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In order to make money from stocks, indexes, gold, silver, cars, houses, investments, antiques, or any commodity for that matter, you have to buy low and sell higher. This is 'trading' in a nutshell. There are many ways you can trade stocks, using a multitude of different instruments from simple to sophisticated...
For instance, you may use the trend index signals to simply buy and sell stocks in the traditional way. Or, you may prefer to trade 'margined' stocks which require less capital. Some of our members like to trade spread-bets or CFD's [also known as contracts for difference]. Others like single stock futures, or 'options'. A great majority of our members trade the Dow Jones Index itself. How you trade is up to you. We will discuss some of these 'instruments' in a few moments.
To buy low and sell higher sounds a little over-simplistic. But, this is the principle foundation for any successful trade. The objective of each individual trade you do is to produce a profit. To buy for a specific price, and then to sell it for a higher price. Notice I do not say 'highest' price, but a 'higher' price...
Take the example of property prices. Over the past century prices have gone up in property in all the developed nations/cities, then corrected [moved down] a little, gone up again, corrected a little, gone up again, and so on, in cycles...
Now unless you are the Duke of Westminster, no matter how good a property dealer you are, you can only really take a 'slice' of the action. You could buy a property in January for say $500,000 and sell a month later for $530,000, pocketing a $30,000 profit. Or, you could simply buy in the year 1950, and sit on the property for 50 years, and make good money. But this is a very mundane existence - not a lot of fun!
Trading is very much about excitement - making money in a dynamic marketplace - getting in and getting out - frequently. This is what drives the market.
In the old days, it was almost impossible for the average Joe to make good money 'trading' stocks short term [buying and selling within the span of a few hours or a few days]. This is because brokers commissions and trading fees swallowed up much of the profits, even if you were right about the direction of stocks.
Let's go back to our property example again for a minute...
The property cost $500,000, and a month later you could sell it for $530,000, which is a $30,000 profit. Now to buy and sell, the transactions incur say 3% expenses, which is $15,000. That wipes out half your profit right away. Rather off-putting!
Now, imagine on the same deal, the expenses crash to just a quarter of a percent, equal to $1,250. Suddenly the deal looks very attractive!
The advent of 'cheaper' and more 'advanced' technologies have brought down the 'costs' [or overheads] of trading dramatically over the past few years. This is the primary reason why stock trading [from home] has brought in a new generation of traders into the markets in their thousands. However, the majority that come into the stock market often fail at trading, because they do not have a sound trading plan/strategy underlying their goals...
Newcomers spend far more time looking for what's 'hot' at the moment, or what the tipster mentioned in the Sunday newspaper, than actually gauging and lining up the 'mood' of the market. To line up the 'mood' is to check the 'trend' in the stock, and the 'trend' in the major indexes. This is beautifully simple but wretchedly overlooked, in the newcomers advent into making a quick-buck. Understanding mood-cycles and using the right tools to 'gauge' these swings provides the key to much better trading decisions - more intelligence, more awareness. This is the stuff of common sense.
What are stocks?
Stocks are simply 'shares' in a company. To raise capital a company issues shares, say, 100,000 shares at $10 each, therefore valuing the company [also known as the ‘Market Cap’] at $1,000,000. These shares are 'floated' thus allowing you and I to buy and sell bits of paper saying we 'own' a stock. We buy and sell these instruments through a stock broker [or online broker] who keeps the records.
Traders are not concerned with ‘investing’ for the long term. Instead, they buy and sell the same bits of paper, much more frequently, usually holding on to a position for a few days per trade, in anticipation of making quick profits from the rising and falling 'swings' in the market price of the stock itself.
Traders are not interested in long term retirement plans, long-term stocks earning dividends, etc. Trading is a business. It is not any different to buying and selling any other product in order to produce short term profits. If you run a fruit shop, and you buy 1,000 apples for 10 cents each, and then sell them all for 15 cents each by the end of the day, then you make a profit of $50 on the 1,000 apples. Then you move onto the next opportunity, in a sequence of trades. This is the nature of ‘trading’.
Similarly, imagine a trader specializes in stock trading. A stock can cost, say $3. Assume the trader buys 1,000 of them. Some time later, the stock price moves up to $3.50, and he sells all 1,000 shares. A profit of $500 is thereby achieved.
There are many ways you can trade stocks. As in the example above, you may simply buy a stock at, say $3, and sell it later for $3.50. If you bought 1,000 of them, your capital would have been $3,000 and your profit would be $500. This is a simple, straightforward [traditional] way of trading stocks.
However, there are other, more advanced methods of trading stocks, which we will cover in detail in later sections of this manual. For example, instead of trading straightforward stocks, you may decide to trade 'margined' stocks.
What are margined stocks?
Margined stocks simply require a smaller amount of capital to control a stock. For instance in the above example, instead of putting up $3,000 to buy 1,000 shares, you could put up just a quarter of the capital, ie., $750 to buy the same number of shares. This is known as 25% [quarter] margin. Many brokers offer this, some offer 50% [one half] margin, others 33% [one third] etc. In this example, a 25% margin would incur a capital of $750. The stock moves up to $3.50, and you make the same $500 profit but with much less capital outlay, than the full $3,000. This is known as margined stock trading. We will cover this in more detail in a later section of this manual.
What are indexes?
Indexes such as the Dow Jones, the FTSE 100, etc., are a combination of leading stocks, which integrate to produce an overall measure of the market. These indexes can be traded. By far the most popular index traded by our members [including ourselves] is the Dow Jones Index...
I would strongly recommend you initially test our trading system on just this one market, which has proven to be very successful for us. You may check and test this yourself to prove profitability...
Focusing entirely on the Dow Jones 100 Index, using our Trend Index Indicator method [123 steps below], the following results were obtains...
[1] Upon a Brand New Orange [or Gray] Bar, you enter the Dow Long [or Short if Gray] just before the close of trading that day.
[2] Hold the position for precisely three days, thus capturing the momentum in the swing.
[3] On the Third day, exit the position at the market close.
Using the system, check the Dow Jones chart to see the profitability...
Nov 21/2005: Long Signal: Entry=10820 Exit=10931 PROFIT= 111 Points
Nov 29/2005: SHORT Signal: Entry=10888 Exit=10877 PROFIT= 11 Points
Dec 14/2005: Long Signal: Entry=10883 Exit=10836 LOSS= (47) Points
Dec 27/2005: SHORT Signal: Entry=10777 Exit=10717 PROFIT= 60 Points
Jan 04/2006: Long Signal: Entry=10880 Exit=11011 PROFIT= 131 Points
Jan 17/2006: SHORT Signal: Entry=10896 Exit=10667 PROFIT= 229 Points
Jan 27/2006: Long Signal: Entry=10907 Exit=10953 PROFIT= 46 Points
Feb 06/2006: SHORT Signal: Entry=10798 Exit=10883 LOSS= (85) Points
Feb 09/2006: Long Signal: Entry=10883 Exit=11028 PROFIT= 145 Points
Feb 24/2006: SHORT Signal: Entry=11061 Exit=11053 PROFIT= 8 Points
Mar 10/2006: Long Signal: Entry=11076 Exit=11209 PROFIT= 133 Points
Mar 24/2006: SHORT Signal: Entry=11279 Exit=11215 PROFIT= 64 Points
Apr 18/2006: Long Signal: Entry=11268 Exit=11347 PROFIT= 79 Points
May 01/2006: SHORT Signal: Entry=11343 Exit=11438 LOSS= (95) Points
May 05/2006: Long Signal: Entry=11577 Exit=11642 PROFIT= 65 Points
May 12/2006: SHORT Signal: Entry=11380 Exit=11205 PROFIT= 175 Points
May 25/2006: Long Signal: Entry=11211 Exit=11168 LOSS= (43) Points
Jun 06/2006: SHORT Signal: Entry=11002 Exit=10891 PROFIT= 111 Points
Overall Results Since Inception to June 15th 2006:
Total Number Of Trades: 18
Number Of Winning Trades: 14
Number Of Losing Trades: 4
Percentage Winners: 77.7%
Number Of Dow Points Gained: 1368 Points
Number Of Dow Points Lost: 270 Points
Net Gain Since Start: 1098 Points (80%+ Winning Points vs. Losing Points)
The Dow can be traded using Dow e-mini futures [which follow the index very closely], or Exchange Traded Funds [or ETF's].
For more information on Dow E-Mini's, point your browser to:
http://www.cbot.com/cbot/docs/49707.pdf
http://www.cbot.com/cbot/docs/42357.pdf
http://www.cbot.com/cbot/docs/62166.pdf
For more information on ETF's, point your browser to:
http://www.streetauthority.com/cmnts/sp/2004/01-05-dia.asp
Our own trading is now largely focused on the Dow Index, and this is producing excellent single trade returns on a consistent basis.
To wrap up this section, realize that you may choose to trade straightforward stocks, or margined stocks, the Dow, or any other instrument, eg., single stock futures, options, spread bets, e-mini's, ETF's CFD's, etc. It is up to you. All of these instruments will be covered in step-by-step detail later.
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