MW 2 September 2008 Traders move out of resources again
MW 22 August 2008 Reporting season provides trading opportunities
MW 18 July 2008 Oil and financials stage a reversal
MW 11 July 2008 Traders target property stocks as market stays depressed
MW 20 June 2008 Warning of difficult years ahead as financials, resources remain in traders’ sights
MW 6 June 2008: Traders take profits in resource stocks and buy banks
MW 9 May 2008: Roller Coaster Back in Force
MW 24 April 2008: Traders Climb Aboard Recovering Banks
MW 14 March 2008: Fickle Market Turns Traders Out of Their Hammocks
MW 29 February 2008: Volatility Remains a Challenge
SI 12 November 2007: The Most Common Trading Errors & How to Avoid Them
SI 17 September 2007: Why Only 10 Percent of Traders Succeed
Market Wrap 5 September 2008: Derivatives by Stephen Calder
Traders move out of resources again
Derivative traders moved out of resource stocks again this week and headed for individual stocks they believe are defensive. This includes Telstra, an active stock for both warrant and CFD traders, because it is sheltered from both credit market fallout and changing commodity prices.
Overall, the Australian market, despite some optimism on Tuesday, returned to a bearish sentiment this week, posting several losing sessions in a row in contrast to the previous week’s budding rally.
The index this week was weighed down by selling in resource stocks and although there was renewed interest in financials, with a more positive outlook for ANZ and NAB from commentators including Citigroup, it was not enough to stop the slide.
Losses in commodities were a driver of the trend as oil continued its retracement, trading below $109, and led CFD traders to sell stocks such as Nexus (NZS) and Arrow Energy (AOE). Zinc, nickel and gold producers also fell.
Matthew Press, head of sales at CFD provider First Prudential Markets said, “The macro theme of a slowing global economic environment has been dominant this week with weakness emerging in Japan and the Euro Zone and a dovish RBA monetary policy stance confirmed with soft 0.3% GDP growth in the local economy causing weakness in local stocks.
Mr Press said Healthcare stocks remain the leaders of the market as CFD traders continue their rotation from energy to defensive stocks. Among the winners this week were Healthscope (HSP) Ramsay Healthcare (RHC).
“CFD traders see 4950 as a level to judge the short term direction of the Aussie market as further weakness and a breach of the recent low in the coming sessions could see a further move to the 4750 region,” he said.
The weakness of the US market on Thursday might local time after poorer retail sales figures saw the local index fall heavily on opening on Friday.
A circular from CFD provider IG markets said Australian mining stocks bore the brunt of the lower commodity prices this week, and BHP and RIO finished lower in four consecutive trading session, with energy stocks also taking a hit.
The circular said the first Australian interest-rate decrease in nearly seven years led sellers to target the Australian dollar, which touched lows not seen in 12 months.
“Traders this week leant towards discretionary stocks, with some strong buying seen in David Jones and JB HI FI. Notable buying of Crown Ltd was also witnessed on Thursday,” IG said.
Despite the resource sector weakness, call warrants in BHP were popular this week as the stock fell $5 from its price at the previous week’s close. Those who saw a bargain bought up BHPWOG October $44.50 call warrants and BHPIOU instalment warrants.
Rebecca Mikkelsen on the saes desk at Citigroup said the story of the week was the RBA rate cut and its effect on the currency. It led to buying in stocks likely to benefit from a rising US dollar, including News Corp, Brambles and Amcor.
And despite the gold price drop, or in expectation of a rebound, there was some buying in Newcrest instalments warrants, Ms Mikkelsen said, and also interest in a November $18 barrier call warrant, NCMXOI. Newcrest fell $5 from its opening price on Monday to $21.14 on Thursday.
Mikkelsen believes the sell-off in Newcrest has been overdone, given that when the stock was last at this price, gold was $US700 compared with around $US800 now.
Peter Mathers of The Trading Lounge said that among the stocks he traded on the long side this week were engineering stock Monadelphous (MND) and Pacific Brands (PBG)
“MND was a perfect trading level setup as it sat on $13.00 and we took the breakout which was around $14.00,” Mr Mathers said. “It’s now at a medium[secondary] trading level of close to $16.50, which is an old high. It may have some trouble there but $20.00 is our target on that.”
Mr Mathers said PBG also had a textbook setup at $2 and is now around $2.30. “We’re holding that for a target of $2.50, the next resistance level,” he said.
“When the market got above the 5000 [for the S&P ASX 200 index] this week I was looking for some safe bets to put on so I was looking at Tatteralls (TTS), Transfield (TSE) and United Group. I focussed on stocks with good sturdy bases -- setups and support levels we could work from.”
“What happens is that when the market moves up through 5000 it they always goes back and retests support, which it did on Thursday. If that holds the market will move up but if it breaks 4900 it’s looking rather sad,” he warned.
Mathers says that recently Australian banking stocks have been following pretty closely the fortunes of the US banking sector. “If the US banking sector is up then our banks will be; it’s been really easy to pick what the local banks will do.
“This week the best bets in banking were Bendigo and Adelaide Bank (BEN) and Bank of Queensland (BOQ), for technical reasons. We have had long positions in those for some time but we won’t make a move on the banks until the US banking sector has solid support,” he says.
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Market Wrap 22 August 2008: Derivatives by Stephen Calder
Reporting season provides trading opportunities
The trade of the week in the derivatives market was in Santos ahead of its solid profit report on Thursday. Traders began picking up instalment warrants in the stock as early as Monday and made big profits as it traded as high as $19 after a low of $17.20 the previous day.
That meant profits of up to 10 per cent in the space of a day on instalment warrants, and was one of a number of speculative trades based on reporting expectations that paid off this week.
Less happy were those who punted on OZ Minerals, whose profit result came in below expectations and led to losses for many as the stock plunged 14.5c or 7.9 per cent following the announcement. Traders were divided between those who dumped the stock immediately and those who maintained their optimism along with their long positions.
One factor in the OZ result was the zinc price, which, along with lead, has been moving in the opposite direction to many other metals over the past year in a steady downtrend.
According to David Anderson, vice president, structured products at Citigroup, there has been good buying in Toll Holdings this week, despite the becalmed price, as well as keen interest in long-dated self-funding instalments in the two banks that seem to have escaped the ravages of the credit market, CBA and Westpac.
QBE instalments were also popular this week as the market reacted favourably to its profit report.
Citigroup, along with some other research houses, has sell recommendations ANZ and NAB with expectations of further bad news relating to credit market exposure for NAB.
As for the overall market direction, Mr Anderson said “I have to suggest it will be range bound for some time. There is still some potential downside but it will portably trade in its current range until we’re out of the reporting season.”
Matthew Press, head of sales at CFD provider First Prudential Markets, said the direction of trade in the Australian market this week was set by the trader reaction to the long list of profit results.
“The local market continues to trade in a tight band of 4,850 to 5,000 as it has done since early July,” he said.
He said strength in base metals prices saw CFD traders favouring BHP and Rio on the long side rather than the mid-tier resources and both stocks rallied mid-week following BHP’s strong profit report.
OZ Minerals was heavily traded in CFDs as short sellers pushed the stock lower following its disppainting result.
“CFD traders were unimpressed with the company’s statement of robust long-term prospects but short-term challenging conditions, and continued weakness in the price of zinc saw CFD traders switch from OZL to oil stocks,” Mr Press said.
A rally in the oil price on Wednesday night local time led to CFD activity in Woodside, and another reporting stock, Qantas, was popular with CFD traders although ignored by warrant market participants.
Fairfax closed slightly higher on Thursday and CFD traders reacted cautiously after a solid boost in profit but a warning that economic conditions might reduce advertising revenue.
Private trader Peter Mathers of The Trading Lounge said he had expected the market to be choppy at its current levels and noted that there seemed to be more weight in the market at below the 5000 level for the S&P ASX 200 index than above it.
He said the market could either move to 5100 in which case it was likely to rally further or below recent support at 4800. “In terms of [Elliott] waves, if that is taken out then it looks like we’ll go further down from that point,” he said.
Elliott waves are technical measures of market action and reaction, typically occurring in groups of five. “At this point it’s any man’s guess,” Mr Mathers said.
He considers the banks to be showing continuing weakness and sees St George as the obvious one to short sell along with ANZ.
He thinks gold stocks should be watched carefully in the coming week or so if the metal price rallies as he expects.
“When gold first hit $US1000 an ounce I knew there would be a correction and it has done [typical Elliott wave] correction,” he points out
“We had a low of a target $US800; it’s hit that level as resistance and got through and sat on it making higher lows. I’m going to start looking at gold stocks because the next move looks like a push back up above the $US1000 level,” Mr Mathers says.
He is also bearish on oil, expecting it to move below $US100 a barrel and perhaps even test the $US80 level if it performs according to the usual Elliott wave pattern.
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Market Wrap 18 July 2008: Derivatives by Stephen Calder
Oil and financials stage a reversal
A drop in the crude oil price and a comeback for financials in the US saw a reversal of the recent downtrend in the local market this week. Traders previously long resources were taking profits there, bargain hunting among the financials and retailers, and taking bought positions in index derivatives in the hope of a continuation of the rally that started on Wednesday.
But whether the uptrend can continue into the coming week, or run out of steam as on previous occasions recently, depends partly on what the crude oil price does next, says Peter Mathers of The Trading Lounge.
“While crude reacts at the $US150 level, the stock markets, including the Dow and our local market, will have the chance to rally and retest key numbers or levels. For our local market that is 5000 [for the S&P ASX 200 index]” Mathers says.
He points out that the current low on SPI futures is around 4800, after the retest of the 5000 level. If the rally fails and the moves down below this current low out, then the market is still in a bearish mode for the time being, he contends.
He says that based on his trading levels analysis, the support on the way down will be at 4800, 4500, 4300, 4200 and 4100. A firm break through any of these suggests a decline to the next lower level. Because of the uncertainty, he reiterates that traders should be using smaller positions and shorter time frames than in a more certain trend.
According to Rebecca Mikkelsen at the Citigroup sales desk, Toll Holdings and Virgin Blue were very active in the options markets this week after Toll’s decision to dispose of most of its Virgin Blue stake, and to give each of its shareholders one Virgin Blue share, led to necessary rebalancing of option positions.
One consequence was a big rally in Toll mid-week as option providers were forced to buy the stock, leading to an expectation that it would later decline.
Meanwhile, Mikkelsen said, derivatives traders headed for the banks which were up strongly in the rally on Wednesday and Thursday, with ANZ the odd man out -- still up but not as well supported as the others. A driver for the banks’ turnaround was a recovery in home mortgage stocks in the US.
She said warrant traders were active in call barrier warrants over BHP as well as instalments in Westpac and NAB.
The overall market upturn in the second half of the week led to a sigh of relief, along with doubt that the current market can sustain any rally lasting more than a couple of days. Friday saw an initial wobble that seemed to confirm trader’s suspicions that the rally was yet another bear market correction.
Matthew Press, head of sales at CFD provider First Prudential Markets, said Australian resources stocks came under pressure at the same time as financials were recovering. BHP and Rio both took dives while Newcrest and Lihir tracked the lower gold price, and oil stocks including Woodside were lower after a fall in the crude oil price, he said.
Qantas rose on Thursday on lower oil prices, but was cut back on Friday after a gloomy forecast from the company’s chief executive and news that it would cut staff numbers.
But the news was not all bad for resources. “Falls were restrained by strong Chinese economic data released on Thursday showing a 10.4 per cent growth in their economy in the last half-year while industrial output grew by 16.3 per cent,” Press said.
Property stocks, recently highly volatile, continued to attract the interest of CFD traders, particularly Valad (VPG) which jumped on Thursday on news that it had scrapped its dividend plan, reflecting management’s belief that the current unit price is too low.
Austin Engineering (ANG) also helped the sector buck the previous week’s downtrend, moving up strongly late in the week after announcing it would increase its profits by 130 per cent year on year.
“Limited Australian economic data this week should see the local currency affected by any US events or surprises. Selling of the Australian dollar from highs of 98.5 cents has been a positive for stocks that generate sales in US dollars,” Press says.
CFD traders were active on the long side this week in Billabong (BBG) and James Hardie (JHX) while retailers including Woolworths benefited from continued buying after positive sales figures on Wednesday.
“Traders are attracted to heavily sold retail stocks that are well managed and have exposure to the growth in consumer electronics,” Press says. JB Hifi, David Jones and Harvey Norman all showed strength this week.
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Market Wrap 11 July 2008: Derivatives by Stephen Calder
Traders target property stocks as market stays depressed
Twice this week the S&P ASX 200 index closed below the psychologically critical level of 5000, raising the question of whether the next big support level of 4800 would be breached and giving traders good opportunities for trading index derivatives, especially on the short side.
The overall market continued downward inexorably this week, pausing only on Wednesday to stage a brief rebound above 5000, but then gapping down below this level at the opening on Thursday.
There was some sign of an upward move at the close on Thursday, and a positive lead from the US overnight saw a hint of a bounce on Friday, but it was not convincing. Chartists say the index is likely to remain in the vicinity of 5000 for some time before breaking out on one side or the other.
Derivative traders were short selling property and building stocks this week after a profit downgrade for GPT took the stock to historic lows and dragged the whole sector with it.
Matthew Press, head of sales at CFD provider First Prudential Markets, says the property sector was punished badly and other stocks including Dexus (DXS) and building related stocks Boral and CSR were also heavily sold.
“Dexus was the worst in the property sector, falling 10.5 per cent on Thursday,” Press says, pointing to continued negative news flows including big price drops for US stocks involved in mortgage lending and negative statistics on the Australian housing market.
Among building stocks, CSR led the sector with a drop of 14 per cent after a warning about lower profits, making the stock the worst performer in the ASX 200 on Thursday.
Press says that while equity buyers were looking to pick up bargains, especially in banking stocks earlier this week, “CFD traders remained unconvinced” and stayed short.
As figures revealed some weakness in the economy, media stocks TEN and APN were sold off, seen as vulnerable to any moves by consumers to reign in spending. “Traders have been positioning themselves in stocks related to building and consumer discretionary,” Press says.
Adding to the market’s woes was the spectre, recently thought to have been laid to rest, of potentially higher interest rates in Australia. The tight labour market and signs of reduced consumer spending as well as a warning from the International Monetary Fund about inflation in Australia has revived the ghost.
“Market related stock Platinum Asset Management PTM was down after announcing a decline in funds under management. It tumbled 4.6 per cent on Thursday,” Press says.
Another big loser that attracted trader attention was Computershare, which fell 3.7 per cent.
Traders looking for a play on the long side found Newcrest attractive along with mining explorer PanAust (PNA), both of which bucked the trend to move up about 1 per cent, and
Macarthur Coal, a standout among the recently heavily sold coal stocks.
After positive earnings guidance CFD traders were active in Macarthur as the stock rallied 12 per cent, Press says. But oil and energy stocks, earlier seen as a haven from financial sector weakness, were much less active later this week as the oil price rally faltered.
Technically, the next band of support on the downside is the 4700 to 4800 level, which if broken on the downside would signal further falls, and this would be likely if there were further weakness in the US, Press says.
Private trader Peter Mathers of the Trading Lounge agrees, but says he expects the S&P ASX 200 to bounce back after a drop to around 4800. “I see this as the end of a five-wave structure coming down. That means a move back up through 5000 and then back down, breaking 5000 very clearly,” he says.
He explains that in technical terms the market has undergone a classic 50 per cent retracement of its move from the low of 2003, when it reached 2700, to the high of around 6800 last year, and is now likely to retrace half of the most recent wave down from 6000 to an expected 4800. This would give it a medium-term target of around 5300 after the bounce.
But if the index penetrated through 4700 on the downside, the next logical target would be 4000, Mathers contends.
Apart from a series of short positions, he says he is staying market neutral, hedging any underlying share purchases with CFDs. “That means I’m not making money but I’m not losing it [on those positions]” he says.
Among the few long positions he has in place is in oil explorer stock AED Oil (AED). On the short side, his list includes BHP, with a target of $38 which it is close to reaching; CSR, Newscorp, AMP, Cabcharge, Wesfarmers, Oxiana and Worley Parsons.
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Market Wrap 20 June 2008: Derivatives by Stephen Calder
Warning of difficult years ahead as financials, resources remain in traders’ sights
Banks and financial stocks had a tough week despite overall gains for the Australian market as resource and commodity stocks made up for financial sector losses. Traders gravitated to these two sectors for trading opportunities.
Among financials, the banks hit fresh lows mid-week after poor results from the sector reported by US and UK companies, some of whom have raised the spectre of further losses and write-downs related to the US sub-prime housing credit crisis.
Pia Cooke, associate director in the equity division at Macquarie Bank, said warrant volumes were at the higher end of recent norms and trading in financial stocks was active as longer-term traders bought long-dated instalment warrants.
The hammering taken by Babcock and Brown the previous week had left many traders licking serious wounds, and though the stock did claw back a little of its losses, it was trading on Friday morning at below $7.00, still less than half its price two weeks ago.
Much of the action in financials was on the short side as NAB and ANZ, which looked strong earlier in the week, fell precipitously on Thursday. But CitiWarrants adviser Rebecca Mikkelsen says there was also some buying up of instalment warrants in the banks.
Noting that the financial sector had fallen relative to the overall market by 10 per cent since January, Ms Mikkelsen says, “With ANZ and NAB trading below and close to previous March lows, and dividend yields at close to 10 per cent, long term instalment holders have been establishing new positions or averaging down existing positions.”
She said there was heightened activity in Oxiana instalments and turbo warrants leading up to the recent merger vote. This was spurred by share price weakness and market speculation that Oxiana could be seen as a takeover target either as a single entity prior to the merger or with Zinifex as a merged group.
Ms Mikkelsen quoted a Citi analyst who believed the merged group would make a more attractive target than either company separately.
Meanwhile Ms Cooke at Macquarie also notes good volumes in Oxiana and Zinifex ahead of their merger and their disappearance from the lists as separate stocks at the end of this week. Ahead of the end of trading there was considerable arbitrage between the two as traders sold Oxiana and bought Zinifex.
From Monday the merged company will trade as OZ Minerals, and holders of the former stocks will receive shares in the new company, in different proportions depending on which stock they held.
Traders were also acting on a view that the combined stock, despite recent softness in the zinc market, is likely to do well as a quality resource stock.
As the gold price moved back up toward $US900 this week, traders’ favorite gold stock, Lihir, again saw good volumes, rallying 2.5 per cent on Thursday which out it up 6.5 per cent for the week so far. Lihir is the gold stock least affected by the curtailed WA gas supply.
And the continuing strength of the oil price also propelled Woodside to a 3 per cent hike in price, giving it an 8 per cent gain this week to $65.50, while continuing higher prices for agricultural commodities helped fertiliser stock Incitec Pivot reach a record $200 briefly on Thursday.
Trader Peter Mathers of The Trading Lounge was watching the Dow Jones Industrial Average closely this week and is expecting it to bounce back up from the 12,000 level, which he says is a critical support level. In parallel, the Australian market next week is likely to bounce back after any further move down towards or through 5300.
“But I don’t expect a big bounce,” he says, warning that in the longer term the local market is likely to test 5000 again. In the meantime, “I’m seeing a short-term the bottom to come in and I’m expecting a bounce. The Dow is likely to test 12,500 and our market will test the 5300 to 5500 range,” Mr Mathers says.
He believes the next two years will be a difficult time for the Australian equity markets. “I just don’t think the correction at the 5000 level is over. In the next two years it will sort out the traders from the investors. Fund managers will get their arses kicked and only the traders will be able to read their way through it all,” Mathers warns.
He continues to hold coal and energy stocks and says that of these “AED is the only one giving me any concern. That will vibrate around $3.00 although I wanted it to push higher,” he says.
He is bullish on oil in the medium term, expecting it to trade between its two important levels -- $US130 and $US150 a barrel before gathering momentum for a kick through $US150. “Then come back and sit on $US150,” he believes.
Based on the expected downward move in the Dow, Mr Mathers in the past week or so has been looking for stocks likely to be adversely affected by higher oil and Australian dollar values and has been short selling Harvey Norman, David Jones, and Qantas, among others.
“Now that the Dow has hit 12,000 those positions need to be taken out and we’re doing that now,” he adds.
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Market Wrap 6 June 2008: Derivatives by Stephen Calder
Traders take profits in resource stocks and buy banks
The temporary drop in the oil price convinced many traders late this week that it was time to take profits in resources stocks, particularly BHP and Rio, which had been buoyant earlier. But there was also evidence of bargain hunting as prices slipped.
At the same time, the financial stocks that have struggled to perform recently were suddenly back in favour.
Among the most active warrant stocks yesterday were BHP, Rio and Paladin, with nickel stock Minara Resources making a rare appearance in the top ten by warrant volume. BHP call warrants showed a high level of trading as traders hoped the stock would find support.
Index warrants were also active, and again the market indicated that it was not convinced by the softness of oil and the resources sector, and snapped up cheap, out-of-the-money call warrants as a means of speculating on a bounce in the coming week.
Meanwhile, CFD traders were a little less sanguine about the prospects for energy stocks. “We saw shorting in energy stocks which had been the darlings of the market of late. They were dumped as traders took profits,” says Matthew Press, head of sales at CFD provider First Prudential Markets.
He said there was growing speculative selling in Woodside on Thursday, partly based on the break through [subs: “break through” two words] $US125 on the downside for oil, and the expectation that this could put oil back to its next support level at $110.
This did not occur, and on Friday many of those trades would be unwound as oil moved up strongly overnight on Thursday our time. Nevertheless, day traders did well from Woodside’s 7.8 per cent price drop on Thursday and from corresponding dips in smaller stocks including Australian Worldwide Exploration (AWE), down 5.6 per cent.
Thursday’s session saw the S&P/ASX 200 market index return to its April lows of around 5530, Mr Press says, down almost 400 points from the high of 5900 just last month.
On the bright side, banking stocks including CBA and NAB staged something of a recovery on Thursday despite concerns about the coming reporting season for the US financials and expectations that there might be more write-offs related to the besieged housing market.
Also moving up against the trend late this week were Virgin Blue and Qantas, which had been heavily sold as a result of high oil prices over the past two weeks but suddenly bounced as traders decided they were now better value.
In the coming week mush will depend on economic data from the US, Mr Press says, including the first profit reports from the big investment banks and data on US payrolls.
Trader Peter Mathers of The Trading Lounge said that his recent favourites, the smaller coal and energy stocks, had moved up to the point where buyers are few and there is little further action. His strategy at the moment is to be long the physical stocks and to hedge them with CFDs.
The stocks include Macarthur Coal (MCC), Australian Worldwide Exploration (AWE) and AED Oil (AED). Mr Mathers said he had been following the major US oil companies which moved up to or through major trading levels recently but showed a tendency to pull back.
“Crude is likely to come off the top as well,” he suggests. Meanwhile, many of the local banks are also trading at important psychological levels, such as $40 for CBA. “Any banks sitting on big levels like $20, $30 and $50 will do some work [trade in a range] around those numbers,” he says.
As for the overall market, he says that the next move by the US Dow Jones index will help determine the local trend. “The support zone for the Dow is at 12,400 with critical support at 12,300. That’s where the money men [the Federal Reserve Board] were pumping it up so it will be interesting to see what happens if it breaks through 12,300 on the downside.
“Potentially there’s a lot of strife there, but I think the Dow will react and push back to test 12,500 or 12,800,” Mr Mathers says.
“I still like the penny stocks, though. If you look at the patterns they are making good base patterns whereas the big caps are looking toppy,” he says. He is not recommending new buying but warning that traders in the smaller caps need to move their stops to protect profits.
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Market Wrap 9 May 2008: Derivatives by Stephen Calder
Rollercoaster back in force
The sharemarket roller coaster swung the Australian index from its low of the week to weekly highs on Thursday in one of those gapping, soaring flights that are the hallmark of high-octane volatility.
The sudden reversal saw traders jumping back into the banking and financial stocks they had abandoned or short sold earlier in the week as the tide turned dramatically, floating them higher and leaving resources stocks, which had been bucking the downtrend, struggling to move higher.
But the rally met steady selling by the end of the day and is maintaining its recent behaviour of trading between resistance at 5800 and support at 5500. Index derivative traders are warned that the local market is likely to retrace back to the 5000 level based on Elliott Wave theory.
According to trader Peter Mathers of the Trading Lounge, the market is repeating behaviour previously seen last August, when volume was coming into the market but the market wasn’t moving up. This consolidation was also seen at the market’s high of 6800 last year.
“On the bigger picture I don’t think we’re finished at the 5000 level. This leg, from [the all-time high of] 6800 to where we are, is just the first leg. This is a correction of the last long- term trend. It hit support levels at 5000 and bounced off that, but the bounce is starting to look weak now,” Mr Mathers says.
“The highs in February and March of this year are now being tested and found weak. It’s just the energy sector that’s making ground. The banks are being hit. I just feel this correction has to unfold at the 5000 level. Meanwhile, I’ll trade between support and resistance as they appear in front of me,” he says.
Pia Cooke, associate director in the equity division at Macquarie Group, said that this week had seen real trader interest coming back into the market at levels last seen a year ago. “The resource stocks were on fire and really doing well early in week.
“Now end of the week there’s been a reversal and all the banks are strong. CBA was up 4.5 per cent on Thursday; Westpac was up 3.5 per cent. The Australian market opened down 77 points on Thursday and then closed 90 points up. It’s a real turnaround.”
Among the forces driving the rally was the news that beleaguered property group Centro had gained a seven-month extension on its debt finance, which spurred CBA higher as concerns eased about its exposure to Centro.
Firm employment figures and confident presentations by leading corporations at an investment planner conference this week also helped the financials gain ground, including Babcock and Brown, which was in the list of most active warrants traded.
But the big news of the week, Ms Cooke says, was Oxiana, which closed last week at $3.16. This week rumours of another potential bidder to compete with Zinifex propelled the stock to a high on Thursday of $3.74 -- an 18 per cent move in four days on extremely high volumes.
She says an Oxiana instalment warrant, OXRIMP, traded 1 million warrants on Friday and has done a further 3.5 million trades this week. Traders are using the 70 per cent leveraged warrant as a long-side trading instrument, and its delta of 0.92 means it does make good gains in relation to Oxiana’s upward moves. An instalment warrant is always a long position.
“Also of interest was Zinifex; the arbitrage [pair trade]with Oxiana has been playing for a while, which means you buy Zinifex and sell Oxiana -- in the past at a 4 to 5 per cent spread,” she says.
“Now all the arbitrageurs have been unwinding. They’ve had to buy back Oxiana so that’s pushed Oxiana up. Zinifex hasn’t moved up as much partly because they are unwinding Zinifex longs.” Zinifex started the week at 9.75 and closed on Thursday at $10.40, up 6.7 per cent.
Incitec Pivot was another spectacular winner this week, giving those who held it before Wednesday’s ex-dividend date a free dividend by closing higher at $176.75 despite the effect of a $2.04 dividend. Those who bought for the dividend, which was fully franked, got a joyride. The stock is up 28 per cent on its price a month ago.
Meanwhile Australian Worldwide Exploration (AWE) continues to pay off for the Trading Lounge’s Peter Mathers, who has been building up a position from a price of $3.00 to its current level of around $4.13.
“The target is $5.00, which is a major trading level, but I can see it going much higher than that because the accumulation at $3.00 was large. I’ll be adding to that position at $4.00.”
“I did lose on the opening on Thursday morning; I got into ERA at the close on Wednesday and it opened 1 per cent down so I took a nice whack on that. I worked hard on AWE to get that back,” Mr Mathers says.
He is also long Santos and Macarthur Coal, both at about $18.00 with a target of $20.00, but he has taken profits on penny stocks including Carnarvon Petroleum (CVN), NDO Petroleum (NDO) and Otto Energy (OEL).
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Market Wrap 24 April 2008: Derivatives by Stephen Calder
Traders climb aboard recovering banks
Despite a dip on Tuesday, the Australian sharemarket made good ground this week, forming a solid uptrend line from the low on Tuesday up to Wednesday’s close. On Wednesday the banking stocks and Telstra were the favourites of derivative traders, pushing BHP and Rio further down the list of the most-active warrant stocks.
“Everyone had been awaiting the ANZ result and there were no nasty surprises from the first cab off the rank to report in the sector,” says Pia Cooke, associate director in the equity division at Macquarie Group.
ANZ in fact led the upward charge, while the other banks held off making their upward run until later in the day, when buying appeared in NAB and a large volume was booked in what looked like a switch trade out of Westpac into ANZ. “But by the end of the day the banks were all up three to four per cent,” says Ms Cooke.
Following a poor performance the previous day, ANZ surprisingly ended the day 10 per cent higher then the previous week’s close at $22.03.
“I think people are now comfortably buying [ANZ] for its dividend, knowing there will be no unexpected bad news in the next week or so,” Ms Cooke says, pointing out that for smaller traders, not subject to the rule of holding for 45 days in order to gain franking credits, the traditional dividend yield play could be a smart strategy.
The strategy involves buying instalment warrants over the stock ahead of the ex-dividend date, capturing the dividend and then selling the instalments.
To be successful, this requires the stock to at least hold its price, and hopefully gain further ground, during the period before and after the shares go ex-dividend, to benefit from fully franked dividends. If the stock is buoyant, as bank stocks often are at this time, the tax benefit of franking is augmented by capital gains.
Traders and investors are subject to a 45-day minimum holding period to be eligible for franking credits (for tax already paid by the company) unless they are claiming less than a total of $5000 in any one year.
Also among top warrant stocks this week were Babcock and Brown and Telstra, both benefiting from some renewed confidence as the overall market rose.
Although BHP did not top the most active warrants as it often does, it was not forgotten by traders this week as it jumped to its high for the year of $45.11, just off its all-time high and up 7 per cent for the week, providing traders with solid returns on the long side.
Brambles, the subject of favourable recommendations from warrant issuers Macquarie Group and CitiWarrants, made some headway after a big dip the previous week on unfavourable news from the US concerning possible loss of a big customer there in its pallet business.
Trading at $10.15 before the announcement, Brambles dipped 11.5 per cent following the news, which seemed overdone to analysts. This week it traded in a wide range without making real ground, but is still on traders’ watch lists.
Good news in the pharmaceutical sector focussed attention on CSL this week after higher US sales of its key vaccine product and strong results from major competitor, Baxter. Traders who followed buy recommendations from warrant issuers did well as the stock finished Wednesday’s session 8 per cent up from the previous Friday’s close.
In the oil sector, Woodside was propelled by new record prices for crude, but Oil Search did not benefit as much from the price spike.
Trader and educator Peter Mathers of The Trading Lounge says he has been poking around in the penny stocks this week, looking for example at the oil sector where Australian Worldwide Exploration (AWE) seemed to be looking for a breakout on the upside after some consolidation at the $3.00 level.
Otto Energy (OEL) was another stock that gave good gains this week after breaking up through 34c, Mr Mathers says. “Canarvon Petroleum (CVN) has made a nice pattern above 50 cents; I’ll buy that after it comes back,” Mathers says.
He is still following the fortunes of coal stocks and maintaining a long position in Macarthur Coal (MCC), looking for it to move to its next trading level of $15.60, which would suggest a new target of $18 or higher. “It’s been moving up on lower volumes,” Mathers says. “The support level is $15 but I wouldn’t trust it,” he adds, pointing out that a recent big share sale had left it a possible takeover target.
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Market Wrap 14 March 2008: Derivatives by Stephen Calder
Fickle market turns traders out of their hammocks
The market delivered another nasty shock on Thursday to derivative traders desperately seeking a trend. Wednesday’s surging move up, on news of new props for the US credit market and a big rally in US shares, looked like a classic bounce and the budding of an upward correction to the slide.
Traders certainly took it that way on Wednesday, encouraged by the previous session’s evidence of support for the index at just below 5100. The market gapped up on opening and shorts had to cover quickly. Many of them immediately went long, buying mostly S&P/ASX 200 index-related warrants and CFDs.
This is short-term trading, so tight stops are indicated, as those who decided the upward momentum was strong discovered. After peaking above 5350 on Wednesday, the index began a slow two-day decline to leave it floundering to find support at around 5140 by Thursday’s close – very close to where it was at the end of Tuesday’s trading.
“Anyone who bought in on Wednesday thinking there was going to be a short rally has been burned,” says Ms Pia Cooke, manager in Macquarie Group’s equity division.
Those running stop-loss orders at sensible distances would have survived, and since wider stops indicate smaller position sizes, the smart traders shouldn’t have lost too badly, but it’s an indication of how tough the market is. If you keep getting tipped out on stops, losses start to mount.
Ms Cooke says most index traders are still getting out of the sharemarket overnight, unable to take the risk of good or bad news from the US taking the market gapping through their stop-loss prices the next day.
The other strategy still popular is buying into the current low prices for the long term, usually via instalment warrants. Gold stocks were popular this week, Ms Cooke says, as prices held up and the metal held firm, and traders anticipated higher inflationary data from the US to be announced on Friday (early Saturday local time). Buying of gold as an inflationary hedge and alternative asset has been one of the drivers of the metal’s recent price push.
Also popular among warrant traders were resources, including BHP, and banks, as they tried to pick the lows. “Financials were popular; there was a lot of good buying in Babcock and Brown,” Ms Cooke says.
Traders looking for an oil play on the back of crude’s new record prices were looking at Woodside and Oil Search, but their performance was lacking compared to the oil rally.
Ms Cooke sees this week’s petering out of the budding rally as ominous. “Confidence levels are at record lows. The market’s tone is incredibly bearish, volumes are down and sentiment is negative,” she says, adding that traders are now looking to the next move by the US Federal Reserve (the Fed), widely expected to cut US cash rates by another 50 to 75 basis point when it meets on February 18.
Mr Peter Mathers of the Trading Lounge says it’s cause for concern that despite so much action to prop up the US credit market by the Fed so far this year, the market seems no better off.
Basing his strategy on trading levels defined by the mathematical Fibonacci series, Mr Mathers says that since the S&P/ASX 200 index broke through 5800 and then 5500 on the downside, all the mid-cap stocks have fallen along with the market.
He believes 5000 is a critical level for the Australian index, and warns traders to beware of taking short positions at this level because of strong potential support at this price. In fact, Mather believes 5000 is so important that if the index gets there it will almost certainly bounce up.
“But how far it goes back up to retest recent highs is another story,” he warns. He believes the near-term trading range for the index will be 5400 to 5000.
“But 5500 is the big one -- the market would have to be back above that and sit there for any sign of strength whatsoever to be evident,” Mr Mathers contends. “It’s at the 5500 point and from there to 5600 and 5650, that’s where it will have a hard time and will make it or break it; after that the next level is 5800 and if it makes that it’s headed higher still.”
On the downside, an eventual break through 5000 is also “definitely on the cards,” Mathers says.
But more likely is a move to 5000 and then rally back to 6000 or 6200 before a renewed downturn, he adds. “Most big corrections are in three waves or more; this is just the first leg in an Elliott wave cycle.”
As for particular stocks, he says he has been shorting Qantas and maintaining long positions in coal stocks such as Macarthur Coal (MCC).
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Market Wrap 29 February 2008: Derivatives by Stephen Calder
Volatility remains a challenge
The sudden reversal in the Australian sharemarket on Thursday highlighted the ongoing challenge for derivative traders, who continue to respond by trading short term in the absence of a consistent trend.
Even wide stop losses – which bail you out of a trade when the market moves against you – were set off on Thursday, which for those who bought derivatives based on the market index would have meant giving back a big percentage of the week’s gains.
Although getting out at a loss is better than staying in a losing trade, those expecting the market to recover and move higher over the next few days must now re-enter if they remain confident about a resumption of the uptrend.
Much the same thing happened in individual – especially banking stocks – this week as profit taking drove them suddenly lower.
One response from those looking for longer-term trades has been to turn to instalment warrants. These instruments are a means of entering on the long side with no possibility of being stopped out or called for margins.
With resources the new defensive stocks as financials continue to suffer from nervousness about debt exposure, BHP instalment warrants regained their usual position as the most active on the ASX this week, says Ms Pia Cooke, a manager in the equity division at Macquarie Bank.
BHPIMC, for example, allows a user to put up about half the value of the stock -- $20 -- and stay in the trade for the long haul, with expiry in xxxxxxxx. This moderate leverage of about 50 per cent will not give the high gains that CFDs will provide at leverage levels of up to 95 per cent, but they do allow participation in any rally that occurs in the stock ahead of the warrant expiry.
Instalment warrants, of course, are long-only instruments that cannot provide exposure to the downside.
Short-term traders, meanwhile, remain skittish about continuing bad news from overseas as the UK reporting season begins on the grounds that any revelations of debt problems in the UK will raise questions about local exposure.
So it’s downside exposure they are looking for in the coming week as global inflationary risks mount, adding to the pressure caused by the US sub-prime debt crisis. Ms Cooke said another very active warrant this week was a 5700 March put over the S&P/ASX 200 index which traded at $1.15 – a value that will rise strongly if the index falls.
Other stocks traders found attractive this week were Zinifex, heavily sold recently and now playing catch-up, and the gold stocks, extremely popular as the metals continues to rise and appears headed for $US1,000.
“When inflation gets to the top end of the band you always see gold moving up,” Ms Cooke says. “Lower interest rates in the US offer an opportunity to sell the US dollar and for gold to rally.” The moderately geared instalment warrants in Newcrest and Lihir were active, she says.
Private CFD trader Peter Mathers said a gold stock that caught his eye was St Barbara (SBM), while in the energy sector he found good trading in Energy World Corp (EWC).
But his favourites at the moment are coal stocks, including Macarthur [rpt Macarthur] Coal (MCC) and Whitehaven (WHC), all of which he has traded on the long (bought) side, riding the higher prices for coal now being set globally.
In the coming week Mathers will be keeping a close eye on the US market, which despite inflation concerns was showing some renewed strength this week. Mathers trades based on Fibonacci levels (a mathematical sequence) and says the Dow Jones index at around 12,650 is between two important levels, the next one being 12,800.
If it can break through this level than 13,000 for the Dow is with reach, Mathers contends. This would provide a lead for Australian stocks to resume the upward move that faltered this week.
Like the warrant traders, Mathers likes BHP as a buy, as prices of key metals gold and copper continue to rally. Copper, for example, has breached the key level of $US8000 a tonne, and at $US8,400 is above the record it set in 2006.
“I can see it stretching its legs and going for $US10,000 a tonne, which will be good for BHP,” Mathers says. If BHP keeps moving he will add to his position at the Fibonacci levels -- $41, $42, $43 and $45.
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Smart Investor 12 November 2007, by Stephen Calder
The most common trading errors and how to avoid them
We all know that in order to make money trading CFDs, you don’t have to pick winners more than half the time. In fact, with an efficient trading plan, the number of winning trades can be as low as three or four in ten and you can still come out ahead.
What stops most people from achieving this? It’s a combination of factors that result in common trading errors – errors that can usually be avoided by having a comprehensive written trading plan and the discipline to stick to it.
A word of caution: that’s not as easy as it sounds. If you’re starting out, looking to place yourself among the very few traders who succeed in the long-term, you will need to put some time into developing the mindset of a winning trader, and this can take persistence and determination.
In fact, successful trader, analyst and educator Louise Bedford of www.tradingsecrets.com, has developed a nine-week home study course that deals exclusively with the psychology of trading, emphasising that how you think about your trading makes a difference to your trading decisions.
The conditioned response
Most people are conditioned to respond events in the market as they have in the past to similar events – or what they see as similar events – in their non-trading lives. If we are conditioned against loss to the point where a losing trade is painful, it will be difficult to execute stop losses, no matter how rational that seems when we are in a calm state of mind.
The winning state is calm, optimistic without being overconfident, and accepting of the fact that losses are inevitable. But it can be confronting to deal with the sources of the emotions – usually past events -- that keep a trader from achieving that state.
Putting aside these drivers of emotion and adhering to a rigid discipline in spite of the feelings that accompany losses, or missed opportunities, also seems to work for some traders, but this too is a difficult skill that may take time to acquire.
Coming to a point where keeping to your trading plan, and rigid adherence to predetermined stop-loss levels, is automatic, will allow you to avoid most of the traps described here. The plan will require you to enter the market whenever you see an opportunity that meets your criteria, based on fundamental and technical analysis, and to exit whenever predetermined conditions are met – when your stop loss, or trailing stop loss, point is reached.
The trading plan – the key to avoiding errors
The first step, says David Land, market analyst with CMC Markets, is having a trading plan to start with. “Know before you get into a position at what point you’re going to get out at a loss,” he says.
That’s important for two reasons, he says. “First, if you can work out when to get out when you have no capital riding on it [before the trade] that’s better than trying to decide once there is money on the line.
“Second, it allows you to determine how much capital is at risk so you know what proportion of capital will be lost on the trade [if it loses]. This ties in to the 1 per cent rule.” This rule says that no more than 1 per cent – or 2 per cent at most – should be risked on any one trade.
“Then you can have flow-on issues such as not selling the position where you determined you would, or cancelling a stop loss. Almost universally, stop losses should only be moved to protect profit, otherwise you’re breaching the rules designed to defend your capital.
“There are a limited number of things a trader can control; you don’t know what’s going to happen,” Land goes on. “The amount you risk is something you can pro-actively control. You should only ever be risking a small proportion of your capital on any trade.”
Among other things, this allows a beginning trader to trade through the occasional period of sequential losses that almost inevitably occurs while learning. Land’s recommended reading for traders is Exploding the Myths by Frank Watkins (published by Vocational Education & Training Publications, Australia, 2003).
The importance of belief systems
Trader Peter Mathers of www.tradinglounge.com says the biggest factor in trading errors is the trader’s set of beliefs about money.
“It’s our safety, security, even our happiness. It cuts deep into the psyche, so when we enter a trade, it’s not only money going to market, it’s all our beliefs about money that we end up trading.
“A part of us has entered the market, and when the market is going up and down, so are we; we are on an emotional roller coaster trying to make rational decisions; failure is not far away,” Mathers says.
“Without a trading plan, you will be on the emotional roller coaster and your account is all downhill from there. If you can’t stick to the trading plan, you’re doomed. You need to create your own rules so you understand them and to have accurate risk and profit objectives before placing a trade.”
Mathers says it is the emotional attachment to a position that will cause large losses. “You need to train yourself to keep losses small and practice holding winners for large wins,” he adds.
“Once a trader has a few winning trades he tends to become overconfident and starts guessing his trades, leaving his trading plan and research, placing his winnings on one trade,” Mathers says. “Or they may be just flicking through markets and suddenly start day trading, trying to scalp the market, having several losses, which was not part of the original trading plan.
“Traders who have no discipline over-trade, have no patience in waiting for the correct set-up for entry and tend be anxious and exit profitable positions too early,” he adds. “Lack of discipline also includes results in attachment – holding on to losers, anger, trying to beat the market rather than accepting a loss.”
And now for the top ten
When we asked Louise Bedford about the most common trading errors, she replied that she had just conducted a survey of a large number of traders asking exactly this question.
The results are set out below along with a list given in no particular order by respected US author Mark Douglas, in his book The Trading Zone (published by New York Institute of Finance, New York, 2000).
Louise Bedford’s list
1. Not getting in on the signal
2. Not getting out at the predetermined stop-loss point
3. Not deciding on a fixed trading plan, but tinkering with it
4. Not understanding their own psychology or realising the size of the task of acquiring the psychological skills
5. Impatience and lack of discipline
6. Giving up; not persevering
7. Risking too much; not limiting position sizing properly
8. Focussing on the money rather than on trading well
9. Not allowing profits to run; getting out too soon
10. Not taking responsibility; being unwilling to admit what parts could be improved and so not improving their trading. To this point Bedford adds, “This also has to do with keeping your life in balance.”
Mark Douglas’s list
2. Jumping the gun
3. Not predefining your risk
4. Defining your risk but refusing to take the loss
5. Getting out of a winning trade too soon
6. Not taking any profits out of a winning trade
7. Letting a winning trade turn into a loser
8. Moving a stop closer to your entry point
9. Getting stopped out and watching the market trade back in your favour
10. Trading too large a position in relationship to your equity
Bedford says that people who make such errors are those who trade compulsively, with a gambling oriented approach rather than being mechanical and systematised.
“The survey found that self-sabotage tends to creep in” she says – a common cause of trading errors. “If traders have unresolved issues the market will act as a conduit and bring it to the fore. They either take action or run away and quit – not for the logical reasons they give, which only justify their decision.
“The successful trader is not the person who has the most intellect but the ones that have become more self-aware. Financial success in the markets will rarely exceed a trader’s level of self-development,” she adds.
One clue to what works in this regard is the results of several US studies carried out in the 1990s by Brad Barber and Terrance O’Dean, who looked at thousands of households in which one or more members was a trader.
The studies showed that men tend to trade more than women, and turn their portfolios over more often. They also showed that the more a portfolio is turned over, the worse the performance, and that women earned more money than men.
“They studied confidence and overconfidence and found that men tend to overtrade and earn less. You can’t be overconfident, but there’s a fine line between that and the right amount of confidence,” she warns.
“The study suggests women are not as confident and struggle when feedback is absent or ambiguous, as it is in the market. Sometimes you do the right thing and it won’t reward you, and sometimes it will reward you for doing the wrong thing.
“Women are more inclined to wait for the perfect setup before they invest. They are surer before they pull the trigger.”
She suggests that the life of a successful trader is not like the popular image – animated, dramatic and devastating when things go wrong. “A better way is to be detached, mechanical, methodical, slow to get in and quick to get out. It’s boring but it will bring better results,” she says.
Why traders ignore their own rules
If keeping to the rules – especially those regarding entry and exit – is the secret to successful trading, why do so many traders ignore them? The typical thinking when a trade approaches the stop-loss point and it’s time to get out is based on an emotional need – often the need to be right or to be a winner.
The best point to place a stop loss can be tricky to judge. The error that Mark Douglas puts second last – that of being stopped out only to see the market move in your favour – is one of the great bugbears of traders. They were right, the position was potentially profitable, but they were stopped out before they could take profits from it.
Hence the huge temptation to adjust the stop-loss order level, moving it to a point further from the entry point when the market threatens to trigger it.
But rather than being stopped out too early, the real error is failing to re-enter when the market turns. Being stopped out is better than watching losses mount, and if the new direction shows up on your chart as a valid entry signal, then you shouldn’t hesitate to get back in.
And the need to win, or to be right, is often behind another fundamental error – getting out too early. A trader sees profits on the table and, unable to stand the thought that they might be taken away, grabs them prematurely. Trader Louise Bedford warns against taking profits when the market reaches your price target, advising instead to allow the market to tell you when the profitable trend is over.
Although it’s important to have a price target for the purpose of calculating risk-reward ratios, taking profits when the target is reached simply caps the profit, she says.
Emotional need may also tempt a trader to risk more than his specified percentage of capital on a single trade – the real error here being overconfidence, often combined with a failure to recognise or correctly react to market conditions, suggests Matthew Press, head of sales at CFP provider First Prudential Markets.
“Without experience, they may not recognise how volatile a market is,” Perry says. “They have to be able to recognise when it’s choppy and adjust their position sizes – keeping their stops tighter [closer to the entry point] and taking smaller positions overnight.
In conditions like the sharemarket has seen since the middle of the year, he says “traders should stick to stocks that are less gappy and stocks they feel comfortable holding overnight.”
Like all other educators, he emphasises the need for a trading plan. “Trading plans define entry and exit criteria and a consistent and risk-reward ratio is factored into the setup,” he says.
“They help you recognise your risk level, to know where stop losses will be, and encourage you to look for another opportunity rather than sitting on losing trades waiting for them to come good.”
Finally, he says, it can take persistence to achieve long-term success. “You don’t stop before you reach destination just because you get a few red lights. You’re still on the same track but not every trade will be a winner. With the right discipline you can exit and re-enter and still get there while preserving capital.”
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Smart Investor 17 September 2007 by Stephen Calder
Why only 10 per cent of traders succeed
If you’re trading CFDs successfully and consistently making money from the markets, you’re among the very small percentage – 5 or 10 per cent – who can do this. The rest will fritter away their risk capital, and some will lose more than that.
Why? Because trading the financial markets – shares, currencies and commodities – is a completely different activity from almost any other, and demands a radically different mindset from anything you have done before.
Successful traders agree that psychology, or the attitudes and beliefs you bring with you to the task of trading and managing risk, is the single most important factor in setting them apart from the 90 per cent who will ultimately fail.
It’s not enough to know about market analysis, trading strategies and risk management. Even those who are well educated in these areas still lose money, and the anecdotal evidence is that the smarter and more successful you are in other areas of life – for example at the peak of a successful career – the more likely you are to fail in the markets.
This is so counter-intuitive that many professionals just assume they can succeed in the markets as they did in other activities.
Their failure stems from a false assumption. Because they have spent years being successful at what they are do because they get it right, they have not learned how to recognise when they are wrong and take the appropriate action. They continually make the most common error that traders can make – that if they are losing money it must be because they don’t know enough about the markets.
The fact is that they don’t know enough about themselves, say those who have found the secret of trading successfully. Although the rules for profiting from the markets are fairly simple – learning how to identify opportunities and then getting out of a trade if it moves against you, while staying in as long as it is making profits – they can’t bring themselves to follow them.
If it seems incredible that traders can allow losses to mount up on a trade instead of simply getting out, then you probably haven’t had just that experience and don’t realise how powerfully emotion can affect your trading decisions.
But losing traders who have done intense analysis, using all the tools available to anyone who can read, often have a large emotional investment in being right, and a fundamental belief that the market simply must, sooner or later, do what they predict and expect it will do.
They have ignored the basic fact that trading is a probability game. All the analysis does is tell you what the market is likely to do, not what it must do. Successful traders know that the market can do anything, and are ready and willing to exit dispassionately when it doesn’t conform to their expectations.
No successful trader is emotionally tied to the success of an individual trade. Every one of them knows something the others don’t – that an entry signal from a chart, or a fundamental factor in a stock’s performance, is just an indicator of probable or potential market moves. They expect some – perhaps half or even more – of their trades to lose money, and have no problem being wrong about a trade.
In fact, they don’t even see it in those terms. They expect losing trades, accept them as part of the cost of trading, cut the losses and think no more about it. On the other hand, traders who want to be right feel significant pain from a losing result, and part of their irrational pain avoidance is to deny that they were wrong in the first place.
So instead of cutting the loss, they wait for the market to turn around and prove them right. When they finally exit, with a loss of several times their acceptable minimum, they may then be afraid to put the next trade on, and think they need more market knowledge to correct the situation.
Trader 1 Peter Mathers
“Trading is the great game because it’s just you and the markets; you have to take full responsibility for your own actions. The financial aspect delivers the results,” says trader Peter Mathers of The Trading Lounge, an educational website for traders.
He agrees that techniques for dealing with emotion play an important role in a trader’s success, and that it’s easy to over-analyse the market. “You don’t need all the indicators as they only come from the price itself, and price is simply the shadow of volume.”
Negative thinking, whatever its cause, is the most common reason why traders fail, and awareness is the best antidote, he says, and the best learning ground is the market.
“Whether your beliefs came from birth, or you collected them along the way, the important factor is that you recognize them. Once you recognize a negative thought, it will still probably catch you out in a more or less unconscious state of mind. It’s normally the third time around you get a grip on it, if you’re paying attention. To improve you must become aware of what you are doing.
“While you are trying to do the mental analysis and track down the mental saboteurs, you also need to find a real education. The best education is simply being with the market and observing all its patterns.”
Those patterns come from the thinking of other traders, who are also often plagued by negative emotions, which is why the patterns tend to be repeated.
“You are emotion, and so are the markets. You need to become detached, firstly from your belief about money, and you need to become the observer, detached and watching the natural flow of [the market] unfolding and know when to play a part in the drama.
“There are people who can help you understand how a market works, but essentially you need to know how you work first,” he says.
As for risk management, all you really need to know is not to risk more than 1 per cent of your capital on any one trade, he adds.
Trader 2 Louise Bedford
“You have to be clever enough to write a trading plan and dumb enough to just follow it without thinking,” says Louise Bedford, a successful trader for over 20 years and the author of several books including Trading Secrets, which deals with the psychology of trading.
What traders really need is a way to undo the conditioning, built up perhaps from very early in their lives, that allows them to ignore the trading rules they have carefully studied. And they need to overcome the assumption that success in other areas of life will automatically translate into success in trading.
“It’s called the halo effect. But what they’ve learned professionally does not apply to the sharemarket. They need to overcome the sense of entitlement – that doesn’t work well for them in trading,” Bedford says.
“If pain, or even the thought of pain, interferes with our ability to function, then we have a problem. Trading involves pain – the pain of losing money and the pain of missing out on opportunities. Sometimes it’s easier to avoid these pains and to try and short cut the system by looking for a quick buck. This almost always leads to inappropriate trading decisions,” she adds.
She advises traders to work on clearing the past issues that cause them to repeat trading errors. “These are usually so ingrained that people don’t get through them with one counselling session.
“They need self-analysis to identify weaknesses and they need to find people who can help them overcome their weaknesses.” She cites the example of a husband-and-wife trading team. “The husband puts on the trade and the wife implements the stop loss,” she says.
Traders who lose money despite their deep knowledge of how CFDs work and how to analyse the market need to find ways to centre themselves and over come the need for self-sabotage, Bedford explains.
“We try to punish ourselves and don’t know why. Fear of failure and fear of success are what drives that. The fear of success may derive from the idea that a trader will exceed their friends’ earnings and disrupt the friendship group.”
The antidote is to rely on a mechanical trading system developed in cold light of day before fears took hold in trading. “You need to follow the system like a robot even though emotion is welling up. I used to think the total goal was detachment, but after 20 years I’ve discovered it’s self-awareness. It’s hard to be detached because losses take us back to primal emotion. We have evolved these things to protect us.
“The sharemarket acts as a primal trigger. You may not be able to train that out, but you can be aware of it so that you recognise the reaction and have specific things to do to calm yourself when we have that reaction.”
Relaxation techniques, including meditation, are tools good traders commonly use. “People who can work through their fear will succeed in other areas. They realise they are capable of so much more,” she says.
Trader 3 Catherine Davey
Can what you believe about the market, about money and about yourself really have such a debilitating effect on trading success? Local trader Catherine Davey, author of Making Money from CFD trading, thinks so, and has traced how her thoughts and feelings helped and hindered her trading results as a guide for others.
Davey says that, for example, “If you have an underlying belief that to make money you have to work, you’ll have to find a system that makes you work hard in order to make money.”
She says it takes quite a leap in the subconscious to have the belief that you can make money easily from trading. “Money management is vital, but it can’t just be an idea in your head. You have to live it.”
That’s assuming you know about money management in the first place. “Most people don’t. Only a small percentage of people even use stop loss orders.”
She says people can lose money exponentially because of their mental state. “When I go through a losing streak, the problem is that losses make losses,” she says. In other words, mental turmoil about loss and the possibility of loss prevents good trading decisions.
“If I’ve had a bad losing streak I stop for a while. I wait until I see opportunities and start to build confidence again.
“You’re so in-your-head when you trade; it’s you and the screen and you need to do something physical. Going for a run or swim has a positive effect.”
She says she couldn’t be a trader without meditation. “The reason to do it is to have balance and peace and not be emotional.”
She says that when trading from home, spending time alone with the markets, it’s important to have human contact; otherwise small issues can become big. I make a bigger effort with my social life than I would if I had a 9-to-5 job.”
She lets the market tell her when her state of consciousness is not working for her. “It’s not until I’ve lost money that I realise I’m beating myself up or something’s going wrong. It’s a great barometer of your mental state. If you have a normal win/loss ratio and it suddenly gets worse or you let a profitable trade turn into a loss, that’s an indication.
“The more you do it the more you realise how difficult the emotional side is. Money management makes it less personal. New traders often think ‘I have to win as often as I can,’ but you can be winning 30 per cent of the time and can still make money. And you can win 90 per cent of the time and still lose money.
“I think it’s correct that 95 per cent or so of traders lose money but most people won’t tell you they have lost.”
She urges new traders to keep careful track of their win/loss ratio, the barometer of their success. “It takes diligence. If you don’t know your own money management stats it will become too painful to be trading.”
The psychology comes down to one thing, she says. “It’s about not being right every time. We usually live our lives having to be right. Trading successfully takes a seismic shift in your approach. It’s different from any other endeavour.”
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