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You Will Never Make Money Trading Stocks, Futures Or Forex Part 1

Mar 6, 2008
You may think you know what a CFD, a currency pair, or an option is, but you probably don't know anywhere near as much as you should. For example, trading a CFD and an option using the same outlay can result in two completely different scenarios; the CFD can take out your initial outlay, plus more sometimes resulting in a margin call (if you know what one of these are). Bad traders can have their entire capital wiped in very short time if they're not careful.

An option on the other hand can only ever go to zero; in other words, you can only lose your initial outlay, but with options there is a thing called time decay, which simply means, the longer you hold an option, (all else being equal), the less valuable your option becomes. CFD's don't have time decay, but they do incur interest when bought for every 24 hours you hold the position open.

Options also have various components that go into making up their price, including time (already mentioned), and intrinsic value, not to mention a few others. A lot of newbie options traders are bewildered when they see the underlying asset go up in price yet their call option does nothing. For some reason it escapes these people that it may be a good idea to learn what an option is.

So if you decide you think the little green bar is going to keep going up, what do you buy an option, CFD or just the stock? Then there are market makers and brokers, regulators, and laws which differ greatly between just these two derivatives markets. You can't trade CFD's in the US, so what happens if you get sold on a real great trading system promising huge returns only to find out that the owner of the system lives in the UK and trades his system with CFD's?

Then you have Forex, the market where people think they can start with a measly $10! Unlike all other markets, Forex has two opposing forces at play. By buying the EUR/USD, you are in fact buying the Euro currency with US Dollars, and if you live outside the US, then you've got to factor in the currency exchange rate between the US dollar and your own currency, otherwise you have no idea what you're risking.

Another example; if I live in New Zealand and I decide to go short the CAD/JPY pair, how do I work out my risk for the trade? Well for starters, going short the CAD/JPY means I am buying Japanese Yen, with Canadian Dollars. How many of these Canadian Dollars am I willing to risk so I only risk 'X' amount New Zealand Dollars?

This is not to mention that fact that CFD and Forex markets are unregulated. If you think you're getting the same price at any given time as someone else on the other side of the world, think again, because you aren't!

Futures and Commodities; Ah, the big juicy bull market that no one seemed to care about when our little friend with the bow tie was singing from the rooftops to an empty street. Of course now that our favourite money channels can't stop talking about them everyone else seems interested. Have you ever seen the little pop up ad claiming an 80% success rate trading Oil? Well that's all good and dandy but unless you have the capital to trade Oil, it's absolutely hopeless to you. The standard method of trading one Oil contract requires you have about a $4000 margin. Check out the margin requirements to trade all the other commodities in the news lately, Wheat, Corn, Sugar, and Gold.

Rest assured, now that we have a bull market in commodities, the ways in which one can trade these markets will explode allowing smaller margins and more retail traders to experiment (yes that's what the majority will be doing even if they don't know it). However, these instruments all have their own characteristics that you need to learn.

Every market is different, it has different characteristics, different laws and regulations (if at all), they act differently, and they have different driving forces fundamentally. Pick one or two markets to learn and get comfortable with them, but for goodness sake, pick the markets that will suit you and your goals and allow you to trade with the limited resources you have available.
About the Author
Dean Whittingham created A Traders Universe - Trading System Development in 2005 as a resource site for traders of all levels, with education, courses, brokers, tips, free videos, newsletters, trading systems, simulations and a free 7 step process for building a profitable stock, futures or forex trading system. His coaching program is at Pentagonal Trading System Development
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