Professional Documents
Culture Documents
I N T R O D U C E DB Y C E N T U R YF I N A N C I A LB R O K E R S D U B A I
It will only be possible to complete this section once the rest of the trading proposal has been nished. It will be a nal review of this question that will determine if the trade should be carried out or not.
Are there future fundamentals risks due in your time horizon what are they and when are they due?
If you are trading a stock, you should be aware of any potential Final, Interims or Quarterly Results, Trading Announcements, AGMs and ExDividend dates etc. Most rms will give advanced notice of nancial announcements but some news ow will come out without warning. It is equally important to be aware of some of the biggest economic gures due out across the world, from Ination gures and Interest rates to Non-Farm Payrolls and employment gures. These economic announcements can have a huge impact on current open positions and its best to be aware of them before the news is out. If a major data release is totally against your view and the market moves strongly against you, you need to have a plan B in place.
What are the recent support and resistance levels? How do they compare to your proposed entry point?
Most investors will choose to wait for the price action to trade near or through a recent signicant support or resistance level (signicant high or low) in order to get the best risk to reward ratio (how much you are risking compared to your potential reward). The further the price is trading away from these potentially critical levels, the bigger the potential downside risk. A difcult scenario is when a price is trading between two ranges, if this is the case it can be worth waiting for a more strategic price. Alternatively, you can reduce your position size to compensate.
What are your proposed stop loss and initial target price levels? What risk to reward ratio are you using?
Its a good idea to determine an exit strategy for both directions of your positions, whether it goes against you or in your favour. It would be reckless to invest without suitable risk management in place, one would be taking on unnecessary business risk that is hard to justify. Many investors utilise a 3:1 risk to reward ratio. For example, a risk of 1000 per trade would require a potential initial reward of 3000.
| Trading plan
Risk to reward ratios can be set using stop losses and take prot orders appropriately. Once a stop loss level has been selected, often a few percentage points away from a signicant support or resistance level, caution should be taken if you want to move it in the future. By moving your stop losses you can increase your potential losses. A common mistake is to run losses by moving stop losses if positions start to move in an adverse direction.
What percentage of you r total capital are you risking on this position, can you justify this?
Its never a good idea to risk large portions of your total capital on any one position, or to invest in multiple products that are all strongly correlated - if one drops in value, they could all follow suit. The percentage of your total capital at risk should be directly linked to the strength of your trading proposal, but remember, there are no guarantees that the market will do what is expected. Also consider unforeseeable fundamental events. The 9/11 attack is an example of an unforeseeable event that had a major impact on the markets.. There is rarely any prior warning surrounding such events; think about how you would react.
Have you checked your favourite technical indicators? Are there any conicting signals?
its advisable to gather further technical evidence that can back up your view on the potential direction of the product - remember to check for divergence (when a technical indicator is moving in the opposite direction to the price). Many investors like to check 21 and 55-period SMA, the RSI, MACD and Slow Stochastic, before taking a position. Overlaying a Fibonacci retracement can also be useful in helping you to identify additional potentially signicant price levels. The more technical evidence you have, the more condent you will feel about your position. Conicting signals are a business risk and should have an impact on the size.
What amount of margin do you plan to commit to this position and how does that compare to your total account balance in percentage terms?
Most investors would try not to commit more than 20% of their total account balance as margin on any one position. This kind of caution can stop over trading and keep additional capital free for other opportunities. When investing longer term, less nancing and more margin is recommended (this can help to keep nancing costs down). For shorter term trades, less than one week for example, making use of greater nancing can be useful as it leaves you more free equity to capitalise on the longer term, higher margin positions.
Are there any correlations that can impact your view i.e. Index, Dollar or Commodity focus?
If you were looking to invest in a UK mining stock, then you should also look at the UK100 index to see if its trend is expected to follow your view on the equity. Obviously commodity prices have an impact on mining stocks, so you could also check if their trends support the same view. Next, the strength of the US Dollar has a direct impact on commodity prices, as most are quoted in Dollars, does this have an impact on your trade proposal? There can be negative correlations to be aware of, for example, an increase in the price of West Texas Crude might have a negative impact on an airline stock you should always try to consider outside forces.
Why are you doing this trade? Remember to do this section last, once you have collated all your evidence.
There appears to be good fundamentals behind this index (great earnings session, Non Farm payroll gures were very positive and unemployment is falling) and the technical factors match up (nice uptrend and good entry point available). A decent risk/reward ratio seems possible, although could be slightly better. There is some risk of a short term pullback due to over bought markets but Im relatively happy with the rest of the set up.
| Trading plan
forecasts so far with two major rms having reported big gures already this afternoon.
What amount of margin do you plan to commit for this position and how does that compare to your total account balance in percentage terms?
Im planning on committing 20% of my available balance as margin to cover my position, this still leaves me additional funds for other opportunities.
Are there future fundamental risks due in your time horizon? What are they and when are they due?
There are 6 other major rm reporting earnings next week, 3 of them on Friday. They are expected to be at the top of analyst expectations. The US trade balance is due on Wednesday which is expected to show some improvements.
What are the recent support and resistance levels? How do they compare to your proposed entry point?
Support at 12900.00, resistance at 13321.00, entry at 12970.00, going long.
What are your proposed stop loss and initial target price levels? What risk reward ratio are you using?
Stop loss at 12850.00, target 13320.00 using a 2.7:1 risk reward ratio
Have you checked your favourite technical indicators? Are there any conicting signals?
The 55 period SMA seems to be providing support. As the US30 is trending, Im using the MACD, which is close to giving a bullish crossover signal. Used a Fibonacci Retracement, resistance seems capped by the 38.2% level. The RSI and Slow Stochastic are both in the middle of their ranges but not really used much in a trending market.
Are there any correlations that can impact your view i.e. Index, Dollar or Commodity focus?
Most global indices are following suit in the direction of my trend. Gold is dropping as investors move away from safe havens looking for better returns. US crude is also spiking indicating improved global economics.
What percentage of your total trading account are you risking on this trade, can you justify this?
Im risking 5% of my total trading capital on this trade, if I get stopped out. I am happy with this amount.
| Trading plan
The information is not to be regarded as an o er, a solicitation or an invitation to deal in any investment product or an advice or a recommendation with respect to any investment product, and does not have regard to the speci c investment objectives, nancial situation and particular needs of any speci c person. Margin trading involves the risk of sustaining substantial losses and are not suitable for all investors. You should independently consider the Information in the light of your investment objectives, nancial situation and particular needs and, where necessary, consult an independent nancial adviser before dealing in any investment product. Risk warning/disclosures and other important information are available at our website: www.centurybroker.com CFB does not warrant the accuracy, completeness, suitability, currency or reliability of the Information. CFB accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. It should not be assumed that any product evaluation or analysis techniques presented herein, if relied upon, will guarantee pro ts or gains or will not lead to losses. Any graph, chart or any device set out or referred to herein / presentation possesses inherent limitations and practical di culties with respect to its use, and cannot, in and of itself, be used to assist any person to determine and/or to decide which investment product to buy or sell, or when to buy or sell them. Past performance is not necessarily indicative of future performance, result or trend. CFB does not and shall not be deemed, and accepts no obligation, to provide advice or recommendation of any sort in relation to any investment product. CFB may or may have expressed views di erent from the Information and all views expressed are subject to change without notice. CFB reserves the right to act upon or use the Information at any time, including before its publication herein.
www.centurybroker.com