How to start trading

When you’re starting out trading the financial markets, you should approach it much like you’d
approach the launch of a business.

Trading the markets is just like running a business - the goal is to earn revenue but, even more
importantly, to make sure that your revenue exceeds costs. In the case of trading, revenues are the
highly sought-after winning trades, while costs are generally comprised of the losing trades that occur in
market speculation. The difference between revenues and costs is the all-important net profit.

To become a successful long-term trader, it’s vital to establish good habits from the outset. These habits
can assist towards the accomplishment of two goals:

Goal one - Achieve positive net profit over any given time period

Goal two - Increase positive net profit as the business grows

What can help you achieve these trading goals?

For one, before getting into any trade, you should know and quantify your exit strategy, especially your
downside risk.

Before you enter into any position, you should know exactly where the ‘point of pain’ resides: where the
trade must be cut in order to preserve financial health and the integrity of your trading account.
Constantly allowing losing trades to go beyond this point is a recipe for failure.

Another habit exhibited by many good traders involves position-sizing. For every trade, a proper
position size should be predetermined according to the size of your trading account. This can contribute
to controlling and quantifying your risk.

Obviously, a £10,000 trading account requires different position sizes than a £1,000,000 trading account.
But, with any account size, it can help you avoid large losses if your positions are prudently and
proportionally sized.

Many good traders also have a habit of not rushing into trades. Trading opportunities should be weighed
and considered carefully.
This means that before any trade is entered, a detailed trading plan should be created and adhered to.
Traders shouldn’t enter into any trades randomly or haphazardly, based on the emotions of excitement,
greed, or fear.

There should always be rational reasons for getting into and out of market positions. The fact that a
market is rapidly moving in one direction or another may not constitute a rational reason for getting into
a trade.

Five key things to remember when you start trading

1. Trade with the prevailing trend

Consider taking the path of least resistance and go with the flow of the current market.

2. Establish a detailed strategy for entering and exiting trades

A detailed strategy defines parameters for getting into and out of trades so that there’s no ambiguity.

3. Watch your downside risk and be prepared to act decisively to control that risk

Make sure that you’re disciplined enough in preserving your trading account so that you can live to
trade another day.

4. Trade with reason, not emotion

Human emotions (excitement, greed, fear) don’t usually lend themselves well to good trading.

5. Avoid trading right around scheduled news events

Trading can become more like gambling around the time of news events, where prices may move
drastically within short periods of time. This can exclude the average trader from participating in these
moves.

These are some of the more important habits that you should pay attention to, especially when just
beginning to trade the markets. But there are other habits to consider developing, including trading with
the prevailing trend and running profits while cutting losses. However, the habits mentioned above will
help you build a prudent mind-set.

Ready to take your learning up a notch?

Trading Academy mentor James Chen has created a six-part webinar series on how to become a trader.
Creating a trading plan

Creating a solid trading plan is one of the keys to becoming a successful trader.

Taking the time to think through and write down all the aspects of trading in a comprehensive plan,
which includes the specific trading strategies you’re going to employ, can help you avoid ambiguity and
potentially negative trading behaviours.

A plan for trading is similar to a plan for any other business. It’s essential to ensure that you stick to a
well thought-out and tested approach to growing the business while minimising your risk.

Your trading plan should cover all of the most important aspects of the trading process. At the very
least, this should include:

 Amount of starting capital

 The primary markets and instruments you plan to trade

 Position size, margin, and leverage to be used

 Monetary value per point of each market movement

 Maximum percentage of total trading capital risked on each trade

 Reward-to-risk ratio target

 Realistic daily, weekly and monthly profit goals

 Specific daily, weekly and monthly loss limits (the point of monetary loss at which you
should stop trading for a given period)

 Specific trade entry criteria according to the tested trading strategy

 Specific trade exit criteria (stop losses, profit limits, trailing stops and/or manual exits)
according to the tested trading strategy

 Methods for managing open trades (trailing stop losses and multi-position entries and
exits, among others)
As a part of this plan, you should also keep a detailed journal of every single trade you place, so that you
can carry out an on-going assessment of exactly how well you’re following your trading plan.

This journal should include specific reasons (according to the strategy used) for each and every trade
entry and exit, the amount of profit or loss realised on each closed trade, and the percentage of the
total account equity that each profit or loss represents.

Having the discipline to create a comprehensive trading plan and keep a detailed trading journal allows
you to use this vital information to discern what exactly is working, what’s not working, and what needs
to be tweaked to be more successful in the future.

Without a comprehensive trading plan and trade journal, you may find yourself making blind stabs at
the market that won’t add anything constructive to your growth or improvement.

The practice of following a plan and recording the results can make average traders into progressively
better traders.

Managing your risk

Managing risk is one of the most important aspects of successful trading. It’s impossible for traders to
know exactly how a price will move at any given time.

But, what you can do is take full advantage of the times when you’re right, and attempt to minimise risk
as much as possible for the times when you’re wrong.

A goal is to target longevity when trading so that your account will survive to trade another day.

There are three main things to keep in mind when you’re planning your risk management and we’ll look
at each of them in turn:

 Stop losses (mental versus hard)

 Position sizing

 Reward/risk ratios

Stop Losses

a) Hard stop loss

A stop loss is designed to do exactly what the term suggests; it takes you out of a trading position at a
certain pre-determined point when the position has a negative value. The most common form of stop-
loss is the “hard” stop loss, where the trading platform is pre-configured to close a position at a specific
price level where the position would show a loss.

Using hard stop losses is an extremely important aspect of risk management as it allows you to clearly
define your risk for every trade. Stop losses should be placed according to market conditions and should
strike a balance between being too close to the market price and too far.

Stop losses can also be moved during the course of an open trade in order to lock-in or break even on
any profits that may have been made.

However, stop losses should only be moved in the direction of the trade, and not in the opposite
direction. Moving stop losses in the opposite direction of a trade can potentially leave you with
substantially larger losses.

b) Mental stop loss

Another kind of stop loss is called a ‘mental’ stop loss. It’s not really a stop loss at all. It simply consists of
a trader telling themself that a position should be manually closed at a certain point of pain. If the trader
lacks the discipline to act upon a mental stop loss, however, trading losses could potentially grow very
quickly on a losing trade.

Mental stop losses only work if you have enough discipline to close your losing position when the
predetermined price is reached, which can be tough for even the most experienced traders.

Position sizing

Besides the use of hard stop losses, trade positions should also be sized prudently. The amount of
market points risked - as defined by a position’s stop loss - combined with the size of the position,
dictates the actual financial risk you’re taking on that position.

Generally, risk on any single trade should not exceed a maximum of 5-10% of the trading account’s total
equity. Professional traders may risk significantly less than 10% on each trade.

Reward/risk ratio

The reward/risk ratio is another important thing to think about in your risk-management.

Reward/risk ratios vary according to the type of trading strategy you use as well as the particular market
traded.

In general, however, it’s not a good idea to have a ratio below 1:1, because the risk outweighs the
potential reward. If this is the case, then the number of winning trades must exceed the number of
losing trades in order for you to achieve net profitability.
On the other hand, the more that potential reward outweighs risk, the fewer winning trades you’ll need
in order to achieve net profitability.

There are successful traders that have a low win percentage but are still profitable due to their high
reward/risk ratio. At the same time, it should be kept in mind that traders with higher reward/risk ratios
generally have lower win percentages, while traders with lower reward/risk ratios generally have higher
win ratios (if all other variables are the same).

So, to recap, these five risk-management techniques should be part of your risk-management
strategy:

1. Use hard stop losses instead of mental stop losses, especially if you lack the discipline to act on your
mental stop loss.

2. Do not allow the monetary risk on any one trade to exceed a maximum of 10% of your total account
equity.

3. Look at moving your stop losses in the direction of an open trade in order to lock-in any potential
profits.

4. Target a reward/risk ratio greater than 1:1 so your potential reward exceeds the risk on each trade.

5. Diversify your risk exposure by trading non-correlated markets, i.e. markets whose price movements
are not related or not impacted by the same events.

How to trade stocks - the beginner’s guide to stock trading

In this article, we look to cover some basics of stock trading, and demonstrate the different approaches
and strategies traders use when deciding what position to take.

We'll also show you why CFD trading and spread betting is a unique and cost-effective alternative to
traditional shares trading, and how it could help you maximise your trading potential.

How stock trading works

A firm's share price typically moves in three ways; up (if a company is performing well), down (if a
company is underperforming) or sideways (if investors are unsure how the company will perform in the
future). What traders seek to do from the movement of share prices is attempt to predict where they
will head to next and profit from this prediction.

For example, at the end of December 2000, Marks and Spencer's share price was valued at 187p.
Investing £10,000 in Marks and Spencer would have gotten you approximately 5,348 shares in the
company.

Fast forward to 27th April 2007, and Marks and Spencer's share price peaked to 759p. That means your
5,348 shares are now worth £40,591.32 - a profit of over £30,000.

However, timing your trading decisions are absolutely crucial as Marks and Spencer's share price then
slid to 386.75p a share in the year by 15th January 2008, which would have reduced the value of your
holding to £20,683, around half its value from a mere nine months earlier.

Knowing when to sell your stock is just as integral as knowing when to buy and its crucial decisions like
these which will determine how much profit or loss you'll make trading shares.

In traditional shares dealing, you would have to pay your broker the total of the value of the shares you
wish to purchase. So, 5,348 shares in Marks and Spencer in December 2000 would have cost you around
£10,000 up front. You would also have had to pay a small commission charge for the trade, which varies
from broker to broker.

Spread betting and CFD trading

The reason that spread betting and CFD trading are an attractive alternative to physical shares trading is
because it allows you to take a position on the share price without paying the full value up front.

So, with City Index, you only have to deposit a small percentage of the total trade value to maintain the
same level of exposure.

Let's go back to the Marks and Spencer example. If we charge a margin rate for M&S of 4% of the total
value, you would only need to deposit £400.03 (5,348 x 187p x 4%) for the same £10k exposure. This
means that your investment capital can go much further than it could with conventional trading and
your potential returns when compared to your initial investment amount are also much greater.
However, this also means that should prices not move in the way you expect, you could also lose more
than you invested, which is why risk management is a crucial part to long term successful trading.

There are a few key things to remember when you spread bet or trade CFDs. Firstly, you don't actually
own the shares as you would with buying stocks - you're simply speculating on the price movement of
that share. Secondly, because spread betting is a leveraged product, your profits and losses are
magnified, so please be aware of the risks involved. Thirdly; you can profit from falling markets as well
as rising ones, which is explained in more detail below.

Ability to profit from falling markets as well as rising

One of the most unique aspects of spread betting and CFD trading is the fact that you are able to profit
from falling markets as well as rising. This gives you complete trading flexibility to take advantage of any
market movement, be it up or down.

If you believe a share price will rise in value, you 'buy' or go long and you'll profit from every increase in
prices above your opening level. Alternatively, you'll lose for every price fall below your open level.

If you believe a share price will fall in value, you 'sell' or go short and you'll profit from every fall in price
below your opening level. Alternatively, you'll lose for every price increase above your open level.

For example, if you believe that Facebook's current value is overpriced, and you expect it to fall to a
more reasonable level over the coming days, you can go short and 'sell' Facebook shares at a price of
$76.50. (Please note that this price is accurate at the time of writing, but is subject to market volatility.)
For every cent or dollar that the value of Facebook's share price decreases, you earn a profit.

You cannot do this when trading shares physically.

Trading stocks with City Index

As a leveraged product, you can use spread betting or CFD trading to make your investment capital go
further, but you must make sure you are aware of the risks involved.
  No capital gains tax or stamp duty*

 No commission to pay when spread betting - just the dealing spread

 Take advantage of falling and rising share prices

 You can use spread betting and CFDs to fit your strategy, with varied levels of risk

 You can access global shares with over 10,000 markets to choose from

When spread betting or trading CFDs on shares, there are a number of ways to approach evaluation
before investing.

Choosing which shares to trade

Which stocks you trade on is going to depend on a number of different factors, including your level of
experience, how much capital you have available, your trading plan, and the analysis you employ.

Fundamental analysis and technical analysis are the two main methodologies when it comes to trading
the financial markets.

Essentially, fundamental analysts look at a number of factors, known as fundamentals, to help them
understand whether current share prices undervalue or overvalue a company. In financial terms, a
fundamental analysis attempts to measure a company's intrinsic value using information on the
company's balance sheet, cash flow statement, income statement and many other factors.

Fundamental analysis approaches the company much in the same way as property investors go about
purchasing a property - you would look into certain factors before you made your decision. You would
look at its foundations, schools in the area, crime rate and value growth potential to help you decide
whether it's a property worth buying.

In this approach, trading decisions can be easy to make - if the price of a stock trades below its intrinsic
value, it could be a buy trade potential. On the other hand, if the price of a stock is trading well above its
intrinsic value, it could be a sell trade potential.

Here are some terms that you may come across concerning fundamental analysis of a stock:

The fundamental approach:

 Balance sheet: Also known as the statement of financial condition, the balance sheet is a
summary of a company's assets, liabilities, and owners' equity

 Earnings: Net income for the company during a period - usually divided into four financial
quarters

 Management team: The people who administer a company, create policies, and provide the
support necessary to implement the owners' business objectives
  Market share: Also known as market penetration, this is used in the context of general equities,
and refers to the percentage of trading volume in a stock that a particular market maker trades

 Mergers/acquisitions: Acquisition in which all assets and liabilities are absorbed by the buyer -
but more generally, any combination of two companies

 P/E ratio: This is the current stock price divided by annual earnings per share

 Revenue outlook: Also known as revenue forecasting or market outlook, this is a calculation of
the amount of money a company will receive from sales during a particular period

Technical analysis, on the other hand, looks at the historical price movement and price activity of a
share and uses this data to predict its future activity. Technicians believe that the fundamentals of a
company are already built into the company's share price, so they believe all the information they need
about a stock can be found in its charts. One of the key beliefs of market technicians is that history tends
to repeat itself.

Here are some terms that you may come across concerning technical analysis of a stock:

The technical approach:

 Trends: The general direction of the market (up, down or sideways)

 Support levels: Refers to a price level where buyers have historically emerged, typically giving
support to prices as a result. A market tends to stop falling because there is more demand than
supply, and can be identified on a technical basis by seeing where the stock has bottomed out in
the past

 Resistance levels: Refers to a price level which is supposedly difficult for a market to rise above
and has historically seen sellers emerge, pushing prices lower as a result. This is a ceiling which
technical analysis notes persistent selling of a commodity or security
  52-week high/low range: The highest and lowest prices that a stock has traded at during the
previous year. Many traders view the 52-week high or low as an important factor in determining
a stock's current value and predicting future price movement

 Moving average: This is the average stock price over a certain period of time - this can be as
short as a few days or as long as several years

Technical vs. fundamental

When you start shaping your trading strategy, you might wonder whether fundamental or technical
analysis is best for you when entering new positions. While many consider the approaches to be polar
opposite, there's also an argument that the two can co-exist, meaning that you employ both methods
when considering your next move.

As with many things, there is not one correct answer. There are pros and cons to both approaches, but
what's really important is that you find the philosophy that best works you. It's up to you to apply your
education and your research to your own strategy.

In the meantime, however, here are some key differences between the two approaches that may help
you decide which is best suited for you:

Time-frame

Fundamental analysis takes a relatively longer-term approach to analysing the market compared to
technical analysis. Looking at data from a number of years, fundamental analysis is more commonly
used by long-term investors, as it helps them accurately select stocks that will increase in value over
time.

Technical analysis takes a comparatively short-term approach to analysing the market, and can be used
in a time frame of weeks, days, or even minutes. Technical analysis is used more commonly by day
traders, whose philosophy is to select assets that can be sold to someone else to a higher price in the
short term.

Sources

Fundamental analysts use data from economic reports, news events, and industry statistics. They'll
often compare current news events against historical events, and report expectations against actual
outcomes.

Technical analysts use data from analysing charts, and utilise trends, support and resistance levels, and
price patterns.

Top-down vs. bottom-up

You may also be familiar with the terms 'top-down' and 'bottom-up' as additional approaches to trading.
A top-down investor involves looking at the big picture. Investors use this approach to look at the
economy, and try to forecast which industry has the greatest potential for big returns and value growth.
For example, using the top down approach, you may decide that a certain industry or sector is going to
benefit from current economic factors, so you can choose to trade within that industry. An example of
this may have been investing in the mobile tech and chipmaker sector over the past decade, which has
seen tremendous growth as a result of the popularity of smartphones and tablet devices.

A bottom-up investor overlooks these economic conditions and seeks strong companies with good
prospects, regardless of industry of macroeconomic factors. A bottom-up investor will use fundamental
analysis to evaluate a company; such as p/e ratios, earnings growth, etc.

Top down investing is a global approach that doesn't just limit itself just to looking at the markets, but
also takes political aspects into consideration. Seasoned market watchers and professionals take a
bottom-up approach which just looks at assets. For an individual investor, a 'top down' investor is
probably the more logical approach.

Geopolitical aspects

Politics plays a huge part in affecting stocks and shares. The market is sensitive to all types of
geopolitical events - for example, the sliding price of oil in 2014 has affected the profits and thus the
market value of major global companies around the world.

Geopolitical factors for 2015:

 The price of crude oil

 China's economic slowdown

 Eurozone economic stagnation

 Greek exit risk

 Japan deflation/stimulus/hyperinflation

 Russia/Ukraine

 Syria/ISIS/Middle East

 UK general election
Read on for more 2015 market predictions.

View from the floor: Ken Odeluga, market analyst at City Index

Now we've set the scene for our deliberations about the market, we can drill down further to make an
assessment of the specific market (or markets) we're interested in.

Ken Odeluga is a market analyst with over 13 years' experience in reporting and analysing on the
financial markets. He has a wealth of experience and specialises in the indices and equities markets.
Here, we ask Ken for some general guidelines when it comes to approaching trading strategy.

How do you go about picking which stocks to trade?

I usually take a 'top-down' approach combined with technical analysis. I look to hold for at least a couple
of months and as much as several years, so perhaps that categorises me as more of an 'investor' rather
than a trader.

But for short-term situations, I will primarily rely on a wide assessment of news and very probable
momentum using technical analysis. I'll use indicators like Moving Average Convergence Divergence
(MACD), Stochastic, Percentage Price Oscillator and others.

Do you prefer to go long or short?

I prefer buying and holding over a period of months or years rather than selling stocks. Still, like most
involved in the market in some way, going short can provide a quicker thrill than a steady long-term
investment, and sometimes that temptation is difficult to resist.

What was your best stock pick of 2014?

My best pick for 2014 was Activision Blizzard Inc (ATVI).

What was your worst?

Poundland (PLND) was a dud! I bought in March quite soon after its IPO and it's still down on a net basis
despite a bounce since January.

How do you analyse your stocks?

For the sake of simplicity let's think about the near to medium-term outlook for the UK's FTSE 100.

We've seen a FTSE 100 whose recent gains have taken it 71 points away from its best closing level ever,
on a weekly basis, whilst its companies report only moderately successful quarters.

The transatlantic context is an S&P 500 that is performing well in earnings terms, although admittedly, a
significant portion of these corporate earnings are being reinvested in the stock market itself - which
should be born in mind in considering the US market's strength.

As for US share prices, it's fair to say there's been a broad, if moderate, retreat.

In conjunction with the approaching FTSE 100's all-time high and pause in the rise of the US benchmark,
we might decide a cautious undertone would become more obvious in sentiment over UK blue-chip
stocks for the medium term.

We can try to take into account the extent of weight investors would press on the market from the over-
arching influences of (still) weak crude oil demand, falling consumer prices, caution ahead of the UK's
general election, and uncertainty in the stagnant Eurozone economy from current negotiations between
Greece and the EU.

In such a scenario, the index might remain largely within its current range for the year-to-date.

Which stocks suit this scenario?

Following our exercise to its logical conclusion we would then decide which segments of our chosen
market(s) to focus on for interest, either on the short side or long side.

My current view undoubtedly lends itself to a more 'defensive' stance over the time-frame we are
considering, and therefore sectors regarded as having such properties make sense.

Financial firms and healthcare companies tend to be traditional defensive sectors, although there are
many factors that can modify such basic assumptions in context, and these would need to be born in
mind.

Still, my FTSE 100 choice to buy might well veer more towards blue-chip bank stocks like HSBC and
Barclays, asset managers and commercial real estate firms like Aberdeen Asset Management and Land
Securities.

If I'm looking to go short or to reduce existing holdings, those segments traditionally regarded as more
risky, or 'high-growth' ought to come under our scrutiny.
The telecom and technology mainstays like BT Group and Vodafone, ARM Holdings, and Sky, should be
considered in this respect.

A nod to current conditions that modify customary assumptions makes sense because these may widen
or narrow the list of companies which, for instance, one can regard as being 'higher-risk'.

A good example of such changes in the last year has been Britain's supermarket sector which has
suffered severely, sending its stocks to multi-year lows.

Expressing a negative view on erstwhile blue-chip stocks like Tesco and Marks & Spencer would be a
context-specific decision that would have made less sense for the average investor in years past.

You can read more about Ken's views and analysis via our market analysis section.

Navigating Periods of Stock Market Volatility

"Stocks take an escalator on the way up and an elevator on the way down"

This trading cliché inevitably gets trotted out in periods of stock market volatility. Stated differently, the
quote means bull markets tend to rise gradually and consistently (like an escalator) while bear markets
are characterised by sudden, vertical drops (like an elevator).

The recent price action in the U.S. stock market clearly illustrates this phenomenon. After experiencing a
drop of nearly 20% in Q3 2011, the widely-watched S&P 500 index went nearly four years without
experiencing even a 10% pullback (on a closing basis), the longest such streak since 2007 and the third
longest since 1950; we saw a similarly strong rally in the correlated Dow Jones Industrial Average.

That all changed abruptly when the calendar flipped to August 2015. Collapsing oil prices, fears about a
slowdown in China (the world’s second-largest economy) and concern about a crisis in emerging
markets has led to broad-based selling in stocks. Since retesting its all-time high above 2130 in mid-July
2015, the S&P 500 has dropped an intraday low of 1834 in a little over a month, creating nearly a 14%
peak-to-trough intraday pullback so far. In other words, it’s clear that stock market volatility is back, and
this increased volatility is creating a variety of trading opportunities in different markets.

How Stock market volatility impacts the FX market

In addition to driving global stock markets lower, the recent bout of global risk aversion has spilled over
into the forex market. In environments like this, higher-yielding “risk” currencies, like the Australian and
New Zealand dollars, often fall while lower-yielding “safe haven” currencies, like the Japanese yen and
Swiss franc, tend to benefit.

The chart below shows the recent correlation between the Australian dollar/Japanese yen currency pair
(AUD/JPY) and the popular Dow Jones Industrial Average (DJIA) of U.S. stocks:

Source: City Index. Note that there is no guarantee this correlation will persist in the future.

China: the epicenter of the current volatility

The current epicenter of the global economic concerns is China, which is showing signs of slowing down
after decades of strong growth. Therefore, some traders might want to go to the eye of the storm and
focus on trading that theme. China’s government has recently loosened some of the restrictions on
trading the renminbi (CNY or CNH), but many FX traders prefer to focus on trading the currencies of
China-dependent economies. In that vein, currencies like the aforementioned Australian and New
Zealand dollars, as well as other Southeast Asian currencies and the South African rand, may offer the
best trading opportunities.
For instance, USD/ZAR is testing its all-time high near 13.75 as of writing. While the pair could see a
short-term pause off this resistance level, the longer-term bullish channel remains intact as long as rates
hold above about 12.00. Meanwhile, the secondary indicators are also painting a supportive picture,
with the MACD trending higher above its signal line and the “0” level and the RSI holding in a bullish
range above 50. Given the bullish long-term fundamental and technical catalysts, traders may consider
fading near-term dips in USD/ZAR in order to take advantage of a strong trend that is independent of
the major global stock markets.

Source: City Index

And what about EUR/USD?

Meanwhile, the world’s most widely traded currency pair, EUR/USD, has been a surprise beneficiary of
the recent market turmoil. That’s because, up until recently, many traders were confident that the
Federal Reserve would raise interest rates in its September monetary policy meeting, whereas the
European Central Bank (ECB) is at least a year from even considering normalising its monetary policy.
Therefore, it became a consensus trade to sell EUR/USD in an attempt to front-run the Fed’s “inevitable”
interest rate hike later this year.

Now, the global market turmoil has forced all of these traders to run for the exits at the same time,
driving EUR/USD up nearly 1200 pips from its 12-year low to trade at a high above 1.1700 thus far.
When and if the present fear in the market fades, the divergence between monetary policy in Europe
and the US could prompt EUR/USD to resume its downtrend, but as long as anxiety is elevated, EUR/USD
may hold on to its counterintuitive strength.

How else can traders take advantage of volatile stock markets?

Beyond the forex market, there are many other ways to play the recent stock market volatility. Most
obviously, traders could simply embrace the volatility and trade CFDs on individual equities and indices.
However, it’s important to recognise that these instruments may see larger and faster moves than
traders have grown accustomed to over the last several years. One tool that traders can use to help
navigate volatile markets is the Bollinger Bands indicator.

Basically, Bollinger Bands plot standard deviations above and below a moving average, and they are
often used to identify overbought or oversold markets. Assuming a normal distribution, price “should”
stay within between the upper and lower Bollinger Bands about 95% of the time using a the default two
standard deviation setting for the bands. Volatility tends to come in waves, so market prices don’t
necessarily follow a normal distribution, but a move beyond the upper or lower Bollinger Band still
highlights an extreme movement in the underlying instrument that may be more likely to reverse.

Traders can also use the width of the Bollinger Bands, or the distance between the upper and lower
bands, to measure volatility. The width tends to contract in periods of low volatility (as the standard
deviation falls) and expands in periods of high volatility (as the standard deviation rises). Given the
tendency for volatility to come in waves, a contraction in the Bollinger Band width is often followed by
period of higher volatility and a corresponding large move in price.
Source: City Index

As the above chart shows, the Bollinger Band width on the FTSE index has expanded dramatically of late,
signaling a big outbreak of volatility. A trader who had become accustomed to using certain set stop
losses and profit targets in low volatility conditions would likely need to modify his strategy in the high-
volatility periods following these events. For instance, it may be prudent to reduce the size of each
position and use wider stop losses to accommodate the potential for larger moves on a day-to-day basis.

Whither commodities?

Beyond stocks and forex, commodities can also present attractive opportunities amidst highly volatile
markets. As a general rule of thumb, growth-dependent commodities like oil, copper, and other base
metals often underperform in volatile, risk-off markets. This theme is playing out in spades with the
most recent outbreak of volatility: Crude oil (both the WTI and Brent contracts) and copper are both
hitting their lowest levels since the Great Financial Crisis of 2007-2008.
On the other side of the coin, gold tends to benefit amidst global economic uncertainty and volatility.
The yellow metal is seen as a safe haven given its long history as a store of value. Traders who anticipate
the current volatile market conditions to linger may want to consider the merits of gold, though any
attendant strength in the value of the US dollar could serve as a headwind for the metal.

Of course, there are many ways to take advantage of the recent outbreak in stock market volatility
beyond just these few examples. Traders are encouraged to identify their own correlations and stay
tuned to City Index for daily updates throughout the current bout of market volatility and beyond. Even
when the stock market eventually stabilises, traders can still keep their eyes out for opportunities to
take advantage of technical patterns, fundamental trends, and country-specific announcements.

Remember, all traders incur losses from time to time. The most successful traders stick to their
strategies and employ the technical, fundamental and risk-management tools at their disposal to try to
ensure that their potential profits outweigh their losses.

Fundamental analysis

Many traders carry out fundamental analysis on the strengths and weaknesses of a particular market to
assess whether it might appreciate (rise) or depreciate (fall) in the future.

Through our trading platforms, you can access multiple tools and resources to help you analyse your
market of choice, including indices, forex pairs, shares and more.

What is fundamental analysis?

Unlike technical analysis, which looks purely at price action and trends, fundamental analysis takes on a
much more rigorous assessment of an asset, such as a commodity or currency.

Looking particularly at the forex markets, fundamental analysts look at key elements that are likely to
have a bearing on the strength or weakness of a particular currency, such as economic data, political
factors and even the impact of natural disasters.

For example, in property investment, you might buy a house on expectations that its price should rise in
value because it’s in a high-growth area. A fundamental analyst however, would look at its foundations,
insulation, history, the surrounding schools and scope for improvements before deciding to invest.
It’s similar for fundamental analysts, when trading the financial markets, they use every piece of
available data to help them gauge the strength of a particular asset.

For example, fundamental analysts pay particular attention to the release of key economic data and
reports such as unemployment and GDP data, interest rate announcements and production data to
determine the future direction of a currency's price movement whilst share traders would look at
earnings reports.

Key factors of fundamental analysis

Company earnings

Company earnings form a crucial part of fundamentally analysing whether a current share price is
undervalued or overvalued.

Fundamental analysts can also get guidance on profit projections from earnings reports while looking at
key contributing elements to the bottom line, and then use this information to ascertain whether a
company could outperform or underperform in their future earnings.

Natural disasters

Natural disasters, such as flooding, hurricanes and tsunamis can have a major impact on the
fundamental strength and weakness of an asset.

For example, the 2010 tsunami in Japan had a debilitating impact on the region's manufacturing sector,
which caused significant disruption to the production of mobile technology and automakers. At the
same time, the tsunami also increased expensive insurance claims, which weighed on the balance sheets
of major insurance firms.

Economic growth and output

The key indicator of economic growth is Gross Domestic Product (GDP), which calculates the sum of
goods and services produced within the country. It’s one of the most important indicators of economic
growth and output, which tells us about the economic strength and performance of the country.

Inflation

Key indicator 1: Consumer Price Index (CPI) measures the change of the average price of goods and
services paid by consumers. It’s a major indicator adopted by governments for inflation targets and has
a significant impact on setting interest rates.

Key indicator 2: Producer Price Index (PPI) measures the changes in the price of goods and services at
the producers’ level.

Interest rates
Interest rates have a direct impact on currency rates. The demand on the currency with a higher yielding
interest rate is often greater than the one with a lower interest rate.

International trade

As the demand for goods and services from a particular country increases, demand for the country’s
currency also goes up. This means the value of the currency will appreciate (rise).

Political situation

Political crisis and uncertainty in a country often have a negative impact on the demand for the
currency. When a country is politically unstable, investors’ confidence in its economy tends to decrease.

Fiscal policies

Fiscal policies, such as budget planning, government spending and taxation encourage or discourage
productivity and spending in the economy, and therefore have a major impact on the currency markets.

Monetary policy

The monetary policy adopted by Central Banks has a big influence on the near-term demand for
currencies.

If, for example, the Bank of England adopts a hawkish monetary policy, this indicates that interest rates
are set to rise and may increase the demand for the pound sterling, which could therefore appreciate as
a result. (Hawks generally favour using relatively high interest rates to help keep inflation in check.)

Options trading strategies

Strangles, straddles and covered calls are popular strategies with options traders. At City Index, we offer
options on our indices, currencies and commodities markets.

Strategy 1: Strangle

Long strangle (buying a strangle)

Short strangles involve the sale of a low strike put option and a high strike call option on the same
underlying security with the same expiry dates.
Short strangles are popular with option traders, because they allow you to potentially profit when
market volatility is low and in a range-bound market.

However, your profits are limited to the premium of the strangle and losses are potentially unlimited.

Short strangle (selling a strangle)

Long strangles are created by purchasing a low-strike put option and a high-strike call option on the
same underlying security with the same expiry dates.

A trader who owns a strangle can profit if the market is volatile and moves by more than a certain
amount in either direction.

The profit is potentially unlimited, the maximum loss is known at the time the trade is executed and will
be equal to the total premium paid for the two options.

Example of a short strangle (with a spread bet)

Let’s imagine you:

Sell a UK 100 Dec 6000 put option at a price of 90 for £10 per point.

Sell a UK 100 Dec 7000 call option at a price of 45 for £10 per point.

Best-case scenario: If the UK 100 expires between 6000 and 7000 on the expiry date, you could make a
profit of £1,350 (90 x £10 + 45 x £10).

Break-even points: You’ll break even if the UK 100 expires at 5865 (90 + 45 points below 6000) or at
7135 (90 + 45 points above 7000) on the expiry date.

Worst-case scenario: If the UK 100 falls well below 5865 or rallies well above 7135, your loss will be
equal to £10 for every point that the UK 100 expires below 5865 or above 7135.

For example, if the UK 100 expires at 5700, your loss will be £1,650 ([6000 - 5700] x £10 per point - [90 +
45] x £10 per point).

If you’re trading CFDs, 1 CFD = £1 per point, therefore 10 CFDs = £10 per point.

Strategy 2: Straddle

A straddle is similar to a strangle, except the strikes of the call and put options are the same.

Short straddle (selling a straddle)

A short straddle is the sale of both a put and a call option on the same underlying security with the same
strike prices and the same expiry dates.
Typically, this strategy is used by traders to profit in low volatility markets. Positions can be closed
before the expiry date.

You could make a profit at expiry if the market stays within a range based on the premium received
from the straddle. But profits are limited to the premium of the straddle and losses are potentially
unlimited.

An investor might sell a straddle in a range-bound market or if he expects a market to stay at current
levels.

Long straddle (buying a straddle)

A long straddle is created by purchasing a put and a call option on the same underlying security with the
same strike prices and expiry dates.

Typically, an investor will buy a straddle if he thinks the market will be volatile.

You would make a profit if the underlying price moves, either up or down, by more than the premium
you paid for the strategy.

Profits from being long a straddle are potentially unlimited. Losses are limited to the premium paid for
the two options and so the straddle has what’s known as ‘limited risk’.

Example of a long straddle (on a spread bet)

Let’s say you:

Buy a UK 100 Dec 6500 put at 220 for £10 per point.

Buy a UK 100 Dec 6500 call at 200 for £10 per point.

Best-case scenario: If the UK 100 falls well below 6080 or rallies well above 6920, your profit will be
equal to £10 for every point that the UK 100 expires below 6080 or above 6920.

Break-even points: You’ll break even if the UK 100 expires at 6080 (220+200 points below 6500) or at
6920 (220+200 points above 6500) on the expiry date.

Worst-case scenario: If the UK 100 expires at 6500 on the expiry date, your loss will be limited to £4,200
(220 x £10 + 200 x £10).

If you’re trading CFDs, 1 CFD = £1 per point, therefore 10 CFDs = £10 per point.

Strategy 3: Covered call

This is a strategy where you already own the underlying instrument. If you believe the underlying
instrument will stay the same, or you’re happy to sell it if the price increases, then you could sell a call
option against it.
If the price of the underlying instrument stays the same or increases, the covered call strategy will give
you a profit equal to the premium (price x stake) of the call option.

At the same time, if the underlying instrument falls in price, you won’t lose as much as you would have
done if you hadn’t sold the call option.

Example of a covered call (spread bet)

Let's say you currently own £100 per point of BP from 400p.

You sell a BP Mar 420p call option at a price of 25 for £100 per point.

If BP were to expire around 400p in March, you’d make £2,500 (25 x £100) more than you would have if
you hadn't sold the call.

If by expiry BP settles above 420p, you’d make a profit of £4,500.

If BP were to settle at 420p in March, you’d make £4,500 (420-400 x £100 = £2,000 profit from the
underlying BP position. 25 x £100 = £2,500 profit from the call option).

If by expiry BP has fallen, you’d make a loss. However the loss would be £2,500 less than the amount
you’d lose if you hadn't sold the call option.

If BP were to fall only a tiny amount by expiry, to say 380p, you would still make a £500 profit (£2,500
profit from the call option. £2,000 loss on the underlying BP position).

If you’re trading CFDs, 1 CFD = £1 per point (equivalent to 100 shares), therefore 100 CFDs = £100 per
point (this is equivalent to 10,000 shares).

Running profits

Get to grips with maximising your gains by running your profits and you’ll have mastered one of the key
aspects of successful trading. Without the ability to run profits, a good risk-management plan can be
meaningless.

If a trader is able to cut risk well but can only achieve very small relative profits, it’s extremely difficult to
get ahead and become net profitable.

Using a risk/reward ratio

Generally speaking, you should keep your reward/risk ratio at least at 1:1, or even higher. The only
instance where a ratio of less than 1:1 can be used is when your winning trade ratio is extremely high.

When trying to run profits, it’s not always necessary to be excessive, especially when trading short-term
time frames. Keep in mind that the further that profits are run, the lower the overall win ratio tends to
be, if all other factors are kept constant.

In other words, when you’re targeting greater profits, you may hit your stop loss more often. This is
simply due to the element of probability. Achieving a close profit target is more likely than hitting a
distant profit target before the stop loss is hit. So, a 3:1 or 4:1 reward/risk ratio will generally result in
substantially fewer winning trades than a 1:1 or 2:1 ratio.

Actively managing open trades

One method of dealing with this probability element and to take some guesswork out of profit-targeting
is to actively manage open trades. This is an alternative to non-management of trades, where the entry,
stop loss and profit target are all pre-determined and set according to the trading plan, the tested
trading strategy, and the risk-management plan, which is also an acceptable approach.

If you choose to actively manage your open trades, there are several methods you can use, including
moving (or trailing) stop losses and scaling-in and scaling-out.

Moving stop losses

Moving, or trailing, stop losses involves shifting the initial stop-loss after a certain profit level is reached.
This is to help decrease potential losses and ultimately lock-in gains if the position moves into further
profit.

Stop losses should be moved in the direction of the trade, and not in the opposite direction of the trade.
For example, after opening a long position, the stop loss should only be moved to higher prices to lock-in
any gains and never to lower prices in an attempt to allow the position ‘more room’. Trying to do this
can open you up to large losses.

The first stop loss move is often to the break-even trade entry level after a certain profit is reached.

Some traders only move stop losses for specific reasons – for example, the price has reached another
plateau, or a new support/resistance level, or a consolidation pattern. It’s not usually a good idea to
simply trail the stop loss by a random number of points or pips, as this introduces a level of
unpredictability into the trade.

Here is one possible approach for moving a stop loss:

Scaling-in

Scaling-in, or adding additional positions as price moves in your favour, progressively increases
directional commitment as a trend develops. This technique is one of several tools used by longer-term
trend-followers, but might not be as suitable for very short-term trading. You should generally only
scale-in in conjunction with protecting profits on earlier positions and during strongly trending markets.

Scaling-out

Scaling-out, or progressively closing out portions of an open position in order to realise profits, protects
gains as price progresses in the trade’s favour.

To scale-out, you should consider entering a full trade at a certain price level according to your chosen
trading plan and strategy. Then, portions of the position can be closed for profit at increasingly greater
profit levels in order to potentially lock-in your gains.

If you use this strategy, two or three profit levels might be enough. The negative aspect of scaling-out is
that it can reduce your overall profit when you compare it to having just one take-profit level for the
entire position.
Technical analysis

As a spread bettor, CFD or forex trader, it’s important to have a trading strategy that helps you identify
profitable trades, maximise your profits, and cut your losses when a trade goes against you.

Technical analysis and fundamental analysis are two common trading techniques used by many traders
to analyse and trade the financial markets.

Technical analysts look at historical price data to forecast where price trends may move in the future
and attempt to speculate on these forecasts. Fundamental analysts, on the other hand, look for a more
rigid assessment of the core underlying factors that affect demand for an asset.

Most traders tend to categorise themselves into one of the three areas below when determining their
trading strategies:

Key beliefs of technical analysis

Technical analysis has risen strongly in popularity over the last five years and is actively used by traders
to spot possible future price trends using a multitude of charting tools and historical data.

One of the key beliefs of technical analysts is that history is likely to repeat itself.

Using hard stop losses is an extremely important aspect of risk management as it allows you to clearly
define your risk for every trade. Stop losses should be placed according to market conditions and should
strike a balance between being too close to the market price and too far.
 For example, for those choosing to trade forex – let’s say that the price of the EUR/USD historically saw
traders selling when prices neared the $1.5000 level (commonly referred to as a resistance level).
Technicians, or technical analysts, would use this historical trend to forecast that prices could face
selling pressure when they near the $1.5000 mark, and might decide to sell EUR/USD if prices get near
to $1.5000.

When looking at historical price trends through charts, most technical analysts would typically have
three key expectations in mind:

 Price discounts everything

 Prices move in trends

 History tends to repeat itself

Technical Analysis main tools


Technical analysts typically use a range of tools to analyse market prices. These tools include the
following:
Charting
A price chart plots a series of prices over a particular time period. The timescale is plotted on the
horizontal axis (x axis) whilst the price scale is on the vertical axis (y axis). Prices are plotted from left to
right on the x axis.
Charts are important for defining trends, finding suitable entry and exit points and looking for chart
patterns. A technical analyst would use charts as their main tool when looking for trading opportunities.
Line, open high low close (OHLC) and candlesticks are the most common charts used by technical
analysts.
Line chart
Line charts plot a line between a series of data points dictated by the settings used within the chart. For
example, if the settings dictates ‘closing prices’ and ‘daily’ then the chart will automatically draw a line
between each daily closing price. Line charts are a great way to get an instant visualisation of where
current prices are trending.
OHLC chart
The OHLC chart plots four pieces of information: open, high, low and close. By including both the opening
price and closing price, a trader can immediately see if the price has closed higher or lower than the
open.
The opening price is plotted on the left-hand side of a vertical bar, which represents the high and the low
of the trading range.
The close is plotted on the right-hand side of the vertical bar. OHLC charts are a good instant
representation of the typical price range for a specified period.
Candle chart
A candle chart contains the same information as the OHLC. However, candle charts are much more
visual and contain a ‘body’, which is the difference between the opening and closing price.
When the close is higher than the open price, the body is ‘hollow’. If the close is lower than the open, the
body is ‘filled’.
The thin lines above the body are referred to as the ‘shadows’ and are simply the high and low prices.
(All of these chart types are available to our clients. Simply open an account to access our powerful
charting tools.)
Timeframes
Charting is a useful form of looking back and seeing how a market price has performed over a specified
time period.
You can choose different timeframes to determine a trend over short, intermediate and longer-term time
periods, based on your personal trading style and strategy.
For example, if you’re looking to trade for a few days, you’re most likely to use either an hourly or daily
timeframe, rather than a yearly one.
Popular short-term timeframes usually range from five minutes to 60 minutes. If you wanted to hold
positions for more than a few hours, you might look at daily charts for an intermediate time frame, while
weekly and monthly charts would be used for your longer-term trades.
By utilising different timeframe charts, traders and analysts can look for support and resistance levels
where a security could find potential reversals.
Technical indicators
If you have a City Index account, you can benefit from access to our interactive live-pricing charting
package, which includes a range of powerful technical analysis tools.
Technical indicators plot a series of data based on price and/or volume. These indicators are used by
traders, along with additional information, to make informed trading decisions.
There are many different types of indicators available, which can be useful to provide signals for:
Trends – the current bias to which prices are trading (bullish/ bearish/ sideways).
Momentum – the strength of the current trend.
Divergences – when the price of a financial market and an indicator diverge in trend i.e. move in
opposing directions.
Reversals – when a price trend reverses.
Some indicators are useful in trending markets while others, referred to as oscillators, can be used in
range-bound markets to find overbought and oversold conditions, which can then be used to spot
potential price reversals.
There are many ways to use technical indicators and, if used sensibly, they can help you to make better
trading decisions.
Trading with technicals
In today’s fast-paced financial markets, finding trading opportunities and using chart patterns and
technical indicators are important. We offer you the ability to use powerful tools with a combination of
technical indicators and different charting styles to suit your needs across different time frames.
Open a City Index account or an MT4 account to take advantage of our sophisticated charting packages
and features.