Global Financial Markets Trading

Financial Markets Trading, Forex Trading, Spread Betting, Ways to Trade

Understanding The Power of Financial Markets


A healthy understanding of the markets

 

Investing or trading in financial markets can be a powerful way to create wealth and generate regular income. However with this opportunity for potential wealth creation and massive income streams comes risk. It is therefore important to understand how the financial markets work and how best to invest whatever capital you are prepared to put at risk in the market.


Understanding the mechanics of risk and reward will help you plan trades. 


In simple terms risk is the amount of capital you are prepared to put in any given trade. This is the amount you could lose if the market moves against you.


Reward is the overall profit you could make if the market moves in your favour. Understanding risk and reward can help you look for trade 

opportunities where the potential reward is greater than risk in such a way that it gives the edge to be profitable overall over a given series of trades.


Understanding the Pros and Cons of Leverage


Leverage refers to the ability of a trader or investor to control (buy/sell) an exponentially greater value contract with only a fraction of the overall price. A small deposit called margin is paid to allow a trader to trade a much greater total value. However should the market move against the trader loses will be magnified and they may be required to fund their account to increase the margin. So leverage provides potential for magnified gains but there is also the risk of magnified losses attached to this potential.


Understanding the mechanics of risk and reward will help you plan trades


In simple terms risk is the amount of capital you are prepared to put in any given trade. This is the amount you could lose if the market moves against you. Reward is the overall profit you could make if the market moves in your favour. Understanding risk and reward can help you look for trade opportunities where the potential reward is greater than risk in such a way that it gives the edge to be profitable overall over a given series of trades.


Understanding the Pros and Cons of Leverage


Leverage refers to the ability of a trader or investor to control (buy/sell) an exponentially greater value contract with only a fraction of the overall price. A small deposit called margin is paid to allow a trader to trade a much greater total value. However should the market move against the trader loses will be magnified and they may be required to fund their account to increase the margin. So leverage provides potential for magnified gains but there is also the risk of magnified losses attached to this potential.

Below is an example of trading using The S&P 500 Futures Index:


The S&P 500 Index is the most widely used barometer for large-cap U.S. stocks. Day trading is not done using the cash index itself, but instead using a futures contract that closely follows movements in the Index. This futures contract, dubbed the E-mini S&P 500, is listed by CME Group, the largest futures and commodities exchange in the world. Each e-mini S&P contract is worth $50 multiplied by the index futures price. That means when the market is trading at 1275.00 that contract is worth 1275 x $50 or $63,750. So, for instance, if a day trader buys a September E-mini at 1275.00 and then sells it later in the day at 1278.00, then this would result in a profit of $150 (calculated as 3 points x $50 per point), minus fees and commissions. The minimum price fluctuation or "tick" is 0.25 points or $12.50.


Initial Futures Margin is the amount of money that is required to open a buy or sell position on a futures contract. Margin essentially acts as a good faith deposit demonstrating your financial ability to tolerate the risk of the trade - as well as cover any potential losses. Initial Futures Margin for the e-mini S&P is set by the CME Group and is currently $5000 per contract. Margin rates are sometimes updated or adjusted according to market volatility.


For every long or short position you have, a $5,000 (or in the case of day trading, considerably less) deposit enabling you to control of over twelve times that value. This means if the market moves against the position that you have taken you can lose far greater amounts than you have on margin. If your account dips below maintenance margin levels, you have to make an immediate deposit to bring it back to the required levels. If margin rates change while you have a position open, it is your responsibility to add funds to meet that level.


Consider the value per point and the size of the market being traded


If you are trading the e-mini S&P 500 contract, each point represents $50 and it only takes a 100 point move to get to that $5,000 margin level. Some days have smaller trading ranges, or a tighter point spread between the high price and low price. Other days might have extremely volatile trading where 20 points can be made or lost. 20 points is $1,000 per contract. In this instance if the market moved against by these 20 points, you would have to deposit a further $1,000 to bring your margin up to the required levels. The more you add to a contract, the greater the potential reward but potential losses are also magnified. It is therefore important to understand the bigger picture in terms of the risk being taken in every trade and how it’s going to be managed relative to the account size being traded.


Understanding risk will help you respect the market’s potential


It is easy to get carried away with the potentially glamorous parts of trading, but it pays to be aware of the real risks for every minute detail of a trade. I recommend planning every trade with these details in mind. I have specific targets for entry as well as profitable or losing exit strategies. Knowing when and where to pull the trigger every time is important whether the market it moving in my favor or against it. It helps me maintain a healthy respect for the power of the market, and keep me from letting my emotions dig me in too deep.


It is important not to only focus on the potentially huge rewards from trading in financial markets. The rewards and profit making objectives will only be achieved if one understands and appreciates the risks of every trade position taken. An understand of other aspects such as trading psychology and the risk to reward potential of any given strategy as well as the possibility of random outcomes in trading are essential for trading success.


The S&P 500 Index is the most widely used barometer for large-cap U.S. stocks. Day trading is not done using the cash index itself, but instead using a futures contract that closely follows movements in the Index. This futures contract, dubbed the E-mini S&P 500, is listed by CME Group, the largest futures and commodities exchange in the world. Each e-mini S&P contract is worth $50 multiplied by the index futures price. That means when the market is trading at 1275.00 that contract is worth 1275 x $50 or $63,750. So, for instance, if a day trader buys a September E-mini at 1275.00 and then sells it later in the day at 1278.00, then this would result in a profit of $150 (calculated as 3 points x $50 per point), minus fees and commissions. The minimum price fluctuation or "tick" is 0.25 points or $12.50.


Initial Futures Margin is the amount of money that is required to open a buy or sell position on a futures contract. Margin essentially acts as a good faith deposit demonstrating your financial ability to tolerate the risk of the trade - as well as cover any potential losses. Initial Futures Margin for the e-mini S&P is set by the CME Group and is currently $5000 per contract. Margin rates are sometimes updated or adjusted according to market volatility.


For every long or short position you have, a $5,000 (or in the case of day trading, considerably less) deposit enabling you to control of over twelve times that value. This means if the market moves against the position that you have taken you can lose far greater amounts than you have on margin. If your account dips below maintenance margin levels, you have to make an immediate deposit to bring it back to the required levels. If margin rates change while you have a position open, it is your responsibility to add funds to meet that level.

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Disclaimer – Futures, CFD, Margined Foreign Exchange trading, Warrants, Options and Spread Betting all carry a high level of risk to your capital. Only speculate with money you can afford to lose. Futures, CFD, Margined Foreign Exchange trading and Spread Betting may not be suitable for all customers, therefore ensure you fully understand the risks involved and seek independent financial advice if necessary. 


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