There are significant advantages in trading indices over individual shares.

Here are seven of them:

1) When trading the indices you are trading a more reliable indicator than when trading a share. The share price can be manipulated but it is harder to manipulate the indices. This is because an index consists of a number of different companies that represent billions of dollars. The Dow Jones Index (DOW) consists of only thirty companies but they are thirty of the top companies in USA. If they go broke, the USA is bankrupt overnight. This will not occur because only companies in good standing are represented in the index. If a company does not comply with the conditions to be included in the index, it is removed. Besides the DOW, there is the S&P 500, the FTSE 100, the Eurostoxx 50, Nikkei 225, the Heng Seng, the SPI 200 and many more. All these indices are comprised of quality companies.

2) Because these indices represent quality companies there is considerable volume being traded in the derivatives as funds and large private investors hedge their investments in individual companies.

3) When investing in a company, you need to be like Warren Buffet and make a business decision based on sound fundamental facts. This means doing research into the company, the competition and the industry. It also pays to have an understanding of the management, as well as much inside information as possible. This requires quite amount of time, Unless you are going to buy a business, or intend to be a major investor in a company, there is really no need to invest time and energy in researching and seeking out this information, when all you have to do is understand how to read a chart.

4) An index can be traded during market hours and outside market hours. Because of this indices can be traded virtually around the clock. This gives a lot more flexibility for the smaller trader, who cannot buy and sell shares outside market hours.

5) The indices enable you to get greater leverage for your dollar, which means you are able to make more money on a market move. In fact, using cfds you can get leverage up to 2000%. What this means is you have access to $200 leverage for every $1 outlaid. With $100 you are leveraging $2000 and this can mean significant profits. Instead of having to find $200,000 cash to play an index with to make a living, you can have the same purchasing power $10,000 because of the power of leverage. This means that you can trade an index with $10,000 and invest your $190,000 elsewhere. Or if you do not have $200,000, at least you can have the same trading power with only $10,000,

6) There are no issues about short selling indices. You can just as easily take a position where you can make a profit in the shares going up or going down. There is no complicated formula. There is no need to borrow shares. There is no need to pay interest. When there were bans put in place on short selling shares, there were no bans on the indices. This is because the indices do not affect the sharemarket, instead they reflect what is happening in the sharemarket. When share prices fall, then the value of the indices fall with them. The indices themselves cannot be manipulated, since they rely on the underlying sharemarkets to determine their value.

7) The indices provide a better reflection of market psychology than individual shares. Individual shares may rise and fall with the general mood of the market, but they will all not rise and fall in the same way. Different shares in the same industry sector will vary in performance, but this will not affect the index because it reflects the overall position, so there is no concern about being on the worse performing stock. This means all that a trader needs to do is understand how to read a chart that reflects the psychology of market participants and utilize money management techniques.

To Your Success

Happy Riches

www.happyrichesclub.com/yourgifts

The two percent rule is one of the most tried and tested rules there are for making money. This rule is applied by professional punters and traders all around the world. Successful professional card players and gamblers are known to use to rule to great effect.

The main reason for this rule being so effective is that it alleviates stress. This rule also preserves your working capital and your bank balance. Most importantly, the two percent rule enables you to be in control of your game. You need not succumb to those ugly demons that try to rip you apart mentally and emotionally, as you navigate your way through the wild terrain of chance with its cluttered jungle of conflicting possibilities.

This is how the two percent rule works when it comes to trading shares or indices or currencies or any other market.

Say you have a bank of $1000, the most you will risk of this money is $20. The reason you will only risk $20 is that you will not allow yourself a loss of more than $20. This means that in the event you lose $20, you will still have $980 left in the event of a loss.

This is called good money management because you still have the bulk of your capital intact. If you had allowed yourself to lose $100, then you would be putting your bank in jeopardy, because you would have lost ten percent. You might not think that this is a problem, but if you have two more consecutive losses, you will have lost nearly one third of your bank. This will start to have an emotional impact upon you, even if it is only slight.

Had you had five consecutive losing trades when risking only two percent of your original bank of working capital, you would find yourself down ten percent, and still with a feeling of control.

Because we are only trading with $1000 in working capital, it is a little difficult to trade to lose only two percent of the existing bank because of the small sum of money. If you like, after the third losing trade in a row, you could drop your loss for the next couple of trades to $19 and $18 in the event that you have had five losing trades.

Of course, when your bank grows from having had winning trades you increase the size of your potential loss to reflect two percent of the bank of your working capital.

You might think that you will not be able to make much money starting from a small base of $1000. However, you can start with $1000 and turn this into whatever you like in no time at all using the two percent rule. This is especially so trading the indexes. Of course, you need to know how to trade them so you can have more winning trades than losing trades.

The two percent rule is the best way I know of keeping yourself from losing money, losing your temper and losing control of your trading game. The reason for this is its a proven principle. It keeps you in the game longer. It is simple. It works.

Beginners who learn to apply the two percent rule, discover how to control their emotions and make better judgments, thus becoming better traders much quicker. Losing is never an issue. The focus is on recognizing how to make better trades to increase profits.

The simple equation being small losses (SL) cancel out small profits (SP), while no big losses (NBL) equals no big profits (BP) to lose. We can write the equation like this (SP-SL+ BP-NBL=BP).
Every one wants big profits but not everyone is prepared to pay the price to discover the principles of profiteering.

With a success rate of only 40% you will be able to make substantial money. The reason for this when we are talking big profits, we are talking about returns of 400% over a possible loss of $20.

Let us look at the following scenario where the first six trades are losing trades and the next four trades are profitable trades to demonstrate how only losing 2% of the initial bank can be turned around with on a 40% profitable trading success strategy, which represents a 400% profit to potential loss ratio, that is $80 profit to a possible $20 risk.

STARTING BANK $ 1,000.00

LOSS $ 20.00 BANK $ 980.00
LOSS $ 20.00 BANK $ 960.00
LOSS $ 20.00 BANK $ 940.00
LOSS $ 20.00 BANK $ 920.00
LOSS $ 20.00 BANK $ 900.00
LOSS $ 20.00 BANK $ 880.00

PROFIT $ 80.00 BANK $ 960.00
PROFIT $ 80.00 BANK $1,040.00
PROFIT $ 80.00 BANK $1,120.00
PROFIT $ 80.00 BANK $1,200.00

END OF TRADING BANK $1,200.00

This might seem rather slow, but in ten trades the bank has grown by 20%. For a day trader these ten trades might be six hours work, or even less. This demonstrates how a very mediocre skill of analysis to find winning trades can be turned into a profitable enterprise by using the 2% money management rule.

Once you have learnt to maintain this ratio of profitable trades to losing trades with the 2% rule, you will see your success increase. The reason for this is now you will only have to work on increasing your proportion of profitable trades. However, if you do the figures you will see that even with only a 30% success rate, it is possible to do very well as a trader, for a 10% return on your bank balance every day or every ten trades adds up very quickly.

to your success

Happy

For the majority of people, one of the easiest ways to make money would have to be on the share market. This is the case even when the market is going down. Many people think that it is impossible to make money from the share market when it is going down. This is even more so when short-selling of shares have been banned.

But let us look at where we can still short-sell. You can short-sell shares using derivatives. You can short-sell the indices. You can short-sell currencies. You can short-sell commodities. All this means you can still be making money short-selling the markets.

There are five options you have when selling shares, derivatives, indices, commodities and currencies.

The first option is you can sit on a loss and wait until it turns into a profit. This option is not really the way to make money on the markets. In fact, this is how you go broke very quickly if you do it too often. The reason you will go broke is that when you sit on losses, your capital is being depleted and your ability to turn other opportunities into profits while your capital is going down the drain is lost.

The second option is to cut losses quickly. To do this effectively you have to draw up a plan that takes into account your style of trading and the size of your trading account and what you can afford to lose without threatening your personal psychological equilibrium when faced with exiting a losing trade. Once you have determined what is the most you can afford to lose on a losing trade without troubling you, then that is the maximum loss you will incur, which will be a small loss.

The third option is to break even on every trade rather than taking a loss. The difficulty with this approach is that when entering a trade, the moment you enter the trade, the market could move against you and you will not be able to close the trade without a loss. This is a common occurrence and you may find yourself exiting a profitable trade for a loss.

The fourth option is to take a quick small profit. The problem with small profits is that you have to make quite a few to make any serious money. The other problem with small profits is they may not be sufficient to cover your losses that you try to avoid, which you cannot do because you don’t know the future.

The fifth option is to identify a trend and take larger profits. There are only two types of trends and they are up or down. A sidewards pattern is not counted as a trend; although similar profits can made by trading sidewards patterns.

The five options you have when buying or selling the markets is large losses, small losses, break even, small profits and large profits.

By eliminating large losses, you have to deal with small losses, no loss, small profits and larger profits.

Effectively, this means that small losses may cancel out small profits, but no loss trades do not cancel out larger profits. What this means for you is that there is a road to riches for the patient trader who learns the right strategies for trading the markets, even as a day trader.

Here’s To Your Success

Happy Riches

Share trading, as opposed to share investing, is about buying and selling shares for a living. It is like buying and selling any item for a living. You buy at a certain price and sell to make a profit.

Shorting is the same deal, except people find the concept rather confusing. Shorting a share or an index means buying high and selling low for a profit. This sounds silly to most people, because nobody pays more for an item and then sells it for less to make a profit. This means making a loss—except when shorting the market.

Shorting is the easiest way to make money on the share market. It is the easiest way because you do not have to worry about the market crashing and you making a loss. When the market crashes and people are talking about everyone making losses, the person shorting is making profits. Jesse Livermore, said to be one of the greatest share traders, made most of his profits from shorting shares.

The reason why shorting is the easiest way to make money on the share market is people are more fearful than courageous. Everybody has fear drilled into their subconscious so much that once an image of loss starts to grab hold of a person, irrationality starts to take control and the person will begin to sell shares at any price. When this emotion starts to grab hold of a multitude of people, panic selling sets in, and share markets crash. The markets come down so quickly that in a matter of days, a person shorting the market, a share, currency, or commodity, is able to make very quick money easily. This is how George Soros was able to make $1 billion dollars in a single trade in one day.

How many people do you know who have made that much money? More to the point, how many people do you know who have made that in a single day?

George Soros made that money by shorting, not the share market, rather the currency market. Soros made his money shorting the British Pound. However, what this does is demonstrate that shorting is the easiest way to make money on the markets, be it the share market, commodities market (oil, metals, agriculture), index or currencies.

Fear and greed control the markets, but fear is a stronger emotion than greed. This is because fear is embedded in the subconscious when children are small. And while even you might be courageous enough to face fear head on, once it rears up within you, it will cause you to be unstable and cause you to act irrationally. This is why it is easier to make money from people who are fearful of losing more still, because they will sell for less.

To be a shorter means that you have to go against the grain of popular wisdom. Share markets go up, not down, and, besides, down is limited, whereas up has no limits. Many brokers will tell you that the markets can only go up indefinitely, while there is a limit to going down. What many brokers will not tell you is that companies go broke and if you are left holding the share certificates, the paper is worthless, and there is no more up, once a company is wound up.

There is a saying, “The taller they are, the harder they fall.” It is like the market, the more a price goes up, the more it has to come down. Having been caught too many times with prices crashing after I have bought, my preference is to go short.

Which is the best method of trading shares for the retail investor; that is, the person who invests their own money on the share market?

There are often arguments put forward that Fundamental Analysis (herein referred to as F.A.) is superior to Technical Analysis (herein referred to as T.A.) because the former is based on facts and the latter is based on fantasy.

Firstly, let us look at what F.A. involves.

F.A. relies heavily upon company information to assess the viability of the company and the value of its current status. This involves accessing the company financial reports, director’s statements, and the history of the company and credentials of its management. For F.A. to be conducted properly, research needs to be done into its products or services, the company’s position in the market place, the growth potential of the company, and a knowledge of its competitors is required.

F.A. when conducted properly is very involved and most people tend to rely on second hand information which is based on what the company directors say and the financial reports and what might be happening in the business sector the company belongs.

The major problem with F.A. is the information that investors rely upon is not current and reflects what has happened, and the guidance given by directors can never be taken as gospel. While directors might have insight into their industry and short-term prospects of the company based on orders and possible future orders, none of them really know the future. All this means, the average investor has to make guesses as to whether the directors are really telling the truth and the directors reports and guidance are based on accurate information. What this means is F.A. can be a very hit and miss affair.

The only time F.A. can really be valuable is when a person has access to sound research and inside information of pending deals or other knowledge which will directly affect the future performance of the company.

Some people claim that closely watching what directors are doing regarding their buying and selling of shares of companies on the boards they sit is as close as you can get to getting an insight to knowing a company’s future prospects. However, this is not a fool proof means, but it is certainly something that needs to be kept an eye out for if you want to use F.A. for determining your investments in the share market.

Now let us look at the advantages of T.A. This method does not require any knowledge of the company. It is about understanding what patterns and indicators on charts suggest. Because of this, detractors deride T.A. as a form of astrology. In fact, W.A. Gann, actually made use of astrology in his trading. To what extent this actually helped him, I am not really sure, but many people claim to make predictions based on the stars, using some of his more advanced methods.

However, just like the movement of the astronomical cycles of the night sky, so, too, does human behavior fit into cycles based on the seasons of the year. It is this human behavior that T.A. records. Every year, you will find that the market will usually have a least two corrections about six months apart, with an accompanying rally. This means two rallies and two corrections. Coincidentally, there just happens to be four seasons in a year, which are three months duration each. Not only do the stars in the sky change, but also human behavior is affected by the seasons.

When there is fear in the minds of investors, they start selling off and the price of shares fall lower. When investors are feeling positive about investing in the market, the price of shares rise. Really, it is this simple. T.A. simply records this. Those who learn how to read the trends and the patterns and understand relevant indicators are able to make money on the markets.

Market psychology is reflected in the charts and, if you are a retail investor, you do not have to do the research required when investing billions of dollars. Understanding T.A. will enable to you know very quickly where the money is going. The share price will reflect what is happening in a few hours, whereas if you were relying on directors’ reports, the company could well be in receivership by the time you get to place your order to sell.

In the argument, about which is the best way to make money on the share market when considering T.A. or F.A., it depends on what sort of an investor you are. If you are investing billions of dollars, you will need to know more than what the market is doing; because you will be one leading the market. If you are investing your own money, you will probably find that you will make more money using T.A. than F.A. This is a fact that many retail investors will attest to, including myself.