The Trader’s Essential Tools
by Stephen Calder of afr access
Market trader and educator Peter Mathers of The Trading Lounge says beginner traders don’t have to pay thousands of dollars to become educated about the market. Nevertheless, he agrees education is essential for those starting out.
“My opinion about new traders is simple: you need to be trading shares first and successful at trading without leverage. Then move in to the CFD market and take advantage of leverage, but just trade shares.
“If you get excited about that and go and trade forex and commodities and indexes, remember the margins there are as low as 1 per cent so they’re more highly geared,” Mathers says.
Passionate about education to the point where he offers free educational articles on his website, Mathers has also opened a business offering clients daily help via an email question and response, and he gives away free accounting software to help traders track their positions.
He advises those who want to learn about technical analysis to join the Australian Technical Analysts Association (ATAA). “Everybody new to technical analysis should join up,” he says. “The meetings are free and you meet like-minded people. Their journal is well written goes out every month. It’s an affordable and practical place to start learning.”
In talking to new traders, Mathers says, the most common weakness he finds is “the whole money management thing -- people don’t get the relationship between the amount of capital and the exposure they have in the marketplace.
“You can start off safely with $10,000 can take positions of around $30,000, but no more if you’re learning. New traders get excited about leverage and miss the point of exposure; some don’t even know how to calculate their exposure,” he says.
Although he likes to day trade, Mathers says those starting out should be looking at taking longer-term positions. “Generally my assumption is that people that position trade (ride longer-term trends) make more money than those who trade short term because they don’t have the skills.”
Mathers, one of whose earliest memories is asking his father what was that city building and being told it was the stock exchange, found when he started trading that he was a good analyst. “I love charts and I understand them,” he says.
But he long ago dispensed with many of the standard indicators chartists use and now concentrates on what he calls trading levels, which use the Fibonacci series as guideposts for timing position entry.
The sequence, which is infinite, starts 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on, a sequence known to be associated with growth in nature. The next number in the series is found by adding the last two together (34+55=89).
Once the number 10 is passed, there is a second sequence involving the tenth multiples of the original series -- 10, 20, 30, 50, 80. And between a price of $1 and $2, a share’s levels will run $1.10, $1.20, $1.30, $1.50, $1.80, $2.
“I only buy after one of those levels has been reached, not before,” Mathers says. “Always buy above the levels because the risk is too high of it not being able to get through that level,” he says.
The levels are points where corrections are most likely to occur, and the bigger the correction at any level, the safer the following trend. “A market is simply a trend, then a correction. As it moves up the corrections get bigger in proportion, like the ratios [the series] we’re talking about. I can see when it’s ready to go using relationship between volume and price,” he says.
He says that when trading levels in this way the average trade is about 3 months, although some take as little as a month.
Levels also help answer the question “If I let profits run, where do I let them run to?” Mathers says, because there is a big chance of a correction when the market reaches a new level. If you want an exit point -- the alternative to using, for example, a trailing stop -- the next trading level, as shown by the series, is the place to get out.
©2007 Stephen Calder and John Fairfax Publications