How to open more positions with less money.....
You will have noticed that my trading technique involves opening one new position each week. How is it possible to keep doing this each week without running out of money? What I do (mostly) is to trade Contracts For Difference (CFDs). This enable me to take a trade each week, because I able to do this with a small amount of money and yet potentially get far greater return on my money than just buying shares in the normal way. Take, for example, Facebook. This is currently trading at $83.80. It's trending upwards, which suits my style of trend-trading. Lets say I decide to buy Facebook shares in the 'normal' way and that I have £1000.00 (sterling) to spend on those Facebook shares. At current exchange rates this would give me $1500 (dollars) to spend which would get me 17 Facebook shares.
I decide to set my stop-loss at $71.80, just below the ma50. In doing so, I am only risking $12.00 per share. Multiplied by 17 shares, that creates a maximum risk of $204, if the share price falls to $71.80. More optimistically, however, lets say that at some stage in the future, the trade gets closed for a profit at share price of $100.00. This would represent a profit of 17 x $16.2 which totals $275.40, (18%) profit - not bad at all! However, during the lifetime of the trade all of the capital below the stop-loss of $71.80 is simply sitting in the trade, tied up in the shares. That is $1080 ($3000-$420) of my money that I cant use for anything else. This represents an 'opportunity cost'. In other words: I cant benefit from the postential return of having that money invested, because it is tied up in the cost of the shares. But there is a way round this!
Instead of spending £1000 on Facebook share ownership, I could enter into a 'contract for difference' (CFD) agreement that would allow me to benefit from the change of share price (if it goes up) but would result in me making a loss (if the share price went down). Lets say that I decide that I will risk the same amount of money as if I had done a share purchase ($204). To calculate the number of CFDs that I buy, I divide the amount of risk ($204) by the difference between my purchase price and my stop-loss price ($83.80-$71.80= $12.00):
$204/$12.00= 17 CFDs
If the Facebook share drops to $71.80, my CFDs would be sold, and my broker would debit my account $204, the same as if I had bought the shares. However, if this did not happen, and the Facebook share price rose to $100 as in the example above, and my trade was closed, I would make a profit of $100-$83.80= $16.20 multiplied by the number of CFDs (17 ) which makes $275.40. This is the same profit that I would make if I had bought and sold the share itself. The huge difference, however, is that I would have only invested £137.00 ($204 x the exchange rate of 0.67), not £1000.00, although the broker will hold back some of my trading capital as margin. The bottom line is that rather than having my money tied up in shares, my money can be at work making other trades. As long as those trades are profitable, then this is a good thing! There are other issues to consider when trading CFDs which I will go into in another post sometime, but the bottom line is this: trading CFDs enables me to have many more positions open, than if I just buy the shares.
Simple n'est ce pas?
What am I going to trade this week? Not Facebook, I own that already, and it has trebled in value in the time that I have had it! I am going to follow the money - the quantitative easing money, to be precise, and buy continental Europe via the TR European Trust (TRG). This investment trust owns shares of companies on the continent. 30% of its shares are German. So, I'm setting an order to buy TRG and will set my stop just below the Donchian channel.
The Donchian channel settings are formed by the lowest high/lows of the past n weeks, where n equals any number you like. I use the 10wk setting. Once this rises above the 50ma, then I will use the 50ma as a guide for setting my stop loss. usually I set it just below. I don't want my stop-loss to be too close to the share price and for the trade to get stopped out by random market 'noise'. The price that I pay for this is to have a wider stop-loss, and although I should get stopped out less frequently, when I do, I will lose more than if I have a tight stop-loss
Buying an investment trust like this minimises specific company risk. My trade is not at risk if one of the many companies that it holds goes broke. Why am I buying it?
If you are interested in my views on how the markets have been this week, then click here (6mins).
If you would like to see how my open positions are performing, then click here (11 mins).
Have a great week!
I decide to set my stop-loss at $71.80, just below the ma50. In doing so, I am only risking $12.00 per share. Multiplied by 17 shares, that creates a maximum risk of $204, if the share price falls to $71.80. More optimistically, however, lets say that at some stage in the future, the trade gets closed for a profit at share price of $100.00. This would represent a profit of 17 x $16.2 which totals $275.40, (18%) profit - not bad at all! However, during the lifetime of the trade all of the capital below the stop-loss of $71.80 is simply sitting in the trade, tied up in the shares. That is $1080 ($3000-$420) of my money that I cant use for anything else. This represents an 'opportunity cost'. In other words: I cant benefit from the postential return of having that money invested, because it is tied up in the cost of the shares. But there is a way round this!
Instead of spending £1000 on Facebook share ownership, I could enter into a 'contract for difference' (CFD) agreement that would allow me to benefit from the change of share price (if it goes up) but would result in me making a loss (if the share price went down). Lets say that I decide that I will risk the same amount of money as if I had done a share purchase ($204). To calculate the number of CFDs that I buy, I divide the amount of risk ($204) by the difference between my purchase price and my stop-loss price ($83.80-$71.80= $12.00):
$204/$12.00= 17 CFDs
If the Facebook share drops to $71.80, my CFDs would be sold, and my broker would debit my account $204, the same as if I had bought the shares. However, if this did not happen, and the Facebook share price rose to $100 as in the example above, and my trade was closed, I would make a profit of $100-$83.80= $16.20 multiplied by the number of CFDs (17 ) which makes $275.40. This is the same profit that I would make if I had bought and sold the share itself. The huge difference, however, is that I would have only invested £137.00 ($204 x the exchange rate of 0.67), not £1000.00, although the broker will hold back some of my trading capital as margin. The bottom line is that rather than having my money tied up in shares, my money can be at work making other trades. As long as those trades are profitable, then this is a good thing! There are other issues to consider when trading CFDs which I will go into in another post sometime, but the bottom line is this: trading CFDs enables me to have many more positions open, than if I just buy the shares.
Simple n'est ce pas?
What am I going to trade this week? Not Facebook, I own that already, and it has trebled in value in the time that I have had it! I am going to follow the money - the quantitative easing money, to be precise, and buy continental Europe via the TR European Trust (TRG). This investment trust owns shares of companies on the continent. 30% of its shares are German. So, I'm setting an order to buy TRG and will set my stop just below the Donchian channel.
The Donchian channel settings are formed by the lowest high/lows of the past n weeks, where n equals any number you like. I use the 10wk setting. Once this rises above the 50ma, then I will use the 50ma as a guide for setting my stop loss. usually I set it just below. I don't want my stop-loss to be too close to the share price and for the trade to get stopped out by random market 'noise'. The price that I pay for this is to have a wider stop-loss, and although I should get stopped out less frequently, when I do, I will lose more than if I have a tight stop-loss
Buying an investment trust like this minimises specific company risk. My trade is not at risk if one of the many companies that it holds goes broke. Why am I buying it?
- The share price is rising and looks like it's trending upwards
- There are higher lows and higher highs in place
- Quantitative easing should help European share prices to rise further.
- The 20ma is about to rise up through the 50ma (okay, I know it hasn't yet...)
If you are interested in my views on how the markets have been this week, then click here (6mins).
If you would like to see how my open positions are performing, then click here (11 mins).
Have a great week!
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