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Traders in shares, indices, forex or commodities should always have a backdrop of basic rules, which revolve around going with the trend, limiting losses and good money management. In other papers, we have covered these items extensively, together with how to avoid mistakes and other important factors to watch when trading CFDs. There are, however, some commonsense rules that do not have to be applied to rigorously, but add another level of comfort within what can be a very stressful process.

A simple first rule – watch the cost

Market makers and other brokers are not stupid, and the setting of prices and spreads (or slippage) depends on several factors including time of the day, volatility and before and after news items. If you have a system that is not tailored to quick, intra-day moves, and your chosen timeframe is to look for results within anything up to a month, then minute by minute timing is less important than getting the overall picture correct.

On that basis you need to reduce your slippage costs as much as possible, so the time to place trades should be when the spreads are narrowest. After a while you should be used to the normal minimum spreads on most shares, and unless there is a pressing need to immediately deal (maybe on a profits warning or takeover news), then it pays to always ensure the spread is at the minimum before dealing.

This means not trading in the first few minutes of the trading day as buyers and sellers position themselves for the session. Sometimes the whole market may not only be marked down, for instance on a heavy fall in Far Eastern stocks overnight, but spreads might be wider because of the frenetic nature of early dealing. After a while though the spreads should usually return to normal, and you can deal more comfortably.

Example: You have a system that uses 3% targets and 2% stops, and say you normally buy and sell Royal Bank of Scotland shares with a minimum 1p spread, which represents a 0.05% or 5 basis point spread. From time to time the spread widens and can be as much as 5p after an outside event or early in the morning. This means that if applied to both sides of the trade, dealing on this wider spread would cost an additional 0.4% or 40 more basis points and effectively negates almost half of the edge of your system, which is fairly serious.

Moving on from this, it pays to stick to the biggest and most liquid stocks for the majority of your trading and this is a quick list of the leaders in the UK and which have the narrowest spreads:

Banks: Barclays, HBOS, HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered
Beverages: Diageo, SAB Miller
Food producers: Unilever
Food retailing: Tesco
Household Goods: Reckitt Benckiser
Insurance: Aviva, Prudential
Mining: Anglo American, BHP Billiton, Rio Tinto, Xstrata
Oils: BP, Royal Dutch Shell, BG Group

Pharmaceuticals: Astra Zeneca, Glaxo Smithkline
Telecoms: BT, Vodafone
Tobacco: BAT Industries
Utilities: National Grid

Rule 2: Get to know a few stocks very closely and increase your knowledge

Many market professionals focus on one area of the market, and some simply trade a handful or even just one issue, be it a particular commodity, Treasury bond or stockmarket index. You will probably find that you become accustomed to the ebbs and flows of certain shares, and if you feel you are on the boil with these companies, then you have an edge.

If you decide to focus on say ten UK shares, you should get to know their trading ranges, average daily volume, sentiment to their particular sector, previous support and resistance levels, the tone of previous management comments and when news is due.

Furthermore, it goes without saying that when trading commodity stocks including miners and oil companies, you need to be aware of movements in the price and direction of principal metals and crude oil. Because there are other factors in play when institutions buy or sell in the market, such as dividend payments, overall market action or takeover hopes, share price movements can sometimes lag a rise or fall in the underlying commodity, but this is very important to each company’s overall profitability. Likewise, overall retail sales figures are important to the retail sector, which is obvious, and the health of the housing market and interest rates affect financial stocks.

A couple of extra rules

The ‘trend is your friend’ is a valid theme throughout swing trading, but it pays to only go long when the price offers further upside potential, or there is another volume and/or candlestick signal, otherwise you risk buying at the top. The aim is to ride an established trend, so while it is OK to miss the first part of a move, you should not buy when a trend may be about to reverse.

Broker upgrades and newspaper tips are a waste of time, because they are usually already factored into the market by the time it is your turn to place a trade. Whilst some analysis can be excellent and thought provoking, the persons giving the advice may sometimes have a different agenda. Price and volume action is the key when trading, but of course for longer term decision making the fundamentals must be examined as well.

Source: Free Articles

Mike Estrey is the Head of Research for Blue Index, the Day Trading specialists in Contracts for Difference. Foreign Exchange Trading also forms part of their extensive services.

by Melanie

There's an important distinction between a supercycle for commodities and a supercycle for resources stocks.

With a heading like 'Resources mania or mining supercycle?', a small piece in issue 197/Apr 06 was always likely to polarise opinion, and sure enough we've received a number of emails disagreeing with the point of view we expressed (which leaned heavily towards the 'resources mania' side of the fence).

We have no difficulty with that, because it's different opinions that make a market and we're not afraid to voice our own. Subscribe to The Intelligent Investor for long enough and you're bound to disagree with us on something or other. But we'll do our best to explain our thinking, and a contrary viewpoint often helps to test one's own opinion.

It's also bound to be the case that the analysts at The Intelligent Investor don't agree on everything, and this is one of those areas. So, in the interests of balance, we thought it would be worth airing some other sides to the debate.

Crucial distinction

Firstly, let's get two very important definitions straight. We'll use the term 'commodity supercycle' to describe a large, sustained increase in the price of underlying raw commodities: crude oil, gold bullion, silver, iron ore, uranium etc. While commodities also include agricultural produce such as wheat, sugar, pork bellies and frozen orange juice, we'll just limit the discussion to something we collectively know more about: mineral commodities.

And we'll use the term 'resources stock supercycle' to refer to a situation where the BHP Billitons, Rio Tintos and Kicking Rocks NLs of the world experience large, sustained (perhaps decade-long) increases in the price of their shares. The difference between the two terms may seem so obvious as not to warrant a mention, but we frequently see the two being confused, and that might prove to be a costly mistake.

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By: Halston

The money to be made over the next several years in basic commodities is incalculable. You don't want to miss out on this upcoming market opportunity. We are in the midst of entering the next leg of the first major move in commodities in the past 30 years. Pretty much every market has made gains, consolidated, and is now ready to continue upwards. If past bull market history can shed any light on the current situation, prices of almost every commodity will probably take off to new all-time highs over the next two to three years. Here are my picks for the best trades for 2007:

1 - Gold
Keep buying it. In my opinion, the effective "floor" in the gold market, at least for the foreseeable future, is close to $550. After an initial run-up over the $600 an ounce level, the gold market went through a correction/consolidation phase, retracing about half the distance between $625 and $525. It is, as of this article, back up around the $630 level. Expect gold to take out its former all-time record, and move well above $1,000 an ounce. Between gold and silver, to date gold has been the market leader, which is why I would recommend it over silver. I would be floored myself to see gold fall back under $500 anytime soon--but I would not be surprised in the least to see the price of gold over $2,000 an ounce within the next 18 months.

2 - Cotton
Cotton has been, up to this point, a kind of "weak sister" in the overall bull market in basic commodity prices. Whenever it decides to join the flow of the overall market, I expect it to play catch-up very quickly. Currently, cotton is languishing around the 50-cent level, despite steadily growing export demands from China and India, and despite the fact that the cotton belt across the South still has not fully bounced back from the destruction of Hurricane Katrina. My prediction: cotton will double in price during the next 24 months.

3 - Wheat
Among the grains, wheat has revealed singular determination almost since the starting point of the current bull market. Even on days when USDA reports sent soybeans and corn tumbling down, wheat managed to push through. My long-term price target for wheat is $8-$10.

4 - Cocoa
Cocoa's performance has recently been in line with the gold market: for a few years it was stuck at the same price, but then in the most recent bull market, cocoa prices advanced up to the mid-$20s. They have since pulled back to $14-$15, but recent signals of prices hitting the floor mean a turnaround could be waiting just around the bend. As with nearly all other markets, I predict that cocoa will hit new highs during the second part of this bull market. If you hesitated to buy during cocoa's first run-up, don't miss out the second time around. Buy!

5 - The CRB Index
The CRB Index is the smartest way to benefit from gains across the entire commodities market, which now happens to be the most significant bull market we have seen. In the 1980s and 1990s, many people spent too much time searching for winning stocks. In those days, it was practically a free ride to Easy Street to buy into in the Dow Jones or S&P indexes. The CRB Index is the equivalent for commodities. Especially for wet-behind-the-ears investors, the CRB Index lets you benefit from all market momentum without having to specify a certain hot market and investment time. As in all markets, every commodity market can see-saw, but in general the market always moves up. We are in a bull market, after all.

The chance to win big in the commodity markets over the next 5 years is the single greatest investment opportunity that I have ever seen. I do not expect to see another one like it for at least five decades. Do not miss out on this chance to create a fortune that could take all your financial worries away, in the space of just a few years.

Article Source: http://www.kokkada.com

Halston Adams is an ex-broker who had the chance to emulate top traders, giving him the ability to explode his own $8,000 futures account into over $56,000 in 3 years. Find out more about his trading approach at: Futures Trading Secrets today.