Category Archives: Being Right or Making Money

Trading System
Wisecracks

Breadth turning up….so is interest rates… boo

These days rates are very low in our savings a/cs….hands up…how many of us here have grumbled …. “what…interest rates so low? …. so stupid! might as well put the money into investments!”

Ok i have to stop typing now…. my 2 hands are up….
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Ok im back.

So this explains the surge in interest recently (past 1yr or so) in S-Reits (Singapore REITS) and so many reits listings here … OUE and SPH eh? (Mandarin Hotel Orchard…Paragon, Clementi Mall etc….)

If interest rates starts to rise again (back in 1998….fixed deposits offers were at….5%!!!) more conservative investors may want to exit riskier products (stocks, REITS) and reach for much safer products (Government bonds etc) ….

And now…. we can see more advisories start to back off on REITs….

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Do take note on the “new” less “bullishness” in the REITs as SGS’s (singapore government securities….think the local version of US Treasury Bills) rates starts to rise…

The simplified rationale is this….SGS’s rates are considered “risk free”… you are almost 100% sure the singapore government will not default on it’s debt (yes, if you buy bonds, you are the “lender”…..)

So if this “risk free” rates rises….that means “free money” is getting more…..why should you risk your money on so called “secure and stable” products like REITS which gives out 5-8% rates…but comes with the risk of larger capital (stock price) swings?

So higher rates means more investors will tend to “flee” interest / dividends based products….

This is the point of view for the retail investors….of course the repercussion in rising interest rates is much wider…. on the macro level….

Businesses (or even you….I will come to that….) will find that increasingly, borrowing costs (financing that joint venture into…Myanmar? the hot thing now eh?) will rise as your business loan with perhaps 7% rate is now at 8%?

For us, perhaps that car loan, home loan, education loan with low interest rates of 2-5% may start to get to 3-6% instead….

This all may lead to lower economic activity (eg, lesser spending…by you and business) thus inadvertedly dragging down….gasp….the stock prices…. 🙂

Hope I have not frightened confused you :p

cheers

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On a brighter note…market breadth is turning up! hahha

Going long…soon.

cheers!

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5) Being Right or Making Money – When to Sell (Exits, End of Uptrend) 2/2

So the tool for the selling is the same for the buying…your indicator for your trend. There are many punters who sell when they “feel” that the market is oversold (oh! Dun sell in when an oscillator eg RSI, Stochastic hits oversold an uptrend…), or when ost of us are badly “influenced” by negative headlines that a “correction” is near or the market has gone too hot etc…where the rationale for that oversold or too high etc…

Just let the market and the prevailing trend decide how strong and how long the current move will last, dont try to dictate how much you should earn this window. Let the markets decide. You just focus on your stops and risk management 🙂 Let me tell you, it can be pretty boring and you can get impatient keeping still…sitting and holding on to long positions… 

The view is that it is not worth attempting to predict when the next correction might occur. To do so would be to put one’s personal opinion ahead of the market. There are two types of participants. One uses her opinion to try to outthink the “market” and the other tries to emulate the market as much as possible by being a trend follower. While opinions can often be wrong, the market usually isn’t.”

Kevin Marder http://www.marketwatch.com/story/a-few-stock-leaders-show-fissures-2013-01-31 

Men who can be right and sit tight are uncommon. I found it one of the hardest things to learn. In a bull market your game is to buy and hold until you believe that the bull market is near it’s end. To do this you must study general conditions and not tips…” Jesse Livermore 

Since I used market breadth to measure trends (or market condition or sentiment), I use it to “time” my exits too. Here the same breadth chart vs the index again.

Breadth05Dec

Remember for buying there is a good time and price to buy? Similiarly here, a good time to sell/exit is when the trend ends, and a good price to sell? Same! Price confirmation! 

A good time to exit doesnt mean sell immediately…it must be confirmed by prices falling down. (yes, I buy on the way up and sell on the way down…) So this way, you keep riding the price trend with a close trailing stop. You only exit when both trend indicator and price is down. 

Lets complete the 5 steps with a brief touch on trailing stops. Trailing stops are often used to “lock” in profits, letting the counter runs its course while keeping a close eye on exiting…very very soon. Here’s 2 simple examples, Parabolic SAR and a Price channel as trailing stop. 

CMA STI TStop

One of the great myths of the stock market is that you have to be in the market all the time in order to be successful…sometimes “good defense is the best offense,” and there will be times when the market direction is not as obvious. During such an environment, being out of the market and in cash may be the wisest play. For this reason, underlying general market conditions will always be a key factor in any of our recommendations.” Gilmo Report http://www.gilmoreport.com/gilmoreport.html 

I have finished my 5 steps. Now is your turn to form your 5 steps. 🙂

While you are pondering about that…here a few good stuffs to read … 

Differs on everything, but agree on 1 thing…

http://www.trading-naked.com/The_Billionaire_Traders.htm 

http://thezikomoletter.com/2012/04/29/interviews-with-paul-tudor-jones-louis-bacon-bruce-kovner/

What’s so special about macro hedge fund managers?

..When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it. 

What’s your take on the next generation of managers?

I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over…We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. 

You’re not necessarily a fan of hiring people straight out of business school.

Today there are young men and women graduating from college who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. While I’m a staunch advocate of higher education, there is no training – classroom or otherwise – that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it – a sort of baptism by fire. One has to experience both the elation and fear as markets move five and six standard deviations from conventional definitions of value. 

Who are these 3?

http://www.businessinsider.com/richest-hedge-fund-managers-2012-9?op=1 

cheers and safe trading!

5) Being Right or Making Money – When to Sell (Exits, End of Uptrend) 1/2

Yeah! Finally! Last step! Now we decide when to sell…

“…eh siao lian eh…what last step? Where were the 1st few steps?…”

Huh!!!???

“..siao lian eh…joking la…i know this one…I not greedy…got profit I run liao…agar agar la…if buy at $1.50, I aim $1.60, then wait for it to come down to $1.50 again, I buy again…simple…”

Not so simple bro. Different trading set ups have different profit or price targets…eg for chart patterns and S/R lines, the initial target is the projected upside…the same size as the chart pattern… or the next up S/R line…confusing? Ah…you can read Magee or Peterbrandt.com, excellent source for chart pattern trading.

See this familiar pic again, the “height” of the Head & Shoulders patter is about 200 points (3315 – 3115) so the target (we are talking about shorting the H&S pattern here) is 200 points down from the “neck line” at 3115, so minus 200 = 2915…bingo…we nearly hit that target din we?

Then there is Elder’s triple screen…the initial target is the upper channel of the moving average channel.

STI MA Upp

So the price target for now, for example is 3354…the upper line.

Hey…this is another viable price target 😀 hahahaha!

Price Tgt

But please please remember….analysts targets are based on 1year projection and will change according to their whimps and fancy the forecasted business outlook.

“..look at the favorite picks of January 2008..S&P 500 plummeted 39%. For anyone trusting the index, it was a total disaster. But if you’d stuck to the analysts’ 10 favorite stocks instead, you’d have only lost, er, 48%..With that caveat, the most-hated stocks that are still in the S&P 500 today fell 51% in 2008—just three percentage points worse than the top picks.

I also checked some of that year’s more-spectacular blowups. Lehman Brothers? At the start of 2008, 17 analysts covered the stock. Of them nine had it as a “hold,” five as a “buy” and two—amazingly—had it as a “strong buy.” Given that one of the smartest things anyone could have done with their money, ever, was to sell Lehman stock at the start of 2008, how many analysts actually issued that recommendation? One. Out of 17.”
http://online.wsj.com/article/SB10001424052748703808704576062033926741952.html

For me personally…price targets and economic forecasting is just like weather and socer results predictions or forecastings….many people and gurus have many views….always popular…always tend to be inaccurate….

“Got black clouds, sure will rain, bring umbrella” My mother to me.

“Got rain so what? No cat 1…still continue outfield!” Me to recruits.

“It would be fruitless to set targets when our process is controlled by the market. If we can participate in most of the uptrends, we will do well. We strive for equity-type returns with lower beta, lower volatility. We don’t set targets” Greg Morris

“..eh siao lian eh…so no targets…then how and when to sell..siao!”

When you (through your trend spotting glasses) determine that there is no more uptrend (provided you are a trend trader), so you sell, hopefully still in the money, if your uptrend has not generated profit yet…you still have to sell since your trend spotting glasses can no longer see any trend.

The next and the last…my tool for deciding to sell…is damn boring….familiar?

4) Being Right or Making Money – When to Sell (Stops) 2/2

For chart pattern trading (I learn and read up particularly a lot from Peter Brandt, peterbrandt.com), near the failure of the chart pattern formation or breakout point will be your stop loss. I like to lump chart patterns eg Head and Shoulders, Cups, Triangles with trading on support and resistance lines… So similarly…the failure for R/S lines will be the stop loss level.

Here is a screen shot of a good H&S initial failure then follow by a good breakout, a double bottom, and a rectangle trading range formation with good examples of whipsawing breakout failures…can you see? 

STI Patterns

If you like to buy on “dips” or “pullbacks” or “flags” etc during an uptrend (actually, Elder’s Triple Screen is a very good set up for trading this style), then the prior mino low is your stop loss level. 

See the below? The 1st blue circled entry was not stopped out….but the 2nd one is…can see? 

 STI Dip Fail 

The 5 steps or questions are quite interlinked…stop loss helps me dictate how much to buy too…not just an independent step on focusing out stopping out…

So now the last stop (sic…..hehehhe) that I am familiar with….stops based on trailing volatility. There are many tools to help, eg Standard Deviation or Bollinger Bands, ATR, Price Channels, MA Channels, % Change etc….

Basically, you are using the specific volatility or average price movement of the particular counter to dictate when the current movement is too much, based on the average movement of the past. A bit chim huh?

STI Bands 

Sorry ah, I lumped all the channels indicators avaliable to me here 🙂 Purple is bollinger bands, green is MA Envelope, Yellow is MA Channel and Blue is price channel. All are all different forms of price movement or a form of volatility on average for the counter. 

For example, lets say we use MA envelope here…stop will be at 3215 (somewhere there la). So incorporating our position sizing step and if our entry is now at 3285, units to buy is based on amount to risk / (3285 – 3215) = amt to risk / 70points. 

So how do we get this amount to risk? I have actually detailed this in “Maximum Drawdown”…. a lot of us around like to use percentage of capital as a guide. (Alexander Elder advises 2% max per counter, and total 6% current open position exposure….) 

Lets say we have a trading capital of $50k, and would like to risk 1% (for me, based on my personal backtesting and comfortable maximum drawdown of around 10%…risk per trade it will be around 3%), so that will be $500 / 70 = 7 units or contracts or shares to buy etc… 

STI Bands_1 

I like this method as a stop near the extreme end of the volatility means I dun get stopped out by unnecessary market “noise”…. of course you have to choose our parameters yourself….the period to measure and the units of risk etc… Once again…a bit vague here (intentionally) you have to do backtesting to test the best numbers for your system. Im trying to highlight to you about stops…not my actual trading system here :p 

…Of course, there can also be sudden changes to initial moves. These cases normally reverse or stop out my positions but losses are part of the business and they are normal. It is important to trade what you see and not what you are convinced of as convictions are often misleading…Losses are normal; there is nothing wrong in positions getting stopped out. You need to see the long-term picture in the context of your trading approach and view losses as costs of the business you are building….Andrea Unger

http://www.sharesinv.com/articles/2012/10/31/trading-insights-from-three-time-winner-of-world-cup-trading-championships/ 

The last of the 5 steps is next…

4) Being Right or Making Money – When to Sell (Stops) 1/2

Stop loss is your pre-determined exit point should your counter start to go awry. When it comes to trend trading, this can mean you can get stopped out even if the trend is still positive. Stop out does not mean the trend has changed. As long as your trend is still up…you can still look for re-entry. Stop out in this sense means an sudden abnormal selling volatilty had went down to your stop loss level.

Investing is ridiculously hard to do. You can do all the legwork to check out a company…You will buy that stock on a Monday and on Tuesday everyone in the market will dump it in droves. For no reason at all. Sure, the financial TV shows and pundits will come up with reasons…Some reason out there will fit…in retrospect, seems to prove the folly of buying too soon or too late. The truth is, a bunch of people got up Tuesday morning and decided they needed cash more than your stock, and they sold. Sorry.

http://www.marketriders.com/investing/investing-for-beginners-yes-i-mean-you/

 Before we go further..I have another quote… (Yes, Mr Originality strikes again)

 Being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul. Jesse Livermore

Marty Schwartz, one of the featured trader in Jack Schwager’s Market Wizrds book, have this so say,in Pit Bull: Lessons from Wall Street’s Champion Day Trader

Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself. You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you’re right, but to hear the cash register ring…

That’s right. That’s why I like this phrase very much… “Being Right or Making Money”… oh…it’s a book by Ned Davis 🙂

Let’s ge back on track again.

There are 2 situations where you sell. One is where you are kicked out (Stops), despite the fact that in your trend trading analysis, the trend is still on…the other is where you walk out (End of uptrend).

When you get stopped out, you sell at a loss. When you exit voluntarily when the trend ends, you sell, either at a profit or loss. We will come to this later, as it is actually the last of this 5 steps. (Yes! There are 5 steps!…have you lost count?!)

..eh siao lian eh…you sibei long winded leh…I dun like stop…I only play to win….if the stock knn lose money…I dun sell…so no loss at all…i keep till at least it comes back up then I sell… pui!…”

Yup, meanwhile the capital locked up cannot help you make money eslewhere (opportunity loss) while you now can join the majority of people to wallow about this sickening counter which you are still holding…..and not learning….

We have to be mean here…not having stops means having a very real opportuinty of financial (trading capital) loss, so deep it may not be possibly recoverable…

Remember this earlier?

Stadion Funds 80yrs MA

Greg Morris, Stadion Funds

And this?

Loss Table

Very briefly, here are some forms of popular stops…erm…stops for trading style which I am familiar with. Try to have a logical stop, or some form of basis for your stop. Not a stop based arbitrarily on a % amount of your capital that you are comfortable to lose, or a % of the current price.

I really try to stay away from a percentage of account, because it really doesn’t tell me anything. It just says “I am willing to lose this amount of money.” Well, the market doesn’t care about how much money you are going to lose….You know what, before I hit my five-point stop, the average price where it would have been hit (my stop/loss) would have been, say, five points or four points.”Now I know this is at least the amount of room I need to give before I can execute that trade.” Mike Toma

http://www.moneyshow.com/trading/article/42/VideoTransTr-24907/Tough-Talk-about-Risk-Management/

A stock like Coca-Cola (KO) may move 5% a year. A stock like Google (GOOG) or Baidu (BIDU), it may move 5% a day. So if you use a certain percentage, that percentage may not apply to the stock that you own. For instance, if you put a tight stop on Google or Baidu, you’d be stopped out maybe intraday, and if you put a loose stop on a stock like Coca-Cola, you may never get stopped out and miss out on other opportunities. So it’s important to understand each stock and its own volatility and adjust your risk discipline to the stock you own.” Buff Dormeier

http://www.moneyshow.com/investing/article/43/VideoTrans-26439/How-to-Determine-Stops-and-Profit-Targets/

Next up are some examples of stop loss choices…

3) Being Right or Making Money – When to Buy (3/3)

When we are waiting for the trend to confirm…and not trading blindly all the time…we are actually waiting for the lowest risk period to trade or enter the market….now that we have settled buy at the right time…what about the right price?

Have you often heard people mentioning price confirmation? Or wait for confirmation? This should be familiar to chart patterns traders…always wait for confirmation…else, the pending pattern is null and void.

“eh siao lian eh…this one I know….buy low sell high…. Very easy…. U tell me good time to buy? I tell what what is a good and cheap price to buy…confirm right?…”

Wrong.

Too many of us take the price of stocks like it is a material product…buy when there is a sale…cheap then buy…buy low sell high! Too high dun buy!

We often like to queue lower, hopefully the price will come down and hit us….come to think of it, isnt it quite a contradictory action? Look, you buy a counter because you feel/hope/analysed that it will go up…and yet at the point of buying….you are thinking that it will come down?

If you think that Arsenal FC will win a match…just bet win. Why narrow the odds for yourself by betting that Arsenal will lose 2 goals and come back up to win 3-2?

You get what I mean?

There is a way of buying cheap….only when you have thoroughly analysed the valuation, the financials, and the potential of the company…and feel that the current price is traded at much of a discount to it’s true valuation…so you buy. Then….you have to wait patiently for the market to realise that this stock is undervalued and pick it up… Could be 1mth, 1yr, 1 decade…

Buy and hold supporters or long term investors often are presented with a super long term chart of how equities tend to go up in the long term…check out the slide below.

Stadion Funds 80yrs MA

Greg Morris, Stadion Funds

Anyway…most of us when we think cheap…we are not thinking of the valuation (most of us)…most of us are thinking of the relative term of cheap….last week $2.00 now drop to $1.00 …. Cheap! Can buy! Moreover this one is Temasek related counter…sure wont die one….

(Remember your primary school science experiment? Put left hand into cold pail of water, right hand in a hot pail of water. Hold for 1 minute and then put both hands into a room temperature water. Left hand feels hot and right feels cold….)

Those who bought at $2.00 will feel $1.00 is cheap…those who have bought at even lower will think its high….

Let me tell you…when the trend is down…most counters will go down….cheap will get cheaper…. Trend is like a tide…when it’s approaching high tide…almost all the ships will rise….

Price confirmation in general, for trend trading is the price moving in the direction of the prevalent trend. Yes, buy on the way up dude! I buy on the uptick. I advise my clients to do so. All, yes, all think that I am mad when I tell them, “this period is positive…but for this counter…better wait for it to come up then buy….”

Remember, most stocks will follow the prevalent trend…what if the counter you have chosen doesnot follow the trend? Price confirmation will help reduce the risk that you have chosen a black light counter…Yes…risk management again…

I did not know then what I learned later, what made me fifteen years later, wait two long weeks and see a stock on which I was very bullish go up thirty points before I felt that it was safe to buy it. I was broke and was trying to get back, and so I waited. That was in 1915.
Jesse Livermore

We have gone through 1) what to buy (for me liquid counters & close correlation with market, regardless of beta), 2) position sizing (how much to buy, depends on logical stop loss level and maximum drawdown), and 3) when to buy (upon establishment of trend and price confirmation).

Next up is when to sell, in terms of getting stopped out. It is similar like whipsaw…but not exactly the same.