The Blue Roof

I want to spend some more time on trading. I am not a trader – yet, so if there is anybody that has the real life experience, please speak up.

 Back to the example of trading apples. When I buy the apples I have a certain expectation regarding the selling price of apples. Apples will sell in a price range based on the type and class of apple and where I buy it. I might be able to sell at a lower price, but it would be difficult to sell at a higher price. I have to keep this in mind when I BUY my apples.

 Further more, there will be costs involved. Transport to buy the apples and to get to the sales point. Packaging and handling. In all likelihood some of the apples in the box will be bad and unless I can sell it quickly, some of the apples will start rotting before I can sell it. Apples hava a limited shelve life.

 Which means that when trading in apples I have to consider the following: Expected selling price, dealing costs, how quickly I can sell the apples and a margin for stock loss.

 That is no different from any other form of trading. If I trade shares as such, then there is not the time urgency, but dealing costs are quite high. And there is the loss of interest on the money that I tie up in the shares. And I normally need a lot of money to buy enough shares to really make it worth my while. But at least, all things being equal, the shares will not rot. In other words, as happens daily, I can turn a short term speculative transaction into a long term investment.

 When it comes to futures and options (called derivatives), we are much closer to the rotting apple example. There is a time where I have to be out of the investment, or I lose big time. Derivatives have an expiry date!

 But what makes derivatives so attractive, is that dealing costs are relatively low and you can use gearing. With a couple of R100 you control a couple of R1000. It means that a small change in the price of the underlying instrument results in a big profit. If we compare it to dealing in shares, you need a fairly good price increase to make share trading worthwhile. Not so with derivatives.

 But the opposite is also true – a small change in price to the wrong side could see you feeding the investment quite quickly. And that is the important thing to manage. It is not the potential gain that you have to manage, you have to manage and control the potential loss! The profits will look after itself, but you have to look after the losses!

 When trading, greed is your biggest enemy. Be satisfied with regular small profits. If you can make 5% per week, it equals 250% per annum! If you can make a R1000 per week, it equals R40 000 per year, assuming you only trade 40 weeks per year.

 Once again I recommend you find the series on gambling, as the whole issue was addressed there in much more detail.

The point is: if you can trade successfully and build up the capital with which you trade, you can actually generate an extra income that you can then use for real investing!

 I am currently looking at trading opportunities – I am open for suggestions.