Derivatives (Part 4/ Practice)
For the other parts or the whole Derivatives Guide please read the attached post on my profile.
Practical basics (subjective! )
7) Basic requirements
Of course, anyone who has access to a broker can trade derivatives. However, to make profit with them in the medium and long term is so difficult that some prerequisites should be met beforehand.
1. strategy
Only with the help of a trading strategy can the use of derivatives lead to profit opportunities. This consists at least of a fixed target and various scenarios according to which long or short derivatives are traded.
2. market understanding (macro)
If you do not prepare yourself for the market influence, you will experience surprises more often, which often end in total losses with derivatives. Questions to ask yourself include:
What is the effect of key interest rate hikes?
What are other ways in which the central bank can intervene in the market?
Current political situation?
Issuer situation?
Influence of exchange rates (currencies)?
Witches Sabbath? When, where and what can happen?
3. basic TA understanding
No one needs to be able to draw the one-legged gorilla on the chart, but I think it is naive to use derivatives, especially short-term ones, without a basic understanding of support and resistance. However, I am equally critical of a strategy based solely on TA.
4. product understanding
Many situations that can arise with derivatives I have not explained so far. Self-research is just as relevant here as in the acquisition of individual stocks.
5. risk management
Before executing the first trade, it is not a disadvantage to have a plan for both take profit and stop loss (yes, you can also set a stop loss above the knockout for knockout products). This way you can influence the risk even after choosing the warrant. This, the choice of a derivative and the position size are the most relevant factors of risk management.
If you don't pay attention to any of these factors, you're probably a child of Wall Street and will either be a gambling addict or lose everything in the long run. Or both. @getquinfuermerchverkauft <3
If you are interested in the basics of TA, risk management, a trading strategy etc:
https://www.amazon.de/Trading-mit-Hebelprodukten-Schritten-erfolgreichen/dp/3898798615
I don't get anything for it and I don't know the author, the book just helped me a lot in the beginning.
7) Examples
So where to start?
Derivatives can usually be traded at the most common neobrokers, special trading brokers or CFD brokers. In the beginning, I would not pay much attention yet to get a basic understanding. Basically, the selection at Trade Republic or Scalable is sufficient.
There is the possibility to set up demo accounts on some platforms, through which investing can be "tested". Useful for only one aspect: to check one's strategy.
Related to TA: if you use Tradingview Papertrading, you can test your strategy with simple long and short trades before implementing it, regardless of the type of derivative.
Otherwise, the biggest danger (with derivatives even more than with stock buying) is that emotions can influence selling or buying. "The price is bound to go up" is not a reason for a long certificate, "the numbers are bound to be bad" is not a reason for a put warrant.
If one uses the demo accounts, the emotions do not really come out, since there can be no real losses. Thus, they miss their purpose to prepare for a real trade.
To better understand all the dry theory, here is a trade in practice that worked out wonderfully:
Approach:
At the beginning of the Ukraine war, the defense stock Hensoldt rose from 14 to 28€. Weeks of high volatility followed, sudden focus on defense stocks.
On 03.03. the Hensoldt share price was at 21€, TA not clear.
The war was just starting, oil price in uptrend, hardly any public estimates on the length of the war. Days before, the 100 billion package was announced; Hensoldt was supposed to get small orders, but at the same time is supposedly working on a project with the white house. Market cap 2 billion, rather niche business, but which would benefit from increased defense spending.
Assumption: oil-dependent stocks will be punished, armaments rather constant/increasing, should the crisis persist. Private investors would jump on the armaments bandwagon.
Implementation:
First approach:
Call warrant that is in the money, since duration of the whole difficult to estimate -> rather longer designed
Actual execution:
Open End Turbo, news on defense stocks increased on 03.03. more and more+ probability for good news/ new orders/ hype of the share increased
Trade size:
Risky trade, as it is only based on news and TA, therefore 4% position size (In relation to the portfolio) when buying the derivative (should never be more than 6/7% with reasonable risk management anyway).
Knockout Underlying:
Choose derivative so that the knockout is slightly below 5% below the next support= 16,40€, because a support at 17,50€ can still hold the stock in case of a selling streak.
(So I (personally) do not choose the leverage, but the amount of the knockout).
Stop Loss:
At 17,20€, (if the price falls below the support -> damage limitation).
Take Profit:
At the previous high, profit is taken (as then bearish TA/ profit taking).
Result:
Ran longer than planned, thereby the base value of the Open End Turbo was set high (see pictures: Long @16.40 -> Long @16.43), but since the course was fine until then and the situation did not change-> SL pulled higher and let run.
Sold on 25.03. because previously determined take profit was reached. (see picture 3)
Follow-up plan:
If the price rises above 30€ -> new Bull Chart signal, possibly new trade.
If the price falls again -> Bearishe chart formation, cooling of the trend, possibly market situation wait,
Since then, no more Hensoldt trade has been created.
And how not to do it/ Why emotions are dangerous:
Palantir short (see picture; top purchase price, bottom selling price).
I had already given the premonition (short reasoning) here: https://app.getquin.com/activity/tzxiDVkAjc
Why I sold it one day later?
THAT DOESN'T HappEN TODAY ONLY BECAuSE OF SUCH A LEADING INCREASE.
If I had acted rationally, it would have been a nice profit.
