Mistakes Of The Newbie Trader
The LearnMoney website has long stressed the importance of trading with small position size when first starting out. For example say you have £1,000 or even £100,000 to allocate to spread betting, risk only a maximum of 10% for the first 3-6 months.
It was therefore reassuring to see on a recent internet message board a thread labelled 'Top 3 Mistakes Newbies Make' and that the first two posts stated the following;
First Post
- Size (meaning too large a position)
- Size
- Size
Second Post
- Jump in unprepared
- Overtrade (meaning looking to trade all the time)
- Size
All of them actually relate to each other but position size is certainly the most dominant especially when you're dealing with leveraged products such as spread bets, CFDs, Options and futures etc. The 'Jump in unprepared' point also relates to what we were saying back in the January 2005 with the 'Three Main Foundations of Successful Trading and Investing' article.
In the Jan newsletter point one was 'Have a good understanding of what you're doing, what you're trading in and how the financial instruments really work'. What it means is simple, a lot of money is lost by people not knowing what they're doing or how the actual markets work and products really work.
The trouble is with these kinds of points is that they never change. People made the same mistakes in the markets 200 years ago and the majority will make them 200 years in the future.
Not long ago if you wanted to trade leveraged products one could only trade the big futures contracts but now with both spread betting and CFDs the smallest trades can be executed with no problems. Also many of the spread betting companies notably Capital Spreads and City Index offer dummy trading accounts with which to practise.
These are massive advantages not available to the trader or investor of yesteryear. So if you're just starting out keep the majority of your powder dry and only trade with a small amount of capital for the first few months.
China & Commodities
We all know that China has a massive appetite for commodities but the chart below shows just how perfectly correlated this relation has now become in the first few years of this century versus last. If you believe that the Chinese economy is only going one way over the next 5-20 years AND recognise that many commodities are still bumbling around multi-year lows ALONGSIDE commodities being very cyclical then it might not be a bad decision to actively allocate money to this sector. Realise though that commodities are very volatile and can easily fall by 10-20% in a week so long term investors who can ride out storms while looking at the bigger picture may generate superior returns over the next decade or so.
But remember the Chinese stockmarket chart we posted back in December 2004 because although many pundits are raving about the country you wouldn't think so by looking at its stockmarket performance. But like the commodities for those with a long term horizon of at least 5 years if not 10-20 drip feeding a monthly deposit into a Chinese stockmarket fund looks like a sensible plan. Also if you're especially interested in investing in China and the Far East you're well advised to subscribe to Marc Faber's excellent newsletter the Gloom, Doom & Boom Report. He's one of the best western analysts based in the region.
From the chart performance above you can well imagine that investors in the general Chinese stockmarket must be getting very frustrated indeed. It's almost impossible to find any economic commentator not lauding the Chinese growth and money making potential. But 'where is the money' is no doubt a question that investors are asking because all they seem to have is losses over a multi-year period.
Perhaps the answer to making money lies not in the overall index but with individual shares or certain sectors. And this is where someone like Marc Faber can help a lot.
