T is not widely known that the popular contracts for difference (CFDs) first appeared more than 30 years ago, in the volatile post-crash environment of the late 1980s. At the time, professional investors were keen to find a tool which would help them focus the risks in their portfolios and protect them from market falls. A pioneering product was developed called an equity swap, which allowed these investors to short sell individual stocks with leverage.
While the fund managers were rejoicing, private investors were unable to get access to this product. That was until 2002, when contracts for difference came along, specifically designed for private investors. For the first time, individuals were able to access markets and structure their investments with the same flexibility and efficiency as the professionals. CFDs provided a level playing field for private investors.
Since then, CFDs have boomed in popularity among private investors around the world. In the UK, the London Stock Exchange estimates that CFDs now account for almost half of all stock trades that pass through the exchange. Quite a compelling figure.
The same trend has occurred throughout Europe, Australian, Japan and Singapore. It seems that CFDs are meeting the needs of private investors like no other trading tool has done before.
So what are CFDs and what makes them so popular?
A contract for difference is an agreement between two parties to exchange the difference between the price of the underlying asset at the time the position is opened and the price at the time the position is closed, multiplied by the number of units of the underlying asset detailed in the contract.
CFDs look and feel like the underlying equities they reflect. The only difference is that the investor doesn't 'own' the underlying stock and so doesn't get to vote at annual meetings - but everything else is the same.
The benefit for investors is that CFDs are generally cheaper to trade, require only a fraction of the investment (that is, they are traded on margin) and can be used to 'go short' as well as 'go long'. This means you can actually make money if a stock falls. Or - and this is the real reason smart investors are using CFDs - you can straddle both short and long positions and protect yourself from market downturns, such as we have seen in the recent financial crisis. This style of investing is called 'market neutral' investing. It is new to private investors, but professional investors and hedge funds have been making use of equity swaps in this way for 30 years. It's the modern style of investing and CFDs are what allow private investors to do it.
While CFDs were initially restricted to individual stocks, some providers now offer CFDs over other asset classes such as index futures, commodities and foreign exchange.
Basically, CFDs bring the world of investing to your fingertips, from one account and one online trading platform which is available 24 hours a day.
Contracts for difference allow investors to gain leveraged long or short exposure to equity, index, commodity or forex markets without the obligations and expense of ownership.
But note that not all CFD providers are alike. There are two basic models that providers follow - market-maker and direct market access.
Market maker providers do not necessarily hedge their clients' CFD trades in the underlying market. Many clients have complained that this model is less transparent and that the provider is not accountable for the prices and liquidity they provide. A market maker model opens up the possibility that the provider has a conflict of interest with their client - that is, the provider may benefit when the client loses.
In contrast, the direct market access (DMA) model has gained popularity because the provider automatically hedges clients trades in the underlying market - immediately. This means that clients can see their trades in the 'course of sales' of the underlying exchange and orders appear in the official order book. This ensures client orders benefit from the fairness and accountability of exchange queue priority. Basically, the DMA CFD model is more accountable and more transparent. A DMA provider does not benefit when its clients lose money.
An interesting trend in the CFD industry is that professional investors such as hedge funds and trading houses have begun moving back to CFDs and turning away from the predecessor instrument, equity swaps. CFDs have evolved to such an extent in meeting the needs of private investors that professional investors are realising they also satisfy their more sophisticated requirements. It's a rare scenario - professional investors discovering that private investors are being better served.
But that sums up CFDs - an innovative product that is turning the world of investing on its head. If you haven't discovered CFDs yet, it's time you made some inquiries, before the world leaves you behind.
Wednesday, December 23, 2009
Understanding the forex trading!
THE foreign exchange market is the largest and oldest financial market in the world, with a daily turnover approaching US$2 trillion. It is also the biggest and most liquid market - running 24 hours a day, five days a week, circling the globe with financial transactions.
By its nature, there is always a bull market going on somewhere (you just have to know where to look), offering opportunities for investors. Traded in pairs, each currency is measured against another one, meaning that for every bear market, there has to be a corresponding bull market. As we enter 2010, there are signs that the global financial crisis is easing up. In the US, the economy has just started growing again for the first time in more than a year; while recent data showed that Europe has been lifted out of the deep recession. Asia has also recorded signs of the recovery picking up. Australia recently raised interest rates in order to prevent house price and wage inflation. China is reporting that it will see substantial economic growth this year.
Finance ministers from the Asia-Pacific Economic Cooperation (Apec) forum have also called for greater exchange rate flexibility. In a joint statement, they said Apec members should follow 'monetary policies consistent with price stability in the context of market-oriented exchange rates that reflect underlying economic fundamentals'.
The dynamic forex market is affected by several elements including economic, political and psychological factors - people who are interested in forex trading should ensure that they are aware of these factors. For example, the following macroeconomic issues are all likely to influence forex markets:
* Government budget deficits/surpluses
* Balance of trade levels and trends
* Inflation levels and trends
* Economic growth
Equally important is the political situation in the country of the currency. For example, the markets may perceive that an incoming political party may foster better relationships with its neighbours or trading partners, which may cause that country's currency to strengthen.
Market psychology also plays an important part. If most participants think a currency will fall, and have taken a position in the currency to reflect this view, then some market professionals will think the market is prone to a large move up. This situation is often called a 'squeeze' - because if the currency moves contrary to what participants think, the subsequent rush to liquidate positions and minimise losses causes the market to move even further.
There is no formal exchange for currency transactions. Instead, transactions are conducted over-the-counter (OTC) and rates at any one time are defined by the major global institutions - typically investment banks - who will conduct many trades every day on behalf of corporations, governments, local authorities and trading desks.
In the past, foreign exchange trading was limited to these large players. However, recent technological advancements, along with the development of online trading platforms, have made it possible for retail investors to take part in the forex market.
Online trading platform providers like IG Markets allow retail investors to trade a wide range of markets, including forex contracts, with spreads starting from just one pip. These online trading platforms typically also provide traders with free technical research tools and access to real-time financial news reports, allowing traders to make more informed decisions.
There are also several ways that one can manage and mitigate risks in forex trading. For example, consider trading 'mini-FX' contracts. With a full contract being 100,000 of the first-named currency, mini-FX contracts allow traders to manage smaller contract sizes at 10,000 of the first-named currency. Traders can also choose 'limited risk trading', where 'guaranteed stops' are placed to guarantee that the provider closes the position at exactly the chosen level should the market move against the trader. This allows the trader to set the 'maximum possible loss' in advance, effectively limiting liability with risk protection.
Although forex trading offers great potential profits to retail traders, education and a proper mental attitude to trading should not be neglected.
By its nature, there is always a bull market going on somewhere (you just have to know where to look), offering opportunities for investors. Traded in pairs, each currency is measured against another one, meaning that for every bear market, there has to be a corresponding bull market. As we enter 2010, there are signs that the global financial crisis is easing up. In the US, the economy has just started growing again for the first time in more than a year; while recent data showed that Europe has been lifted out of the deep recession. Asia has also recorded signs of the recovery picking up. Australia recently raised interest rates in order to prevent house price and wage inflation. China is reporting that it will see substantial economic growth this year.
Finance ministers from the Asia-Pacific Economic Cooperation (Apec) forum have also called for greater exchange rate flexibility. In a joint statement, they said Apec members should follow 'monetary policies consistent with price stability in the context of market-oriented exchange rates that reflect underlying economic fundamentals'.
The dynamic forex market is affected by several elements including economic, political and psychological factors - people who are interested in forex trading should ensure that they are aware of these factors. For example, the following macroeconomic issues are all likely to influence forex markets:
* Government budget deficits/surpluses
* Balance of trade levels and trends
* Inflation levels and trends
* Economic growth
Equally important is the political situation in the country of the currency. For example, the markets may perceive that an incoming political party may foster better relationships with its neighbours or trading partners, which may cause that country's currency to strengthen.
Market psychology also plays an important part. If most participants think a currency will fall, and have taken a position in the currency to reflect this view, then some market professionals will think the market is prone to a large move up. This situation is often called a 'squeeze' - because if the currency moves contrary to what participants think, the subsequent rush to liquidate positions and minimise losses causes the market to move even further.
There is no formal exchange for currency transactions. Instead, transactions are conducted over-the-counter (OTC) and rates at any one time are defined by the major global institutions - typically investment banks - who will conduct many trades every day on behalf of corporations, governments, local authorities and trading desks.
In the past, foreign exchange trading was limited to these large players. However, recent technological advancements, along with the development of online trading platforms, have made it possible for retail investors to take part in the forex market.
Online trading platform providers like IG Markets allow retail investors to trade a wide range of markets, including forex contracts, with spreads starting from just one pip. These online trading platforms typically also provide traders with free technical research tools and access to real-time financial news reports, allowing traders to make more informed decisions.
There are also several ways that one can manage and mitigate risks in forex trading. For example, consider trading 'mini-FX' contracts. With a full contract being 100,000 of the first-named currency, mini-FX contracts allow traders to manage smaller contract sizes at 10,000 of the first-named currency. Traders can also choose 'limited risk trading', where 'guaranteed stops' are placed to guarantee that the provider closes the position at exactly the chosen level should the market move against the trader. This allows the trader to set the 'maximum possible loss' in advance, effectively limiting liability with risk protection.
Although forex trading offers great potential profits to retail traders, education and a proper mental attitude to trading should not be neglected.
Emerging as the winner - ETF?
THE Asian exchange traded fund (ETF) industry celebrates its 10th anniversary this year, a decade since Asia's first ETF - the Tracker Fund of Hong Kong - was launched. While the launch of that ETF was to allow the Hong Kong government to dispose of stock holdings acquired during the Asian financial crisis without causing undue market impact, the industry took root nevertheless. To date, ETFs exist in almost every Asian market with Indonesia the latest market to list its first ETF in 2008.
There are 114 ETFs in the Asia Pacific ex-Japan markets with assets under management (AUM) of US$36 billion, as at Q3 2009. In Japan alone, there were 69 ETFs with AUM of US$27 billion. During the year, 23 new ETFs were launched in Asia. Riding on the back of a strong technical recovery in global equity markets which started in March, Asia ex-Japan ETF AUM grew 47 per cent. This performance is better than the global trend which saw AUM hitting a record US$934 billion, representing growth of 31.3 per cent during the same period while most of the global markets these ETFs track are still miles away from their previous peaks. It is now an open secret that ETFs have emerged as the biggest winner in the financial tsunami.
However, there is still a little secret that has eluded even the keenest market watchers. Over the past 12-18 months, acceleration in new listings in such markets as Hong Kong and Singapore has quietly transformed these exchanges from their traditional roles as local trading centres to global investment hubs. Hong Kong and Singapore now boast 37 and 43 ETF listings respectively, representing a mixture of locally domiciled funds and cross-listed products. They cover a range of asset classes and geographic markets. This allows investors to conduct global investing in a convenient and cost-effective manner.
The table shown here represents the respective USD performance of those markets already covered by ETFs listed in Singapore. It doesn't take a lot of imagination to see the potential offered by the dramatically expanded range of ETFs. With more listings planned by various issuers, it is high time that investors take note of this recent development and make the most of it.
What is the risk of investing in ETFs?
Most ETFs are relatively simple products but recent evolution has led to more complex structures in response to increasing investor demand. At its core, an ETF is a simple index mutual fund that is also traded on an exchange. It is the public trading feature that gives an ETF the benefits of higher transparency, liquidity, cost-efficiency and convenience over its traditional mutual fund counterparts.
Since an ETF is an index fund and passively managed, an investor is exposed primarily to the systematic risk of the market and the currency tracked by the ETF. For example, an India ETF represents a portfolio of Indian stocks and the investor is thus exposed to the movements in the India markets and the rupee. Typically, potential currency movements should be taken into account when making overseas investment decisions.
An index fund, such as an ETF, represents the most direct means by which an investor can implement a macro view without the added active risk related to stock picking. Investors should note that taking on active risk is not necessarily compensated for by extra returns. The notion of 'high risk, high return' only holds true for choosing a higher risk asset class, such as equities over bonds. Unfortunately, to consistently pick the right stocks requires certain skills, not just luck. As such, ETFs are good news for the average investor who may not possess the specialised skills necessary to pick stocks or choose funds.
Unlike an actively managed fund where performance is based on how much it outperforms the market, the performance of an ETF is judged by its tracking error, a risk measurement of how well the ETF tracks its benchmark index. An ETF's tracking error is affected by its replication strategy, expenses and dividends. In layman terms, a one per cent tracking error translates into an expectation that the difference in performance between the ETF and its benchmark will not exceed one per cent roughly two-thirds of the time.
Liquidity risk - how easy it is to buy or sell an investment and whether the price would be impacted dramatically in the event of a fire sale - is a key investment decision. In this regard, ETFs excel with liquidity featuring the proven open-ended mutual fund structure and complemented by secondary trading on exchanges with market making support.
Today, it is impossible not to mention counterparty risk which had received scant investor attention until the bankruptcy of Lehman Brothers last year. Few investors realise that counterparty risk exists in every investment, even those always considered safe. For example, when you keep your money in a bank you automatically take on the credit risk of that bank. Holding government bonds carries sovereign risk - think Iceland.
In the case of an ETF, counterparty risks related to its manager and other service providers are mitigated by its mutual fund structure which mandates the ring-fencing and segregation of the fund's assets. Additional counterparty risk can also be introduced when the synthetic replication methodology is employed, especially those involving the use of derivatives such as swaps or access products. Such derivatives are used to gain access to highly restricted markets or to lower costs and achieve closer tracking. It is also important to note that the level of risk (per cent of net asset value or NAV) is often highly regulated and restricted.
In Asia, all swap-based ETFs cross-listed from Europe are UCITS (a pan-European investment directive) compliant with counterparty risk limited to 10 per cent of NAVs. Most other Asian-based ETFs that use access products issued by a third party feature counterparty risk limits of 10-15 per cent. This is achieved through diversification of issuers or asset collateralisation. An exception is a Singapore-listed India ETF that still relies on a single issuer for the India P-notes used and is thus 100 per cent exposed to the default risk of the third party issuer. It is interesting to note that the most successful ETFs in Hong Kong and Singapore are access product-based ETFs that carry third-party counterparty risks.
While the counterparty risk relating to ETFs employing synthetic replication are well-publicised, those seemingly normal cash-based ETFs utilising full replication can also be exposed to counterparty risk when engaging in stock borrowing and lending activities which are often hidden from investors. As such, investors are reminded to always look under the hood when it comes to risk evaluation. Investing inevitably involves taking risk. Risk should be evaluated on whether it is compensated for. Therefore, a holistic view is needed to balance the risks versus potential impact on performance, costs and efficiency.
Who uses ETFs and how to use them?
ETFs are best considered as simple and effective investment tools. As in the real world, more tools mean better capability to build more complex products. The global success of the ETF industry has been predicated on a wide range of products. Recent innovations have brought single commodities, currencies and strategy ETFs such as leveraged and short to the fold. Because of its stock-like trading convenience, ETFs are used by investors of all types. The ever-expanding array of ETFs allows investors to customise strategies to meet their respective needs.
At its core, an ETF provides exposure to a market whether it is a country, a region, an industry sector, a commodity, an asset class, or even a strategy. Since there are more than 1,800 ETFs listed globally, they present an impressive array of choices and opportunities to investors even when used individually. Using ETFs to access highly restrictive markets or simply to implement macro market views represent the most popular usage. The popularity of the India and China A-shares ETFs around the world and the surge in inflows into emerging markets and Asian regional ETFs are good examples.
When large numbers of different ETFs are trading and settling seamlessly under one roof, they become powerful asset allocation tools, especially for those investors for whom stock picking is not the priority. Even active managers sometimes use ETFs, for example, to effectively execute an asset allocation decision. In such a case, a decision to add 5 per cent Singapore exposure to a portfolio can be quickly met by investing initially through an STI ETF. The manager can then take his time to pick stocks and buy them at the right prices by selling the ETF to fund the purchases. In this way, the asset allocation decision is executed instantaneously without compromising on the stock prices.
The recent advent of commodity and strategy ETFs further provides investors with alternative options on hedging, leveraging and portfolio diversification. Holding an ETF is often more regulatory friendly and a great deal simpler than dealing with futures which involves many administrative burdens. Today, gold, oil and other broad-based commodity ETFs are used to hedge against the weakness of the US dollar, potential inflation, as well as for portfolio diversification.
Finally, we are beginning to see ETFs feature increasingly as underlying investments for derivatives and structured products. Trading ETF options is already popular in the US. Hong Kong recently saw a slew of warrants launched on popular ETFs such as the gold and A-shares ETFs. In the structured funds space, ETFs are replacing traditional benchmark indices as the underlying performance references because of the ability to settle physically (ie, client given ETF units) at maturity. In Taiwan, ETFs are now appearing on lists of underlying investments of investment-linked policies offered by major insurance companies.
Driven by strong global demand, ETFs are evolving quickly through innovations and expanded coverage of markets and asset classes. The number of ETF users is also increasing, attracted by their simplicity and flexibility. The result has been impressive with global ETF AUM at a record high and trading volume expanding continuously. ETFs now account for roughly 30-40 per cent of all turnover on US exchanges and, routinely, seven to eight of the top 10 traded securities are ETFs. In Asia, the industry is still young and there is a lot of room for growth. In Singapore, ETF turnover accounts for about one per cent of total turnover but that already represents a five-fold improvement from barely three years ago. With more products coming Singapore's way, the growth in ETFs and in their trading can only improve. Investors are urged to take note.
There are 114 ETFs in the Asia Pacific ex-Japan markets with assets under management (AUM) of US$36 billion, as at Q3 2009. In Japan alone, there were 69 ETFs with AUM of US$27 billion. During the year, 23 new ETFs were launched in Asia. Riding on the back of a strong technical recovery in global equity markets which started in March, Asia ex-Japan ETF AUM grew 47 per cent. This performance is better than the global trend which saw AUM hitting a record US$934 billion, representing growth of 31.3 per cent during the same period while most of the global markets these ETFs track are still miles away from their previous peaks. It is now an open secret that ETFs have emerged as the biggest winner in the financial tsunami.
However, there is still a little secret that has eluded even the keenest market watchers. Over the past 12-18 months, acceleration in new listings in such markets as Hong Kong and Singapore has quietly transformed these exchanges from their traditional roles as local trading centres to global investment hubs. Hong Kong and Singapore now boast 37 and 43 ETF listings respectively, representing a mixture of locally domiciled funds and cross-listed products. They cover a range of asset classes and geographic markets. This allows investors to conduct global investing in a convenient and cost-effective manner.
The table shown here represents the respective USD performance of those markets already covered by ETFs listed in Singapore. It doesn't take a lot of imagination to see the potential offered by the dramatically expanded range of ETFs. With more listings planned by various issuers, it is high time that investors take note of this recent development and make the most of it.
What is the risk of investing in ETFs?
Most ETFs are relatively simple products but recent evolution has led to more complex structures in response to increasing investor demand. At its core, an ETF is a simple index mutual fund that is also traded on an exchange. It is the public trading feature that gives an ETF the benefits of higher transparency, liquidity, cost-efficiency and convenience over its traditional mutual fund counterparts.
Since an ETF is an index fund and passively managed, an investor is exposed primarily to the systematic risk of the market and the currency tracked by the ETF. For example, an India ETF represents a portfolio of Indian stocks and the investor is thus exposed to the movements in the India markets and the rupee. Typically, potential currency movements should be taken into account when making overseas investment decisions.
An index fund, such as an ETF, represents the most direct means by which an investor can implement a macro view without the added active risk related to stock picking. Investors should note that taking on active risk is not necessarily compensated for by extra returns. The notion of 'high risk, high return' only holds true for choosing a higher risk asset class, such as equities over bonds. Unfortunately, to consistently pick the right stocks requires certain skills, not just luck. As such, ETFs are good news for the average investor who may not possess the specialised skills necessary to pick stocks or choose funds.
Unlike an actively managed fund where performance is based on how much it outperforms the market, the performance of an ETF is judged by its tracking error, a risk measurement of how well the ETF tracks its benchmark index. An ETF's tracking error is affected by its replication strategy, expenses and dividends. In layman terms, a one per cent tracking error translates into an expectation that the difference in performance between the ETF and its benchmark will not exceed one per cent roughly two-thirds of the time.
Liquidity risk - how easy it is to buy or sell an investment and whether the price would be impacted dramatically in the event of a fire sale - is a key investment decision. In this regard, ETFs excel with liquidity featuring the proven open-ended mutual fund structure and complemented by secondary trading on exchanges with market making support.
Today, it is impossible not to mention counterparty risk which had received scant investor attention until the bankruptcy of Lehman Brothers last year. Few investors realise that counterparty risk exists in every investment, even those always considered safe. For example, when you keep your money in a bank you automatically take on the credit risk of that bank. Holding government bonds carries sovereign risk - think Iceland.
In the case of an ETF, counterparty risks related to its manager and other service providers are mitigated by its mutual fund structure which mandates the ring-fencing and segregation of the fund's assets. Additional counterparty risk can also be introduced when the synthetic replication methodology is employed, especially those involving the use of derivatives such as swaps or access products. Such derivatives are used to gain access to highly restricted markets or to lower costs and achieve closer tracking. It is also important to note that the level of risk (per cent of net asset value or NAV) is often highly regulated and restricted.
In Asia, all swap-based ETFs cross-listed from Europe are UCITS (a pan-European investment directive) compliant with counterparty risk limited to 10 per cent of NAVs. Most other Asian-based ETFs that use access products issued by a third party feature counterparty risk limits of 10-15 per cent. This is achieved through diversification of issuers or asset collateralisation. An exception is a Singapore-listed India ETF that still relies on a single issuer for the India P-notes used and is thus 100 per cent exposed to the default risk of the third party issuer. It is interesting to note that the most successful ETFs in Hong Kong and Singapore are access product-based ETFs that carry third-party counterparty risks.
While the counterparty risk relating to ETFs employing synthetic replication are well-publicised, those seemingly normal cash-based ETFs utilising full replication can also be exposed to counterparty risk when engaging in stock borrowing and lending activities which are often hidden from investors. As such, investors are reminded to always look under the hood when it comes to risk evaluation. Investing inevitably involves taking risk. Risk should be evaluated on whether it is compensated for. Therefore, a holistic view is needed to balance the risks versus potential impact on performance, costs and efficiency.
Who uses ETFs and how to use them?
ETFs are best considered as simple and effective investment tools. As in the real world, more tools mean better capability to build more complex products. The global success of the ETF industry has been predicated on a wide range of products. Recent innovations have brought single commodities, currencies and strategy ETFs such as leveraged and short to the fold. Because of its stock-like trading convenience, ETFs are used by investors of all types. The ever-expanding array of ETFs allows investors to customise strategies to meet their respective needs.
At its core, an ETF provides exposure to a market whether it is a country, a region, an industry sector, a commodity, an asset class, or even a strategy. Since there are more than 1,800 ETFs listed globally, they present an impressive array of choices and opportunities to investors even when used individually. Using ETFs to access highly restrictive markets or simply to implement macro market views represent the most popular usage. The popularity of the India and China A-shares ETFs around the world and the surge in inflows into emerging markets and Asian regional ETFs are good examples.
When large numbers of different ETFs are trading and settling seamlessly under one roof, they become powerful asset allocation tools, especially for those investors for whom stock picking is not the priority. Even active managers sometimes use ETFs, for example, to effectively execute an asset allocation decision. In such a case, a decision to add 5 per cent Singapore exposure to a portfolio can be quickly met by investing initially through an STI ETF. The manager can then take his time to pick stocks and buy them at the right prices by selling the ETF to fund the purchases. In this way, the asset allocation decision is executed instantaneously without compromising on the stock prices.
The recent advent of commodity and strategy ETFs further provides investors with alternative options on hedging, leveraging and portfolio diversification. Holding an ETF is often more regulatory friendly and a great deal simpler than dealing with futures which involves many administrative burdens. Today, gold, oil and other broad-based commodity ETFs are used to hedge against the weakness of the US dollar, potential inflation, as well as for portfolio diversification.
Finally, we are beginning to see ETFs feature increasingly as underlying investments for derivatives and structured products. Trading ETF options is already popular in the US. Hong Kong recently saw a slew of warrants launched on popular ETFs such as the gold and A-shares ETFs. In the structured funds space, ETFs are replacing traditional benchmark indices as the underlying performance references because of the ability to settle physically (ie, client given ETF units) at maturity. In Taiwan, ETFs are now appearing on lists of underlying investments of investment-linked policies offered by major insurance companies.
Driven by strong global demand, ETFs are evolving quickly through innovations and expanded coverage of markets and asset classes. The number of ETF users is also increasing, attracted by their simplicity and flexibility. The result has been impressive with global ETF AUM at a record high and trading volume expanding continuously. ETFs now account for roughly 30-40 per cent of all turnover on US exchanges and, routinely, seven to eight of the top 10 traded securities are ETFs. In Asia, the industry is still young and there is a lot of room for growth. In Singapore, ETF turnover accounts for about one per cent of total turnover but that already represents a five-fold improvement from barely three years ago. With more products coming Singapore's way, the growth in ETFs and in their trading can only improve. Investors are urged to take note.
X'mas and New Year soon
Wah...so fast this year! Nothing to look ahead....no much hope too but for short term, I am looking to my year-end 13th month AWS to add to the funding to make-up for last week's losses to stand-by for Jan 2010.
Hopefully I can be better off with my understanding of trading and that I can do a better job for a good return too.
Went to this Tuesday mentor session....and I am sort of being re-charged. Yes....at
least, Darren managed to get me on track again about the stock market as a whole and HK market especially.
Hopefully I can be better off with my understanding of trading and that I can do a better job for a good return too.
Went to this Tuesday mentor session....and I am sort of being re-charged. Yes....at
least, Darren managed to get me on track again about the stock market as a whole and HK market especially.
Up-date till to-date
Didn't have a chance to do any up-dating....btw no trade on Monday, just watched the Korean drama the whole day and up to almost 2am that night. Can hardly keep eyes open too by them....guessed both me and wife must be sleeping half the time too.
Tuesday....itchy back-sided, I went in to buy 20 lots of Epure at 76.5 cents then when the HK market started one hour later, I also went in to buy 2 counters.
Till to-date, sold off 1 HK counter for a 10% profit, thought it was a big return for a single day since I need to sleep as I am working from tonight onwards. Shit...at 5;15pm woke up and check, saw that the HK market went up by 200+ points...no wonder the 2 counters went up lor. For Epure....down again to 73 cents.
My new plan was that I will only trade when I have a strong gut-feel that the market will go up if buy "long" or "short" when market is going down. For the moment, don't think I will be doing any shorting as there is no clear trend of showing that the market is on a down trend...even for HK market after losing more than 700+ points last week. It is a healthy mini-correction at most, so....timing the market is very important if want to trade. No point trading for the sake of trading....still got
to pay for commission and interest if kept over-night since I am using CFD.
The other important point is that I shall keep to the max....3 counters at most, that way I can focus on what is happening and in tune with all my trades. The main aim of all these is to make money while protecting my capital. I realised that after losing 30% last week...I have to make back up to 43% in order just to break even for my funding. That is not an easy task. So money management is "super" important part in the "whole concept" of protecting of capital. Therefore stop-loss is the main step to take if the market is turning against me. No second guessing anymore....keep cut stop-loss to the minimum % age.
Good example is today.....market up but still managed to make less than 10%. But when it was down eg on last Thu and Fri....I got 6 "stopped out" and I lost more than 38%. On Fri morning....before I go and sleep, the 4 counters were still trading fine but by the time, I woke up at 5pm....all gone!!! And by then....the market also rebounded too. SHIT....just came down enough to eat my positions then bounded back! That taught me one thing....no focus, no trade!
Really cannot afford to make too many silly mistake with real money....as it is not easy to win back again. I remember that most trainers and books....talk about 90% of all traders lost money, therefore I must make up my mind not to be in this 90% group or else....might as well give up now then just to lose money and time doing this.
If....I seriously want to be one of the winner then I must put in all my efforts to make this work for me. If need to go for re-course then I have to go, if need to rethink my concept of trading....then stop all trades and do a review before trading again. There must be a cause for the failure....mah!
Tuesday....itchy back-sided, I went in to buy 20 lots of Epure at 76.5 cents then when the HK market started one hour later, I also went in to buy 2 counters.
Till to-date, sold off 1 HK counter for a 10% profit, thought it was a big return for a single day since I need to sleep as I am working from tonight onwards. Shit...at 5;15pm woke up and check, saw that the HK market went up by 200+ points...no wonder the 2 counters went up lor. For Epure....down again to 73 cents.
My new plan was that I will only trade when I have a strong gut-feel that the market will go up if buy "long" or "short" when market is going down. For the moment, don't think I will be doing any shorting as there is no clear trend of showing that the market is on a down trend...even for HK market after losing more than 700+ points last week. It is a healthy mini-correction at most, so....timing the market is very important if want to trade. No point trading for the sake of trading....still got
to pay for commission and interest if kept over-night since I am using CFD.
The other important point is that I shall keep to the max....3 counters at most, that way I can focus on what is happening and in tune with all my trades. The main aim of all these is to make money while protecting my capital. I realised that after losing 30% last week...I have to make back up to 43% in order just to break even for my funding. That is not an easy task. So money management is "super" important part in the "whole concept" of protecting of capital. Therefore stop-loss is the main step to take if the market is turning against me. No second guessing anymore....keep cut stop-loss to the minimum % age.
Good example is today.....market up but still managed to make less than 10%. But when it was down eg on last Thu and Fri....I got 6 "stopped out" and I lost more than 38%. On Fri morning....before I go and sleep, the 4 counters were still trading fine but by the time, I woke up at 5pm....all gone!!! And by then....the market also rebounded too. SHIT....just came down enough to eat my positions then bounded back! That taught me one thing....no focus, no trade!
Really cannot afford to make too many silly mistake with real money....as it is not easy to win back again. I remember that most trainers and books....talk about 90% of all traders lost money, therefore I must make up my mind not to be in this 90% group or else....might as well give up now then just to lose money and time doing this.
If....I seriously want to be one of the winner then I must put in all my efforts to make this work for me. If need to go for re-course then I have to go, if need to rethink my concept of trading....then stop all trades and do a review before trading again. There must be a cause for the failure....mah!
Saturday, December 19, 2009
How to be a day-trader?
What is Day Trading?
Day trading is traditionally defined as buying and selling stock, options, or commodities during the same trading day and be have your positions closed by the end of the trading session. In the past, day trading had been reserved for financial companies and professional investors. A large percentage of day traders work for investment firms or are specialists in fund management. With the advance of technology, day trading has continue to grow among the casual trader working from home.
The History of Day Trading
Before day trading, if someone wanted to trade a stock, they needed to call a stock broker to place their order, who would then route the order through a specialist on the floor of the exchange. The specialist would match the buyer with a seller and write up a physical ticket that would transfer the stock and send that confirmation back to both brokers. Commissions were charged at a flat rate of 1% of the total amount of the trade. That means that to buy $10,000 worth of stock, it would cost you an additional $100 in commissions. In 1975, the SEC (Securities and Exchange Commission) made fixed commission rates illegal opening up the markets to the first of the discount brokers competing for business by lowering their commissions and making short term trading much more profitable.
Day Trading Strategies
The following are basic strategies used by day traders. Some of these strategies require short selling stocks instead of buying them long. There are a few challenges to short selling stock which include your broker not having shares which you can short or the stock might be restricted from being shorted on that exchange.
Trend Trading
Trend Trading is a strategy where it is believed that a stock that is rising will continue to rise, or a stock that is falling will continue to fall. You enter the trade in the direction of the trend and exit once the price breaks this trend. Trend trading usually incorporates the use of trend and support/resistance lines. Click here for more information on Trend Trading.
Contrarian Trading
This strategy assumes that prices that have been rising or falling at a high rate of momentum will reverse and start going to opposite direction. The basic idea is that you are trading in the opposite direction as the masses. Click here to learn more about contrarian trading strategies.
Channel or Range Trading
Range trading is a strategy that assumes a stock’s price will continue to trade inside of a price range or channel. Traders using this strategy will buy long when the price is at the lower end of the channel and sell short when prices are at the upper end of the price range. Click here for more information on range trading.
Scalping
This trading strategy used to be defined as spread trading where you would take profits where small gaps expanded and contracted between the bid and the ask price for a stock. This strategy has now evolved to include technical indicators, support/resistance levels, and volume spikes to make round-trip trades lasting seconds to a few minutes. The basic idea of scalping is to take advantage of market inefficiencies using speed and high trading volume to create quick profits. Click here for more information on scalping.
Trading Rumors and News Events
This strategy is mostly only done by day traders. It requires that you have access to one to several real-time news sources and can make split second decisions. News and rumors can provide large amounts of volatility and high emotion creating great opportunities if traded properly. The biggest challenge of trading this strategy is anticipating the market’s reaction to the news and how it effects the price of the stock. Click here for more information on trading news and rumors.
Risk versus Reward
Due to the increased leverage and quick returns, day trading can be extremely profitable. The downside is that if done incorrectly, it can also be extremely unprofitable. Due to the high volatility of day trading, some people have labeled Day Traders as gamblers or adrenaline junkies. However, many people make a very consistent and comfortable living from day trading. Some even make millions of dollars each year.
Using Margin
Buying on margin can greatly increase your gains or losses. Brokerages usually allow a bigger margin percentage for a day trading account but reduce the amount of margin available for positions held overnight. Normally a day trading account must have a minimum of $25,000 and can buy on margin at a rate of 4 to 1 giving you $100,000 in buying power, which is called day trader buying power. That number drops to 2 to 1 for positions held overnight, which can be called overnight margin buying power. That means that if you have 100% of your margin being used during the day, you must exit at least half of your positions before the close of the trading day.
Some Rules
Your account will be designated as “day trader status” if you have 3 round trip trades (one round trip = an opening and closing transaction), in a rolling 5 business day period. If you have 4 round trip trades in a 5 day period, you will be restricted from day trading for 90 days. Your brokerage firm will probably allow you to buy a stock and hold it overnight before closing the position. If you have a second day trade violation, your account will either be restricted from trading or you can request your account be a non day trader status account and buy and then sell after 3 business days. This depends upon the specific brokerage firms rules for some of these details but they are getting very strict with enforcing these rules.
Day trading is traditionally defined as buying and selling stock, options, or commodities during the same trading day and be have your positions closed by the end of the trading session. In the past, day trading had been reserved for financial companies and professional investors. A large percentage of day traders work for investment firms or are specialists in fund management. With the advance of technology, day trading has continue to grow among the casual trader working from home.
The History of Day Trading
Before day trading, if someone wanted to trade a stock, they needed to call a stock broker to place their order, who would then route the order through a specialist on the floor of the exchange. The specialist would match the buyer with a seller and write up a physical ticket that would transfer the stock and send that confirmation back to both brokers. Commissions were charged at a flat rate of 1% of the total amount of the trade. That means that to buy $10,000 worth of stock, it would cost you an additional $100 in commissions. In 1975, the SEC (Securities and Exchange Commission) made fixed commission rates illegal opening up the markets to the first of the discount brokers competing for business by lowering their commissions and making short term trading much more profitable.
Day Trading Strategies
The following are basic strategies used by day traders. Some of these strategies require short selling stocks instead of buying them long. There are a few challenges to short selling stock which include your broker not having shares which you can short or the stock might be restricted from being shorted on that exchange.
Trend Trading
Trend Trading is a strategy where it is believed that a stock that is rising will continue to rise, or a stock that is falling will continue to fall. You enter the trade in the direction of the trend and exit once the price breaks this trend. Trend trading usually incorporates the use of trend and support/resistance lines. Click here for more information on Trend Trading.
Contrarian Trading
This strategy assumes that prices that have been rising or falling at a high rate of momentum will reverse and start going to opposite direction. The basic idea is that you are trading in the opposite direction as the masses. Click here to learn more about contrarian trading strategies.
Channel or Range Trading
Range trading is a strategy that assumes a stock’s price will continue to trade inside of a price range or channel. Traders using this strategy will buy long when the price is at the lower end of the channel and sell short when prices are at the upper end of the price range. Click here for more information on range trading.
Scalping
This trading strategy used to be defined as spread trading where you would take profits where small gaps expanded and contracted between the bid and the ask price for a stock. This strategy has now evolved to include technical indicators, support/resistance levels, and volume spikes to make round-trip trades lasting seconds to a few minutes. The basic idea of scalping is to take advantage of market inefficiencies using speed and high trading volume to create quick profits. Click here for more information on scalping.
Trading Rumors and News Events
This strategy is mostly only done by day traders. It requires that you have access to one to several real-time news sources and can make split second decisions. News and rumors can provide large amounts of volatility and high emotion creating great opportunities if traded properly. The biggest challenge of trading this strategy is anticipating the market’s reaction to the news and how it effects the price of the stock. Click here for more information on trading news and rumors.
Risk versus Reward
Due to the increased leverage and quick returns, day trading can be extremely profitable. The downside is that if done incorrectly, it can also be extremely unprofitable. Due to the high volatility of day trading, some people have labeled Day Traders as gamblers or adrenaline junkies. However, many people make a very consistent and comfortable living from day trading. Some even make millions of dollars each year.
Using Margin
Buying on margin can greatly increase your gains or losses. Brokerages usually allow a bigger margin percentage for a day trading account but reduce the amount of margin available for positions held overnight. Normally a day trading account must have a minimum of $25,000 and can buy on margin at a rate of 4 to 1 giving you $100,000 in buying power, which is called day trader buying power. That number drops to 2 to 1 for positions held overnight, which can be called overnight margin buying power. That means that if you have 100% of your margin being used during the day, you must exit at least half of your positions before the close of the trading day.
Some Rules
Your account will be designated as “day trader status” if you have 3 round trip trades (one round trip = an opening and closing transaction), in a rolling 5 business day period. If you have 4 round trip trades in a 5 day period, you will be restricted from day trading for 90 days. Your brokerage firm will probably allow you to buy a stock and hold it overnight before closing the position. If you have a second day trade violation, your account will either be restricted from trading or you can request your account be a non day trader status account and buy and then sell after 3 business days. This depends upon the specific brokerage firms rules for some of these details but they are getting very strict with enforcing these rules.
Day Trading Strategies
Trading Myths
You may have heard of a trading strategy called 'buy and hold'. Numerous sources and an occassional day trading seminar have expounded this theory over the last few years, including impressive looking statistics that suggest simply buying stocks or index tracking funds and hanging on to them will make you rich. Until fairly recently, 'buying and holding' was the limit of most people's involvement with the stock market. The experiences of the last 3 years have raised serious doubts about this strategy, and it is now commonly (and jokingly!) referred to as 'buy and hope'. Besides, we want to make serious money now, not wait for it till we are 70 years old! As a strategy therefore, it is probably unsuitable for you.
Tips and News Services
You may have come across pundits offering you cast-iron advice about what a particular stock or market is about to do. The simple fact of the matter is that at any point in time, EVERYTHING that is known about a stock (or market) is ALREADY figured into the price. The only kind of information that is outside the price is 'insider information', and if you attempt to trade using that kind of info (even if it were possible to buy it from a public source, which it isn't!), you will go straight to prison. Any kind of trading strategy based on such a service, is, therefore, doomed to failure.
Swing Trading
This is a short - medium term strategy (typically holding a position for a few days). The swing trader usually follows the trend, buying on pullbacks, or selling on sudden rallies, then riding the trend a little further till a trailing stop loss takes him out. While requiring less work than day trading, it also requires a higher risk tolerance, as positions may be held overnight, and who knows what gaps the morning may bring?
Day Trading
Popular opinion states that day trading is dangerous, and most participants quickly lose their trading money and give up. The reality is that those traders who prepare themselves adequately can prosper at it, and it is only the kind of person who would fail at ANY business who is doomed to fail at day trading. Also against popular conception, day trading is where the day to day serious money is made. Day traders do not hold positions overnight. They attempt to take advantage of large intraday movements that typically happen in minutes. The problem is identifying the moments when such a move is about to occur, and being ready to jump on it and ride. The second problem is knowing when to get off. A substantial fast move can reverse just as rapidly and take you from sudden profit to sudden loss.
Scalping
Widely regarded as 'easy money', this is the shortest term trading. Originally the preserve of the 'pit traders' (the traders actually physically present on the floor of an exchange), it has begun to creep into the internet realm, with a number of erstwhile day traders now effectively trying to scalp with direct access accounts and ECN routing. Scalping involves taking tiny nibbles from a minute price move, and it is possible for pit traders because they have 'the edge', the spread between buying and selling. Off the trading floor, you will not have this advantage, and therefore scalping as a proposition can NOT be recommended.
You may have heard of a trading strategy called 'buy and hold'. Numerous sources and an occassional day trading seminar have expounded this theory over the last few years, including impressive looking statistics that suggest simply buying stocks or index tracking funds and hanging on to them will make you rich. Until fairly recently, 'buying and holding' was the limit of most people's involvement with the stock market. The experiences of the last 3 years have raised serious doubts about this strategy, and it is now commonly (and jokingly!) referred to as 'buy and hope'. Besides, we want to make serious money now, not wait for it till we are 70 years old! As a strategy therefore, it is probably unsuitable for you.
Tips and News Services
You may have come across pundits offering you cast-iron advice about what a particular stock or market is about to do. The simple fact of the matter is that at any point in time, EVERYTHING that is known about a stock (or market) is ALREADY figured into the price. The only kind of information that is outside the price is 'insider information', and if you attempt to trade using that kind of info (even if it were possible to buy it from a public source, which it isn't!), you will go straight to prison. Any kind of trading strategy based on such a service, is, therefore, doomed to failure.
Swing Trading
This is a short - medium term strategy (typically holding a position for a few days). The swing trader usually follows the trend, buying on pullbacks, or selling on sudden rallies, then riding the trend a little further till a trailing stop loss takes him out. While requiring less work than day trading, it also requires a higher risk tolerance, as positions may be held overnight, and who knows what gaps the morning may bring?
Day Trading
Popular opinion states that day trading is dangerous, and most participants quickly lose their trading money and give up. The reality is that those traders who prepare themselves adequately can prosper at it, and it is only the kind of person who would fail at ANY business who is doomed to fail at day trading. Also against popular conception, day trading is where the day to day serious money is made. Day traders do not hold positions overnight. They attempt to take advantage of large intraday movements that typically happen in minutes. The problem is identifying the moments when such a move is about to occur, and being ready to jump on it and ride. The second problem is knowing when to get off. A substantial fast move can reverse just as rapidly and take you from sudden profit to sudden loss.
Scalping
Widely regarded as 'easy money', this is the shortest term trading. Originally the preserve of the 'pit traders' (the traders actually physically present on the floor of an exchange), it has begun to creep into the internet realm, with a number of erstwhile day traders now effectively trying to scalp with direct access accounts and ECN routing. Scalping involves taking tiny nibbles from a minute price move, and it is possible for pit traders because they have 'the edge', the spread between buying and selling. Off the trading floor, you will not have this advantage, and therefore scalping as a proposition can NOT be recommended.
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