INTRODUCTION

The explosive growth of international financial transactions and capital flows is one of the most far-reaching economic developments of the late 20th century. Net private capital flows to developing countries tripled – to more than US$150 billion a year during 1995 to 1997 from roughly US$50 billion a year during 1987 to 1989. At the same time, the ratio of private capital flows to domestic investment in developing countries increased to 20% in 1996 from only 3% in 1990. Hence, this has effected a shift from the national economy to global economies in which production and consumption is internationalised and capital flow freely and instantly across borders.

Powerful forces have driven the rapid growth of international capital flows, including the trend in both industrial and developing countries towards economic liberalization and the globalisation of trade. Revolutionary changes in information and communications technologies have transformed the financial services industry worldwide. Computer links enable investors to access information on asset prices at minimal cost on a real time basis, while increased computing power enables them to rapidly circulate correlations among asset prices and between asset prices and other variables. At the same time, new technologies make it increasingly difficult for governments to control either inward or outward international capital flows when they wish to do so.

In this context, perhaps financial markets are best understood as networks and global markets as networks of different markets linked through hubs or financial centres.

All this means that the liberalisation of capital markets and with it, likely increases in the volume and volatility of international capital flows is an ongoing, and to some extent, irreversible process.

It has contributed to higher investment, faster growth and rising living standards. But this can also give rise to shocks and stresses resulting in financial crisis as we have all witnessed in 1997 and 1998.

Testimonies to the risks of open capital markets are the several waves of instability in the financial markets in early 1998 and again in the wake of the Russian crisis in August/September 1998. To illustrate, net private capital outflows from the five countries most affected by the crisis, namely, Indonesia, Korea, Malaysia, Thailand and the Philippines rose to US $28.3 billion in 1998, reflecting mainly the decline in net bank and non-bank lending. Meanwhile, foreign direct investment which had been one of the main sources of growth during the pre-crisis period in these countries remained sluggish in 1998, amounting to US$8.5 billion as compared to an average amount of US$17.8 billion during the period 1995 to 1995.

Global trade has experienced a slowdown over the past two years due to trade contraction of East Asian economies. Generally, world GDP and trade growth slowed in the past 1997/1998 as the East Asian crisis deepened and its repercussion were felt increasingly outside the region. Asia recorded the strongest import and export contraction in volume and value terms of all regions of the world. The dollar value of Asia’s imports registered an unprecedented decline of 17.5%. The five Asian countries most affected by the financial crisis that broke in mid-1997, that is, Malaysia, Indonesia, Philippines, the Republic of Korea and Thailand experienced import contraction by one-third.

In the context of these powerful trends, I like to discuss a few significant the issues relating to them, particularly from a capital market regulator’s perspective. Given the breadth of the topic at hand, and in the interest of keeping to time, please allow me to focus particularly on current trends and difficulties faced in the capital markets.

DEVELOPMENTS IN ELECTRONIC COMMERCE AND CAPITAL MARKET REGULATION

Developments in computer and information technology have made dramatic changes to the way the financial services industry operates. These changes are affecting and will affect every aspect of the financial services industry and offer the possibility of reduced costs in raising capital, greater efficiencies in the mobilisation of domestic and international savings and the provision of better, cheaper investment products more closely tailored to the needs of different investor segments. The convergence of computer and communications technology is promoting the development of computer mediated networks, allowing for users to communicate and transmit data and other information regardless of boundaries and distance. As communication costs continue to fall, the potential of outsourcing grows.

These changes will affect –



The way investment products are offered, distributed and marketed and the way in which investors access information about the products and entities involved;

The activities of financial services intermediaries, especially advisers, and the way they deal with investors;

The continued blurring of product and institutional boundaries, and even the scope of financial services sector itself as non-traditional entities take on some of the functions of financial intermediaries;

The methods of distribution and marketing of investment products which will increasingly draw upon the techniques of mass marketed consumer products; and

The way secondary trading in investment products takes place as greater scope for direct investor transactions and low cost competitors to established securities and futures markets becomes more of a reality.



Just as electronic commerce affects investors and providers of financial products and services, it will affect the role of corporations and capital market regulators. Just as electronic commerce facilitates activities across jurisdictional borders, it poses in clear terms questions about the practical enforceability of national laws. As well as practical enforcement questions, electronic commerce also raises issues about the role that capital market regulators should play and the effectiveness of many of the traditional regulatory approaches and mechanisms that have been employed by them. An example might be an offering of securities made without a prospectus or registration statement on the Internet by a person in a jurisdiction with which the capital market regulator has no regular contact or mutual enforcement arrangements. There are also concerns about illegal and fraudulent activity on the Internet.

In this regard, the Malaysian position is that it is committed towards a structured development of electronic commerce. Towards this end, Malaysia has proposed to introduce a National E-Commerce Masterplan. This Masterplan should focus on key initiatives which will create momentum in trading via e-commerce. Besides looking at developing the technological infrastructure such as telecommunications infrastructure and systems providing for electronic delivery of goods as well as payment, the Government is also aware that there are legal and regulatory issues which will arise with regard to e-commerce. Malaysia has introduced several sets of laws catered towards proper regulation of e-commerce known as ‘Cyberlaws’. The Cyberlaws which have been introduced include, among others :

(i) Computer Crimes Act 1997

This Act provides for a framework to counter computer offences such as unauthorised access to computer material, crimes of fraud and dishonesty through the computer, unauthorised modification of contents of a computer and so on. The Act is not limited by jurisdiction. It has effect outside as well as inside Malaysia. Where a computer crime is committed outside Malaysia in respect of computers or data in Malaysia or that which may be connected to or used in Malaysia, the crime may be treated as a crime within Malaysia and the perpetrator may be dealt with under the provisions of this Act; and

(ii) Digital Signatures Act 1997

This Act addresses issues of security and authenticity of electronic transactions and it allows for greater confidentiality and integrity of messages. It allows for businesses to use electronic signatures instead of hand-written counterparts in legal and business transactions. The Act provides for the treatment of document signed with a digital signature created in accordance with this Act to be treated as legally binding as if the document was signed with a handwritten signature.

The development of an effective regulatory framework is essential in attracting and maintaining confidence for the world in trading with Malaysian counterparts via electronic means. The regulatory framework as it stands is currently incomplete as many other areas such as electronic banking and broking are still in the process of development.

To instil confidence, Malaysia must be able to provide for regulatory certainty and coherence as well as prevent regulatory capriciousness. In relation to financial services, a major consideration is cross-border implications. The Securities Commission, as an example, is currently looking at issues relating to Internet offering of securities and fund management and broking services over the Internet. A re-examination of current laws would need to be conducted to ensure that they have not been overtaken by technology and to restructure the laws so that they are technology neutral.

As far as the capital market is concerned, the Securities Commission recognises that electronic commerce is an area where it is important that the regulatory infrastructure responds in a positive and timely way to facilitate market developments and not hinder innovation in market products and processes. We believe that there are important benefits to be gained through the Commission’s facilitation of market developments in this area for the competitiveness of the Malaysian capital market, efficiencies in the operation of our capital markets and the better making of investors at lower cost. At the same time, the Securities Commission considers that it is important for the successful implementation of electronic commerce that investors retain confidence in the integrity of the market for investment products.

LIBERALISATION VS. PROTECTIONISM

On the issue of liberalisation vis-à-vis protectionism, there has been a proliferation of multi-lateral trade agreements since the middle of the century. Such agreements provide for a framework of rules within which nations are ‘obligated’ to assure other nations signatory to the agreement of a sovereign’s approach towards international trade. For example, Malaysia is a member of, among others, the World Trade Organisation through which it is a signatory to the GATS (General Agreement on Trade in Services) and GATT (General Agreement on Tariffs in Trade), APEC as well as ASEAN, all of which have the objective of achieving liberalised trading of goods and services within specified, albeit not immediate, time frames. Through these trade blocs, Malaysia has committed itself to progressive liberalisation which essentially entails a gradual opening of the economy to foreign participants.

The globalisation of economies is intrinsically linked to the internationalisation of the services industry. It plays a fundamental role in the growing interdependence of markets and production across nations. Information technology has further expanded the scope of tradability of this industry. Access to efficient services matters not only because it creates new potential for export but also it will be an increasingly important determinant of economic productivity and competitiveness. The main thrusts of the ‘services revolution’ are the rapid expansion of the knowledge-based services such as professional and technical services, banking and insurance, healthcare and education. Responding to this phenomenon, regulatory barriers to entry in service industries are being reduced worldwide, either through unilateral reforms, reciprocal negotiation or multilateral agreements. Developing countries such as Malaysia are increasingly looking at foreign direct investment in services as an especially powerful means of transferring technical and managerial know-how, besides attracting foreign capital and investment to the country.

Malaysia has made a commitment under GATS under legal services covering advisory and consultancy services relating to home country laws, international law and offshore corporation laws of Malaysia. Under the GATS commitments, commercial presence of foreign legal firms is not available except in relation to the Federal Territory of Labuan and in such a case, their services are limited to legal services given to offshore corporations established in Labuan. However, there are no limitations placed on the provision of legal service cross-border, that is, provision of such service from a foreigner without having a legal presence in Malaysia. This may be done via fax, telephone or the Internet. As stated before, most aspects of legal services does not need the physical presence of the service provider except perhaps where a court appearance is necessary. Furthermore, a Malaysian may obtain legal services abroad without any limitation either.

Malaysia is also signatory to the ASEAN Framework Agreement on Trade in Services (AFAS). The AFAS is an agreement made within the auspices of the GATS. In very basic terms, commitments under AFAS are GATS-plus which means that liberalisation of trade is accelerated within the ASEAN region under the AFAS as compared to the world at large under GATS. Its ultimate aim is to achieve regional integration and free flow of services within the region. In achieving integration and free flow of services within the region, many issues would need to be ironed out. Issues such as harmonisation of professional standards, acceptable levels of accreditation between member countries, movement of labour in relation to provision of these services, licensing and certification of service suppliers are still under intense discussion within the Member Countries. Taking into account the different levels of economic and regulatory maturity of Member Countries within the ASEAN, it is understandable that it would be a long process of consultation before a consensus may be achieved.

LIBERALISATION OF CAPITAL ACCOUNT

A most obvious impact of globalisation of trade are pressures exerted on developing nations to liberalise their financial markets and capital accounts. However, it is important to recognise that domestic and international financial liberalisation heighten the risk of crises if not supported by prudential supervision and regulation and appropriate macroeconomic policies. Domestic liberalisation, by intensifying competition in the financial sector, removes a cushion protecting intermediaries from the consequences of bad loan and management practices. It can allow domestic financial institutions to expand risky activities at rates that far exceed their capacity to manage them. By allowing domestic financial institutions access to complex derivative instruments it can make evaluating bank balance sheets more difficult and stretch the capacity of regulators to monitor risks. External financial liberalisation in allowing foreign entry into the domestic financial markets may facilitate easy access to an abundant supply of offshore funding and risky foreign investments. A currency crisis or unexpected devaluation (such as in the Asian crisis) can undermine the solvency of banks and corporations which may have built up large liabilities denominated in foreign currency and are unprotected against foreign exchange rate changes.

The ideal free market is one that every one should be free to enter, to participate in and to leave. However, events in the recent financial crises have led many of us to believe that in the freest of markets, there is a need to ensure that free flow of capital does not destabilise the market itself.

Indeed, calls for reform have gained increasing support and credence within the international community with the unfolding of the devastating effects of the crisis beginning mid-1997. The SC’s work within IOSCO’s Emerging Markets Committee has drawn attention to fundamental weaknesses in the existing global financial infrastructure that have caused and exacerbated these effects. These weaknesses include the inordinate power of highly leveraged institutions to move markets, the destabilising force of volatile short-term capital flows and the failure of existing credit assessment systems to adequately inform market participants of increasing risk of default.

One example of this mounting consensus was the express recognition by G7 countries at their recent meeting in Cologne of the need to strengthen the international financial architecture.

There are now increasing calls for greater transparency and regulation of hedge funds and greater awareness of the dangers of volatile short-term capital flows. To rebuild East Asia and the global economy, we now urgently need to engage in a sincere discussion about what constitutes sound governance in the contemporary world.

On the domestic front, we would have to ask ourselves this question: has our financial markets kept pace with change? Whilst markets have become global, applicable rules and regulations remain predominantly parochial or local. From a regulator’s perspective, the challenge for us in a global market is to design the regulatory and structural framework which will allow the market to function efficiently, competitively in a fair and level playing field environment, ensuring at the same time that the market is not subject to highly concentrated or destabilising forces that would disrupt its functioning.

The recent crisis also shows up the need for a careful and sequenced approach towards liberalising a country’s capital account. The experiences of Thailand, Korea and Indonesia clearly tells us that there is no prescribed formula on sequencing. However, it is important to recognise that countries vary greatly in their levels of economic and financial development, in their institutional structures, in their legal systems and business practices, and their capacity to manage change in a host of areas relevant for financial liberalisation. It is in recognition of this that the IMF policy-setting committee and subsequently the Finance Ministers and central bank governors of the G7 industrial nations, in the fall of 1998, stressed that a country opening its capital account must do so in an orderly, gradual and well sequenced manner.

Issues of liberalisation versus protectionism would need to be considered at great length to ensure that a country is competitive in a global trading environment. In a developing nation such as Malaysia, a protectionist policy towards local financial services industry and industry participants have been adopted to assist the local industry to develop to international standards. In the area of financial services, for example, the Government’s stance has been that consolidation of local financial services providers is necessary to ensure the development of a core group of strong and stable financial institutions to be able to withstand international competition when the financial services markets are opened to international participants.

Indeed, the Malaysian experience clearly shows that a premature freeing up of the capital account, which was done in 1988, without the requisite reforms and institutional arrangements in order to withstand the shocks, can result in debilitating effects as was faced in the Malaysian financial services industry.

MALAYSIA’S EXPERIENCE

Perhaps the most important lesson learnt from the Asian financial crisis was the interdependence of financial markets. Even the most developed economies were not spared of the effects of the financial turmoil which began as a result of Thailand’s default on its eurobond issue in February 1997. By May, 1997, the Malaysian Ringgit was under severe pressure from currency speculators and interest rates had risen from between 7% to 9%. It was reported that Bank Negara Malaysia expended about RM1.2 billion of its foreign exchange reserves to try to stave off the attack of currency speculators. However, this was the first of many repeated attacks on the currency.

The effects of the currency crisis began to take its toll on the country in 1998. Interest rates were rising to above 11% and the Ringgit had dipped to an unprecedented low of RM4.71 in January, 1998. All sectors of the economy experienced severe contraction as access to liquidity and credit became more scarce. Bank Negara had made many attempts to quell the effects of the financial crisis through imposition of tight monetary policies and attempts to ease credit to certain sectors of the economy to no avail. But the avalanche would not stop.

Malaysia’s sovereign credit rating was downgraded by international rating agencies to just above so-called junk bond status. Malaysia was facing a serious credit squeeze. Raising international capital was prohibitively costly. Flight of capital from the country resulted in a sharp decline in the stock market which fell to levels of 250 before bottoming out in the second half of 1998.

As many of you are aware Malaysia’s response to the crisis was one that was totally unexpected by the global community. The Government decided that it needed to protect the economy from increasing global pressures on the Malaysian economy. On 1 September, 1998 the Government introduced selective exchange controls with the intention of curbing and preventing further manipulation and speculation on the Ringgit. The Ringgit was pegged at RM3.80. The Government took further measures to discourage short-term flows of money by requiring that inflow of funds should remain in the country for at least one year. On 15 February 1999, this was replaced with an exit levy for repatriation of capital. The selective exchange control measures imposed by the central bank on 1 September, 1998 were directed towards reducing the internationalisation of the Ringgit by eliminating access to Ringgit by speculators and reducing offshore trading of the Ringgit. This involved the introduction of rules relating to the external account transactions of non-residents and currency of settlement of trade transactions. However, general payments, including movement of funds relating to long-term investments and repatriation of profits, interest and dividends remain unaffected. Payment for the import of goods and services must be made in foreign currency. All export proceeds must be repatriated back to Malaysia within six months of the date of export and proceeds from exports must be received in foreign currency.

The selective exchange control regime is intended to provide the time and opportunity for the Government to institute the necessary financial reforms in the Malaysian financial markets. This is in fact in progress in the work of Danamodal (the equivalent of the Resolution Trust Corporation of the US) to alleviate non-performing loan from banks’ balance sheets and Danamodal which is to recapitalise the banks. The Government is also committed to consolidating the domestic financial services industry in having few but strong and viable financial services providers in order to be prepared for financial liberalisation.

GIVING CERTAINTY TO INTERNATIONAL FINANCIAL TRANSACTIONS AND PROTECTION TO FOREIGN INVESTMENTS

International trade and finance, because of its global nature, necessarily involves many areas which may give rise to uncertainty as to the applicability of the contract under which certain trade and financing arrangements are made. These areas range from political issues and political stability to sovereign intervention of the economy, certainty of applicable laws as well as independence of the judiciary.

The Asian lawyer will be fascinated by the rapid changes which are taking place in foreign investment law both within this region as well as in the rest of the world. In less than half a century, the states of Asia have moved through a whole range of stances which could be adopted towards foreign investment. The immediate post-colonial period was characterised by a period of hostility towards foreign investment, motivated by the belief that the ending of economic imperialism alone will bring about true independence. The ensuing period was dominated by a debate about the regulation of multinational corporations and the fear that they posed a threat to state sovereignty. In this period, laws were devised to control the entry of foreign investment and the manner in which such foreign investment operated in the host country after entry. The third and present period is a period of pragmatism where the dominant view is that foreign investment, if properly harnessed, can be an instrument which generates rapid economic development. Competition for the limited investment that is available means that each state country which is bent on a foreign investment led growth strategy must make its laws as hospitable to the foreign investor as the other state which is also bent on a similar strategy.

As much as there is competition among countries to attract foreign investment, there is competition among multinational corporations to enter host countries. Whereas previously the market was dominated by large multinationals, now, there are small and medium enterprises which can transfer more appropriate technology and bring sufficient assets for investment.

This “open door” policy towards foreign investment in developing countries is typically achieved through careful screening of entry by administrative agencies which have been established for the purpose and regulation of the process of foreign investment after entry has been made. After entry, there is continued surveillance of the foreign investment to ensure that the foreign investment keeps to the conditions upon which entry was permitted. In this regard, attitudes to foreign investment protection and dispute resolution will be affected by the new strategies adopted towards foreign investment.

In the context of the new strategies which have been developed by controlling entry and the later surveillance of operations of foreign investment, the foreign investment has ceased to be a contract based matter and had become a process initiated by a contract no doubt but controlled at every point through the public law machinery of the state. The old notions of foreign investment protection which concentrated on the making of the contract and the contract as the basis of all rights of the foreign investor would inevitably become obsolete. This transformation which has taken place is crucial to the devising of effective methods of foreign investment protection. The subject matter of the protection has also changed in that not only physical assets of the foreign investor but his intangible assets which includes intellectual property rights as well as public law rights to licences and privileges have become the subject of protection.

The proposition that contractual provisions in an agreement concluded with a host country offer little protection to foreign investment must be qualified in a situation when a bilateral investment treaty has been entered between the state of the foreign investor and the host country. The result will be different, for the contract becomes effectively internationalised as a result of the existence of such a treaty. It is a basic proposition of international law that any matter that is essentially within the domestic jurisdiction of any state could be internationalised if it is made the subject of an international treaty. The existence of a bilateral investment treaty which covers the foreign investment then internationalises the whole process of foreign investment which would otherwise have been a process that takes place entirely within the sovereign jurisdiction of the host state. But, whether this result will follow depends on the terms of the bilateral investment treaty.

As a matter of general international law, the position seem to be that a contract between a party and host country must always be subject to a national legal system. Those who seek to prove the contrary have an onerous task of showing that his accepted proposition has undergone a change. There are a few usually uncontested arbitral awards which support the view that a foreign investment contract is subject to international law or some other supranational system.

Bilateral investment treaties are obviously regarded as important by both capital exporting and capital importing states. But, these treaties are not uniform and they do not have the ability to create any uniform law on foreign investment protection. But their existence adds to investor confidence and creates an expectation of investor protection. The importance of these treaties lies in the several results they achieve. The first is a signaling function about the national policy towards foreign investment.

Another advantage is that the foreign investment contract in the context of a bilateral investment treaties could have the effect of forming assets protected by the bilateral investment treaties. This will also include licences and other advantages obtained from the government during the course of the foreign investment. Whereas without the bilateral investment treaty these licences and advantages may have been without protection under general international law, they new receive protection as a result of the wide definition of property in the bilateral investment treaty. Whether the host country did intend that its administrative decisions be subjected to international review as a result of the treaty, will remain a moot point. But, it remains a possible result if the treaty.

In Malaysia, efforts have been made by the Government to ensure a level of certainty between international trading partners trading with Malaysian counterparts. The Government has expressly guaranteed that foreign companies acquiring equity participation in local companies would not be required to restructure its equity at any time[1]. Further to this, the Government has taken many steps to increase confidence of foreign investors in Malaysia.

INVESTMENT GUARANTEE AGREEMENTS (IGA”)

The Investment Guarantee Agreement protects parties involved in an international transaction from non-commercial risks such as nationalisation and expropriation. The IGA will provide a foreign investor with the following :



protection against nationalisation and expropriation;

prompt and adequate compensation in the event of nationalisation or expropriation under a lawful or public purpose;

free remittance of currency, profits, capital or other fees on investment;

settlement of investment disputes either through a process of consultation through diplomatic channels or if such process fails, for referral to the International Court of Justice. Disputes in connection with investments, under IGAs should first be resolved through local judicial facilities. In the event of failure to settle, it would be referred to the Convention on the Settlement of Investment Disputes or the International Adhoc Arbitral Tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law.



Malaysia has concluded IGAs with about 64 trading nations including trading blocs such as ASEAN and major trading partners such as the United States of America, United Kingdom, Germany, Taiwan, etc.

TRADE DISPUTE SETTLEMENT

Another aspect of international trade is the availability of acceptable dispute resolution form. Globalisation of trade obviously involves greater potential for generating international trade disputes. The international business community looks for prompt, economical and fair conflict-resolution mechanisms. Negotiation, conciliation, litigation, and arbitration are well-known conflict-resolution devices. Direct negotiations and conciliation may resolve a conflict. However, when parties fail to solve the controversy through direct negotiations, they have two choices: litigation or arbitration.

Within the context of the GATS, there is an express provision for trade settlement dispute where countries have disputes in relation to commitments made under the agreement. The WTO have provided for procedures in relation to a dispute settlement process. The dispute settlement procedure is considered to be the WTO’s most individual contribution to the stability of the global economy. The WTO’s procedure underscores the rule of law, and it makes the trading system more secure and predictable. It is clearly structured, with flexible timetables set for completing a case. First rulings are made by a panel, appeals based on points of law are possible and all final rulings or decisions are made by the WTO’s full membership. No single country can block a decision.

Malaysia is also signatory to the Convention on the Settlement of Investment Disputes established under the auspices of the International Bank for Reconstruction and Development that establishes facilities for international conciliation or arbitration. Further to this, the Kuala Lumpur Regional Centre for Arbitration was established in 1978 with the objective of providing a system for the settlement of disputes for the benefit of parties engaged in trade, commerce and investments with and within the Asian and Pacific region.

In conclusion, as we draw close to the new millennium, it is indeed a challenge to us all to be able to grapple with some of the abovementioned issues and adopt appropriate responses.



By: loveleenchawla

About the Author:

Make Money

It is very important not to package together the placing of stops with money management, as the two represent different strands of Stock trading. Simply put, stops are there to protect profits and limit the potential downside at any time once a trade has been opened, and are part of an exit strategy for trades that are already open. Money management covers position sizing or amounts to be risked within each trade of a portfolio.

Within this potentially complex subject, there are many different types of stops, and it should be added that stops are never guaranteed unless that facility is offered by the broker for an additional charge. Nevertheless, their use is an essential part of any trading strategy. For the examples below share prices are used, but stop losses should also be used when trading CFDs in commodities, forex or indices.

The uses and abuses of stops:

Much has been written about the placing of stops and how to avoid them being triggered without too much risk. This of course is the $64m question for most CFD traders and very often causes more consternation than any other aspect of the trading process.

The basic idea behind where to place a stop is by reference to the overall trend or trading range within which the share is moving. As to the actual level of the stop, it depends on several factors including the trader’s overall money management rules, the amount of leverage, the time frame, and crucially the underlying volatility of the share chosen. The stop should aim to be placed at a level which if triggered would confirm the trade was incorrect.

There is no point in trading a highly leveraged CFD account with routine 5% stops as eight losses in a row, which statistically can be expected every few hundred trades, would lead to a minimum 40% drawdown on the account.

Having said that, there is equally no point in attempting to reduce the risk too far by setting 1.5% or 2% stops in highly volatile stocks or takeover situations as each trade needs room to breathe, and stops this tight are likely to be triggered within the normal daily ebb and flow of price movements.

A good rule of thumb is that if you cannot see at least double the potential profit in a trade compared to where you expect to place your stop loss, that trade should be passed over. Indeed some CFD traders look for three times profits achieved against losses as a starting ratio. Consequently an approach like this can be very successful by winning just three or four times out of ten, and is the hallmark of many of the world’s leading traders.

Many losing stock traders look for an entry point or strategy that wins six or seven times out of ten, but this is very hard to achieve consistently. Although the feeling of winning regularly is certainly warm, the win/loss ratio here very often tends to be very poor as too many winners are taken quickly, so the correct use of initial and running stops placement is crucial.

Types of stops:

The basic maximum loss stop

The maximum loss stop is the starting point for most traders and is triggered when the share price hits a level below or above the opening price of the trade, depending on whether it is a long or short position. It can be measured in percentage points or actual money terms, but for these examples percentages are used. So if a CFD trader Buys Shares in British Telecom at 330p with a 2% stop loss, then the allowed loss is 6.6p and the position is closed if the bid or selling price falls to 323.4p or lower.

Note that no mention is made of how many shares are purchased or how much is being risked, as this is part of the client’s overall money management.

If the shares gap down below the stop either intra-day or at the open of trading the next day, the closing trade is triggered at the first price available in the market for that size, which is why stops are not guaranteed.



By: 2Stock Trading

About the Author:

Buying Car Insurance

Leroy Rushing wrote:


Most people feel the lure of day trading: seeing the frenzy on the floor of the New York Stock Exchange, grabbing onto the tail of a skyrocketing stock, and earning your millions. They want to start day trading and find the answer to that famous quote from the movie Wall Street: “How many yachts can you water-ski behind?”

Unfortunately, the vast majority of these beginner traders want to see results faster than it takes to watch the movie. In fact, about 90% of beginner day traders are knocked out of the game within the first few months.

The good news is that this fact can easily be addressed. Just about all of those who crashed and burned did so because they didn’t have a plan. If you take the time to develop a plan and learn how to trade, you stand a much better chance of making that top 10% of day traders who go on to successful day trading careers.

Here are five things you need to know before you start day trading:

1. Is Day Trading Right For You? – This seems like a basic question, but you should seriously evaluate your trading personality. Will risking that much money make you nervous? Can you afford to lose money in the stock market? Are you financially – and emotionally – prepared to leave your job and co-workers behind you? These and other questions must be answered before you go any further in planning your day trading career.

2. How to Control Your Emotions – What most beginner day traders don’t realize is that trading psychology has a huge impact on your success – and the market likes to play with your mind! There are many different emotions that come into play, but it boils down to two main dangers: fear and greed. It is vitally important you learn how to control your emotions before you try to tackle the market.

3. How to Develop a Solid Trading Plan – If you fail to plan, you plan to fail. And yes, it really is that simple. A solid trading plan will include details like determining what type of trader you are, your trading strategies (see below), what products (stocks, e-minis, etc.) you will trade, what software you will use, even your entry points, exit points, and stop loss points. The more detailed your plan, the more likely you are to have day trading success.

4. What Kind of Trading Strategies You Will Use – There are many trading strategies that will help you succeed at day trading. As a beginner trader you will probably be best served learning one or two to start with. For example, the Bull Trap is an easy type of momentum play for beginners to learn that allows you to predict a trend reversal, and cash in by following the momentum. But there are many different trading strategies; the key is finding the right set of strategies for you.

5. How to Develop a Business Plan – You should approach day trading as a business, not a hobby. Even if you plan to trade just part time, make sure you develop a full business plan that covers all the financial basics like how much trading capital you have, what your short-term and long-term financial goals are, developing cash flow statements, etc. You should also decide how you will work: where your office will be, what time you will be in your office in the morning, what daily preparation you will need, etc.

Learning these five things won’t guarantee that you will become a successful day trader. But if you start day trading before you find out these answers, you most certainly won’t get too far.



How to Lose Weight

Brian McAboy wrote:


“To Err is Human”, but in trading it often happens that traders will knowingly make decisions that create losing trades. Now we’re not talking about losses that come about because of testing out a trading plan or a specific indicator. Nor are we looking at simple errors committed purely by accident. If our goal is to profit, then why would we do these things that are clearly against what we know to be right? This phenomenon has many very undesirable consequences that are experienced quite regularly in the trading world.

A person’s confidence can take a severe blow when these intentional mistakes occur on top of the loss of money. Other after-effects often include a lot of putting oneself down for having done these things. Depending on the magnitude of the error, this can wind up in a rather nasty cycle that compounds the problem and sets the stage for it to happen again. Until the source of the issue is discovered and the trader takes action to address it, the self-sabotaging behavior is likely to happen again and again. This isn’t limited to new traders either.

For an example, one such trader (a real person that we’ll call Mark) of over 50 years had been going through this month-after-month for over a decade since becoming an individual trader trading from home. Mark has done just about everything in the futures industry that there is to do. He worked on soybean farms and at the shipping docks loading ships and coordinating shipments and orders. For about another decade, Mark ran orders on the exchange floor. From there, he worked both for and as an introducing broker in the commodities industry until he decided to retire at the age of 59. Needless to say, Mark had plenty of experience in trading, but for nearly fifteen years, Mark has been losing money. But why, and why does he keep doing it?

Trading is definitely nothing new to Mark. As a broker, he was very successful. He’s tried just about every strategy and system there is. He’s pretty sharp and knows his way around the computer and what he’s looking at on the charts. Mark loves trading and looks forward to getting up every morning to get busy with his trading. On a typical day, he might make $600 or lose $800. More often than not he loses. When his wife gets home from work (yes, she still works at the age of 70), he’s usually brooding in his easy chair after kicking himself and calling himself “stupid” or “idiot”. In all these years, he still has yet to end a year in the black. He’s also concerned about how much longer his wife is going to let him keep on this way.

When asked why he continues to trade this way, and why he doesn’t make use of a system that he knows can make him money, he simply says that he doesn’t want to because they are boring. This is very true: a well-thought out trade, where you know what you’ll do before you get in regardless of which way the market moves can be very boring. However… when you enter trades without a plan, or if you’ve deviated from your system, the suspense can be very intense.

Why do people take the time to sit through movies instead of going straight to the end to see if the hero triumphs or fails? Why do millions of people watch baseball games, rather than simply check the scores in the morning? It is the suspense, the excitement of not-knowing the outcome, that brings the thrill. The moments that are most enjoyed and fully hold our attention are when the ball is in the air and we don’t know if it will be caught or dropped, when the hero’s fate hangs in the balance. As humans, there is a part in all of us that craves that excitement.

At the conscious level, profits are what everyone wants (who doesn’t?). Many people choose trading because trading offers the opportunity to realize very significant financial gain. The real risk is that it also offers the thrill that another part of us craves at the subconscious level. If that part of you isn’t being fulfilled through other channels of your life, it is highly probable to find its way into your trading and seek satisfaction there. Excitement from not-knowing the outcome in your trading is where you don’t want it. What you need to do is to include activities in your life that provide sufficient excitement, and be okay with it if your trading is a bit boring - but profitable.



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Mikeal Whitemore wrote:


They are 20 years old, They negociate thousands of actions everyday with the dream of being rich. Welcome in the strange world of Day trading. =)

It’s 9:30 in the morning. In the basement of the Place of Canada, street of Gauchetière, Montreal, it is the routine. With signal of the opening of the North-American stock exchange markets, a bunch of young adults are inclined feverishly towards their keyboard of computer. And it left for another bogus day! From here until the closure of the Stock Exchange, at 4PM, this heteroclite band will buy and sell tens of thousands of actions of companies. Marjorie Landry, 23 years old, coed with the baccalaureat in finance at the University of Quebec at Trois-Rivières (UQTR), takes seat behind his working station and opens a meeting of computer. At once its password accepted, the amount that it can speculate for the day on Stock Exchange Market appears on one of the screens in front of it. It can then start to make its first transactions on the title of Intel, on the Stock Exchange of Nasdaq. Its spirit and its must be sharp.

If the title of Intel tumbles down, it must withdraw its balls of the market quickly. A few seconds are enough to miss its transaction and to wipe important losses. The young woman baits herself on the title of the American giant. microchips since several months already. With the least fall, it buys and, conversely, it liquidates when the prices go up. Sometimes, when it anticipates a fall of the title, it pushes the audacity until selling with overdraft, a hazardous technique where the negociator on meeting, or daytrader, sells titles. that it does not hold in the hope to repurchase them with a lower course to make profit. To see her keyboards frantically, one has the impression that she devotes to a video game.

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