“Without these three rules, you can kiss your trading success goodbye”

by , 20 June 2018
“Without these three rules, you can kiss your trading success goodbye”
Q. “I want to manage my money correctly with every trade I take with Red Hot Storm Trader. Timon can you briefly tell me what your most important money management rules are when you trade?”
 
A. For the past decade, I’ve followed the same three rules to make sure I protect my portfolio from going bust and to maximize my profits.
 
Rule #1: Never risk any money you can't afford to lose.
 
(This way you’ll feel calm and focused when you trade)
 
Rule #2: Never risk more than 2% of your portfolio per trade no matter what market you’re trading.
 
(This way you’ll be able to take five to ten losing trades, when markets are bad, and only be down a fraction of your portfolio)
 
Rule #3: If ever you find your portfolio has lost more than 20% of what it was originally, stop trading live and go back to demo (paper) trading.
 
This way you’ll be able to review your strategy to see how you could have avoided this loss before you trade with real-money again.
 
These rules will not only save your portfolio from going bust, but will also bring you peace of mind with a game-plan knowing what you’re prepared to risk before you risk it. 
     
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Q. “I still don’t understand what margin means when Pickpocket Trader sends out a CFD trade. Could you explain it in layman terms for me using the Natural Gas trade example?”
 
A. The best way to understand margin is to think of putting down a deposit.
 
Your broker will expect you to put down a ‘deposit’ for Natural Gas, as collateral, to allow you to be exposed to a larger amount of Natural Gas contracts.
 
Here were some of the specifics for the Natural Gas trade. 
 
Entry= $2.91
Margin= 10% 
 
Please note: Each broker has their own margin requirements, which you’ll need to phone and find out.
 
First, we need to calculate what the margin (deposit) is for one Natural Gas CFD.
 
Margin per CFD=10% X $2.91
                       =$0.291
 
When you trade a commodity like Natural Gas, you can’t just buy one CFD. You’ll have to buy a standard but minimum contract of 100 CFDs. (Similar to how Single Stock Futures work).
 
We know that hypothetically, one Natural Gas CFD will need a margin deposit of $0.291. And so, the minimum margin for 100 Natural Gas CFDs is:
 
Margin per 100 CFDs=(Margin per one CFD X 100CFDs)
                                   =($0.291 X 100)
                                   =$29.10
 
Now we just take the dollar margin requirement and convert it into rands.
 
This will tell you exactly what the minimum margin “deposit” you’ll need to put down to be exposed to 100 Natural Gas CFDs.
 
At the moment the rand is at R13.00 for one dollar.
 
So, the initial margin (deposit) to be exposed to 100 Natural Gas CFDs is R378.30 (R13.00 X $29.10).
 
Q. “I understand when you invest in stock CFDs, you receive the dividend. How do I find companies that pay good dividends?”
 
A. Yes, when you get into a CFD with the underlying share about to pay a dividend, the dividend value is factored into the price. Most trading platforms only offer about 50 companies on which you can trade the CFD…
 
So the list is relatively small to start with, next you need to identify companies with a good track-record of paying dividends every year.
 
(You can find this information by going to Sharenet.co.za and search for the company).
 
When you’re at the website, look for companies that are looking to increase their dividend pay-outs.
 
Increasing dividends are positive signs for the company’s share price and from management as it’ll indicate there is growth and sustainability for the future.
 
Please note: “This next question is an intermediate technical trading question”
 
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Q. “I have added the Stochastic indicator, as per your article this week. I see the default parameters for the indicator are set at 8,3,3. What must I set the Stochastic indicator to, to see the buy setups you see on Barloworld?”
 
A. The default settings I use on the Stochastic indicator is 14,3,3.
 
Because the Stochastic indicator is based on moving averages, your 8,3,3 setting will show more volatility and noise, compared to if you set it to 14,3,3.
 
Add this indicator on the Barloworld weekly chart, and you will see the buy setups as per Once a year this stock gives away a ‘Free-money’ opportunity  - Don’t miss it
 
Always remember, “Wisdom yields Wealth” 
Timon Rossolimos,
Managing editor, Red Hot Storm Trader
 


“Without these three rules, you can kiss your trading success goodbye”
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