FOUNDATION 1 - Having a Good Understanding of what you're doing
If you sat on a retail brokerage desk for a month (or in a spread betting office) you would be amazed at just how much money is lost by clients simply not knowing what they are doing.
How can someone who knows nothing about spread betting read an 800 page article in the Investors Chronicle magazine over the weekend, open an account the following week and then expect the profits to start flowing almost straight away? But this is what happens time and time again.
Ask experienced money makers in this game if they find it easy to crank out the profits and well over 90% will moan and groan about just how hard it is. It's a definite fact that making money over time in the markets is no easy endeavour. Also many people new to the markets make the fatal mistake of thinking that because they are successful in their present line of business they can easily and quickly transplant this success into trading. This is not so for most people because it's likely they know exactly what they're doing in their present business, all the ins and outs, all the tricks, aware of the scams etc and similar information regarding the financial markets can't be learned in a short period of time.
In trading there are so many things to learn such as;
- the different types of orders
- how and when to place them
- what stop losses are and how they really work
- the characteristics of the individual markets
- the actual cost of doing business
- is the 'tax-free' advantage of spread betting really such an advantage
- the list can literally go on and on and on
Critical and important information such as this cannot be learnt quickly because not only do the questions that need to be asked change, so do the answers.
So if you want to give yourself the best chance of making money in the financial markets then you must have an excellent understanding of exactly what you're doing. Take note that other market participants who'll be trading against you will know exactly the ins and outs of these products and financial instruments.
A Sensible Way to Combat Point One is with a Twofold Attack
1) Open an account with a broker and deposit a small fraction of the money you're eventually going to allocate.
For example if you have £5000 to play with in the spread betting arena then open an account with £250 and get trading. It doesn't really matter what you do in the markets because this experience will be at least 50% of your education. And if you lose the lot it's immaterial because it's only 5% of your potential account.
In fact losing when you first start out is most probably more beneficial than making money! The reason is twofold, firstly you tend to learn from your mistakes and secondly it quickly shows you that making money was perhaps not as easy as you first thought. So when you've got the hang of the things, how to enter orders, the characteristics of the markets etc, you can allocate some real money to the account.
2) Try to attend some free or cost effective (no more than £250 for the whole day) trading lectures or seminars. Beware of the heavily promoted seminars that try and promise you financial freedom (*tip: look on www.ebay.com to see how much the courses that initially cost up to £2000 are now going for). Also sign up for free trading simulators to test out your trading ideas and level of understanding.
Most of the spread betting firms offer free or discounted seminars alongside the CFD brokers as well. Another advantage of going to lectures/seminars is that you'll meet like minded people to swap ideas and talk with. Also take time to read some of the excellent trading/investing internet message boards for help, ideas and tips. Two very good ones are discussed on Page 4 of this newsletter. Note that there is a big difference between message boards that talk about ideas, books, systems and the like and those that tip and hype stocks.
Foundation 1 Summary
Losing money on individual trades because you get the market direction wrong is part of the game, it happens to everyone and there is little one can do to get around this problem. But losing money or not making the maximum amount of money on any given trade because you didn't fully understand what was going on or how the product works is simply not acceptable. As an estimate we would state that at least 30% of new clients suffer losses, and sometime horrendous losses due to their lack of education and experience within the markets as a whole or the products they're trading.
So if making money is not an easy endeavour, don't make it even harder by not knowing the ground rules.
