Learn more and earn more the CFD trading revolution doc

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Warning

*Past performance is not a reliable indicator of future performance This information is based on technical analysis of historical data and does not take developments since writing into account, which should

be considered before acting on the advice The advice included in this report is general advice, based solely on

technical analysis of the securities alone without taking into account the investment objectives, financial situation and particular needs ("financial circumstances") of any particular person Before making a trading decision based on the advice presented in this report, the subscriber must consider whether the advice is appropriate in light of his or her financial circumstances or seek further advice on its appropriateness Please check with your Stockbroker regarding availability of short selling services and placement of "stop loss" orders and extra potential transaction costs Figures in this report do not include transaction and financing costs for CFDs

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Content

Introduction 3

Trading In All Market Conditions 4

"This GFC surely it can't get any worse!" 5

ASX Share Ownership Survey - Where investors get their information 7

What is good investing all about? 10

Winning and Losing Investors 11

Protecting What You've Got - Understand your exposure 13

Protecting What You've Got - Diversify, diversify, diversify 16

Protecting What You've Got - Always use a stop loss 20

Profiting From A Falling Market 22

Think Outside the Square 26

Step 1 Technical Analysis - Always follow the trend 29

Step 2 Identify high impact trading opportunities 31

Technical Analysis - Japanese Candlesticks 34

Step 3 Attend an Education Workshop with Australian Stock Report 37

Conclusion: What Winning Investors Do 37

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Introduction

In the last 30 months we have seen the financial markets hit their highest levels during an unprecedented bull market In the same way, during this time we have also seen unprecedented global market corrections and government intervention to impede the advent of a global recession, better known to us all as the GFC – the Global Financial Crisis

Only weeks ago a new

financial crisis began to emerge,

that of the European Foreign Debt

Crisis This crisis has caused

recovering markets to further give

up

This report is a transcript

of a lecture given by Carl

Capolingua, Head of Education for

the Australian Stock Report, at a

conference held during May 2010, in Sydney, Australia, where he explains how to better trade the financial markets under all conditions

For more information on trading the financial markets, stocks, index, FOREX, commodities and bonds visit our website at www.australianstockreport.com.au

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Trading In All Market Conditions

Let’s start by talking about

the current market situation: is it

good or bad right now? What’s the

biggest problem that the world is

facing at this point in time? Debt

The debts of who? Europe, or

specifically the “PIIGS” This term has come to refer to those countries worst affected by the current debt crisis: Portugal, Italy, Ireland, Greece and Spain

For those who remember the last “GFC” we had, what does GFC stand for? Geelong Football Club? No The Global Financial Crisis These three letters – GFC - are synonymous with people losing money and horrible things happening in the global markets The last GFC was caused predominately by companies taking on too much debt, getting into trouble with that debt and eventually going bankrupt That was the last GFC But this apparently recent GFC, starting just a couple of weeks ago -what is this one been caused by? Not by

companies going bankrupt, but by countries going bankrupt So I need to put to you: which

of the market now - I’ve tricked you That’s the share market back when it fell from the high

in November 2007 down to about 5,000 and a bit That is what it looked like last time when

the last GFC just started and everything was going gangbusters Then the market fell down and people thought ‘that’s okay, it will go back up’

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"This GFC surely it can't get any worse!"

Surely it can’t get any

worse Here is a chart of the

market now (on right) The two

charts we’ve looked at so far are

almost identical, aren’t they? So

I think there’s a lot of people in

the same situation right now

going, “Gee, I hope it can’t get any worse”, and you know what? It’s not so bad because you only lose if you sell A lot of people say “It’s okay, I only lose if I sell - when it goes back up I will be alright” and we have seen how poorly that strategy worked last time Now the question is, from where we are right now, how low can it go? If we are indeed in a GFC, we could be in big trouble

Through the last GFC the markets fell about 55% and a lot of peoples’ self-managed superfunds fell by probably close to that amount On the way back up, though, quite interestingly it rallied at about 63% to go from that bottom to back up the recent high It doesn’t make much sense, does it? For something to go down 55% and go back up 63% and still not be anywhere near where it started Why is that? How can something go down 55% and back up 63% and not be back where it was? The reason is that on the bounce the price

is coming from a different base, isn’t it? Let’s just use round numbers here If you started with 100% and you lose 50%, you’ve got 50% left, don’t you? How much do you need to make on that 50% to get back to 100%? 100% don’t you? You need to double; if you halve, you need to double to get back to where you were and we certainly did not double

There is a major problem with this because how often does the market go up 63% in about 12 - 13 months? Not very often! So you really need to question the sustainability of this rally to get all the way back up to those old highs, especially now with what we are seeing in Europe Now, I’m not trying to scare you about that, I’m just trying to put the reality of this situation in front of us as investors; I say ‘us’ because it’s an issue for all of us And the performance of that squiggly line on that computer screen actually affects

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everybody, whether they like it or not It can affect you directly because you are holding shares, it can affect you because you’ve got a superannuation fund, or it can affect you because general wealth levels and the share market value of those companies can affect you keeping a job A lot of people lost a lot of their personal wealth in that last GFC, and unfortunately a lot of people have already started to lose in this correction, too

The question I’ve got for you right now is: If you have lost some money, what are you going to do about it? Are you going to get bitter about it and say the market is crazy or this

is stupid, or question why this is

happening? Do we get bitter about it?

Don’t get bitter, get what? Who said

‘even’? Get even! That’s like a Clint

Eastwood movie! Not “get even” -who

are you going to get even with? Get

better! Don’t get bitter about the

money you’ve lost, get better so that it

doesn’t happen to you again If you have lost some money in the past and you’re still enacting the same sort of processes that caused you to lose that money, you can expect to

lose money again when the next GFC rolls around

What is it going to take for you to get from bitter to better? There’s one word I’m looking for; I’ll give you a hint Knowledge? Learning? I think the one key factor to help get

you from bitter to better is education Education on how to protect yourself from what

happened last time to ensure that it does not happen again

The ASX do a Share Ownership Survey1 every two years where they survey literally thousands of investors just like you and ask various questions about investors investing habits The response which had the most impact on me was this one basically asking “where investors get their information to make their decisions on how they put their hard earned money in the market” And those two words are really important for me, “hard earned”

1

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Has anybody ever tripped over a crack in the pavement or fallen face first into a pile of money? Or have you worked hard for your money? I’m sure you did Your money is important to you and we would all like to have more of it, of course We hate to have less

of it and therefore we need to take very seriously how we put that money at risk Don’t we?

When you make an investment, you take on risk I’m not sure if enough people fully understand how they put their money at risk The reason I’m saying this is because of the following results from the last ASX Share Ownership Survey The survey found that 34% of people said, “My primary influence for investing my hard earned money comes from a financial professional”.2 Now I don’t mind this concept because what you are really saying here is ‘I don’t really know a lot about investing, so I need to find someone who does I’m going to pay them a little bit of money for them to improve my returns As long as they improve my returns by an amount greater than what I pay them – I have a good deal’ It makes a lot of sense

How have your thoughts changed regarding financial professionals over the last few years? Have these so-called professionals increased the value of your wealth or are they simply riding the whole roller coaster all the way down and back up? I think a lot of people out there who engage these financial professionals - like a financial planner or financial advisor - have probably been paying them to lose money I’ve got some news for you: you

don’t have to pay someone to lose your money You can do that by yourself!

ASX Share Ownership Survey - Where investors get their information

34% of people said,

“My primarily influence for investing comes from a financial professional”

I want you to be very, very, very vigorous in the way you scrutinise the performance

of financial professionals Now should you judge the performance of these financial professionals by how they do in a rising market? Who makes money in a rising market?

2

http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf

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After financial professions, the next major source people get their information from

is (and this was no surprise to me) the media This includes newspapers, TV and magazine Almost one in five people said, “The decision to put (their) hard earned money at risk in the market came from reading the newspaper”.3 That was interesting to me When a newspaper hits your door step, how old is the information in that paper? Around 24 hours,

isn’t it? You can’t really call this news At that rate, it is “information” but it’s not news – in

fact, as far as the share market is concerned, it’s ancient history

What is the value in using information which was news yesterday? Is there any value

at all? You’ve got to remember that markets work pretty quickly these days Any information in the newspaper is already embedded into the prices on the market So if you are acting on such information now, you’ve got no advantage; in fact, if you act on what you read in the newspaper, you’re actually helping those people who got in yesterday So the value of the information is - and I’m being quite serious here - zero There is no value in that information

The other problem with newspapers of course is that they are written by journalists Some journalists won’t just report the cold hard facts - they exaggerate the story a bit, sensationalise it Why are they encouraged to do that? To sell newspapers, so we get excited, we want to buy that newspaper, read why the world is coming to an end, or why the world is fantastic

Newspapers, correct me if I’m wrong, are designed to make us emotional and we are emotional beings Most of us get emotional easily Do we make good investing decisions when we are emotional? No, we don’t So there are two important points here about

3

http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf

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The third place where people get their investing information from is friends, family, colleagues, etc I won’t harp on about why that’s quite crazy However, 13% of people said this is the primary sources of where they get their information from

The final category was company reports This one really worries me the most For example, the National Australia Bank produces its annual report and it comes to you in the post Two things are of concern here, the first being currency - how old is this report? Very old! Secondly, with what vision does National Australia Bank produce the report? Does it come from accounts? Or rather does it come from marketing, sales and public relations? Certainly the information there is very glossy and if there were anything bad it would be buried where you wouldn’t be able to find it, in a font so small you wouldn’t be able to read

it without trying very hard Is that a fair comment, or am I just making stuff up? I think that’s fair

So you really need to question the value of the top four responses to the last ASX Share Ownership Survey I would say that if your money is important to you and you didn’t fall into a pile of it recently but worked hard for it, you’ll want more of it and will hate to see

it go away unnecessarily If this is the case, I think you need to do something a little different with your approach If you do the same as most people, you’re probably going to struggle to

beat the markets That means when the markets go up we do okay, but we don’t beat the

markets When the markets go down, we get wiped out It’s all about beating the market returns If the four ways that most people get their information is the wrong way, what’s the right way?

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What is good investing all about?

I will give you two options here Is good investing about:

1) making money, or is it

2) about protecting what you’ve got?

We’ve got a couple of responses, so let’s do a survey and you can only answer once and I want to see all hands go up How many people think number one is the most important – that is, making money? I think that’s about two thirds of you How many people think you need to protect what you’ve got? There’s the rest - and this lady has put her hand up for each one so she thinks they are equally important I guess in many ways they’re both important, aren’t they?

But for me, personally, I think the one which is most important is protecting what you’ve got However, most investors are only thinking about number one These investors

go into the market thinking it’s some giant pool of money that they are going to fall face

into and they’re going to have untold wealth because it can’t be too hard How hard can it

be? You just buy a bunch of blue chip stocks; hold onto them and they go up in the long run Don’t they? Yet we have seen that the market goes up in the long run, but in the long run it also goes down a few times, doesn’t it? What do you think is more plausible? The market

goes up in the long run or the market goes up and down in the long run? The so-called

investment professionals don’t talk to you about this, do they?

People want to make as much money as possible in the

shortest space of time and they forget number two There is a

relationship between risk and reward If you want greater

reward, what happens to risk? You need to take more risk,

don’t you? If you want less risk you need to accept less reward

So we know that relationship Now the importance of

protecting what you’ve got can be summed up in really just one

little analogy If you lose 50% of your capital, you need to make 100% of what you’ve got left to get back to just break even How easy is it for you to make 100% on your capital?

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Not easy How easy is it to lose 50%? Very easy, yet most people, as we just saw in that response, think about making the money and they don’t think about protecting what they’ve got

Winning and Losing Investors

Another thing I want to discuss before I move on is an equally important relationship, which I think also most investors take for granted and it’s this idea of effort and

reward If we want more reward, what do we need to do to achieve this? We need to put

more effort in Absolutely, and that’s not just with your investing, it goes for anything you

do in life If you want more reward, you need to put in more effort If you want to make less

of an effort, then you need to accept less reward I think a lot people here think, ‘It’s so easy, I will be able to make all this money myself’ and before they know it they are in over their heads and they have lost too much This brings me to the definition of two types of investors I think most people in the room are going to fall into one of two categories Winning investors make money in a bull market, which is when the market goes up Now remind me: in a bull market, who makes money? Everybody makes money, so there is nothing special about winning

investors there But where winning

investors really prove their worth is

when they also make money in a

bear market And what’s the bear

market? It’s the one that goes

down But are we in a bear market

right now?

I’m feeling another survey coming on I will give you three responses and please only answer once

The first response is “I’m a bull, and I think this is just a correction and the market is

going to be much higher than this in the next 18 months”

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The second is “I’m a bear, I reckon that GFC2 has just started and in 18 months time

we are going to be down to the lows again”

The third is “I’ve got no idea; I’m just going to stick my head in the sand and hope for the best on this one”

Ok, who are my bulls? I’ve got a couple of bulls My bears - it looks like probably just as many And finally who is happy to admit that they have no idea? Hmmm, most people Most people have got no idea, and that’s kind of the response I get more often than not So we’ve got the bulls, we’ve got the bears; do you know what I call the third group, the ones with their heads in the sand just hoping that it’s going to blow over? I call them the ostriches The bulls, the bears and the ostriches

Winning investors make money in all types of markets Losing investors make money

in the bull market because everybody does, but unfortunately they give a great deal back in the bear market Which is a real shame What I want is to get every single person in this room into that group of winning investors

To do that I need to show you how to do two things: I need to show you how to protect what you’ve got, and then I need to show you how to profit from a falling market You need to protect what you’ve got because the top of the market comes suddenly and you won’t see it coming You want to keep your losses very small so you don’t lose 50% of your capital, because once that market has turned from bull correction, what does it turn into after that? That’s right: A bear market We then need to be able to profit from that bear market If you can get these two things right, you are going to be a winning investor

In terms of protecting what you’ve

got, I’ve got a three step process for you

Step number one is understanding your

exposure to the market and again, it’s

another thing that most investors don’t do

I’m going to break down your exposure

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(which really is another word for your risk) into the simplest way you can look at it What

we are saying here is ‘what is your risk’? What is your loss or profit if the price moves by just one cent, for whatever share you are investing in? BHP Billiton, Rio Tinto; whatever it

is If the price moves by just one cent, what do I stand to make or what do I stand to lose?

To work this value out it’s actually quite easy: all we are going to do is divide the number of shares we happen to be trading by 100

Let’s take a hypothetical example We are looking to invest in 100 shares of BHP Say

it looks pretty good and it’s about $40 and we want to buy 100 shares This is a typical transaction Isn’t it? The question is how much are we risking if BHP moves in our favour by one cent, and if BHP moves against us by one cent, what are we going to lose? Now, what

we are going to do is divide that number of 100 shares by 100 I need everyone in the room

to divide 100 by 100 How are we going on that? One Thank you If you divide 100 by 100, you get one

Ok, now there is another rule we can use: if you divide anything by 100 you knock off two zeros or move the decimal point two places So let’s say we move the decimal point a couple of places For every 100 shares I’m going to invest in, on any share, if it moves by one cent, I make or lose $1 That’s as simple as it gets For every 100 shares I invest in, every one cent movement equals $1 to me in profit and loss So if I buy 100 BHP shares that group one cent, I make how much? One dollar If I buy 200 shares of BHP and it goes up one cent, I make $2 and so on

Protecting What You've Got - Understand your exposure

How quickly can BHP move one cent? Bang How quickly can it move $1? Bang Prices can move pretty quickly So you need to be aware of the number of shares you’ve got and that relationship to determine how much you lose if things go very quickly against you Now be honest here - how many people in the room have exactly 5,000 Telstra shares? Anyone? About 6 or 7 people Back when buying Telstra shares was in vogue, many years ago, it was usual to buy $1,000 for ourselves, $1,000 for the wife, $1,000 for the husband,

$1,000 for each of the kids, $1,000 for the dog, $1,000 for the canary, etc., until we ended

up with $5,000 worth of Telstra shares Does that resemble anyone’s situation? Do you

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NAB shares and so forth - and each of those have an exposure And if the market moves by x% in a hurry we need to ask ourselves: how much of my portfolio am I going to lose? And if that number gets closer and closer to 50% you are getting closer and closer to needing to make 100% to get back and break even

What I want you to do is keep your portfolio risk to less than 10% You see, if you lose 10% of your portfolio in one big wack because you didn’t see that top coming (and you never will) do you know how much you need to make to get back to break even? If you lose 10%, you need to make 11% to get back to where you were If you lose 20% you now need

to make about 33%? If you lose 33%, you need to make 50% If you lose 50% you need to make 100% and it goes up exponentially from there So if you can keep your portfolio risk within 10% it’s not the end of the world, is it? You can get back to where you were reasonably easily I wonder how many people are doing this How many people have actually sat down and worked out the exposure of all their stocks and then determined if the market moved by x%, I could lose “this much” Has anyone done that? Nobody? Well that’s a big problem, isn’t it? You need to start doing this

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Step number two is

diversify, diversify, diversify

What is diversification all

about? Not putting all your

eggs into one basket; it’s about

spreading your risk around the

market Now, this is where I’m

going to talk about CFDs and if you haven’t ever heard of a CFD it stands for Contracts for Difference They are very popular at the moment, for the major reason that CFDs help us manage our risk They also profit from a falling market, which I will talk about later

CFDs are very simple to explain A CFD is designed to replicate a securities transaction Give me an example of a security We’ve talked about one already here today - the security BHP Billiton (BHP)

So a CFD on BHP is designed to do everything that BHP does Above is a picture of BHP trading on the ASX (left) and there’s also BHP as a CFD (right) Let’s say BHP goes up 10 cents - what does the CFD do? It also goes up 10 cents If BHP is down $1 then the BHP CFD

is going to go down $1, too If BHP pays a 34 cent dividend, the CFD is also going to pay a 34 cent dividend If I split my BHP shares or consolidate them, the CFD is going to do exactly the same thing The CFD is designed to replicate the securities transaction

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So the question becomes if the CFD is exactly like a share, why would you bother trading a CFD? You’d bother because it costs you less In the aforementioned chart we can see that BHP is trading at about $40 on the ASX and if you were to buy 100 shares, it would cost you $4000 By using a CFD

however we only need to use $200

of our capital to perform the same

transaction Because a CFD is not a

share, it is just designed to replicate

a share trade So there is no need

to put up all the money With

CFDs, all we are interested in is the difference between where we get in and where we get out, plus any dividends we can get in the meantime A CFD deposit of $200 represents the money you need to put down to secure that BHP transaction for your contract for difference

Protecting What You've Got - Diversify, diversify, diversify

What other common transaction might be part of our investing lives that requires us

to put down a deposit to buy something? A house Now, let’s say we are looking at a property worth half a million dollars Do we go to the vendor and say, “Here is half a million bucks”? No, we go to the bank first and we put down about a 10% deposit Ten percent of

$500,000 is $50,000 So we put down a $50,000 deposit and we borrow the balance, which

is $450,000

Now, what would happen if the price of that house increased to $550,000? Let’s imagine a perfect world where there is no stamp duty

or real estate fees If the price went up by 10% -which is

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$50,000 - and you sold out, what would your profit on the transaction be? It would be

$50,000; or rather you would make 100%

For the people who can’t follow this, let’s start again You bought a house for

$500,000 dollars and it went up in value to $550,000 You have made a $50,000 profit but you only used the initial $50,000 deposit to do this You have doubled your money, haven’t you?

That’s what happens in property and I tell you what, that’s exactly what happens in shares, too CFDs are basically property investing for shares Rather than having to put up all the money for BHP, CFDs enable you to put down a deposit on BHP You are effectively borrowing the rest, but now you don’t need BHP to go up so much to get a higher return, do you?

And this is what people are doing all the time Some people have one, two, three or four investment properties using this method, and they probably don’t realise that this is what they are actually doing Because if you have $500,000, would you buy one house? More likely you would buy a few houses, and it’s the same thing with shares What we’re doing with CFDs is instead of having a small amount of money to put on one share, we are going to take that money and get a few shares using this methodology of putting down a deposit and borrowing the rest

Let’s apply this to the BHP example It’s trading at $40 per share and you want to buy 100 shares or $4,000 worth The deposit on a BHP CFD is only 5%, so you would have to put up $200 and would control $4,000 of BHP Now, if BHP goes up to $42.00 per share meaning your investment is now worth $4,200 in value you’ve just doubled your $200.The flip side is if BHP goes down to $38.00 per share your investment is now only worth $3,800 and your $200 investment is gone

It’s the same as with property If you put $50,000 into property worth $500,000 and that property went down to $450,000, you’ve now got zero equity left in that property The act of using a deposit and borrowing the balance to secure an investment is known as using leverage Professional investors use the power of leverage all the time and certainly when it

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useful if you have a limited

amount of capital How many

people in the room would say

they fall into the category of

having a limited amount of

capital? Of course! Everybody

has a limited amount of capital,

so CFDs can be useful to everyone

Let’s say we have $5,000 to get started with our investing If we were going to do this with normal shares and we bought $4,000 of BHP, we’ve only got a small amount of money to keep diversifying ($1,000 less costs) Now let’s say the next trade that came along was Rio Tinto How many Rio Tinto shares can we get with roughly $1,000 right now? About

12 So we’ve got 100 BHP and 12 RIO shares - that’s it We’ve used up all our money Is that diversified? No, not at all, you’ve got all your money in the resource sector via just two stocks

If you are using CFDs, however, you will put down $200 on BHP instead of $4,000 Then put down $200 on RIO to get $4,000 worth of stock there, and you’ve pretty much got the resource sector covered Where do we go after that? You tell me, you’re investing right now! Commonwealth Bank? OK, you’ve got $200 on CBA Are there any other banks you would like to invest in or should we keep going? OK, $200 on Westpac

We’ve got four stocks now: two resources and two banks I think that’s enough banks, where to now? Healthcare, give me an example Resmed, a $200 deposit there Great, we have five stocks now How about some utilities like AGL Energy? Another $200

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down And another $200 on Wesfarmers - we could keep going, in fact we could get 10 investments at $200 each and only use up $2,000 our capital

Now we’ve got diversification We have spread our risk across the market This is

how you can use CFDs to reduce your risk in the market

Step number three is always use a stop loss This is important because when you get a little crazy and put down too many deposits you’ve got a much bigger exposure Stop losses are the difference between property investing and share investing; you don’t have a stop loss when it comes to property, but you do with shares You can protect yourself and limit your risk on the deposit you’ve put down

For the people that don’t know what a stop loss is, it is just an automated order with your broker to get you out of the market when you have lost a specified amount So you can set up a stop with every investment essentially stating, “I don’t want to lose more than

$200” It is as simple as that An amount of $200 is probably acceptable for most people in the room and you can certainly lay down just that amount for CFDs – it’s very easy to do, and the stop loss will just take you out of the market when you have lost that amount

The important thing about a stop loss is they don’t just protect your capital, they protect you from hurting yourself and no one’s good at taking losses It’s actually quite ironic as to why some people lose: People lose a lot of money in the market because they can’t take a loss I want you to think right now about one investment which is in a big losing position and it is going to hurt a little bit Think about one investment you have got right now that is losing more money than you initially believed could happen That loss you’ve got right now started out as a small loss somewhere down the track And a small loss is easier to take than a big loss

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Protecting What You've Got - Always use a stop loss

A strong point about stop losses is that they help you to take a small loss rather than

a big loss The computer does the work of executing the stop loss - and the computer doesn’t ask any questions like, is this still a good blue chip stock, what’s the dividend yield, maybe I should hold on, maybe the market is going to bounce? The computer just gets you out, and you can then ask all the questions you like after that

Essentially, the stop loss protects you from hurting yourself in the market It’s really important stuff and separates

the winners and the losers The

winners are good at taking

losses and the losers, ironically,

are bad at taking losses They

let small losses become big

losses and then they lose too

much of their capital and it

makes it too hard to get back to breakeven At Australian Stock Report we certainly use a stop loss for every single investment we do We don’t leave anything to chance; we let the computer take us out

So that’s a three-step process for protecting what you’ve got If you put this process

in place, you are going to go a long way to limiting your losses when the market turns suddenly

Step number one: understand your exposure and try to keep it to a certain amount

Don’t risk more than 10%

Step number two: diversify, diversify, diversify – don’t have all your eggs in one

basket Spread your capital across the market as much as you can

Tiêu đề	Learn More and Earn More: The CFD Trading Revolution
Năm xuất bản	2010

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Số trang	40
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