wont cover those here as they are very complex).

There are plenty of benefits trading in shares let’s use Microsoft (MSFT) as an example. These shares are currently in the region $55.00 per share, by share I mean standard share certificate, owning part of the company. However most people buy shares do so as a long term investment of 2 to 3 years, and look to make a profit over that period.. You would need a great deal of money to buy even just 100 shares. $5,500 in fact. Now if we bought the real share we'd have to pay this $5,500 and be out of pocket of $5,500 and now if the share rose up 10% to $60.50 and we sold we would get $6050.00 that is great. BUT! We would have to pay TAX on the profit as its classed as income. Also, we would have to pay the Broker a fee to buy and to sell, plus the $5,500 we put in isn't very liquid.

Where as if we opened a trade, we don't own the share and we could have made anything from 1p to £500 per 0.01p price movement. At £1 trade going long we would have made the same profit, but would have kept it all as Financial Spread Betting is Tax Free and we don't pay our Financial Bookmaker. Plus, were risking far less, not putting thousands of pounds into one share, our position is highly fluid, can easily be closed. Finally, we could have geared up our position by adding more to the trade as it went up. We could have started at £1 per point then moved to £10 easily and instead of making $550 we would have made $5,500 instead - for the same amount of work.

Not to forget to mention that the biggest difference between trading in REAL shares and owning a part of that company and trading in Financial Spread Betting, is that with Finan-cial Spread Betting we can make a fortune when the price of ANY share, indices and many other financial products go DOWN. It does make me think why people really look to make money from shares in the short term.

My changing currencies may confuse some of you. My local currency is the GBP £, but the example I gave was Microsoft who are American and therefore quoted on the S&P500 (Standard & Poor’s - another Index). You don't have to worry too much about trading in differing currencies. Everything is worked out for you. When you open most Financial Bookmaker accounts, you can decide the currency you wish to have your account shown in and therefore be trading in. I personally use GBP £ but it doesn't matter if you choose the USD $ the AUS $ or whichever currency you feel comfortable trading in.

One other thing I feel I need to mention. Within Trade Focus, I tend to concentrate on the FTSE100 to 350 and also the US markets. Now before you start worrying. It makes no dif-ference where you live what trades you make, whether they are FTSE, DJIA, and NIKKEI. They are all just trades, it doesn't matter which sector, indices or share you or I concen-trate on. Therefore you will notice within Trade Focus I will be looking at the FTSE, how-ever, I do make frequent visits into the S&P500 and the NIKKEI. Basically, don't be alarmed if you see a great many FTSE100 shares in Trade Focus (the student website), or swings from FTSE100 to S&P500. I try and keep an eye on as much as possible, but it makes sense to spot trends in the FTSE or S&P as these are the ones I know the most about.

The other advantage on Individual Share prices is that there is more information available to you than would be on any other trade. Simple when you think about it. As all the others are either Indices (a massive collective of companies), Sectors (companies within a par-ticular industry grouped together), or commodities (Gold, wheat, sugar etc.) and so on.

Granted our main concern is with Technical Analysis, therefore we rely mostly on data supplied in chart form. It is always nice to look at the companies financial data, their profits and maybe even some of their products on the companies own website. Plus, companies create news from press releases etc. Where as Indices only make news if they reach a high or low and the same goes for sectors, as these are parts of an Index. Commodities make news only when there is price rises in Oil, gold etc. There are charts obviously but little news.

You have to remember and it is quite easy to forget. That commodities and Indices are traded as Futures contracts (not real Futures contracts but based on in terms of pricing and contract periods). So these are based heavily on greed and psychology – traders con-stantly second guessing where that market is going to go. If one company goes belly up in the FTSE, it won’t have a massive effect on the overall Index. This greed and fear is what fuels the Index Future and that is why they are so volatile and fluctuate a great deal. Shares on the other hand tend not to fluctuate as wildly and it's easier to trade in my opin-ion using technical analysis, there is a reassurance that the share will gently follow the trend in the chart. Unlike an index, which tend to swing more and therefore there is greater risk of getting “Stopped Out”. All in all, I prefer individual shares to trade for their ease in finding information, there relative stability in following a trend and the fact that I can easily get a gut feeling about the company based upon what we have already surmised.

Therefore trading in singular shares has become one of the most common products within Financial Spread Betting, because of the ease in gathering information, the ability to quickly gauge how that share is performing and simply because that most of us are famil-iar with the companies quoted as they are house hold names.

A quick note about US shares. US stocks do tend to swing much more than those on the FTSE. This is simply because of the high volume of trades, which creates their more vola-tile nature. There is a great deal of money that can be made from trading US stocks, and they are good for spotting ‘bounces’ as their high volatile nature makes them prone to swings in fortunes. It’s not unheard of for a stock in the US markets to drop several hun-dred or more points in one day. However, to trade the US markets you will need more margin (deposit with your bookmaker) to cover the trades. Because of the nature of the US markets and the fact that they do indeed swing much more than that of the UK or EU mar-kets, the bookmaker (broker, financial company call them what you will) will ask for a higher amount of margin to cover the trade.

Personally, I feel that if you’re just starting out with Spread Betting and you have never done anything like this before, it would be advisable to start of with just placing UK trades to begin with, then moving onto more volatile forms of trading – US stocks, Commodities and the FX markets as your experience grows.

Right let’s move on. I gave an example previously of purchasing an actual share within a company – remember this is actually owning a fraction of the company. Perhaps the most important and key aspect and the largest negative are; if the share drops, so do your prof-its. There is no possible way to trade in real shares and make money when the markets fall, much like they have in the past and will do over and over again in cycles – as an aside; for those interested in spotting these cycles in markets there is an additional tutorial on the student website in Elliott Wave analysis, it’s well worth a look.

Where as with Financial Spread Betting, we are in the incredible position to benefit greatly when markets fall. In fact as a trader in Financial Spreads, we are in the excellent position of taking advantage of negative markets (going SHORT) and making money quicker than we could from a rising market. Why? Because shares fall quicker than they do when going up. Think about that for a moment.

Why do shares fall faster going DOWN and go UP slower? When shares go up, it involves people, institutions actually physically spending money, money is limited, even in huge in-stitutions. Therefore, the share can rise from buying (supply & demand) and continue to do so until the money dries up or simply no one wants to buy. This is slow, sometimes there are panic purchases which cause 'spikes' or 'breaks' in charts (where the price has shot up so quickly that there is a break or spike in the chart) but money, interest, demand runs out.

Where as when the share drops. You have the entire shareholder stake at risk. There are the people who have recently bought the share and the people and institutions that have had the share months, years and sometimes decades. Who maybe selling. This is why shares fall quicker. Selling causes panic, word spreads around and before you know it the share price has fallen through the floor. Mini versions of this happen everyday, some greater than others. More so in fact in US stocks.

To those that trade shares, this is a sad inevitable fact that you lose money quite quickly when shares fall. Spread Traders on the other hand can't wait for shares to fall and that is part of the reason why Spread Traders have had a good couple of years recently. The Dot Com crash made many Spread Traders millionaires, whilst it left many share dealers broke and crying in their beer.

However, and this is another reason why most people involved with Financial Spread Bet-ting lose money. Most traders within Financial Spreads, never trade going Short. Yet this is the most profitable trade you can make. You will make more money trading short than long. Obviously prevailing markets have a strong say in what you do and I for one whilst placing my analysis up on the Trade Focus service will aim to have a balanced SHORT & LONG trades view for you to monitor.

Sadly though most traders only trade going LONG! Why? It's down to psychology. For years we are taught that you can only make profits from shares if they go up, most traders think when trading in financial spreads that they physically own something when they don't. I am not saying they believe they actually own a part of the company, but the under-lying psychology suggests to the individual that they have a real stake and therefore should seek stocks that are rising. A lot of the time the people that get involved with Fi-nancial Spread Betting have come from a "purchase & hold" share buying background, so they are conditioned to only pay attention to rising markets. It’s a way of thinking, we are taught that from a early age you can only make money if something increases in value, not drops.

They also tend to use the same strategy that may have worked well in a rising market with actual share purchases, but may not on the other hand work that well with open financial spread trades.

Now I am not telling you to always trade SHORT. I want you to learn that you can trade going LONG or SHORT. The key point is that you are aware that there are other means to making profit and they don't require that trades or stocks are going up.

DON'T MAKE THE MISTAKE OF MOST!

The next few pages I will be pointing out the other products that you can trade in. How-ever, it’s not important that you do trade in these products, as ever it is your choice.

My aim over the next few pages is to give you some good knowledge on these so when the time comes you understand how they work and what profits you can expect to see from trading them.

Please be aware that within Trade Focus I concentrate on individual share trades when I analyse the charts and show the videos. I will from time to time point out good opening trades within that of the Indices or commodities. For the most part though I will be supply-ing you with information that will allow you to successfully trade in Share Financial Spread Betting and become a great learning tool.

From there I will begin to talk about the actual strategy for trading. What tools I use and most of all why I am using that particular tool or technique.

My ideal belief is that you will know exactly what to do after you have spent some time reading through the courseware and following the Trade Focus service. Maybe even hav-ing made a few so called 'Paper Trades' or indeed having properly traded using the Trade Focus service as your guide to analysing charts.

Paper Trading:

There are now many brokers that will allow you to open a ‘virtual’ account. These accounts are a great learning tool. As you will be using the same tools, the same trades, the exact same information that you use when you begin trading real money. However, with ‘virtual’ money it’s easy. We know that it is make believe. Believe me, to make the same trade us-ing your own hard earned money is very different indeed.

So don't forget! The next few pages are just an outline of what products you as a trader can trade. They vary from Financial Bookmaker to Financial Bookmaker. Some have better spreads on trades than others, some companies will not deal with some of the products I am mentioning. I do believe though that knowledge is power and you can then benefit from this knowledge.

Lets get going.

Trading Financial Sectors

What are sectors?

Sectors can be seen as collectives of companies that represent a particular market, for in-stance British Telecom, Telewest etc. all come under the Sector called Telecom's within the FTSE350. HSBC, Barclays Plc would come under Banking within the FTSE100 as would Wells Fargo come under Banking within DJIA. There are many sectors that I will list at the end of the section, you maybe surprised at how many there are. Most financial pa-pers like the Financial Times NY/London versions, have sector listings within the back of them. Also most if not all charting packages allow you view sector performance in chart form, and to break down which companies that appear within each sector.

Why have sectors?

Its all well and good having lists of the top 100, 250 or 350 companies within either the US, Japan or UK. Which give a generalised view of the top performing companies in once snapshot such as that seen by the FTSE100, which shows as a collective how the top 100 companies within the UK are performing.

However, the companies that are within the FTSE100 consist of varying companies who have very differing markets. So to get a tighter view on particular markets, we use sectors to show how a market sector (group of companies that share a market type) are perform-ing.

Having these separate market sectors allow us a snapshot view of that sector and act as a large barometer of that sector. Ability to read and connect sectors allows you to possible use this 'Fundamental' analysis to gauge what the price movements in one sector may have a reflection to another.

Remember in an earlier example, I gave the commodity for Oil a mention which comes un-der the Oil & Gas Sector (no prizes for guessing that one). In that example we could follow use that market sector price rise to gauge an effect within other sectors, namely Transport, Engineering & Machinery, Electricity as an initial knock on effect. If prices continued to rise within the Oil & Gas markets, then these in turn would affect prices in Electronic & Electri-cal Equipment and other retail markets. Would it have a positive effect if price rises in the Oil & Gas Sector went up? Not at all, it would decrease profits within the knock on effect markets and therefore, if you were trading in say Transport as a market sector, you would look to go SHORT in the medium term on a 3 month contract. We shall be looking more about trading strategies later in the Workbook.

The contract lengths for Sectors range from Daily to Quarterly only. I have yet to see any Financial Bookmaker having weekly contracts. In fact weekly contract generally are quite rare within Financial Bookmakers. Some bookmakers are offering Rollover trades (Rolling trades) but you know my view on Rolling Trades.

Other than giving you the ability to view a group of companies as a sum of the whole index linked to a market type, there are no fundamental differences with trading this product. Just take note of the knock on effect that other market sectors have on others. I believe that is the biggest lesson to take from this part of the workbook.

MARKET SECTORS:

Aerospace & Defence Banks Beverages Chemicals Construction & Building Materials Electricity Electronic & Electrical Equipment Engineering & Machinery Food & Drug Retailers Food Producers & Processors Forestry & Paper Gas Distribution General Retailers Health Household Goods & Textiles Information Technology Hardware Insurance Leisure, Entertainment & Hotels Life Assurance Media & Photography Mining Oil & Gas Personal Care & Household Products Pharmaceuticals & Biotech Real Estate Software & Computer Services Speciality & Other Finance Steel & Other Metals Support Services Telecommunications Services Tobacco Transport Water

Looking at the above market sectors it is easy to see which market sectors would have a knock on effect to another. Some sectors such as Oil & Gas would have a knock on effect to most areas.

Currencies

Trading in currencies within Financial Spread Betting is somewhat different to the other trades that you are used to reading about so far.

Currency bets are usually divided in to two type of trade:

Spot Currency Bets, which are predominantly used for short, term trading such as In-traday trading.

Forward Currency Bets (including bets on the Chicago Mercantile Exchange known as CME currencies) are ideal for those wishing to trade in the longer term on currencies. The usual trade is that of the standard quarter contract much like that of other trades we have talked about before. However there are other key differences that make trading in curren-cies different and therefore more interesting to trade.

Please take note of the following key differences:

Which way round the currency is being quoted

The currency your trade is being denominated

The size of your transaction in the foreign exchange market, which is the equivalent of your bet

How to know which way round you are betting?

When you trade in currencies. You don't open a contract on one currency market, you open a contract on whether a particular currency is either going to strengthen or weaken against another. You never just trade a single currency. It has to have something to pivot against. For instance you may wish to trade in the EURO/US Dollar, which is a trade that means that the EURO will strengthen or weaken against one another.

So how do you determine which direction you are trading?

Well if you wanted the EURO to strengthen against the US Dollar you would look for the following quote EURO/US Dollar and the type of trade you would look to make would be a LONG trade.

If on the other hand you were expected the USD to strengthen against the EURO, you would once again look for the above trade. However, the type of trade that you would be looking to make would be SHORT.

It depends how you wish to look at it. All you are simply saying with the above opening trades is that you either believe the EURO will go up LONG or down SHORT in relation to that of the USD.

At first it can be quite confusing, which is why it is best that you get used to trading normal stocks, before moving to the currency markets.

Which currency is your bet denominated?

The usual denomination to which your trade in any currency is converted back to is either the USD $ or GBP £ (Sterling). Dependent upon which denomination you wished to be key when you opened you trading account.

However, some Financial Bookmakers ask you which denominating currency you wish the trade to be closed in.

For instance if you were to be trading the Swiss Franc/US Dollar, you could with some Fi-nancial Bookmakers, request when opening the trade that the currency upon close be converted into Swiss Francs, regardless of whether you had opened the trade LONG or SHORT.

Why do this? For smaller bets chances are the denominating currency will make little dif-ference to the overall amount you receive. However, should you be in the enviable position to be trading above and beyond £10,000 then the exchange rate of one currency to an-other maybe more favourable to that of your own.

You need not worry too much about it here. I am telling you this so that you have a clear understanding of how currencies work. Who knows you maybe in that enviable position of trading thousands where that extra few cents/pence make a great deal of difference, Insti-tutions mainly use the above choice of denomination.

How big is your trade?

We need to be clear what a 'Point' is in currency trades. A 'point' is the last figure that you are quoted when you open a trade (some currency trades are 4 or 5 figures). If you were quoted Euro/US Dollar £10 per point 8490/8500 and you went LONG - for each point (sin-gle number movement up or down) your trade went up.

Lets say you closed the bet at 8515 (which could have been only seconds later if trading intraday) you would have made £150. As you opened the trade at 8500 and closed at 8515, which is a 5 point difference. The same calculation works in the apposite direction for SHORT trades. If you went short thinking the EURO would weaken against the Dollar and opened a the trade SHORT £10 per point at 8490. The Euro weakened and went down to 5450. You would have made a 40 point difference and a comfortable £400 profit.

Interest Rates

Believe it or not you can even open trades on Interest Rates. In fact the there are more and more products entering the market every year. It makes my mind boggle as to what they will add next. It's all very good news for us, as it supplies us with an added means of mak-ing money from a financial movement in a particular product, old or new.

Interest Rate trades may seem a little strange at first, but stick with me and they will soon make sense. Just remember that the trade works just the same as they have before - BUY (LONG) SELL (SHORT) etc. and you profit is the difference between you opening and close prices.

The key difference you have to realise and take note of regarding Interest Rates is what the prices quoted to you actually mean. At present there are two differing trades that you can open with most financial bookmakers.

SHORT TERM INTEREST RATES:

A short term interest rate trade, allows you to open a position on the direction of various countries' 3-month interest rates.

If you plan to trade Interest Rates, its obvious that you start trading your countries own in-terest rate. As news on your local interest rate is quickly and easy to come by. Most daily newspapers, TV etc. have the local interest rate available at hand. Remember though to use this as a guide. As the trading we are involved with is linked to that of the Futures markets and therefore they are more volatile.

The price of the contract that is opened is the number 100 minus the actual interest rate figure. Therefore a price of 94 signifies that the interest rate would be 6%, a price of 97 would mean 3% and 100 would obviously mean that there is no Interest rate at all, which I've not so surprisingly seen yet.

If you think the Interest rates will fall you simply BUY, go LONG and if on the other hand you think that the interest rates are going to up you. That’s correct... you SELL go SHORT on the trade. Simple really.

Dealing in Interest Rates is very similar to dealing with Guilt Edge Securities. Isn't it funny that when we here these terms though sound so difficult and assume that trading in them would be incredibly difficult. Yet as we have proved over and over, the banks want you to believe that and justify their jobs and charges.

Lets look at an example just to clarify:

If we take UK interest rates as an example, only because they are my local interest rate. The trade can be any interest rate you chose from any country, regardless of your location.

We believe that the short term interest rates will rise so that the price of 3 month Sterling Deposits (sometimes called Short Sterling) will fall in value.

Therefore we decide to sell go SHORT on 3 month Sterling Deposit (because interest rates we believe will rise, interest rates rise value of UK currency falls as becomes less attractive globally). The quotation we receive on Sterling Deposits are minus the decimal point 9030/9070 (first price is SELL (SHORT)/ second is BUY (LONG)) We decide to go SHORT/SELL at 9030 on March Short Sterling at £10 per point. The price of interest rates rise, the values of Sterling Deposit Futures fall to 89.90 and we Buy to close the trade. Which works out at a 40 point difference between our opening (9030) and closing prices (8990) , working out a £400 profit.

Remember the price that we get quoted on is not the interest rate itself. It is on the local currency value Short Sterling UK etc. going up or down as a reflection of the interest rate change. Told you they can be a little tricky.

LONG-TERM INTEREST RATES:

Now just to make things a little more confusing for you, I am going to throw Long Term In-terest Rate Futures at you. Long Term Interest rates are reflected in the price of govern-ment bonds. Government Bond Futures allow you to trade on the long term rise or fall of interest rates from around the globe. All you have to remember is that BOND prices rise when interest rates fall and visa versa when interest rates rise and Bond process fall. So we either buy (LONG), or Sell (SHORT) on that particular countries Bond.

An example would be great again I think:

We believe that interest rates in the US will fall and therefore the US T Bonds will rise as result. So we decide to go LONG on the US T Bond March Contract.

Now I don't want to freak you out here, but T Bonds are quoted in fractions - no I don't like it either. So we get a quote of 98-20; which works out as 98 & 20/32nds We get a quote of 98-17/98-23 so we go LONG at 98-23 @ $10 per point.

The interest rates fall, T Bonds rise in value and we sell at the quote of 101-11/101-17 closing the trade at the sell to close point of 101-11. Working our profit out is simple:

Opening Price: 101-11 Closing Price: 98-23 Profit 84 32nds = 84 x $10 = $840

Now I don't want you to think that this is getting way too hard. I am just showing you the various trades that you can make. You can also trade Options but I wont go into those and will leave that for another time. Your main 'Bread & Butter' will be earned trading using share prices, which are quick and simple to trade and follow. The other trades I am listing here are merely for your reference, so when you invite your bank manager around for Din-ner in your new house. You can sit smugly as he tries to blind you with his knowledge - or lack of.

Commodities

Personally I have made a good amount of money from commodities, namely some low trades and high returns on Gold. Very much like those, which you initially viewed on www.insightsupport.com webpage. Commodities are not difficult to trade, providing you know which is which and that commodities are effected by World events be it War, weather or economic up/down turn. Let's look at what commodities are and how we can make good profit trading them.

Commodities where the first Futures markets products. I mention Futures a great deal with regards to Financial Spread Betting. Fundamental differences apply, namely we are not trading 'real' Futures contract as such. We are trading using a tool that is related to Finan-cial Spread Betting, in the fact that the prices that we get quoted are linked highly to those of the Futures markets. Yet without the same amount of risk involved with Futures.

Futures products first appeared in the 19th century as a means for businesses to buy or sell a large quantity of a particular mass product (wheat, sugar etc.) and fix the price now for delivery in the future - hence the name.

Why do this? Businesses as we all know, run on their own internal revenue. The ability to lock in prices now for a future delivery of a product they use would help them maintain and monitor production costs and effectively prices to Mr & Mrs Joe Public.

It soon became apparent that a great deal of money could be made (and lost) with trading these contracts. As by locking in a price now, and they price dropped and the contract was sold - you could buy to close the contract and make a fortune. Or if indeed you opened a sell contract and bought to close, the gearing can make or lose you a great deal of money. The risks with Futures trading are much higher than they would ever be when we trade in Financial Spread Betting . However as far as the gearing and the profitability of the Futures and that of Financial Spread Betting there is little difference on that re-spect.

The key difference with actually trading 'real' Futures is that the contract you take out, if left to expire, would mean that you would be responsible for the purchase/sale of those products. Not great if you're trading, as the deposit on Futures are a fraction of the real cost. Don't think anyone would like a Tanker load of Oil being delivered on his or her door-step – that’s an awful lot of oil.

There has been a great deal of changes since those early days and that of the Financial Futures markets has overtaken commodity Futures’ trading easily.

There still exists are great deal of opportunity for those wishing to trade in Financial Spread Betting within the commodity markets. Commodities have a tendency to remain pretty static over time, then just when you were getting bored at the whole static nature of them, they double almost over night.

There are more risks trading in commodities in Financial Spread Betting . If you are not careful you can find that you are unable to close a losing trade and have to let it run. Why?

Most of the markets use a system of price limits that will lock in a someone to a open posi-tion, to which you must honour. The commodities that these vary on depend on whom you're trading with. Should you be concerned as to the possibility of being locked in, I would suggest that you trade only used a Controlled Risk Bet, otherwise known as a Guaranteed Stop Loss.

I would like to point out that even though I have traded Commodities, I wont be touching them within Trade Focus. There are plenty of Financial Spread Betting Financial Brokers who would be more than happy to help you with commodities and I have had little trouble trading them in the past.

Some Financial Bookmakers trade the London Metal Exchange. I would like to warn you of some bizarre things that makes the LME a strange beast and will save you a great deal of headache. Note: Only some use the LME as a strict guide, when you sign up with one of the Financial Bookmakers I outline later - please read their booklet they supply before trading. Don't worry however, I do point out which Financial Bookmaker is good for begin-ners, moving up to the more advanced trader.

London Metal Exchange

The LME contracts for none-ferrous metals such as

ALUMINIUM ALLOY

ALUMINIUM

COPPER

LEAD

NICKEL

TIN

ZINC NASAAC

They run from 90 consecutive days and not 3-month contracts to which we have become accustomed. This can cause confusion. As when you open a 90-day LME contract then a week later you decided to close by either buying or selling a 90-day contract - you would be opening a new contract and not selling/buying the old one to close.

That is why when trading the LME markets you makes a note of the contract date to which you are closing. When you go to close that contract you chose the contract date for which you are closing and not buying/selling to close on a new 90 day contract.

Sounds difficult, but only a handful of the professional league Financial Spread Betting firms trade using the LME as a guide.

Most people that hear of Financial Spread Betting don't realise for various reason quite how easy and profitable it can be, but also the variety of differing products to which you can trade within. One such product that is gaining more and more popularity is trading in UK House Prices.

You can get the best data from the horse’s mouth, direct from the LME: http://www.lme.co.uk/dataprices_daily.asp

UK House Prices

As far as I am currently aware you can only trade on the housing market within the UK. It doesn't matter where about you live, you just have to realise that the property values quoted are based on UK Property values. I am sure as international popularity of Financial Spread Betting grows further housing markets from around the globe will arise, along with additional products for us all to make money from.

So how do you make money from the UK Housing Market?

Well I feel a need to clarify a few points before we go into some details of the housing market and as ever it isn't difficult. I just want to make sure we are clear on a few things:

• We are not buying any property

• We do not own or share any ownership in any property

• The contracts are identical to other Financial Spread Betting contracts

• There's no red tape, expenses or delays

• No Stamp Duty (UK Government Tax on property)

• No Capital Gains Tax (UK Government Tax on windfall profits)

• No need to put up the full value

As you can see, once again we don't own anything, there are no liabilities or tax obliga-tions, as there would be if we were actually buying and selling property to make profit.

The only liability we have is that of our contract with the Financial Broker whom we have opened the trade with.

Financial Spread Betting on UK Property prices as we have seen lets you avoid many of the financial and tax implications often associated with investing in the property market. Financial Spread Betting on property prices may seem at first somewhat odd, but it lets you gain a great deal of exposure to a market without purchasing or obligating yourself to any property related contract.

The trade prices quoted on most house prices with Financial Bookmakers are usually based on the Standardised Average Price as reported by the HBOS from the UK lender Halifax, who issue their own survey called the Halifax House Price Survey. Therefore, the prices you are quoted are not inflated or guessing.

You therefore have an opportunity to profit from price movements within these markets, or indeed if you live within the UK, you can even 'Hedge' against your own property* so you can reduce possible losses in the value of your property by clever use of 'Hedge' betting.

*The value isn't based on your actual property value. You select the average property value based on the above average SAP (Standardised Average Price). Either your own UK county/District or that of another UK Country/District.

Trading on house prices can either be traded as price quoted based on the SAP average of the whole of the UK, or that of a selection of key regions within the UK. Not all regions are quoted by every Financial Broker. Please check with your Financial Broker before trad-ing in UK Property Prices.

Both the national house prices and regional house prices are measured against the sea-sonally adjusted Standardised Average House Price which is published monthly, regional house prices tend be based on the SAP for regions which are published quarterly. You can find further information regarding the average house prices and the SAP prices by visiting the following URL: www.hbosplc.com

The actual type of trade that you can open varies. It is best to check with your selected Fi-nancial Broker, prior to trading in this market.

Lets look at a trade to see how house price movements are reflected in Financial Spread Betting:

Lets say that the average HBOS figures out claim that the UK average house price is £140,500. The prices quoted by a Financial Broker are formatted as follows:

Average House Price: £140,500 = Quote 140.5

This maybe quoted as the following trade & spread

139.5/141.5

We decide to trade LONG at 141.5 @ £100 per point. The value of property reaches £143,500 we therefore close at 143.5 resulting in a profit of £200

We can of course trade SHORT if we believed that the National/Regional property prices will fall.

How to ‘Hedge’ and lock in the value of your own property?

One of the clever things with trading house prices, is that you can hedge against your own property and therefore protect some of the gains that your property has got over the years.

Please note that this is just an example and anyone deciding to ‘hedge’ against their own property using this method is best first consulting a Financial Advisor, as there may be stipulations or laws depending on where you live that prohibit you from doing this.

As I update and write this courseware in July 2004, property in the UK has risen to an in-credible amount. We have people selling up and moving abroad, there are those that are releasing equity (getting a loan secured on the house basically – not a great move, but very popular) to fund extensions, conservatories, pools and more. It does amaze me that the general public as a whole are ignorant to the fact that overall the property market is cycli-cal. Therefore, to borrow against any available equity in the house because it has risen by 40% in two years is crazy. The loans tend to be over 5 – 10 years to pay back, or the house is re-mortgaged to release the same equity. Property values adjust every 3-5 years or so. Currently, the average cost of a starter home is over 5-6 times that of the average income. Mortgages that are now on offer are going beyond 25 years which was the norm, to 50 to an amazing 75 years in some cases.

Where does that leave the average man and woman on the street? Well property has al-ways been a good investment over the long term. The best time really to buy property is after a ‘bubble’ similar to the one we are in bursts and settles. Personally, to buy a house now (July, 2004) would be crazy and there are signs that the market is slowing. One tell tale sign is that the ‘Buy to Let’ mortgages which have become popular with those with high equity in their own houses, have re-mortgaged on their current property to buy an-other smaller property to Let out. This was a massive market and was growing tremen-dously, especially in the south of England. However, there are signs that this is slowing. Additionally, the markets tend to look at the south and London for signs in the housing market slowing down.

Now I am going to tell you something, which may at first seem very obvious, but in fact very few people actually think about. Your house is only worth what others are prepared to pay for it – NOT what it’s valued at. Think about that for a moment. It’s not the valuation of the house, it’s what people are prepared to pay for your house. Obviously I know that may sound like a stupid thing to say, but bare with me.

In London the valuations of properties have remained pretty constant, growing by a per-centage every month. Now however, I feel the market has, or is about to reach a pivotal point. Valuations may be high and all this sounds great, but because valuations are high and the market is tremendously overprice. For instance, at the time of writing a £150,000 house real value is around £115,000.

The fact that the market has exploded has created greed amongst those looking to capi-talise on the equity within their houses. Meaning that there are more houses on the market now, than when there was previously before the boom. The more expensive the property, the smaller the number of people that can afford to pay for it, unless they have a similar property and are moving to another similar priced property. Few people can afford to add more to their current mortgages, as wages haven’t increased to the same levels that prop-erty has. Remember, I said that the current cost of the average house is five times that of the average wage. Combine that, with the fact that the property and mortgage markets are desperate for first time buyers to join the property ladder. Yet, we come across the same problem in that first time buyers are currently being priced out of the market.

This is why I say ‘your house is only worth what people will pay for it’. Considering all the above points. If the market is over populated with overpriced property, combined with buyers who are finding it difficult to fund higher mortgages; a correction in the current market, in terms of people offering lower amounts for properties that what they are valued at. There has been signs of this in certain parts of central London on the higher value properties, it’s not foolish to assume that this same correction will begin like a domino ef-fect through out the market in general.

Now I hope that I have made you think? Also, I hope that this has made you keen to know of a possible way of locking in the current value ‘hedging’ – on your own property.

Here’s how

For example; we will use a round figure for a value of a property, let’s say, property X is worth £100,000 at the time of writing, which is July 15, 2004.

The overall equity in the house is say £50,000 and you were sure that the price of property was starting to slide. Tell tale signs are news items in the papers that point to doom and gloom and there has been a few of those lately.

Now all we have to do is to take a Short position on the value of property near or where the property resides. For example I live in a beautiful part of the country in the county of Shropshire. What I could do is to release that equity and using that equity place a short on the value of an average property either in the Midlands or in Shropshire whichever is near-est. Or, in fact there is nothing stopping you from going Short on a market that tends to be hit harder than your own and these tend to be reported as the ones that start the slide which are predominantly based in the south of England.

Essentially what you are doing is as follows:

Property X = £100,000

Equity = £50,000

Short opened as a hedge at = £50,000 (as an example)

The gearing on your Short means that as your property fell in value, the profitability of your trade goes up in value, minimising the amount of lost value in that property.

Of course it goes without saying that there is quite a bit more to it than that, but the basics of ‘hedging’ against your own property to protect its current value, I hope has excited you about the possibilities open to you within trading Financial Spreads.

Things to consider are the extra mortgage payments, fees etc. To release that initial equity in the first place. Chances are you wouldn’t need to release all the equity in your home, to fund enough as a ‘hedge’ value. It also goes without saying that every ones circumstances are different and that a Financial Advisor should be consulted. However, be warned that these people are not open minded to risk, especially Spread Betting. You have been warned.

FINANCIAL SPREAD BETTING BOOKMAKERS

Listed below are other companies that offer spread betting services over the Internet. All the companies listed are regulated by the Securities and Futures Authority.

Man Spread Trading

Telephone 0207 144 4090

www.manspreadtrading.co.uk

Part of the huge Man Group PLC - one of the largest fund managers in the world. Now re-cenly opened their own spread betting platform called Phoenix. I think its one of the best out there and with Mans backing you can’t go wrong. You can read more about Man on the Broker page on the member site.

Trade Index

Telephone 0207 422 3830

www.tradindex.com

Financial Spread Betting made easy, with unique virtual trading simulator with £20k in vir-tual funds.

CANTOR INDEX

Telephone 0207 894 8800

www.cantorindex.com

Tax free share trading, indices. bonds, interest rates, commodities and options.

City Index

Telephone 0207 550 8500

www.cityindex.co.uk

Traded options, commodities, interest rates, currencies, bonds, popular markets

Deal4free

Telephone 0800 0933 633

www.deal4free.com

Minimum £1 per point, narrow spreads, real time execution and advanced trading soft-ware..

Financial Spreads

Freephone 0800 096 9620

www.finspreads.com

Stock markets, traded options, commodities, interest rates, currencies, bonds

IG Index

Freephone 0800 195 3100

www.igindex.co.uk

Stock indices, shares, currencies, commodities, interest rates

Spreadex Financials

Telephone 0800 0526575

www.spreadexfinancials.com

Interest rates, stock markets, bonds

Index Trade

customerservice@indextrade.com

www.indextrade.com Interest rates, stock markets, bonds, commodities

Please visit our preferred list of brokers at www.insightsupport.com/brokers.php

There are more and more Financial Spread Betting companies springing up all the time. The market is a hot favourite for any financially related company at the moment and as the years progress the market will become more and more populated with spread betting companies offering all manner of incentives to get your deposit.

Comments 1 comment

quangels 5 years ago from Delhi

Very detailed post. But don't you think it could be split into two or three post series?

There are some charts at http://quangels.webs.com/apps/photos/album?albumid... which should add to the learning value of the readers.

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