My Trading Journal: Entry 2

Hi, I hope you had a good day. I am sure some of you have noticed that I am from South Africa and you may be wondering how my trading journal could help you if you do not trade on the Johannesburg Stock Exchange. That is a good point and it might seem pointless for you to continue reading this at first glance.

The thing is, however, that candlestick charts are universal. Different stock exchanges might be affected by different political and economic situations in their respective countries, but I think that what I do on the JSE is transferrable to most, if not all, stock exchanges. I do not know. It is just my opinion and I would love to hear your thoughts on it.

So in my previous entry I mentioned that I will be trading CFDs and that it can be very rewarding as well as very dangerous. This has a lot to do with the fact that you are trading on margins. For anyone who missed yesterday's entry, margin just means that you do not have to put down the full amount when you buy a stock. You only have to put down a certain percentage of the total price. This percentage is known as the margin.

Let us use a practical example, though. Let’s say company ABC has its stock currently trading at ZAR10 (ZAR=South African Rand) per share. Now say that you want to buy 10 shares at ZAR100. Since we are trading CFDs, we only have to put down ZAR10 as the margin on company ABC is only 10%. Now let’s say the price of ABC’s stock go up by ZAR1. You own 10 shares so that would mean you are up by ZAR10. If you were to exit your position at that moment, you would make a profit of 100% since you only had to put down ZAR10 to begin with. Thus you can see how it can be very profitable to trade CFDs.

There is a darkside to CFDs which you should be aware of, though. Imagine that ABC’s stock went DOWN by ZAR1 to ZAR9. Now you are down by ZAR10 and your margin has been completely wiped out. Say it goes down by another ZAR1 to ZAR8. Now you are ZAR10 in the red and need to add funds to your account to cover those extra losses. As you can see, CFDs can be very dangerous if you do not hedge your bets. You need to be very careful when trading CFDs or you can very easily lose everything.

That is all I want to write about today. In the next entry I will actually start sharing the stocks I am currently trading and what candlestick patterns made me enter those trades. We will finally start with the practical information that you can hopefully use and analyze yourself.

Thank you and goodbye.