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Sunday 12 February 2012

Trading Online Simplified - Part 3

Trading at its Simplest

This is the last of the three part series seeking to clarify and simplify some language used in trading and investing that can leave beginners confused. All good trading blogs should seek to enhance the reader’s learning, and hopefully this one is no different. If you have any questions about the topics, or any topics for that matter, do leave a comment and I’ll get back to you when I can.

Interest Rates

This refers to the official cash rate set by the Reserve Bank of Australia (or ECB in Europe, BOE in the UK or Federal Reserve in the US), rather than any interest rate at your local bank. When a decision is made as to whether to lower, raise or maintain interest rates, it has many effects on global markets. If interest rates are increased, it is often seen that the local currency rises, the share market falls and bond prices fall. The opposite occurs when interest rates are lowered. The crucial factor is whether the interest rate is moved higher or lower than expected. If people have believed rates will be increased 0.25% for a while, the markets will have already priced this in. They will only react if rates are increased more or less than 0.25%.

Long or Short Positions

Being ‘long’ means that you have bought something, whether it is a share or otherwise. You aim to buy it at the lowest possible price, hold onto it, and then sell it at the highest possible price in order to maximise your profit. Many online brokers only allow you to take long positions, as these are often less risky than short positions.

Being ‘short’ is when you initially sell something and then buy it back at a later day, hopefully at a lower price. You profit because you bought the asset back for a lower price than you sold it for in the first place. The ability to take long or short positions allows you to potentially profit regardless of the direction of the market, but also means that you can consistently take the wrong position (long when the market is falling and short when it is rising).

Bullish or Bearish

These two terms refer to whether people expect the market to go up (bullish) or down (bearish). The origin of these words is not known, but suggestions include the fighting style of bulls (horns swipe up) and bears (paws swing down). The words refer to people’s expectations, rather than actual price movement, and so the ratio of bullish people to bearish people is sometimes considered a good indicator for markets to rise in the future. The problem is that it’s one thing for people to say they think markets will rise, but it’s another for those people to back up their opinion with money.

Market Rally or Consolidation

When the market, stock or currency rallies, it is going up. When it consolidates, it is falling, or has fallen to a level that is deemed a fair level, with no further falls expected. These are often medium to long term movements, with the numerous up and downs in between being referred to as ‘swings’.

In the pipeline: The pros and cons of free research

Bullish on: Global gold stocks (gold price has further to rally and Newcrest NCM.AX is producing at record levels)

Bearish on: Telstra (TLS.AX has breached broker targets and will suffer if funds return to riskier stocks)

If you are looking for more trade ideas or strategies, try reading www.pimmtrading.blogspot.com.

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