Trading Pal Blog

Stock market versus real estate

Tue, 15 May 2012 00:00:00 +1000

You can't live in a portfolio of shares and you can't sell just your bathroom to raise some extra cash. What are the pros and cons of those two forms of investment?

You never know the price of a property until someone is willing to buy it and someone else is willing to sell it at the same price. Equities are very liquid because there is a market quoting current prices for each trading day.

Borrowing to buy shares is risky while borrowing to buy property is virtually the norm.

Real estate is very much an all or nothing proposition. You buy a house and you sell the whole of it. Besides capital gain you can rent the property and it ties you to the duration of the lease. Some clever operators had the idea of getting people to invest in a pool of properties by holding a number of units while others have a time-share arrangement in a holiday condominium. Those arrangements end up having the drawbacks of both investment types and none of the advantages.

Shares allow you to build up a position over time taking a small risk at first because your holding is only a few shares (the broker's commission compounds but then you could use CFDs instead). Shares that you hold over time generate income by way of dividends.

People who are skilled as a tradesperson look for properties they can repair and maintain in order to add value. In real estate the location is crucial. Proximity to schools, public transport, shopping centers is built into the price. What maybe a good family home for you may turn out to be a disaster as a rental property.

You would think a farmer close to a urban centre has the option to subdivide his land into residential blocks and make a huge profit. That's the theory but in practice it is a 10 or 20 years plan and will require going around corrupt local authorities.

If you plan to buy land, build a house on it, sell it and repeat the process as an investment strategy this is a full time occupation - not a dabbling investing past-time. The building trade is notorious to attract unsavoury operators and local authorities are sure to change the rules with more and more regulations - not less!

Two big assumptions maybe falling apart with property: ongoing capital gain and cheap credit through a competitive banking sector. The recent crash has shown that like everything else inflated house prices will have to come down to earth while the few banking institutions left will tighten their credit assessment.

Property transaction costs are huge (conveyancing, local council duties, agent's fees) but online brokers have brought commissions to a bare minimum.

It seems people are either comfortable playing the property game or researching stocks with good growth potential but rarely do you find folks who have the mindset to actually do both.

Do you care where you put your money in?

Tue, 08 May 2012 00:00:00 +1000

Ethical investing is a moral issue. If you do your research into a given stock you are bound to uncover issues you may not agree with. So do you put your money where your mouth is not?

In the past people had rightful concerns about investing in military contractors, cigarette companies, gambling operators, etc... Today the spectrum widens as some would be innocent operators turn out into major public relation disasters. But how can you tell in advance if a public company is above board?

The short answer is you probably can't but the question really is: Do you invest with your head or with your heart? Do you know enough about the history, the background and the mindset of a company to be associated with them? Instead of investing your money, would you invest your time that is your working life there? How would it feel like if instead of an investor you were an employee?

What are the issues that would make you embarrassed of financing an operation in the view of earning a profit from it? Do they have a social balance sheet? How do they treat the people whose livelihoods depend on wages paid? Do they train their own staff or would they rather steal employees from competitors?

If a mining concern, do they improve the lives of local residents or do they pollute the water supply?

If a drug company, do they test new medicines in third world countries on unsuspecting volunteers?

If a food company do they use reckless marketing to promote harmful products? Remember Nestle selling baby formula as an alternative to breast feeding.

What is the company safety record? Was the widow of a workplace accident victim treated fairly?

Does the company have a 5, 10, 20 years plan? Has the board recently appointed a new CEO who is going to turn the operation into a cash cow - a bonanza for investors, a disaster for employees and customers?

Does the company stand by its products or do they hide quality assurance issues? Remember Toyota and the massive recall.

In the long run bad policies will turn out to be bad investments. Invest with your head to look at all the fundamentals but invest with your heart to spot an ethical operator who add real value to society and by correlation value to investors also.

Stockbrokers as spin doctors

Tue, 01 May 2012 00:00:00 +1000

Pump and dump strategies and other shenanigans were rife before the advent of discount online brokers. As the saying goes "it's never a bad time to take a commission".

Marketing and spin is taking a whole life of its own if you can spread a rumour and have enough bystanders repeat and embellish the story for you.

Can those good old times survive or has the internet killed the opportunity for brokers to dispense investing therapy? So what made a juicy good story? How easily could greedy investors (gamblers ?) be caught?

Since inside knowledge can be turned into a trading advantage there is an in-built collusion of interest between those who know of some impending market data and those who are eager to trade that information before it becomes common knowledge.

Full service stockbrokers were notorious to cultivate a following of people who wanted to be in on a good trade. For some unknown reason it always became a bad trade. Stock manipulation is more transparent now since any good online trading platform allows you to see the course of trades entered in the market. In the past a broker could interfere with the market of an illiquid stock by withholding either buy or sell orders to cause the asking price to temporarily rise or fall on demand. Then he could place the trades of his "preferred" customers at a more advantageous price. An electronic market has blown out those cosy arrangements.

Insider_trading is a hot issue and authorities play a cat and mouse game to unravel after the facts the actions of operators ever so clever at covering their tracks. After the stock market crash of 2007 authorities had to be seen as doing something. There is even an academic who claims to have written some software to identify suspicious insider trades!

A report by the Australian Institute of Criminology reveals that as long as you don't get caught the practice is too tempting to be passed by.

But life goes on and judging by the stockbroker fraud blog there is still plenty of action going around.

Bottom line: with a fast electronic market the goal post has shifted and there is more transparency. At the same time new opportunities are being created but we will only find out about them when they have been exposed and can no longer be exploited.

One notorious IPO which surprised all the pundits was Google who handled their float themselves. In fact the original Google IPO site is still around. But if you missed out on buying GOOG shares on NASDAQ at $85 on August 19, 2004 which fetched $500 in 2010 don't despair the next hot tip is now the Facebook IPO site

Why the old trading indicators don't work

Tue, 24 Apr 2012 00:00:00 +1000

It's a pity we can't go back and trade the 1950s market with what we know today. There is a lie that people want to believe that says that there must be out there some efficient market indicator that would consistently pull profits out of the market.

Sorry to shatter your dream but there is a cute term for this - it's called financial astrology!

Just think about it; If indeed there was a bullet-proof trading method and everybody was using it, there would be nobody left to trade with. The fact that you think it's time to buy a given stock today implies that someone else has decided exactly the opposite: for them it's time to sell that same stock.

Let us look at some famous snake-oil methods of trading which still today have their ardent followers.

The Elliott Wave is great entertainment to explain after the facts that such and such market move did precisely comply with the arcane rules of the system (waves within waves to map out the fractal nature of the market). The problem is who decides what is a major wave or a minor wave (!) I have codified the basic rules of the Elliott Waves Principle and my personal experience is that it is much worse that other simpler indicators.

W D Gann Square of Nine is a way to map the gyrations of the market to some phasing or vibration and it is totally useless in the 21st century.

J. Welles Wilder gave us the Relative Strength Index which is based on a sound observation but again does not pull any profit in today's markets (ie blue chip stocks, forex or commodities).

There is conjectural evidence that some of those methods might have worked in the past. In particular J. Welles Wilder gave actual logs and hand written charts to support his conclusions.

So why don't they work today and why do some people want to hang on to them?

They don't work today because the market is much more sophisticated. When we have so much CPU power on everybody's desktop any discrepancy in the market is being cancelled out as soon as it appears through automated trades.

People love a good story and it spreads all by itself. WD Gann died in 1955 and took his secrets with him. Ralph Nelson Elliott died in 1948 and is resting in peace. They did their research with kerosene lamps and plotted their charts by hand. Why would you want to go back in time? You can hire a horse-drawn carriage for your daughter's wedding if she is romantically inclined but for your superannuation you'd better move with the times...

CFDs for lunch

Tue, 17 Apr 2012 00:00:00 +1000

Contracts for a difference can be your trading staple fare if handled properly.

One account for stocks, forex, commodities and indices
What will you trade today? The choice is yours. Although I recommend you trade the instruments you have a feel for. Like fishing different fish work better with different baits and times of the day. Once you observe a given market you will know the critical times where things move and where things stagnate. You might even mitigate your risk by being long on an item and short on another related item (a form of arbitrage).

No fuss short selling
Why people would want to trade instruments where you can only go long baffles me. There is as much money to be made (or lost) on the way up as on the way down.

Sophisticated trade orders
Balanced orders like OCO (one cancels the other) allow for strategies to help you not being glued to your trading screen all day long (bad for your mental health). Pending orders also give you guaranteed execution while a sticky mouse or a slow internet connection in a busy market might rob you of the value of the spread or worse.

Huge leverage
This is the one feature that allows you to experiment. You can confirm or discredit your trading strategies with just $1,000 worth of capital. Remember paper trading is just that. No risk means no emotions. No gains no losses. You are always right in hindsight. Your strategy might be right but a lousy execution will ruin your trades. A stop too close will be triggered by a spike in the market. No paper trading will simulate that. You need to get involved to find out if trading is for you or not.
Some fools have given CFD trading a bad name by going crazy with leverage. Yes you can lose more that your capital but then why would you want to stand barefoot in the bathtub full of water and stick your fingers in the power point?

No commission (sort of)
CFDs by and large do not slap you with a commission just for the privilege of placing a trade. Instead CFD providers make their money through the spread. The spread is the difference between the buy price and the sell price at any given moment. If an index is quoted at 4000/4002 this means that you can buy at 4002 and sell at 4000. In other words if you buy and sell straight away you have a built-in loss of 2 points: the CFD provider's commission. To break even you have to wait for the market to move 2 points in your favour. For instance buy at 4002 and wait for the market to display 4002/4004. Then you can sell at 4002 and escape scotch-free.

MarketMakers - love them or hate them
The rumour has it that CFD providers can sniff where all the stop orders are and juggle the market just enough to hit them all. If you were a MarketMaker yourself you would realize that being pegged to a real market is their saving grace. Unless they themselves take real trades to counterbalance their customers CFD positions they would not stay alive very long. There might be some leeway here and there but by and large what a large CFD provider offers is on a par or better than what mainstream stockbrokers can offer.

Ranging Versus Trending - The Trader's Abomination

Tue, 03 Apr 2012 00:00:00 +1000

Markets can move in three directions: up down and sideways. It is the sideways bit that causes us the most grief. Let me explain.

A typical entry point is the breakout. An index, stock or commodity has been trading in a range between a support level and a resistance level. With an uncanny repetition it will retest those levels just to make sure they are holding - so goes the theory. What you do not see as an ordinary trader but what brokers and market makers can see is the congregation of stop orders neatly packed below the support level and above the resistance level.

So here is the tug of war. Someone will try to thump the game by causing the market to drop just enough to hit all those stops. They are sellers. They all assume that if the support level is broken it is a bearish omen and they all want to go short. The thumper of course had just enough weight to penetrate the support level but not much further. He is buying low from all those bears. Meanwhile the market pendulum swings and all the bears cover their shorts having lost hope in a downward trend. This buying pressure pushes the price further up and the thumper sells at a nice profit.

With a CFD platform you are clueless as to what goes on because you do not have a course of trade to see what's coming up on the wings. You do not have a volume indicator so you do not know if a move is sustainable with large transactions taking place. The solution would be a contrarian trap. Say the market currently trades at 4750 - the middle of its range. Place a limit buy order at 4730 and a stop sell at 4720 if it doesn't reverse around there. Place another limit sell at 4770 and a stop buy above at 4780 if it breaks out. The two buy orders at 4730 and 4780 cancel each other. So do the two sell orders at 4720 and 4770.

This system will harvest the 40 points oscillation between 4730 and 4770 whether up or down and will take you out with a 10 points loss if a breakout was to occur.

Nifty, huh? So how often does your market range as opposed to how often does it trend? People would say it would trend 30% of the time. Do they publish in the newspapers whether tomorrow will be a trending or ranging day? You hope! But statistically if it ranges 70% of the time and you make 40 points and trends 30% of the time and you lose 10 points - then this is a profitable system.

Worth checking it out, don't you think? It's always good to check the temperature of the pool before you jump in to swim. I hope this article prompts you to unravel patterns in the market you are trading.

How To Trade Strategically

Tue, 20 Mar 2012 00:00:00 +1100

Some people trade on a hunch others just follow the market. Even though the market can only go in 3 directions (up, down and sideways) I do not make assumptions on what should occur on the day.

These days brokers (especially CFD brokers) provide a range of pending orders which can make you more efficient as a trader. Let's review them for starters. A stop order will automatically open a position for you if the market goes beyond a given price. A limit order will close an existing position if the market reaches the limit price. Instead of being independent orders can be grouped in pairs with the OCO attribute (One Cancels the Other). This gives us the basis for an automated trading setup as follows.

Let's say an index you want to trade is currently quoted at 4740. If it moves up to 4750 you will take up a long position. If instead it drops to 4730 you will enter a short position. If the market trades as high as 4770 you count your blessings and collect your profit with a limit order at that price. In the other scenario if the short position gathers momentum you will close it with another limit order to buy it back at 4710.

Nifty isn't it? What if things go wrong? That's where the OCO comes into play. The two buy pending orders are linked and will cancel one another. Likewise the two sell pending orders also are linked and will cancel one another.

There are therefore 4 possibilities. The market currently is trading at 4740. If it goes up and reaches 4750 the stop buy order is triggered cancelling the other buy limit order at 4710. You are left with a long position sandwiched between a sell limit order at 4770 giving you a 20 points gain and a sell stop order at 4730 giving you a loss of 20 points.

The other scenario is a market dropping from 4740 down to 4730 hitting your sell stop order cancelling the sell limit order at 4770. You are left with a short position sandwiched between two buy orders: a limit down at 4710 giving you a 20 points gain and a stop up at 4750 giving you a loss of 20 points.

The beauty of such a setup is that you can place your 4 pending orders at the opening of the session and walk away from the computer to attend to whatever you do besides trading knowing that you will either make a 20 points gain or a 20 points loss.

Some might say that's as bad as flipping a coin in the air. Not quite. Keeping a log of your trades and being consistent, persistent day after day will reveal if a profitable pattern emerges. Another refinement is moving the remaining stop order back to the price current at the opening of the session. This would bring down the potential loss to 10 points only while the potential gain remains 20 points. The risk though is that in a volatile market the 10 points stop might be hit even though the market did reach the 20 points limit afterwards. Something to think about. Being tight fisted is not always rewarded. Only your trading log will tell you what is wise and what is not.

Gamblers, Speculators and Investors

Tue, 13 Mar 2012 00:00:00 +1100

Gamblers rarely see themselves as gamblers nor would they want their spouse to know what they are really doing. If there are some winners in the market there must also be some losers and I am afraid gamblers make the bulk of it. They compound their misfortune by trading with borrowed money rather than some set-aside capital they can afford to loose if it comes to that. They are attracted to the market for all the wrong motives and supply the grapevine with reasons why you should not be trading. They have no discipline no patience and no accountability. They have no notion of a calculated risk and do not take a break to regather themselves after a loss. Instead they try to make up for it by trading double the original quantity. Their demise is deserved. They suffer from a psychological addiction which blinds them to the consequences of bankruptcy to themselves and their family if they still have one.

Speculators are savvy traders who have a nosy interest in the market. They like to uncover profitable patterns and only trust what they have observed after some long and meticulous research. They use math and charting to document their findings but unlike specialists who know it all but never trade speculators take trades every day as a matter of personal discipline. They learn to take losses in their stride knowing that the next gain is just around the corner if they keep trading and maintain their safeguards. Speculators tend to trade commodities, forex and indices which cannot be manipulated by a single large player. Speculators are predominantly short term and use technical analysis.

Investors are in for the long term and use mainly fundamental analysis. They have a vested interest and inside knowledge of a given industry. They know the main players in the game and keep themselves informed of anything that might impact their industry. Investors tend to trade stocks of all capitalisation. They might know that so and so has been appointed to the board of directors of some unnoticed company and vote with an order for a bundle of shares. Investors are experts at sifting through information. In fact recent scandals have highlighted the fact that what you know and what you do with that information can make you a fortune. Insider trading is hard to quantify, hard to prosecute and hard to expose. Retail investors are in danger of being duped by insiders and recriminations are the norm at company annual general meetings. Share options and the plethora of new weird and wonderful share issues muddy the waters for newcomers.

Find out more at Trading Pal

Trading Basics We Are Quick To Forget

Tue, 28 Feb 2012 00:00:00 +1100

A novice trader seems to have some advantage over an old timer: no pre-conceived ideas! If you have been trading for a while and it could have worked better for you it's time to go back to the basics and review your assumptions.

The tug of war between advocates of fundamental and technical analysis has had its run - but why not use both? You don't know how long a trade is going to take to bring the expected profit. In case you get saddled with a horse for a long trip why not make sure it has a good pedigree? We are all impatient and greedy. In case things don't exactly pan out as expected it is comforting to know later that you did indeed do your homework on that stock and it was a sound investment then. Do it at least as a favour to yourself. As the vicissitudes of the market unfold you need the confidence that you entered a sound situation.

Beware of wild random connections. The fact that your last two successful trades involved companies whose names start with letter "C" does not warrant trading more "C" stocks. Said like that it is tantamount to superstition but you would be surprised at the weird assumptions that mess up with your head when you are greedy or fearful - always trying to rationalise and find an explanation for everything...

Operate on several planes simultaneously and correlate what you see. How does your stock behave compared to its industry? How does your stock behave compared to the index? Do the daily, weekly and monthly charts tell the same story? Are we starting a short term retracement within a long term trend? When will you decide the long term trend is over and the correction wasn't minor at all - you missed the top of the market by 2 months(!) Then answer to that can be found by checking the support and resistance levels in each timeframe. It is also safer to build up and unload a position gradually rather than all at once. You only keep in the market the number of shares your risk tolerance will allow.

Set your parameters before you enter a trade. Decide beforehand what your stop loss order will be and your limit target order will be. If you can't be at the computer that day for whatever reasons you can rest assured that both your profit is protected and your loss will not grow bigger.

You have heard it all before but why do you keep breaking your own rules all the time? Discipline and a cool head do not come overnight but you will be all the wiser if you stick to it.

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

Are You Miffed by Trading Myths?

Tue, 21 Feb 2012 00:00:00 +1100

In this information age where all the facts are available the behaviour of a crowd should be rational. Well, economists deserve the lack of respect they are getting because they fail to grasp that crowds are impulsive. The more a trader trades the higher the danger of being over-confident.

People fall in love with the stocks they are holding. As a result they discount any negative information but seek any confirmation that they have done the right thing.

People buy high and sell low when they should be doing the opposite. Of course people will explain their behaviour by saying that if they bought a somewhat high price there is enough momentum to sell higher. This will work in a bubble situation and reinforce bad habits at the same time. You could call that the greater fool method where as long as you can find someone more crazy than you it will justify your action.

The motivators here of course are greed and fear. Greed of missing out on a good move while you have no idea how close to the top you really are. Fear of a paper loss turning into a debacle while at the same time savvy investors are buying the very stock you are getting rid of in a fire sale. Two years later, not only it regained your entry price but added 50% growth to that.

Applying good statistical concepts to a small sample is another trap. Just like the random flip of a coin will give an equal number of heads and tails, rises and falls in the market seem to follow evenly. But if you rush to apply this to a small timeframe you are being over-confident. There could be 10 heads in a row in a coin flip experiment and over 500 attempts it is irrelevant. Likewise the market has a fractal nature and there are rises and falls within larger rises and falls. Don't think the market will do you a favour by behaving as you want just because you have a vested interest which colours your perception of things.

People develop a pet formula out of random reinforcement. The mind is quick at working out a correlation between random events. If you made a profit out of two companies in Australia you are going to seek other Australian stocks and become an expert in down under issues. Little did you know that the fact your first two Australian wins were a fluke and it went downhill from there. There was no connection there. The company names might have started with letter B or the CEOs might both be over 6 feet in height!

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

Common Ways to Invest to Earn Money Quickly

Tue, 14 Feb 2012 00:00:00 +1100

Just like you can't hurry up the growth of a plant or animal without side-effects, the return on investments is a function of time. The more work you put in, the more results. Nothing happens by chance. But what about those who win the lottery?

That would be the perfect example of a load of cash for next to no effort with instant results - the time gap between you buying the ticket and the publication of the draw. But how reliable is that? Some addicted gamblers have bought tickets all their life and are still betting on it for their retirement. It's amazing what you can get people to do with the right propaganda. Some obviously think they are not paying enough taxes.

Lottery is akin to gambling. The illusion of massive returns for no effort. Lotteries are very sound businesses for casinos and government coffers hence their existence. They produce absolutely no value for the economy but generate social problems which beset the poor and vulnerable. Lotteries would disappear into oblivion if it wasn't for the massive exposure they are getting. The stark truth is that many winners are broke within 5 years because they didn't have the mindset to use their gain wisely. Statistically there is as much chance of you winning the big draw as you being zapped by lightening.

The more hands on you are with your investment the more control you have and the more returns you will get. You need to train yourself to be the nosey type who can suss out opportunities. Do you know that some businesses do as much turnover in the two months leading to Christmas than during the rest of the year? There you have it. Hire a stall in a shopping mall and move merchandise with the help of family members.

By now you have noticed that it's all about doing the right thing at the right time, at the right place. The reason so many investments go awry is that people don't do their homework and trust blindly a manager to look after their money for them. The issue is why should you get a free ride on some investment while someone else is doing all the work and carrying all the risk? The stock market was supposed to be the trading exchange to connect all interested parties. Unfortunately is has become the den of robbers where sheep are being fleeced.

Now let's have a look at another law at work: The more you give, the more you receive. Once you find a worthy cause to mobilise your time and resources you will find yourself empowered to do more. Go and find a cause that really turns you on the inside and throw your weight behind it. It is a biblical law and it works for Christians and non Christians alike because God looks at the attitude of the heart.

If the stock market interests you check out http://TradingPal.net an automated trading system which you can use to compare against your own performance.

To find out more about Christian values check out http://witness4christ.net

Safe Ways to Invest Money With Fewer Risks

Tue, 07 Feb 2012 00:00:00 +1100

Buy yourself a safe and charge yourself $10 each time you open it to count what's inside. Seriously, can you really get around the correlation between risks and returns?

The concept that you can get your money to go out and work on its own is called investing. But maybe your money might feel abandoned and would like your company instead, rather than working with strangers.

We live in a mindset where few people are in business for themselves. The majority work their guts out to make some corporation rich and they demand high returns for the savings that cost them so much blood sweat and tears.

It wasn't always like that. Since we have moved from an agricultural age to an industrial age and then onto an information and now entertainment age we need to go back to the basics and see unshakable laws at work.

The safe investment with fewer risks is when you have a hands-on approach to investing. Why would you trust some glossy prospectus to park your money to work on dubious ethical ventures? This is a cop-out and you deserve to be fleeced for believing a falsehood.

It's your money. You need to take charge and be responsible for it. Maybe the root of the discomfort is that you do not have clearly defined goals - both short term and long term. Even taking a holiday could be a very productive investment if it opened your mind to find out what you really want to do with your life and set aside resources for you to get there.

Setting goals will force you to investigate issues that really resonate with you and will give a meaning to everything that you do. Your research will lead you to solve problems where you have to give out of your substance - both time and money. You and your money working together - what a beautiful partnership!

One of the obvious long term investments people will ever make is real-estate. But unless you are quite clear about what you want to achieve and who with, you will never know what sort of accommodation/business abode you really need and in which part of town.

What maybe a sound safe investment for some might be very risky for others who lack the connections and the industry background. Say you worked all your life in the mining industry. Picking speculative stocks of oil exploration companies might be a clincher for you because you know the background of most of the directors on the board and you trust their experience. Someone else might be fooled by some fake new venture just setup by a creative broker to "pump and dump" on the stockmarket.

Why Investing is Not a Get Rich Quick Scheme

Tue, 31 Jan 2012 00:00:00 +1100

You wouldn't pull out a seed you just buried in a pot to see how the roots are doing. You keep watering it with tender loving care. Then the first stem and green leaf show up to confirm it is working. You should do the same when you put your money out to work.

There are many parallels to be drawn between investing and agriculture. The same principles apply to both.

Returns are a function of time
Regardless of the prevailing mood people still need to buy food, petrol for their car, clothes to wear, etc... Invest in those industries because there will always be a demand for these products.

Impatience is your downfall
How many times have you heard of someone pulling out of the market with a loss in a panic attack? Six months later the price of their stock finished 20% higher than their purchase price.

Risk is part of the equation
The knowledge of the future does not belong to us. But one thing we know. If you don't plant seeds there is no harvest. If you're not in the market there are no profits. In fact you could say that the only reason you ought to make a profit is for your ability to handle risk. By buying shares you provide liquidity into the market and allow businesses to raise capital.

Invest in an industry where you are knowledgeable
A farmer doesn't pick a crop at random but knows the intimate details of each plant he grows. Likewise you need to know the drivers behind a company. You need to have contacts with people who work there to corroborate whatever news or rumour is doing the rounds.

Do not confuse investing with speculating
In fact there is a fine line between speculating and gambling. It is manageable to pick a reliable trend over weeks and months but if you go hour by hour like a day trader you are in a fog.

Take responsibility for your investments
Do not hand over your life savings to some manager to do the work for you. That's the only way you will learn something out of the experience. The one who has built the expertise deserves the profit - not the bystander.

Go for companies that pay dividends
Capital growth is good but if the business is sound they should pass on some of the profits without you having to sell your shares. Check the track record on dividend payouts and compare companies with each other in that regard.

Cast your bread upon the waters, for after many days you will find it again.

Understanding Non-Directional Trading

Tue, 24 Jan 2012 00:00:00 +1100

There are often times when a trading instrument doesn't display any clear trend - either up or down. That shouldn't prevent you from pulling a profit out of the market if you have the right strategy.

A market is either trending or ranging; usually showing a clear move upwards or downwards a third of the time. This means most often it is bouncing between two limits. This is a safe trading opportunity.

Nobody is smart enough to pick the tops and bottoms of the market so you should not try either. Using stop orders you can enter the market only if the stock (currency, commodity, whatever you are trading) displays the expected behaviour.

As soon as you are in the market you can trigger another stop pending order to protect your newly opened position. That way you are not glued all day to the screen. You may check 3 times a day the situation with a smartphone.

A third limit order is placed in the market to collect your profit near the outer range of the trading channel. Simple in theory.

In practice several things can go wrong. How close your stop order is from your entry point is a matter of how much risk you are prepared to tolerate before you call it quits. Funnily enough the more tight fisted you are the more you stand to lose because the market noise is sure to hit a stop order placed to close - only to resume the previous move moments later...

Too much greed is also a downfall. Many have seen a good profit escape their grasp because they were not content with what was on offer on the table and wanted more.

Better many small profitable trades than no gain at all. If brokers commissions are an issue for you then shop around and find a setup that's fair to you.

Most importantly you need to keep a log of your trades and figure out your trading averages. How many losses in a row did you encounter? How many gains did you have in succession?

Remember also that the markets do evolve over time. You might have been fortunate to identify a profitable trading pattern. The market does not owe you anything and is free to branch out into a completely new behaviour without warning.

If that happens don't be stubborn. Don't jeopardize your previous gains. Go and smell the roses and study other more profitable instruments to devise a new strategy.

Keep a Trading Journal to Follow Your Progress

Tue, 17 Jan 2012 00:00:00 +1100

The trading log from your broker tells you precious little nothing about the reasons why you entered and exited a trade. Keeping track of that information is paramount for improving your trading performance.

Trading is a game of bluff. You are betting that an equity will go up and for a trade to take place you need to find through the stock exchange another soul who believes exactly the opposite. They might need to sell for personal reasons but if they were convince the stock will continue to shoot through the roof they probably wouldn't sell - at least not at the current price...

Trading is an emotional game and in order to reign in your temperament you need to document objectively the reasons why you enter and exit a trade.

What information should then be recorded?

What trading signal did you use? Name the indicator or oscillator. Do not change indicators throughout the duration of the trade - that's a cardinal sin!

Was your trade conditional on the equity hitting a particular price level?

Upon entering what are your exit stop and your target stop orders? How long do you expect the trade to last in order to reach that profit?

Paste a copy of the current chart with support and resistance levels.

Did you do any fundamental research on the stock? Is it sensitive to any type of news (ie forex jump at changes in interest rates). Was it the subject of a broker's recommendation? What do you know about the potential of that sector? Did you read the company's annual report?

Of all the possible instruments to trade why did you pick that one? (People often wonder about that one once the trade has gone pear shape later on...)

Was it a tip from a friend? Do you have information not available to the general public?

How did you determine your position sizing? Do you not risk more than 2% of your trading capital on any given trade?

Is this trade independent of other trades you have currently opened? Can a change in the price of crude oil or the price of gold adversely affect several of your opened trades? How can you protect from that? Do you know about hedging?

Do you buy and sell all your shares at once or do you gradually build up and decrease your position?

Did you calculate the brokers' fees and your tax status in regard to dividends, etc...

That's it for now. You get the idea. You will be amazed how you discounted the importance of some of these things in the past.

Looking back give yourself a score on the execution of your trade. Did you panic and closed the position in a hurry only to see the stock reach your target two weeks later? Did you safely bail out according to your rules and avoided a blood bath? Did you execute entry and exit with total detachment for a well earned profit?

Why not compare your trades with what an automated system would do in the same circumstances. Check out http://TradingPal.net

Psychology of trading - do not goof a good trade

Tue, 10 Jan 2012 00:00:00 +1100

Don't you feel like kicking yourself when everything went according to plan but you decided to interfere with a trade? What would have turned out into a tidy profit was aborted as a loss!

How can you trade without letting your emotions getting in the way? Novice traders can execute trades without batting an eyelid. It's when you've been around the traps that fear or trepidation can rear its ugly head. External factors can also jeopardise your trading ability. Going through separation or divorce is not the time to trade no matter how much you need the extra income. Embarking on a career as a day trader when you are unemployed is not advisable either. You will put undue pressure on yourself.

It is best to be detached to your trading activity otherwise you may inadvertently cross over the line and it will become sheer gambling. A good approach is to start with a handful of stocks (meaning no more than five!) and do some old fashioned research on the fundamentals of the company. Can you corroborate from other sources what your broker is saying about each of those stocks? Looking back at 12 months price charts what were the events which caused each stock to rise or fall abruptly? Were there any trading halts, share splits, dividends withheld, etc...

In the first six months do not spend more than 4 hours a week on your share trading activity. A lot of people study their portfolio on the weekend and place orders on Monday morning. If you have a contrarian spirit, do your research on Wednesday night and place your trades on Thursday morning. Placing trades on Friday just before the close of the exchange is not very safe. A lot of unforseen events can happen over the weekend.

When you place a trade you should enter the market only if the stock moves in the direction you expect. Say equity XYZ closed at $50 and you think there is some good upside potential, then only buy if it reaches $51 - a 2% move. Bail out if it goes down to $46 - a 10% move against you. Set yourself a reasonable target - say sell two thirds of your position if it reaches $56.

Use a trading log (spreadsheet) and count how many losses in a row you have suffered so far. Tally your average gain and your average loss. Each time you take a trade and you stick to your rules you should expect to be within your track record. If things stray way out - your system is broken and you need to reconsider what you are doing. Maybe you need to trade other instruments more profitable.

After you have been trading the same 5 stocks for a year and are well versed on these equities you may leverage that knowledge to other markets - forex, commodities, indices.

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

What To Think of Day Trading Robots?

Tue, 03 Jan 2012 00:00:00 +1100

Technical analysis came of age in the fifties when RSI and the stochastic indicators were published. It was criticized by the advocates of fundamental analysis who argued that you'd better learn to read the balance sheets just like Warren Buffet does to make it big on the share market.

Then with the downfall of Enron and others it was apparent that a solid balance sheet was not enough and the argument was: "Everything you need to know is built in the price." Tomorrow's price that is - and nobody knows for sure what that's going to be.

Why on earth would you believe an algorithmic system would be any good at pulling consistent profits out of the market? Testing is the answer. You can put your day trading robot out to pasture for a while until you have trade logs to show the evidence of something above random chance in terms of success rate.

If there was a way to turn lead into gold we would know about it by now - yet financial alchemy is alive and well.

When there is greed, failure follows close behind. Yet an astute trader would readily try and use a new system to challenge common assumptions.

Markets do and will change over time. You might be fortunate enough to have locked onto a profitable pattern. The moment it becomes known and many participants start to emulate your trades, the pattern will disappear! It's called an arbitrage effect.

In the nineties William Eckhardt and Richard Dennis set up the Turtle Trading experiment. The issue was to settle an argument between the two partners, to figure out if the skills of a successful trader could be reduced to a set of rules, in other words can trading be taught? The experiment was overwhelmingly successful with novice traders ending up making $100 million. Eckhardt who thought trading could not be taught, had lost his bet with Dennis.

These days Wall Street magnates do not throw their pearls to the pigs. If you see someone promising you a blackbox trading system run away as fast as you can. Only gullible fools wishing to be parted from their money will fall for that.

One thing you can do though is compare your own performance with an automated trading system and see how you can improve your skills. That's what Trading Pal is all about.

How to Determine a Trend in the Futures and Commodities Market

Tue, 27 Dec 2011 00:00:00 +1100

It is assumed that a trend is established if the instrument you are trading is reaching new highs (or new lows for a downward trend). But is there more to it?

Remember that a trending market occurs probably one third of the time. The rest (the majority) is spent fluctuating within a range.

So here is the conundrum: you want to get in early in the impending move to gather the maximum traction (profit) but you don't want to get slapped by false triggers...

Since the majority of the time is spent playing ping pong between the same two levels shouldn't you be trading that instead? When the support or resistance levels are broken you would be on a favourable trade already.

So far so good - that's the theory you're heard from information seminars and introductory books. But what is it like in practice?

The moment the future or commodity touches the boundary of the trading channel you will see a fury of activity if you have the chance of having access to an online trading platform displaying the pending orders placed in the market.

Why is it so? There is a tug of war going on. Some people are trading the channel and want to get out with the profit for that leg. Others are banking on a breakout and have stop orders in place to catch the move. Professional traders try to manipulate the market with large orders, hit all the stops in sight for a quick profit and dump their position quickly afterwards. What looked like a powerful oncoming breakout just fizzled out...

So what next? Have you considered using a trading indicator? Different people have their pet indicator. Some that come to mind are the Supertrend and the Kauffman adaptative moving average.

Only experimentation can determine if they are any good for the instrument you are trading. Yet again the common wisdom is that forex and commodities behave the best when traded with a technical analysis approach.

You have heard the phrase "the trend is your friend". What does it mean? Put simply it means that trading with a contrarian bias might be rewarding on paper but near impossible to get the right timing. Yes, you will leave some money on the table but a decent profit is better than no profit at all; or worst a loss to wipe out your last profit!

Tale Of The Farmer And The Share Trader

Tue, 20 Dec 2011 00:00:00 +1100

Are you in the market? If not, why not? Have you sown your seeds in order to reap a harvest? One thing we know for sure: No seeds in the ground is tantamount to a zero return. So what is it about agriculture that makes a good pattern for long term investing?

First you have to be in the race to win the prize. No matter what adverse conditions prevail the farmer always plants a crop because conditions can change and do change over time. Compare that with fidgety investors staying on the sidelines waiting for that perfect entry point. We know you cannot pick the tops or bottoms of the market. You can only find that out three months later looking back at the charts. By then it is useless information apart from setting a precedent for the next support/resistance level.

Later as soon as the seedlings emerge the farmer waters them with tender loving care. But some investors are so paranoid that they protect their position with a stop too close. Sure enough they get bumped off at the first retracement to re-test the last support level. That would be like a farmer pulling up a plant off the ground to check how the roots are doing.

Lastly plants do grow in the wild without the help of anybody. The farmer knows that time is on his side. The process that was started will eventually reach fulfilment. The seasoned investor also knows that time is on his side. The economy keeps going and going simply because consumers keep consuming what producers keep producing. Yes peaks and troughs follow their erratic ways but there is also an upward bias in the market that will reward those who stay for the long haul.

But what about you? Have you sown your field? Are you in the market? If not, why not? Maybe you heard so many horror stories of people who lost their life savings that you don't know who to believe. Obviously you do not have yet a positive personal experience to fall back on.

What if you could look over the shoulder of a successful trader, gaze at the trading log and ascertain the overall performance?

Find out more at Trading Pal

Rating Stocks against Property

Tue, 13 Dec 2011 00:00:00 +1100

You can't dwell in a portfolio of shares and you can't sell just your bathroom to raise some extra cash. What are the advantages and drawbacks of those two types of investment?

You never find out the price of a property until someone is willing to buy it and someone else is willing to sell it at the same price. Stocks are very liquid since there is an exchange quoting current prices for each trading day.

Borrowing to buy shares is risky while paying cash for a property is rare indeed.

Property is very much an all or nothing proposition. You buy a residence and you sell the whole of it. Besides capital gain you can rent the property and it ties you to the duration of the lease. Some smart operators had the idea of getting folks to invest in a portfolio of properties by holding a number of units while others have a time-share arrangement in a holiday condominium. Those arrangements turn out having the pitfalls of both investment types and none of the benefits.

Shares allow you to accumulate a position over time taking a small risk at first because your holding is only a few shares (the broker's commission compounds but then you could use CFDs instead). People stay for the long haul to qualify for dividends.

Renovators look for properties they can repair and maintain in order to add value. In real estate the location is crucial. Proximity to schools, public transport, shopping centers is built into the price. What maybe a good family home for you may end up a real loser as a rental property.

You would think a rural owner close to a urban centre has the option to subdivide his land into residential blocks and make a nifty profit. That's the theory but in reality it is a 10 or 20 years endeavour and will require making circles around local authorities.

If you plan to buy land, build a house on it, sell it and repeat the procedure as an investment strategy this is a full time profession - not a dabbling investing hobby. The construction industry is known to attract unsavoury operators and local authorities are sure to change the rules with more and more regulations - not less!

Two big premises maybe falling apart with real estate: ongoing capital gain and cheap credit through a buoyant finance sector. The recent global financial crisis has shown that like everything else inflated house prices will have to come down to earth while the few banking institutions left will tighten their credit assessment.

Real estate transaction costs are substantial (conveyancing, local council duties, agent's fees) but online brokers have brought commissions to a bare minimum.

It seems people are either happy playing the property game or researching stocks with good growth potential but rarely do you find those who have the mindset to actually do both.

Only trade money you can afford to lose

Tue, 29 Nov 2011 00:00:00 +1100

Share trading forex or commodities trading is mainly a game of bluff. You can only take a trade if you find someone else willing to buy when you want to sell or sell when you want to buy.

It stands to reason that you can't be both right. One will end up with a profit and the other with a loss.

At the end of the day you save face by trading anonymously. You probably would never trade again if you saw the professional rubbing his hands after making an easy win at your expense.

The market loves to backtrack over the values reached in the preceding days and it's a game of who blinks first. You can be prudent and go home with a small loss or you can be bold and hold on for sheer perseverance only to be punished with a much bigger loss.

That's where all the psychology comes in. The market rewards you for taking a risk but your risk taking ability depends on your present situation. Are you under stress to make ends meet? That's' the worst situation to trade with a clear head. Are you going through separation or divorce? Please do not trade now. Have you just lost your job? Smell the roses but do not turn yourself into an overnight portfolio manager...

The more desperate you are to pull money out of the market the more likely you are of being fleeced. There is a fine line between trading and gambling. You are crossing that line when

* You place more than 2% of your capital on a single trade. (Instruments that move in unison count as one trade here).

* You have done no specific research and trade on a hunch.

* You do not use technical analysis to indicate objectively when the market changes from rising to falling.

* You do not set a stop loss and a limit target before placing the trade.

* You hide your trading from your spouse.

* You dash off at work to the bathroom to check your stocks on your iPhone.

* You pray to the god of the markets that this stupid stock should turnaround now.

* You double your position to get even with that wild beast and recover your losses before it reaches back your entry point.

* You have visions at night of yourself placing a bomb in the basement of the exchange.

* You take up smoking and upgrade to a supersize meal at the fast food outlet.

Fred X commented:
I find that if trading is your only source of income it brings undue pressure which adversely affects your risk assessment.

The art of position sizing

Tue, 22 Nov 2011 00:00:00 +1100

Have you ever seen a good trade turn into a non-event because you only had a nominal quantity at stake? Or worse have you suffered an instant devastating loss because you bet everything on the house?

Moving in and out of a position gracefully is definitively an art and it needs to be practiced to get it right.

Some people try to save on commission charges by placing an all-or-nothing order into the market. This is not a good mindset. If commission charges are your bugbear then trade commission-free instruments such as CFDs.

Before you commit to a substantial trade you need to test the waters. Dip your toe in the pool to feel the temperature. Some experienced traders keep placing small trades constantly to build-up a large position over time but mainly to test the reaction of the market at each step. Feeding the monster with little nibbles tell you how hungry the animal is (how much demand there is out there) rather than offloading it all in one hit and seeing an indigestion thru the course of sales.

This is how losers lose more than they need to lose. Offloading a bad position in one hit tells everybody else that you are giving up. Remember trading is a game of bluff. Why not have the nerve to wait for the next retracement and then make your exit more discreet.

Another issue is: How should debutants build up their trading size over time? We have heard it all. Somebody did their homework dutifully. The early trades were not timed the best but they did bring some bacon home. Then all of a sudden a major disaster happened. Those guys have been eaten alive by the market when being cocky they doubled or tripled their stake being over-confident of a favourable outcome.

The answer cam be found in your trading log. You need to calculate the average length of winning trades and losing trades. If the worst scenario in your past trading activity is a string of 5 losing trades it does not mean your should bet the house on the 6th! But you need to know how long those streaks have been in the past.

Bear in mind that markets do evolve over time and the moment you think you have it pat - the market will prove you wrong by shifting to a different pattern... just to spice things up!

The safety net is to not risk more than 2% of your capital in any and every trade. That could be quite a restriction for some but while you still have your training wheels on just pedal at a safe speed. It is less devastating for the psyche to lose money your previously earned from your trading than to lose your life savings earned the hard way thru your labour.

Where are the leading indicators?

Tue, 15 Nov 2011 00:00:00 +1100

Baltic dry index

This index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic. So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..." The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Because it provides "an assessment of the price of moving the major raw materials by sea," according to The Baltic, "... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."

VIX

Although the VIX is often called the "fear index", a high VIX is not necessarily bearish for stocks. Instead, the VIX is a measure of fear of volatility in either direction, including to the upside. In practical terms, when investors anticipate large upside volatility, they are unwilling to sell upside "call" stock options unless they receive a large premium. Option buyers will be willing to pay such high premiums only if similarly anticipating a large upside move. The resulting aggregate of increases in upside stock option "call" prices raises the VIX just as does the aggregate growth in downside stock "put" option premiums that occurs when option buyers and sellers anticipate a likely sharp move to the downside. When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

Conference Board Leading Economic Index

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession and upward before an expansion. The single index value composed from these ten variables has generally proved capable of predicting recessions over the past 50 years.

Do you believe in superannuation?

Tue, 08 Nov 2011 00:00:00 +1100

The only people who still do are those who derive their fees from it and the government who legislate in order to raise taxes and avoid paying pensions.

The abysmal birth rate in western countries is a time bomb for superannuation. Hear it loud and clear: there won't be enough working people in twenty year to support an aging population.

Legislation has created a whole industry of fund managers - vultures circling around our nest eggs. The government itself can't help reaching into it for its own purposes. It's such an attractive magnet. Not content with inheritance tax - why not taxing people well before their die (in case they live so long, there won't be anything left to tax...)

Superannuation and retirement are modern ideas - by products of our consumer society. The premise that if you keep quiet and obey the rules all your life you can buy at the store anything that tickles your fancy and have the rest of your retirement to enjoy it. Hogwash! Those days are over...

The superannuation crunch is a consequence of the family break-up. In the past people had respect for their elders. People didn't move too far from each other. Housing wasn't a problem. People were content with the basic necessities being met. People had time to read books, play music, teach children, mind grandchildren, cook for each other and store-up for a rainy day.

Today people live longer but what is their quality of life? Even if you have the money to travel the world - what will you do when you get home? Watch the same movies of your trip over and over again? Why are people bored? Because they are disconnected from each other.

Women pay exorbitant child-minding fees when grandparents would love to mind grandchildren if our housing would allow extended families to live by each other.

Government interference with superannuation means that you lose control of how your savings are managed. Maybe one of the best options is still real-estate. Having one or two extra dwellings and living on the rent you collect will ensure your income is indexed with inflation.

Cyberspace and the benefits of a global village have been a big lie. People still congregate in urban centres because bosses don't trust people working from home. Commuting puts pressure on housing prices. Everything is centralised in large monopolies. Small towns are dying as young people seek work elsewhere. But isn't that where the sea change exodus is taking place?

George X commented:
I came to trading to see if I could manage my own retirement fund. Looking at the poor returns from my funds I thought I'll have a go. So far so good.

Why is trading such a mind game?

Tue, 01 Nov 2011 00:00:00 +1100

One buys at the current price, one sells at the same current price. A transaction takes place: Can they be both right?

If they are both entering the market one with a long position and one with a short position obviously they have two opposite views as to what the market might do next.

So this is the game of bluff that goes on in our trading exchanges (casinos?) Has investing turned into a game of poker?

How long are you prepared to wait until you bring the bacon home? Are you rationalizing a bad trade by saying you are in it for the long term? Shouldn't that capital be used to ride on a profitable trade instead?

How far in the red are you prepared to let the market go before you call it quits? Do you have a stop in place? Are you thinking about moving it away to take more risk? Can someone see all the stop orders in place and manipulate the market to hit them all and make a quick profit when the stock returns to where it was?

"You have to be in it to win it!" Sometimes you wish you were not into anything at all. Does your trading keep you awake at night? Does your partner know what you are doing?

Do you have enough integrity to monitor your own trading performance? Do you keep a log of all your past trades and the assumption you made at the time you entered each trade? I mean do you set an entry point, an exit point and a stop point BEFORE you place a trade? That is the only way to find out if your method is profitable or not. If it is then you know how long the longest string of losing trades was. You also know that each trade you took brought home x dollars in profit.

In that case instead of fretting and if you keep to your strategy - each new trade in the long run should simply fit into your law of averages - bringing home x dollars of profit. This is simply what you earned for the risk you took, for your participation in bringing liquidity into the market...

You know all that good stuff - so why is it not working for you? The reason might be that you are cheating, have become impatient and are breaking your own rules. That's easy to fix - get back to your own discipline. Don't confuse speculation with gambling.

There is still another reason why things might go astray: the market may have changed just like tides and equinoxes do - you have to redo your analysis all over again.