Ashish Gupta asked:


Insider Trading

Introduction – Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Insider trading takes place legally every day, when corporate insiders – officers, directors or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. In simple terms ‘insider trading’ buying or selling a security, in breach of a fiduciary duty or other relationship of trust, and confidence, while in possession of material, non-public information about the security

Thus , in nutshell , insider trading is the buying , selling or dealing in securities of a listed company by a director , member of management , employee of the company , or by any other person such as internal auditor , advisor , consultant , analyst etc, who has knowledge of material inside information which is not available to general public

Examples of insider trading -



Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

Government employees who learned of such information because of their employment by the government; and

Other persons who misappropriated, and took advantage of, confidential information from their employers.



Other persons who misappropriated, and took advantage of, confidential information from their employers.

Therefore, preventing such transactions is an important obligation for any capital market regulatory system, because insider trading undermines investor confidence in the fairness and integrity of the securities markets.

For instance, prior knowledge of a bonus issue would result in the insider acquiring a significant exposure in particular scrip, knowing that his holding would increase significantly after the bonus is announced.

The first country to tackle insider trading effectively however was the United States. In the USA, the Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to impose civil penalties in addition to criminal proceedings. Most countries have in place suitable legislation to curb the menace of insider trading.

In India, SEBI (Insider Trading) Regulations 1992, framed under Section 11 of the SEBI Act, 1992, are intended to prevent and curb the menace of insider trading in Securities. Now SEBI has with effect from 20th February 2002 amended these Regulations and rechristened them as SEBI 9 Prohibition of Insider Trading Regulation, 1992. These Regulation have been further amended in November 2002

Rational Behind Prohibition of Insider Trading

The smooth operation of the securities market and its healthy growth and development depends on a large extend on the quality and integrity of the market .Such a market can alone inspire confidence in investors

Insider trading leads to loose of confidence of investors in securities market as they feel that market is rigged and only the few, who have inside information get benefit and make profits from their investments. Thus, process of insider trading corrupts the ‘level playing field’

Hence the practice of insider trading is intended to be prohibited in order to sustain the investor’s confidence in the integrity of the security market.

In Samir C Arora Vs. SEBI

It was observed that activities like insider trading fraudulent trade practices and professional misconduct are absolutely detrimental to the interests of ordinary investors and are strongly deprecated under the SEBI Act, 1992 and the Regulations made there under. No punishment is too severe for those indulging such activities.

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly define the term “insider trading”. But it defines the terms-

. insider” or who is an “insider;

. who is a “connected person

. What are “price sensitive information”.

Insider -According to the Regulations “insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information;

Connected person – The Regulation defines that a “connected person” means any person who- (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or (ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company;

Price Sensitive Information means any information, which relates directly or indirectly to a company and which if published, is likely to materially affect the price of securities of company.

American insider trading law

The United States has been the leading country in prohibiting insider trading and the first country to tackle insider trading effectively. Thus it is important to discuss insider trading in American perspective. While Congress gave us the mandate to protect investors and keep our markets free from fraud, it has been our jurists, albeit at the urging of the Commission and the United States Department of Justice, who have played the largest role in defining the law of insider trading.

The market crash in 1929 due to prolonged lack of investors confidence in the securities market followed by Great Depression of US Economy , led to the enactment of Securities Act of 1933 in which Section 17 of the contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934The 1934 Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b).Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-5 prohibits fraud related to securities trading. Further the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. Much of the development of insider trading law has resulted from court decisions. In SEC v. Texas Gulf Sulphur Co, a federal circuit court stated that anyone in possession of inside information must either disclose the information or refrain from trading. (1966)

In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees (receivers of second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information and the tipper received any personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.)

The Dirks case also defined the concept of “constructive insiders,” who are lawyers, investment bankers and others who receive confidential information from a corporation while providing services to the corporation. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider.

In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who received his information from a journalist rather than from the company itself. The journalist R. Foster Winans was also convicted.

“It is well established, as a general proposition that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principle for any profits derived there from.” However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split.

In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O’Hagan, 521 U.S. 642, 655 (1997),. O’Hagan was a partner in a law firm representing Grand Met, while it was considering a tender offer for Pillsbury Co. O’Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O’Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options.

The Court rejected O’Hagan’s arguments and upheld his conviction. The “misappropriation theory” holds that a person commits fraud “in connection with” a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information.

The Court specifically recognized that a corporation’s information is its property: “A company’s confidential information…qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty…constitutes fraud akin to embezzlement – the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s care by another.”

In 2000, the SEC enacted Rule 10b5-1, which defined trading “on the basis of” inside information as any time a person trades while aware of material nonpublic information — so that it is no defense for one to say that she would have made the trade anyway. This rule also created an affirmative defense for pre-planned trades.

In May of 2007, representatives Brian Baird and Louise Slaughter introduced a bill entitled the “Stop Trading on Congressional Knowledge Act, or STOCK Act.” that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs. The bill would also seek to regulate so called “Political Intelligence” firms that research government activities and sell the information to financial managers.

Insider trading in India

In India Regulation 3 of the SEBI Regulations seeks to prohibit dealing, communication and counseling on matters relating to, insider trading. Regulation 3 provides that no insider shall either on his own behalf of any other person deal in securities of a company when in possession of any unpublished price sensitive information on communicate, counsel or procure, directly or indirectly any unpublished price sensitive information to any person, who while in possession of such unpublished price sensitive information shall not deal in securities. However, these restrictions are not applicable to any communication required ordinary, course of business or profession or employment or any law.

Further 3 A prohibits any company from dealing in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

Insider Trading Regulations have been tightened by SEBI during February 2002. New rules cover ‘temporary insiders’ like lawyers, accountants, investment bankers etc.

Directors and substantial shareholders have to disclose their holding to the company periodically. The New Regulations have added relatives of connected persons, as well as, the companies, firms, trust, etc. in which relatives of connected persons, bankers of the company and of persons deemed to be connected persons hold more than 10% .The definition of relative, under the New regulations is in line with that of the Companies Act, 1956, which ranges from parents and siblings to spouses of siblings and grandchildren. The term “connected person” is defined to mean either i) a director or deemed to be a director, ii) occupies the position as an officer or an employee or having professional or business relationship whether temporary or permanent, with the company. Thus, there are two categories of insiders:

Primary insiders, who are directly connected with the company and secondary insiders who are deemed to be connected with the company since they are expected to have access to unpublished price sensitive information. The jurisprudential basis for the ‘person-connected’ approach seems to be founded in the equitable notions of fiduciary duty.

The secondary insider, who would have traded with an unfair informational advantage, may escape from being caught simply because there can be no trace of how he derived this information in the first place. Insider by reason of his connection with the company. In reality, much of the flow of the price-sensitive information often does not operate by way of such established networks of relational links between individuals. Very often, such price-sensitive information is communicated and spread out through very loosely connected and informal networks of brokers, clients and even between friends and through electronic networks etc. or an elaborate nexus of company official, brokers, traders. These individuals are very often privy to strategic policy decisions or developments that may influence the valuation of a company’s scrip on the bourses

Duties/ Obligations Of the listed company under the SEBI (Prohibition of Insider Trading) Regulations, 1992



To appoint a senior level employee generally the Company Secretary , as the Compliance Officers;

To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures,

To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992

To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts;

To specify the close period;

To identify the Price Sensitive Information

To ensure adequate data security of confidential information stored on the computer;



To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same

The penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992

1. SEBI may impose a penalty of not more than Rs 25 Crores or three times the amount of profit made out of insider trading; whichever is higher; or

2. SEBI may initiate criminal prosecution; or

3. SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information; or

4. SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company

Conclusion -The new 2002 regulations in India have further fortified the 1992 regulations and have increased the list of persons that are deemed to be connected to Insiders. Listed companies and other entities are now required to frame internal policies and guidelines to preclude insider trading by directors, employees, partners, etc. In the past, it has been observed that insider trading legislation is ineffective and difficult to enforce and has little impact on securities markets. Low enforcement rates and few convictions against insiders have been cited as evidence of this ineffectiveness. Irrespective of whether or not the SEBI was bestowed with wide ranging powers, it has been a clear failure when it came to the task of administering the law.

The importance of policing insider trading has also assumed international significance as overseas regulators attempt to boost the confidence of domestic investors and attract the international investment community. So, SEBI now should take the role of a regulator only. Special Courts could be set up for faster and efficacious disposal of cases.

 



Alice

Better Trade asked:


Working for What?

It used to be that you could work a solid eight hours and make enough money to provide for a five person family. However, now things have become much more complicated. Costs continue to rise, and often salaries just aren’t enough to cover the costs. If you’re looking for a break, perhaps it’s time to consider trading some of your money in the stock market.

Many people will tell you that trading is risky at best, but educated traders will tell you that a little education goes a long way. If you are interested in employing the techniques that have made so many wealthy, a bit of knowledge could change everything.

Looking to BetterTrades

BetterTrades will help you find the information and skills you need to become a successful trader. Better Trades is a unique educational company willing to help you learn the tricks necessary to make a reliable income. With live events, interactive web courses, and a host of other resources that are personalized to ensure you get the information you need, BetterTrades is truly different.

Lots of trading companies offer training, but few offer courses that actually allow you to participate. What’s more is that the instructors at BetterTrades are experienced investors with enviable trading backgrounds. With nationally recognized authors and speakers on the team, you’ll get the trading education you need in a format other sites simply can’t offer.

Consider starting with our Market Essentials course, the one place online where you will find the knowledge necessary to begin trading successfully right away.

Joining BetterTrades, though, isn’t only about interactive course offerings. BetterTrades offers you amazing live events, step-by-step tutorials, real time market analysis, trading labs, and newsletters that will help ensure your path to success. Let BetterTrades make a financial difference in your life. A solid knowledge base is the best way to begin your successful trading career, and Better Trades is the only resource for both online and live trading education options to provide you the most flexibility, reasonable costs and knowledge you need to get started.

Taking The Next Step

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If you’re looking to learn to trade in the stock market but are too scared to try on your own, why not learn from those who know what they’re doing? The education for any skill level is what sets us apart. BetterTrades is your key to having a lucrative, wealthy life without fighting with that 9 to 5 job anymore.

This article is originally published here: Better Trades



Johnny

Chris Chew asked:


In May 2, 2007, China officially banned the trade in human organs, China’s state media reported. The Asian giant is often accused of heavily involving in the harvesting the organs of executed prisoners for transplant surgeries.

Is harvesting human organs for transplant in this way ethical? After all, lives are being saved from such transplant surgeries. Well, the debate on this subject matter by various interest and human right groups is ongoing and yet to be settled.

The new law and regulations issued by the State Council, China’s powerful cabinet prohibit all organizations and individuals from trading in human organs in any form, the official state media, Xinhua news agency reported.

Any doctor or surgeon found to be involved in illegal trading of human organs for transplant surgeries will have his/her medical license revoked. Clinics and hospitals will be suspended from doing transplant operations for at least three years if convicted of defying the law on organ transplant trade.

Fines have been set at about ten times the value of the outlawed trading of human organs and government officials convicted for trading in human organs will be sacked immediately.

International human right groups have long accused China country of harvesting organs from executed prisoners for transplant surgeries without their consent or that of their family. China’s hospitals too have also been similarly accused of stealing human organs from road accident victims and other dead patients without telling family members.

The Chinese government has always denied any of these accusations, saying that most organs are voluntarily donated whom the donors have given their consent. Foreign patients facing compatible shortage of human organs in their home countries have flocked to China where human organs are plentiful and the transplant surgeries are relatively less expensive.

China has the world’s second largest number of human organ transplant performed after the United States of America with about 5,000 transplant operations performed every year. However, if you look at the population of China, the world’s largest population, the number of transplant operations is still relatively small.The new law does not apply to transplants of human tissue such as cells, corneas and bone marrow.

Do you think that China’s ban on the human organ’s trade is a move in the right dierection? Are there better ways to harvest human organs ethically? After all, the donors are already dead and their organs will be wasted when buried or cremated along with them. Why not let the dead bring life to the living?



Alex Silverstone

John Forman asked:


It seems like I am always answering the question as to whether trading can be done meaningfully on a part-time basis. My answer is always the same – “Absolutely!”

Somehow people have been convinced that you have to spend hour upon hour in front of computer watching the markets in order to have a chance at success. That is simply just not true. Part-time trading can be extremely worthwhile – in some cases even more so than trading more actively. I am proof of that. Even though I sometimes do have the opportunity to trade more frequently, my best trades always seem to be the ones I do on a more part-time basis – the ones that only require an occasional check of the markets.

This may sound strange coming from someone who used to be a professional analyst and really does enjoy the markets, but I really have no desire to spend all day in front of the trading screens. It’s a grind, and I have a lot of other things I enjoy doing a whole lot more than watching price quotes tick up and down. I’m sure you could say the same.

Effective part-time trading is simply a matter of maximizing the time you have available. That might be an hour a night, or maybe a couple hours on the weekend. Maybe it’s even less than that. It doesn’t matter. If you make the most of what you have, you can do good things trading part-time. Doing so is a matter of developing a method for your work and applying it consistently.

I’ll use myself as an example.

My schedule is somewhat convoluted. I travel frequently and my activities have a seasonal nature to them. There are points in the year when I have almost no time to devote to the markets. At other times I can maybe put in an hour each morning. Then there are also times when things are more open and I can be a bit more active.

Regardless of my time availability, though, I always do the same thing. I scan the charts for the markets I’m interested in trading and look for something specific. If I don’t see it, I move on to the next. If I don’t see anything good, I don’t trade. It’s as simple as that.

My available trading time will dictate which timeframe charts I look at when doing my scan. If I’m at a point where I can be more active, I’ll perhaps look at the hourly charts. If I can only check in on things once or twice a week, I’ll look to the daily and/or weekly charts to find possible trades with longer holding periods. In that way, I can choose the best timeframe for me to operate in for my schedule at that point.

What is more, I don’t ever have to trade. That’s a major advantage for part-time traders. Unlike our full-time peers who are under pressure to produce results every day, we can pick our spots and only go after trades likely to be big winners. I’ll take that relaxed approach any day!

Let’s face it. Full-time trading is a commitment most of us will either never be able to or never be willing to make. That doesn’t mean we cannot make excellent use of the markets to better our financial situation. Part-time trading can certainly provide the opportunity to do just that.



Gregory

John Forman asked:


One of the least understood financial markets is the one for futures. That is in part a function of the fact that for many years it has been referred to as “commodity futures”, which has no doubt turned many would-be traders away, folks who don’t have any interest in things like Pork Bellies and Frozen Concentrated Orange Juice (to include a few from the popular Trading Places film). The other factor is the perceived complexity of the futures market. The fact of the matter, though, is that futures trading is incredibly diverse and not as difficult to do as many think.

Sure, for decades futures trading focused on the commodity markets. That’s a simple function of how they developed. Now, however, the focal point has shifted considerably. Yes, one can certainly trade agricultural good, energy products, and metals. These days, though, there is more action in things like interest rates, currencies, stock indices, and even stocks themselves.

What’s more, technological developments have made the futures market much more accessible to the individual trader. It is now possible for even lightly capitalized traders to operate effectively in the futures market, something difficult to do in years gone by. That has opened up a whole array of new opportunities for the individual to pursue their trading goals.

Consider this. Nowadays just about anyone can trade things like Gold and Crude Oil. These markets have made enormous runs in recent years. One could also take positions in the US Dollar at a time when it has shown persistent weakness, or in US Interest Rates as they were steadily increased.

As for futures being complicated – not really. Are they different than trading stocks? Sure. They are leveraged instruments. That means they present some very exciting opportunities for traders who use them in the context of well developed risk management strategies (which all traders should have anyway, regardless of market).

Futures prices move just like those in any other market. The same analytic techniques used to trade stocks or forex or any other market can be applied to futures. Their prices are, after all, based on those of the markets underlying them. That is why they are referred to as derivative instruments – they derive their value from other markets. Stock index futures track stock indices. Currency futures prices move with foreign exchange rates. Single stock futures follow the prices of the stocks they represent.

Naturally, this derivative nature does mean some differences in the actual trading of futures as opposed to the markets underlying them. The concepts involved, however, are easily understood. It is possible for one with a basic understanding of trading and the markets to grasp them quickly and be operating effectively in the futures markets within only a short period of time.

If you haven’t already done so – and if you’ve read this far it’s a fair bet that you haven’t – take the time to look at the futures market. They could very well provide you with the opportunity to make excellent strides in your profitability and risk management.



Brent

Jason Ng asked:


There are 2 kinds of option trading systems in general; Discretionary and Mechanical. A discretionary option trader follows no specific rules but chooses, enters and exits an option trade using all of his knowledge or gut feeling. A mechanical option trader is one who translates his knowledge of choosing stocks, entry and exit into objective rules. Such a system is commonly translated into a computer program in order to completely automate the option trading system. The advantage of mechanical option trading is obvious; the removal of human emotions in the trading process thereby reducing human errors.

I moved from discretionary to mechanical option trading years ago and only started becoming consistently successful in option trading after I developed my personal mechanical option trading system called the Star Trading System (http://www.mastersoequity.com).

So, what are the steps to be taken in order to develop your personal mechanical trading system for option trading? Here is a guideline…

1. Stock Selection

List down all the criteria you think must be true in order for a stock to qualify as an option trading candidate. Make sure all of these criteria are quantifiable. Example : a. Last close more than $10, b. Last price rising for the past 3 days c. PE must be positive. Finally, program a charting software with these criteria so that you can run a scan of all stocks that qualified within seconds daily. Technological advances have made possible to screen stocks within seconds. Traders used to have to spend hours going through each stock against a spread sheet in order to find trading candidates.

2. Option Selection Procedure

Now that you have chosen your stock, you need to determine which option qualifies for your option trading system. Your personal option trading system may be based on OTM options or ITM options or even based on bullish or bearish spreads.

3. Entry Procedure

Now that you have determined what stock to watch and which option to buy, it is time to determine under what conditions to make that move to buy on. It may be as simple as to enter upon market opening or as complex as to watch the underlying stock movement for a pre-determined period of time before it qualifies for entry. Whatever it is, it must compliment your personal option trading style.

4. Exit Procedure

Now that you have an open position, you need to determine what must be true for you to take profit or to stop loss. There are 2 classes of exit procedure that you must establish; Stop Loss and Profit Taking. Stop loss in option trading can be simply based on a % loss of the option position or based on a % loss on the underlying stock. Profit taking can be based on the stock’s target price or a % gain on the option position. After you have done that, you would want to see how your broker can help to automate that for you. Commonly, people break their own stop loss or profit taking points due to emotional involvement, that is why many brokers have features which allow fairly complex stop loss or profit taking strategies to be automated. If your broker does not support such automation and you are the type who cannot properly enforce your own stop loss or profit taking strategy, then it may be good to consider switching to a broker that does.

Now, give that option trading system a name and paper trade it for at least 6 months. Do not expect to get it right the first time. Developing a profitable option trading system takes time, knowledge and experience and is something which cannot be rushed. My Star Trading System (http://www.mastersoequity.com) took me years of work to arrive at a stage where even complete amateurs can follow easily and make a consistent profit from.

So, have fun translating your option trading philosophy into an option trading system and to watch it in action. I am sure it will be an extremely fulfilling experience whether or not the system turned out to be profitable.



Bobby

singapore trader asked:


Trade and Trade the Plan

 

 Successful stock market trading begins with a winning trading plan. It’s as simple as that. If you develop a well-conceived trading plan to guide your actions in the stock market you will already have the advantage over most of your market competition. Put simply, it gives you the edge you need to win over the long haul when trading the stock market or forex market.

 

A stock market trading plan will not guarantee your success in the markets, but a good plan will enable you to work methodically toward your stock market trading goals while reviewing on a regular basis what is working and what is not. It will act as a roadmap for your trading journey. It will enable you to respond positively and constructively no matter what happens with your individual trades. And, most importantly, it will help you control the only thing a trader can control: his or her own actions.

Finally, stock market trading is a business. It can be a fascinating and sometimes thrilling business, but in the end it is a business. A trading plan helps you treat it as a business.

Here are some important elements of a trading plan.

 

 1. Why am I trading? What are my goals? 

 

The answers to these questions might seem obvious, but they usually are not. Take some time to ask them of yourself, and seriously consider the answers. You may be surprised by what you learn. And whatever the answers, you will have a clearer picture going forward of what this enterprise means to you, and that will help you survive any rough patches.

 

 2. What markets am I going to trade and why? 

 

It is often best to specialize, especially for beginning stock market traders. Many pros make a great living trading the same stock day every single day for years. Choose a market that is appropriate for your experience level and trading style. Consider other factors such as available margin, volatility and liquidity.

 

 3. What is the concept or philosophy behind your trading methodology?  

 

Your trading system must have a concept behind it. Whether you are a value investor like Warren Buffet or a trend trader like George Soros, you should understand why you are doing what you are doing, how your beliefs about the markets define what you will do as a trader.

 

 4. What will be your specific method? 

 

In other words, specifically how will you execute your trading ideas? Will you buy breakouts or pullbacks? Buy oversold or sell overbought? Or will you use specific technical setups such as moving-average crossovers or another indicator-based strategy? Under exactly what conditions will you enter? When will you know to exit?

 

 5. How much money will you risk on any single trade? On trading in general?

 

This is critical. Of course, start small. But just as importantly, have a plan in place for how much you will risk, emotions don’t cloud your judgment when the time comes. The key is to find an allocation that doesn’t cause any stress but still makes the trade worthwhile financially. One of the biggest problems with newer traders is that they are trading way too big in relation to their account size. Like when you are forex trading. Trading forex at 100-1 leverage is like introducing your mistress to your wife. Yes, you can do it, but that doesn’t make it a good idea.  Normally they don’t get along too well.

 

6. What will my trading rules be?

 

This is also critical. Your trading rules include entry and exit rules, rules governing maximum daily, weekly or monthly losses, maximum risk on any given trade, the maximum number of trades per week, etc., etc. These rules enforce discipline and keep you out of trouble. What stock price will enter at, what stock price will I will exit. Be discplined.

 

7. How will I record and evaluate my trading performance?

 

Allow me to repeat myself: This is critical. In fact, this might be the most important element of trading for new traders in the stock market. A new stock market trader who evaluates his trades, winners and losers, in an effort to learn what works and what does not, will make quantum leaps forward in terms of ability and profitability. If you have a working trading plan and evaluate every single one of your trades after you have closed it you have already beaten 95% of the competition.

 

8. What are my rules for managing profits?

 

What’s the problem with profits? Well, believe it or not there is one, and it’s a serious one. It’s called euphoria, and it clouds the judgment perhaps more than any other emotion related to trading. Start piling up the profits for the first time and it won’t be long before you are convinced you are king of the world. About 30 seconds later you’ll be broke, following a series of unwise and exceedingly risky trades. So have a plan for protecting closed profits when you have reached your goals for the week or the month. Don’t give them all back.

 

9. How will I reward myself for following my trading plan?

 

Don’t leave this out. Following your trading plan will bring rewards in the form of profits, but you should also consciously reward yourself for doing so because it is such an important part of successful trading. So if you finish the week or the month (or even the day) without having broken any of your trading rules, find a way to reward yourself. You deserve it. You are in rare company.

 

If you follow your plan you are improving your chances of becoming sucessful stock market or forex trader.

 

Happy Trading

 

About the Author

CFD FX Report is a real time tool for clients with an interest in the trading of stocks, indices and commodities globally.CFDs (Contracts For Differences) are one of the worlds’ fastest growing trading instruments that allows clients to profit from a rising and falling market. The CFD FX Report is a company comprising of expert traders that analyse the market daily and are able to make recommendations for the following day trades based on this analysis. The CFD FX Report is released everyday at 6.30 p.m. (Singapore time) for review by the clients for the next trading day.

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ARASH