Don't go into a trade blindly

Published in the Geelong Advertiser, May 2008 by Dale Gillham

Over the past few months, Contracts for Difference (CFDs) have come under fire from all angles, including the regulators, with ASIC recently claiming that they are much riskier than a flutter on the horses or the odd night at the casino.

While I would agree that there is a risk in trading CFDs, given that it is a highly leveraged instrument, I disagree with the statement made by ASIC.

All leveraged products, including options, warrants, futures and CFDs increase your risk in trading the market and each of these products has left a trail of uneducated traders and investors who have lost money.

That said, I do not believe the product itself is gambling, rather it is the ignorant and uneducated individual who trades this product that is the gambler.

To trade a leveraged product with little or no knowledge is, in my book, gambling, therefore individuals should expect to lose as they would in a casino.

As I always say, knowledge is power and gaining the correct knowledge to trade this instrument will minimise a trader's risk.

So what can we expect in the market?

On Wednesday, the Dow Jones traded down 196 points with the price fluctuating during the day over 341 points.

Given the volatility in recent months, you would expect that this sort of move would send our market spiralling down but instead the market rose to close 43 points up for the day.

This move potentially signals that the negative sentiment in our market has eased and that the buyers are gaining confidence.

Given this strong sign, I expect the All Ordinaries to continue to rise until around May 26 before finding some resistance.

As I emphasised last week, it is wise to take a staged approach to building your portfolio and to focus on quality rather than quantity, therefore I recommend sticking to the big blue chip shares.

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