tech/a
No Ordinary Duck
- Joined
- 14 October 2004
- Posts
- 20,400
- Reactions
- 6,317
Oh, the irony.
My ignore list grows.
My time here shrinks.
I'm sure others will follow.
Better to remain silent and be thought a fool than speak up and remove all doubt!
Newbie Lessons - All your questions answered
- Thread starter Sir Osisofliver
- Start date
My ignore list grows.
My time here shrinks.
I'm sure others will follow.
Better to remain silent and be thought a fool than speak up and remove all doubt!
- Joined
- 28 May 2004
- Posts
- 10,833
- Reactions
- 5,173
A few observations:
1. Please keep this thread on topic. I don't want to see it degenerate into insults and off topic posts.
2. This is a thread for newbies to ask questions so please take it easy on them. Everyone has to start somewhere and it takes time to gain knowledge and experience. Encourage those who are just starting their stock market journey, don't tear strips off them.
3. Let's keep this thread positive and constructive. That was the way it was conceived initially by Sir O, and that's the way I'd like to see it continue.
1. Please keep this thread on topic. I don't want to see it degenerate into insults and off topic posts.
2. This is a thread for newbies to ask questions so please take it easy on them. Everyone has to start somewhere and it takes time to gain knowledge and experience. Encourage those who are just starting their stock market journey, don't tear strips off them.
3. Let's keep this thread positive and constructive. That was the way it was conceived initially by Sir O, and that's the way I'd like to see it continue.
- Joined
- 17 August 2006
- Posts
- 7,739
- Reactions
- 8,332
Howdy Iro, and welcome to ASF.
Regarding the above, if you trade $1000 of stock xyz at $5, you will hold 200 shares.
What TH is referring to is, if you are trading CFD's, you should still only be trading 200 CFD's (shares) .....
The 95% margin means you will only need to put down 5% ie $50 to take the trade .... but you are then taking on the same risk profile.
ie. Using CFD's to take on too much leverage can be a risky game .....
ps. My knowledge of trading Prop is zilch, but at the very least it would require an intricate understanding of order flow in the DOM (Depth of Market) ..... I'd guess that less than 5% of traders here at ASF would have that ... myself included
...... but the fact that you are asking these types of questions indicates you are probably on the right track ..... good luck with it.
- Joined
- 4 December 2008
- Posts
- 486
- Reactions
- 281
Maybe we can still salvage this... Going back to the beginning of all this, a poster commented that they wanted to ultimately get a job trading futures. Another poster responded suggesting they try IG markets (who only do CFD's, not futures). T/H stepped in and pointed out that if you want a job trading futures you should practice on real futures. Then you asked why.
Since then T/H has given you some good info and has gone over the same point a number of times trying to clarify it for you. In the end he realized that most of what he was saying is too advanced for your current level. He then gave you a suggestion on where you should start. I don't think the "ego maniac" comment was necessary.
He wasn't saying that you specifically need to be trading futures, he didn't even know what your goals were at the time. He was just saying that if someone wanted to get a job trading futures then trading CFD's won't be much help.
Think of futures and CFD's as being two different ways of trading the same instrument. Futures being the real market and CFD's being a made up market that is based on the real market. If you were to trade CFD's you would probably trade small, making or losing less than $10 for every point the market moves. At this size, the CFD provider will generally accept the price you attempt to trade at. So when you hit the buy button you immediately get filled at that price. Now, lets imagine you develop skills reading the market and become successful trading for $1 a point CFD's. Could you take this same strategy to the real futures market and still make a profit? No, maybe not. In the real market you don't get your buy order filled unless there are enough sellers at that price to fill your buy order. Add to that the fact that the exchange may be in another country, so there will be some lag in your order being submitted to market. Also add the fact that if you're trading futures you'll be trading much larger size. If trading as a professional working for a prop shop then you could be trading $250 a tick rather than the less than $10 you were in CFD's. This all means that you may get filled at a different price to what you expected, or maybe not filled at all. This "slippage" can drastically change the profitability of your system.
So as T/H says, if you want a job trading futures, you need to practice trading futures. If you just want to make some money on your own personal account, then maybe (just maybe) CFD's are ok for you. But all this is irrelevant in the very beginning. Before you even think about trading you need to know that you have a method that will work. Once you have that you can then learn all about futures vs CFD's and decide for yourself what suits your method best. The fact that you are currently trading shares makes the whole futures vs CFD debate even less relevant.
The conversation quickly changed to position sizing when it became obvious that you haven't learned about it yet. Risk management should be the fist thing you learn. I see Barny has cleared up the leverage issue for you.
Trembling Hand
Can be found on the bid
- Joined
- 10 June 2007
- Posts
- 8,852
- Reactions
- 204
Thanks Lone Wolf thats a nice summery of how we got here.
Iro I wasn't being insulting or not trying to be, just trying to point you to where you need to start.
Iro I wasn't being insulting or not trying to be, just trying to point you to where you need to start.
tech/a
No Ordinary Duck
- Joined
- 14 October 2004
- Posts
- 20,400
- Reactions
- 6,317
Well I didn't take my Valium for breakfast.
Sick of newbs asking for guidance
Getting it
Discarding it
Then attacking those who don't
Fall in line with their pre conceived ideas
Of " how it is "
Why put in the effort( I ask myself ) in the first place?
Egg shells/rice paper/wax on wax off.
- Joined
- 22 November 2010
- Posts
- 3,661
- Reactions
- 9
- Joined
- 30 June 2008
- Posts
- 15,357
- Reactions
- 7,232
Spot on Burglar. A question asked by one person is often relevant to many others.
- Joined
- 12 January 2008
- Posts
- 7,169
- Reactions
- 17,744
Asking the question about what type of instrument to trade shows how little that person understands about trading. It's difficult to reply sensibly because we know nothing about the prospective trader's resources (knowledge, capital and available time to trade). At times this difficulty leads to frustrated replies. Prospective traders need to evaluate their own position first.
A common example: I work full time so the only available time to trade is in the evenings (Aust). I have $3000 starting capital and I am prepared to use this to start trading and if I lose most of it I will not be in any financial difficulty. I have read a few trading books by Bedford, Guppy, Van Tharp, Weinstein, Williams (Larry and Tom). Where do I start? What do I do next? What sort of account should I open?
My reply: You may trade ASX shares using EOD data but $3000 is not enough to start doing this as the brokerage costs as a % of each trade is too high and you don't have enough to open an account with a wholesale broker (like IB). You only develop trading skills by trading and you will not complete many trades in a year trading ASX stocks using EOD data. The leverage of cfds will allow you to complete many more trades with your low starting capital. Cfds are also available in a range of other markets like indicies, currencies, commodities. Many of these cfd markets are linked to markets that are open in the Aust evenings. Trading these markets will provide many more opportunities and this will help develop your trading skills quicker if you keep good records of each trade. IMO you don't have enough capital to start trading futures as the exchanges require a margin to open a trade. Some brokers offer reduced day trading margins but your starting capital may be too small to open an account.
You first goal is to learn as much as you can about the markets you prefer to trade. Your second goal is to formulate a trading plan that will allow you to trade consistently and more importantly to keep your starting capital intact for as long as it takes for you to develop the skills to trade profitably. Most people never develop these skills. You will have to work hardest on yourself to improve. Thirdly, find a market type (indicies, currencies, commodities, equities) that you prefer and a robust strategy and learn to master it. Once you have doubled your starting account three times you will understand that you do have an edge and know how you created it. (Be prepared for this stage to take 1 - 3 years. You are starting a new career).
A common example: I work full time so the only available time to trade is in the evenings (Aust). I have $3000 starting capital and I am prepared to use this to start trading and if I lose most of it I will not be in any financial difficulty. I have read a few trading books by Bedford, Guppy, Van Tharp, Weinstein, Williams (Larry and Tom). Where do I start? What do I do next? What sort of account should I open?
My reply: You may trade ASX shares using EOD data but $3000 is not enough to start doing this as the brokerage costs as a % of each trade is too high and you don't have enough to open an account with a wholesale broker (like IB). You only develop trading skills by trading and you will not complete many trades in a year trading ASX stocks using EOD data. The leverage of cfds will allow you to complete many more trades with your low starting capital. Cfds are also available in a range of other markets like indicies, currencies, commodities. Many of these cfd markets are linked to markets that are open in the Aust evenings. Trading these markets will provide many more opportunities and this will help develop your trading skills quicker if you keep good records of each trade. IMO you don't have enough capital to start trading futures as the exchanges require a margin to open a trade. Some brokers offer reduced day trading margins but your starting capital may be too small to open an account.
You first goal is to learn as much as you can about the markets you prefer to trade. Your second goal is to formulate a trading plan that will allow you to trade consistently and more importantly to keep your starting capital intact for as long as it takes for you to develop the skills to trade profitably. Most people never develop these skills. You will have to work hardest on yourself to improve. Thirdly, find a market type (indicies, currencies, commodities, equities) that you prefer and a robust strategy and learn to master it. Once you have doubled your starting account three times you will understand that you do have an edge and know how you created it. (Be prepared for this stage to take 1 - 3 years. You are starting a new career).
- Joined
- 22 August 2008
- Posts
- 914
- Reactions
- 20
Gee you go on holidays....
Iro I hope that your questions were answered. I'd have to agree that an understanding of positional sizing methods would be mandatory if you would like to trade professionally.
It might be worthwhile if I detailed out an example of a positional sizing method. Would all the newbies like this?
Sir O
Definite yes from me. It is a topic I have been reading up on for a bit but would love to see how you would summarise.
Also, thanks for your continued support to this thread. It has been extremely helpful so far.
AlanGreenspan
Likes false Prophets
- Joined
- 3 April 2012
- Posts
- 7
- Reactions
- 0
Guys, feel free to call me stupid (i am a noob) but if the share price for a stock is the bare minimum at 0.001 and goes upto 0.002 your investment has been doubled? or is it multiplied by whatever when it gets to 1 cent (0.010)?
- Joined
- 17 August 2006
- Posts
- 7,739
- Reactions
- 8,332
AG, If you were able to buy at 1 cent and sell at 2, you would indeed double your money (less brokerage costs)
The theory is fine but the practice is not so straight forward ..... The stock below is a 1 cent stock. For you to buy the stock at 1 cent, you must place your order in the queue.
ie. You will get only get your order filled after the orders controlling the 129 million shares in front of you are filled ....... could take a while, and bear in mind orders are purged from the queue after a month, so you would have to go to the back of the queue.
Even you were able to purchase the stock at 1 cent, you would then need to place your sell order in the queue behind the 146 million other sellers at 2 cents .... same problems as above!
There are times when you can "jump the queue" in the opening and closing auctions, but you will need to be both nimble and "lucky" to get your orders filled at a premium to market. Cheers
Attachments
tech/a
No Ordinary Duck
- Joined
- 14 October 2004
- Posts
- 20,400
- Reactions
- 6,317
Got it Barney
Decimal point has moved in your chart!
Decimal point has moved in your chart!
- Joined
- 17 August 2006
- Posts
- 7,739
- Reactions
- 8,332
Ah yes ...... Value of TNR is one tenth of a cent not one cent .... sorry for any confusion.
So AG, my explanation still works, but when I said 1 cent and 2 cents I meant the 0.001 and 0.002 cents you were asking about.
I blame sleep deprivation ... forex is murder on my sleeping habits
- Joined
- 22 November 2010
- Posts
- 3,661
- Reactions
- 9
Hi AG,
Your investment has doubled in gross value. But then subtract brokerage, subtract tax and any other miscellaneous costs (Internet, newspapers, magazines, ...etc.)
You may well want .010 after taking all that into account!
- Joined
- 22 November 2010
- Posts
- 3,661
- Reactions
- 9
AlanGreenspan
Likes false Prophets
- Joined
- 3 April 2012
- Posts
- 7
- Reactions
- 0
Ah yes ...... Value of TNR is one tenth of a cent not one cent .... sorry for any confusion.
So AG, my explanation still works, but when I said 1 cent and 2 cents I meant the 0.001 and 0.002 cents you were asking about.
I blame sleep deprivation ... forex is murder on my sleeping habits
bit of late reply but many thanks for the explanation barney!
Love your work
yeah, thats a good point, still gotta get my head around the tax part too, as complicated as the taxation system is. When taking into account all the material ive been buying and researching with i think ill need a 10 bagger to break even.
- Joined
- 22 August 2008
- Posts
- 914
- Reactions
- 20
OK Time for a lesson on....
Position Sizing Methods
Just what the hell is this thing called positional sizing and why is it so important? On numerous occasions I've seen posters on here state "Go learn about position sizing, stop losses and money management" to newbies. It's a bit lazy to say that and in fact I'm guilty of it myself. The reason being is that there are several methods of position sizing...and depending upon what you are trying to do in your investments, some are better than others. Hopefully this will help you get your head around some of the types of position sizing and the issues involved.
Investopedia definition....
"The dollar value being invested into a particular security by an investor. An investor's account size and risk tolerance should be taken into account when determining appropriate position sizing."
So basically how much of my account am I going to be putting into any investment? As you can see position sizing is one of the methods of how we manage and minimise our investing risk...in other words how we skew the numbers in our favour to give us the "best" risk/reward profile.
The first step to determine what kind of position sizing to use is somewhat of a negative question. It is, How much am I prepared to lose if I get it wrong? This will be a very personal question and one also correlated to the kind of investing instrument we are using. This is the risk part of the risk/reward profile of the investment.
An ordinary equity position, in say BHP, perhaps we are prepared to lose 10% of our investment. So in a $100,000 investment we've stated the dollar figure of the risk we are prepared to take, $10,000. What's the potential reward? This is always a difficult question to put a number around as the correct response for any investor is "as much as the investment will allow me to make". If we took our hundred thousand dollar BHP investment purchased on the 18th of July 2003, we would have paid $9.25 for our BHP and still be in it at $36.30. If we'd made our investment on 16th of May 2008, we would have paid $50.00 a share and incurred our stated 10% loss on the 30th of May, 11 trade days later and still be down by 27.4% on our investment had we held. We'd have effectively taken a smaller loss that we would otherwise have made, limiting our downside risk. We have executed a stop loss by exiting the trade on the 30th of May. We have limited our downside potential and structured a way in which we can let our correct decision have significant benefits.
This is the heart of any kind of position sizing, minimise the risk associated with losing investments and allow the successful investments to build wealth and/or income. The method above is the simplest type of position sizing. For the majority of long-term and new investors this is as complex as it gets. Obviously diversification comes into play here. Depending on your risk profile you might be comfortable in a single large investment, or the idea may be very uncomfortable for you. It's an established part of finance that diversification lowers specific types of risk, so instead of $100,000 into BHP, the investment is spread across a number of equity positions to lower the specific stock risk and achieve a level of return in line with the market. The stop loss principle applies across all the equity positions.
Now take the same investment but use a CFD (Contract for Difference) where we have only put 5% of the entire investment out of our own equity. This investment exposes us to significant leveraging risk and the risk of a call on the position. Our risk of ruin (losing the entire portion of equity contributed to the investment) is significantly greater, but our overall level of return is also significantly greater. This investment has a significantly higher risk/reward profile. Is the same kind of position sizing appropriate? Hopefully you can see that a simple approach might not be the most suitable when dealing with a different risk/reward profile. Lets now take a look at some of the methods that can be used when dealing with risk/reward profiles.
Fixed Fractional Position Sizing
The idea behind fixed fractional position sizing is that you base the number of contracts or shares on the risk of the trade. IE the risk you are prepared to take. Fixed fractional position sizing is also known as fixed risk position sizing because it risks the same percentage or fraction of account equity on each trade. Note the use of the word equity here, not investment. This is a method that is employed when using leverage. For example, you might risk 2% of your account equity on each trade. 2% is chosen because of the "2% rule". It means that if you only risk 2% of your equity on any one position, you need to get 50 losing trades in a row to blow your entire account. Statistically even if you randomly selected 50 shares in the market the chances of getting 50 wrong in a row is a highly unlikely.
The risk of a trade is defined as the dollar amount that the trade would lose per contract if it were a loss. Commonly, the trade risk is taken as the size of the money management stop applied, if any, to each trade. IE the 10% used in the exmple above.
The equation for the number of contracts in fixed fractional position sizing is as follows:
N = f * Equity/| Trade Risk |
where N is the number of contracts, f is the fixed fraction (a number between 0% and 100%), Equity is the current value of account equity, and Trade Risk is the risk of the trade for which the number of contracts is being computed.
Fixed fractional position sizing has been written about extensively by Ralph Vince. See, for example, his book "Portfolio Management Formulas."
Fixed Fractional isn't the only type of position sizing method, but I'm going to pause here because I almost lost this entire post and want to make sure I don't lose it. More to come on the topic.
Cheers
Sir O
Position Sizing Methods
Just what the hell is this thing called positional sizing and why is it so important? On numerous occasions I've seen posters on here state "Go learn about position sizing, stop losses and money management" to newbies. It's a bit lazy to say that and in fact I'm guilty of it myself. The reason being is that there are several methods of position sizing...and depending upon what you are trying to do in your investments, some are better than others. Hopefully this will help you get your head around some of the types of position sizing and the issues involved.
Investopedia definition....
"The dollar value being invested into a particular security by an investor. An investor's account size and risk tolerance should be taken into account when determining appropriate position sizing."
So basically how much of my account am I going to be putting into any investment? As you can see position sizing is one of the methods of how we manage and minimise our investing risk...in other words how we skew the numbers in our favour to give us the "best" risk/reward profile.
The first step to determine what kind of position sizing to use is somewhat of a negative question. It is, How much am I prepared to lose if I get it wrong? This will be a very personal question and one also correlated to the kind of investing instrument we are using. This is the risk part of the risk/reward profile of the investment.
An ordinary equity position, in say BHP, perhaps we are prepared to lose 10% of our investment. So in a $100,000 investment we've stated the dollar figure of the risk we are prepared to take, $10,000. What's the potential reward? This is always a difficult question to put a number around as the correct response for any investor is "as much as the investment will allow me to make". If we took our hundred thousand dollar BHP investment purchased on the 18th of July 2003, we would have paid $9.25 for our BHP and still be in it at $36.30. If we'd made our investment on 16th of May 2008, we would have paid $50.00 a share and incurred our stated 10% loss on the 30th of May, 11 trade days later and still be down by 27.4% on our investment had we held. We'd have effectively taken a smaller loss that we would otherwise have made, limiting our downside risk. We have executed a stop loss by exiting the trade on the 30th of May. We have limited our downside potential and structured a way in which we can let our correct decision have significant benefits.
This is the heart of any kind of position sizing, minimise the risk associated with losing investments and allow the successful investments to build wealth and/or income. The method above is the simplest type of position sizing. For the majority of long-term and new investors this is as complex as it gets. Obviously diversification comes into play here. Depending on your risk profile you might be comfortable in a single large investment, or the idea may be very uncomfortable for you. It's an established part of finance that diversification lowers specific types of risk, so instead of $100,000 into BHP, the investment is spread across a number of equity positions to lower the specific stock risk and achieve a level of return in line with the market. The stop loss principle applies across all the equity positions.
Now take the same investment but use a CFD (Contract for Difference) where we have only put 5% of the entire investment out of our own equity. This investment exposes us to significant leveraging risk and the risk of a call on the position. Our risk of ruin (losing the entire portion of equity contributed to the investment) is significantly greater, but our overall level of return is also significantly greater. This investment has a significantly higher risk/reward profile. Is the same kind of position sizing appropriate? Hopefully you can see that a simple approach might not be the most suitable when dealing with a different risk/reward profile. Lets now take a look at some of the methods that can be used when dealing with risk/reward profiles.
Fixed Fractional Position Sizing
The idea behind fixed fractional position sizing is that you base the number of contracts or shares on the risk of the trade. IE the risk you are prepared to take. Fixed fractional position sizing is also known as fixed risk position sizing because it risks the same percentage or fraction of account equity on each trade. Note the use of the word equity here, not investment. This is a method that is employed when using leverage. For example, you might risk 2% of your account equity on each trade. 2% is chosen because of the "2% rule". It means that if you only risk 2% of your equity on any one position, you need to get 50 losing trades in a row to blow your entire account. Statistically even if you randomly selected 50 shares in the market the chances of getting 50 wrong in a row is a highly unlikely.
The risk of a trade is defined as the dollar amount that the trade would lose per contract if it were a loss. Commonly, the trade risk is taken as the size of the money management stop applied, if any, to each trade. IE the 10% used in the exmple above.
The equation for the number of contracts in fixed fractional position sizing is as follows:
N = f * Equity/| Trade Risk |
where N is the number of contracts, f is the fixed fraction (a number between 0% and 100%), Equity is the current value of account equity, and Trade Risk is the risk of the trade for which the number of contracts is being computed.
Fixed fractional position sizing has been written about extensively by Ralph Vince. See, for example, his book "Portfolio Management Formulas."
Fixed Fractional isn't the only type of position sizing method, but I'm going to pause here because I almost lost this entire post and want to make sure I don't lose it. More to come on the topic.
Cheers
Sir O
- Joined
- 28 March 2006
- Posts
- 3,554
- Reactions
- 1,283
Excellent Sir O 
