10 shortcuts to consistency and profit accumulation, anka c. metcalf
TRANSCRIPT
ONLY EDUCATED TRADERS SURVIVE INSIDE: TRADER’S STORY
EdgeTradingYourTHE MAGAZINE FOR TRADERS & INVESTORS IN CFDs, STOCKS, OPTIONS, FUTURES, FOREX & COMMODITIES
AUD 8.95EUR 8.00GBP 4.95USD 8.95NZD 9.95SGD 12.90MYR 20.00HKD 79.00
Volume 17, No.4
YTEmagazine.com
10 ShORTCUTSTo consistency & profit accumulation
Jul/Aug 2012www.YTEmagazine.com ELLIOTT
WAVE FOREx TRADINgForecasting currency pairs
VOLUME ANALYSIS
TRADER TAX TIPSOptimise your returns
Page 26
Create a clearer picture
of technical setups
977
1327
5800
01
04
ISS
N 1
327-
5801
SATYAjIT DAS INTERVIEW WD GANN: WEEKlY PERIOD, SEVEN DAYS
Investing in margin foreign exchange and other derivatives can be risky and these products are not suitable for all investors and traders. AxiCorp have not considered your personal objectives, financial situations and needs. The offer of margin foreign exchange and other derivatives is made in our Product Disclosure Statement (available from our website). Please seek advice from your financial advisor and review the PDS prior to making a decision about any product. AxiCorp Financial Services Pty Ltd is regulated in Australia by the Australian Securities and Investments
Commission, AFSL No: 318232, ABN: 85 127 606 348.
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+61 2 9965 58301300 888 936www.axitrader.com.au
iPadiPhoneAndroidWebtraderBlackberry...and more!
Investing in margin foreign exchange and other derivatives can be risky and these products are not suitable for all investors and traders. AxiCorp have not considered your personal objectives, financial situations and needs. The offer of margin foreign exchange and other derivatives is made in our Product Disclosure Statement (available from our website). Please seek advice from your financial advisor and review the PDS prior to making a decision about any product. AxiCorp Financial Services Pty Ltd is regulated in Australia by the Australian Securities and Investments
Commission, AFSL No: 318232, ABN: 85 127 606 348.
Android: Enter the Android Market place and search for "AxiMobile", clickon "AxiMobile Trader", click on the install link.
iPad/iPhone: Search for "AxiMobile" (developed by Xogee) in the App Store,click the install link.
Blackberry: Search Blackberry App World for AxiMobile Trader.
Webtrader: Enter the following address in your web browser: http://webtrader.axitrader.com.au/
PC Platform (MT4): Visit our website: http://www.axitrader.com.au fordetails on downloading our platforms.
Trade FX on almostany device you want
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+61 2 9965 58301300 888 936www.axitrader.com.au
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COVER STORY38. Elliott Wave Forex Trading s
It can be amazingly accurate or hauntingly wrong – Peter Mathers applies Elliott Wave forecasting to currency pairs.
FEATURES34. Ten Shortcuts to Consistency and Profit Accumulation n
Anka C. Metcalf shares her equities trading plan.
42. Examining Volume Analysis l s
Steven Mayne and Nicholas Tidswell, on how traders can benefit from volume analysis to create a clearer picture of the technical setups on the market.
46. Seven Days s
David Burton explores the trading methodology of WD Gann: Weekly period, seven days.
REVIEWS68. Book Reviews n l s
YTE provides a roundup of the latest book titles to hit the shelves.
70. Software Review n l s
Three traders at different levels of experience test Barchart Professional.
INTERVIEWS28. Satyajit Das n l s
Ben Power spoke with author and internationally recognised expert in financial derivatives, Satyajit Das, about global markets, the Australian dollar, gold, commodities, China and why we are currently in a traders’ market.
62. Trader’s Story n l s
Get to know your fellow traders: Kel Butcher speaks with equities trader Tim Sutherland.
COLUMNS12. Market Snapshot n l s
Lachlan McPherson provides up-to-date market analysis: eyeing disaster.
16. Are you an Impostor? n l s
Louise Bedford shows you how to stop ‘impostor thinking’ from sabotaging your life in the markets.
18. Options Corner l
Our resident options experts, James Cordier and Michael Gross, answer readers’ questions.
20. Currency Corner l s
Bradley Gilbert provides analysis of the current market: There is no doubt – Greece will exit the euro!
24. Commodities Corner l
Market expert Aaron Lynch explores commodities markets: Commodities chaos or a logical pullback?
26. Trading Tax q&A l s
Resident tax expert Adrian Raftery, aka ‘Mr Taxman’, answers readers’ most pressing trading tax questions.
46. Another Fork in the Road! l s
Dawn Bolton-Smith on current market conditions and trading education.
74. The Rub n l s
Michael Pascoe: The dangers of listening to the boss.
REGULARS10. Market News n
The latest news, announcements, services and trading tools to hit the market.
53. Chart Watch l s
56. Current & New Charts l s
66. Trading Life n l s
Dale Gillham shares his trading life.
72. Marketplace/Seminars n l s
Contents
n NEWCOMERS l INTERMEDIATE s EXPERIENCED YOURTRADINGEDGE
JUL/AUG 2012 VOLUME 17, NO.4
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34
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1 2 0 6 2 5 _ 2 7 5 x 2 1 0 _ P r i c . p d f P a g e 1 3 0 / 0 5 / 2 0 1 2 , 1 2 : 0 7 : 3 9 G M T + 0 1 : 0 0
www.YTEmagazine.com______________________________________________YourTradingEdge is published by Your Media Edge Pty Ltd.
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The information contained in YourTradingEdge (published and online material) is based on information that is believed to be accurate and up to date at the time of publication. Neither Your Media Edge Pty Ltd (“YME”), nor its Directors or employees give any warranty of reliability or accuracy and readers should rely on their own assessment and inquiries. With respect to third party material published or referred to by YourTradingEdge, such material is published or referred to for information only and neither YourTradingEdge, YME nor any of their staff, warrant its accuracy or reliability. Information contained in published and online material is intended to be of a general nature and is not intended to give financial or investment advice. It is recommended that specific advice be sought prior to acting on any matter contained herein. The opinions expressed in this magazine are those of the authors, not YME, unless otherwise stated. The publisher has the right to reject or omit from publication any advertisement or part thereof.
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editorialJUL/AUG 2012 VOLUME 17, NO.4
edgetradingYour
s the financial year comes to a close our Trading Tax column (page 26 of this issue) is proving very popular with many emails coming in for Mr Tax Man – Adrian Raftery. We had too many questions sent in to fit in this issue, so I have also squeezed one more in to our ‘YTEmagazine.com’ page, page 8 of this issue. You can find additional trading tax Q&A with
Adrian on www.YTEmagazine.com. Also on page 8 we ask ‘Where do you trade?’ – The team at YTE would love you to share with us your home trading offices, setups and terminals, or perhaps you trade from your laptop on the go. Trading can at times be an isolated business and we would love to meet more of you and see where and how your trading takes place. Please email me at [email protected] with a photo of your home office/place that you trade, your name, how long you have been trading and what you trade. You can also share these with us by visiting YourTradingEdge Magazine on Facebook (Facebook.com/YourTradingEdgeMagazine).
In your Jul/Aug 2012 issue of YTE we welcome back Peter Mathers, who shares his thoughts on using Elliot Wave for forex trading in our cover story on page 38. YTE welcomes first-time contributor and long-time YTE reader and trader Anka Metcalf who shares her equities trading plan in ‘Ten Shortcuts to Consistency and Profit Accumulation’ (page 34).
I have received several letters requesting more on volume analysis, Steven Mayne and Nicholas Tidswell take a closer look at its role in technical analysis on page 42. David Burton continues his exploration of the trading methods of WD Gann (page 46) and YTE’s Ben Power speaks with internationally recognised expert in financial derivatives and author of ‘Traders Guns and Money’, Satyajit Das, about global markets, the Australian dollar, gold, commodities, China and why we are currently in a traders’ market (page 28).
Happy reading and profitable trading.
Chelsea ReidEditor in Chief – YTE
a
ONLY EDUCATED TRADERS SURVIVE INSIDE: TRADER’S STORY
EdgeTradingYourTHE MAGAZINE FOR TRADERS & INVESTORS IN CFDs, STOCKS, OPTIONS, FUTURES, FOREX & COMMODITIES
AUD 8.95EUR 8.00GBP 4.95USD 8.95NZD 9.95SGD 12.90MYR 20.00HKD 79.00
Volume 17, No.4
YTEmagazine.com
10 ShORTCUTSTo consistency & profit accumulation
Jul/Aug 2012www.YTEmagazine.com ELLIOTT
WAVE FOREx TRADINgForecasting currency pairs
VOLUME ANALYSIS
TRADER TAX TIPSOptimise your returns
Page 26
Create a clearer picture
of technical setups
977
1327
5800
01
04
ISS
N 1
327-
5801
SATYAjIT DAS INTERVIEW WD GANN: WEEKlY PERIOD, SEVEN DAYS
6 YOURTRADINGEDGE JUL/AUG 2012
Trading can be HARD.
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GET INVOLVED! Join the YTE trading community and learn with, and from, your fellow traders. Share your opinions, experiences and feedback on YTE and the financial markets industry. Send your emails to: [email protected] or visit www.YTEmagazine.com, comment on articles, blogs and join the discussion. You can also get involved by searching for Your Trading Edge Magazine on Facebook, Twitter and by subscribing to our YouTube channel.
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Join our community of traders: Your emails, comments and tweets.
Tax TimeQ. You made mention in the May/Jun 2012 issue of YTE Magazine (Trading Tax Q&A) of the taxation rules that require Australian residents to record their share of income where they controlled the shares in a foreign company. What are the rules if you do not hold a controlling interest? – YTE reader
A. If you do not hold a controlling interest (generally greater than 50 per cent) of the share capital of a foreign company, then the proposed new Foreign Accumulation Fund (FAF) rules may apply instead of the Controlled Foreign Company (CFC) rules. These are in draft form at the moment and are intended to replace the old Foreign Investment Funds rules, which were repealed after the 2009/10 financial year.
Under the exposure draft legislation, the FAF regime is directed at Australian residents who hold interests in a FAF and that FAF is not a CFC for which the resident is an attributable taxpayer. It is proposed a FAF be defined as a non-resident company or a non-resident trust that invests largely in debt interests and distributes less than 80 per cent of its profits or gains. Taxpayers holding such interests will be required to include FAF-attributable income in their assessable income for the relevant income year.
Editor: The above tax question has been answered by Mr Taxman, Adrian Raftery, author of ‘101 Ways to Save Money on Your Tax - Legally!’ For more from Adrian see page 26 of this issue.
This information is of a general nature only and does not constitute professional
advice. You must seek professional advice in relation to your particular circumstances
before acting.
Where do you trade?Editor: Here at YTE we have had the great privilege of interviewing Dawn Bolton-Smith in her home office, and YTE has interviewed many other traders through our Trader’s Story interviews (see page 62 of this issue for a great interview with equities trader Tim Sutherland). The team at YTE would love you to share with us your home trading offices, setups and terminals. Trading can at times be an isolated business and we would love to meet more of you and see where and how your trading takes place. Please email me at [email protected] with a photo of your home office/place that you trade, your name, how long you have been trading and what you trade. You can also share these with us by visiting YourTradingEdge Magazine on Facebook (Facebook.com/YourTradingEdgeMagazine). Submissions will be published on our website, Facebook and in upcoming issues. Looking forward to meeting you!
8 YOURTRADINGEDGE JUL/AUG 2012
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Market newsThe latest news, announcements, services and trading tools to hit the market.
10 YOURTRADINGEDGE JUL/AUG 2012
China Commodities Trade & Investment Summit 2012 – Is China still a giant commodity vacuum?China Commodities Trade & Investment Summit 2012 (CCTI) hosted by the Emerging Industries Institute Shanghai and
organized by IGVision International Corporation, will be held on 13–14 September in Shanghai, China. It is China’s largest networking and information exchange platform for the commodities industry.
This summit is expected to gather more than 200 top professionals/senior executives across the value chain, including market administrators, policy makers, commodity producers, traders, financiers, consultants, academics and other experts, many of whom will speak and give presentations in both plenary and parallel sessions at the meeting.
The summit will highlight supply and demand fundamentals and price trends of commodities, the macroeconomic environment and changing monetary policy, regulatory changes governing China’s new commodity derivatives, investment portfolio and strategy, risk management and control in the commodities market.
Over a two-day period, the speakers, moderators and participants in CCTI will discuss key perennial issues of the commodity economy, such as an uncertain global economy, changing monetary policy, non-perfect market surveillance, unstable commodity prices, complexity of investment strategy
and increasingly important risk management.
What attendees will take away from the event
• Assessment of the latest regulations that exist within the commodities market
• Understanding of economic and political anomalies to enable successful implementation
• Information about the latest and most successful commodities market developments
• An overview of China's commodities market fundamentals • Insight into the future of China's commodities sector • Predictions of commodities' price trends • Information on best practice to mitigate risks, beat inflation and
maximize investment returns • Increased perceptions about strategies for effectively optimizing
the investment portfolio • Knowledge of new and exciting investment opportunities
Attendance at the two-day conference will allow participants to meet more than 200 industry professionals and obtain more than 300 business opportunities.
China Commodities Trade & Investment Summit 2012 is a must-attend event for decision makers to acquire insights and deeper understandings of the impact, opportunities, challenges and strategies of China’s commodities market.
For more information, please visit the official event website: http://www.igvision.com/commodities.
MahiFX Launches New Forex Technical Analysis
Indicators and Charting ComponentsMahiFX, the proprietary-built retail foreign exchange (forex/FX) trading platform, has released a new suite of charting components and market-timing technical analysis features and indicators. The platform enhancements are intended to equip traders with the tools required to better interpret currency graphs and to execute better-informed trading strategies. The new charting package also provides MahiFX traders with the ability to zoom, draw and trade directly from the interactive charts.
MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award-winning e-commerce platform BARX; and by Susan Cooney, former head of electronic FX institutional sales in Europe for Barclays Capital. Operating as a market maker, MahiFX challenges the traditional broker model by providing institutional-level technology and pricing to retail FX traders.
Commenting on today’s release, CEO David Cooney said: “Our ambition is to provide traders with the best possible trading platform.
We intend to continually engineer and evolve the platform based on our clients’ feedback. This first major release since our launch two months ago is a direct result of conversations we have had with our clients; conversations which have highlighted just how important charting and technical analysis tools are to them.
The new fully customisable charting and technical analysis features provide traders with indicator, overlay and trend-line tools to analyse and interpret currencies and movements in real time. MahiFX traders can now examine trends by deploying trend-following Moving Averages indicators including Exponential Moving Average (EMA) or Weighted Moving Average (WMA), or by utilising other trend indicators such as the Parabolic Stop and Reverse system (PSAR) and Donchian Channels.
Momentum indicators such as the Relative Strength Index (RSI) and Rate of Change (ROC) are among many that traders can utilise to assist in trading ranging and trending markets and to determine preferred entry and exit points.
MahiFX also features a popular ‘Quick Order’ function that gives traders the ability to post bids and offers very close to or even inside the spread with only a couple of clicks.
For more information visit: https://mahifx.com.
y now regular YTE readers should be familiar with the wide range of approaches to trading and the way a trader should conduct himself when mastering his craft. However the value of choosing an appropriate strategy that will suit a trader’s personality is often underestimated. Disregarding this factor will inevitably result in both personal and emotional frustration as well as poor trading
results. I have often heard that emotions kill traders and thus trading should be without emotion, even boring. I couldn’t disagree more. The trading methodology should be an extension of the trader which makes trading an enjoyable and rewarding experience. Those who supress their emotions or even trade against them do not stay in the game very long. So choosing a methodology that is suitable to your personality is absolutely imperative.
In this light, even when a trader is initially profitable he or she may
end up being stressed. As strange as this sounds, a series of losses may actually be a relief. The matter of fact is those losses are usually highly leveraged and this presumably makes them both rewarding and fulfilling as a release in a form of emotional experience. The regularity with which it happens to traders makes me believe that excessive leverage is almost always a by-product of boredom and discomfort from the trading methodology rather than pure profit motives. The obvious exception to this would be a new trader who is attracted to the possibilities of leveraged returns.
With the above said, we still question the nay-sayers who question the suitability of the FX markets to novice traders. In my experience, a desire to overleverage a trade is diffused when a trader was able to develop a trading methodology that suited his personality. This in turn allowed the trader to be methodical and productive.
It would be unfair to tone down the advantages of leveraging. Once you become consistently profitable, you will feel confident increasing your leverage and that will lead to better performance. This however, takes place rather naturally and is done by a trader as a rational decision. This should not be done to relieve emotions.
While I do advocate the right approach to trading is imperative to emotional wellbeing and achieving positive outcomes in trading, I do not mean to denigrate the importance of risk management. The trading methodology will impact one’s willingness to develop and then adhere to the trading rules and thus determine the capital they want to risk. Hence, adhering to a set of rules will be much easier in a case when trader is comfortable with his methods.
Once apprehended, the concept raises a number of challenges. First of all, how does one choose an appropriate trading style?
Second, how does one determine whether the selected approach is right for him? Thirdly, where does one depart from the point when the strategy is developed?
The answer to the first question is rather straightforward. In order to understand what suits you, you have to be knowledgeable about who you are. Try to define yourself, your habits, and individual characteristics of your personality. Then, do a search trying to determine the type of market that will appeal to your personality without taking you out without disturbing your daily routines. For instance, if you are an introvert with very little interest in social interactions, there is a good chance that you will enjoy keeping up to date with the economic and geopolitical news which is imperative to adjusting your medium to long term assessments of the market. Alternatively, if you believe in mysticism and happen to read your horoscope on a daily basis, you have what it takes to end up as a promising technical analyst who enjoys counting Fibonacci lines on
the screen of your iPhone. The understanding of whether the selected strategy suits you is also
simple. Artists love to paint. Traders love to trade. If you familiarised yourself with a specific methodology or a market and after limited success you find yourself confused, do not hesitate to move on and attempt to try something new. After almost a decade of working as a broker I am a firm believer that there is something out there in the markets that will be relevant and interesting to you. Would you be surprised to see a supermodel transforming into a trader? And in case you didn’t know, Prada just listed last year. My hypothesis is if you do not enjoy trading or investing, you probably haven’t found the area that is most suitable to you.
Once you find yourself in the markets you are likely to gain new internal sense of comfort with the way things are going on in your life. When I see one of my clients “getting it” with a trading approach, it is immediately apparent from their behaviour and of course the size of their accounts. From then on, however, it is a never ending learning curve which nevertheless is enjoyable and rewarding. Throughout the process one is prone to make mistakes and fall into a trap of overconfidence just to learn from mistakes made, and move on to the new learning experiences. Such is life of a trader and that will never change.
This is precisely why our primary concern has always been providing my clients with assistance, knowledge and education that they could use to formulate their trading methodology. Brokers make money when their clients do. That’s why at Admiral Markets every client starting from a university student to a hedge fund trader is treated like our partner who we want to assist in developing their own trading solutions.
By Admiral Markets.
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MethodologY and risk ManageMent
ADVERTORIAL: METHODOLOGY AND RISK MANAGEMENT
JUL/AUG 2012 YOURTRADINGEDGE 11
In my experience, a desire to overleverage a trade is diffused when a trader was able to develop a trading methodology that suited his personality...
s a trader and investor, I have been taking a bullish stance on the current economic recovery and towards many of the well-geared companies at its forefront. However, nothing moves in a straight line –
especially markets.Politics play a large role in any
major economy’s performance and confidence. The current Obama administration is clinging to recent positive employment numbers in the United States (which, it must be noted, are a mixed bag, at best) but the next few months, including America’s ability to weather the European financial storm, will dictate presidential popularity in the elections.
In Europe, France recently ousted its President for the more hawkish Francoise Hollande, hoping that the new President would bring about what Nicolas Sarkozy could not deliver. Italy is also in a state of political disrepair, and Greece is at the centre of it. Greek voters appear to have all but abandoned their current parliamentary heads, as it seems clear that current moves toward austerity will not help the debt-laden nation. It seems that Greek elections and the latest swing to smaller, independent political parties might tip this European nation into default. Right now Greece continues to struggle, despite an already enormous $A170 billion bailout package and 1 trillion euros in long-term loans.
In Australia, the government has hardly done a great job of instilling confidence. Leaning heavily on a now-prosperous mining industry has saved Australia’s two-speed economy. The Gillard government is proud
to have averted financial meltdown and be once again heading toward surplus. The truth is that there have been too many bungled decisions. There has been political scandal, flawed mining taxes, a frail carbon-tax solution, and most of all, a government that is not so far from its European counterparts.
Certainly, Australian markets are not going to fall into oblivion. Australian banks won’t go under, and mining companies will continue to produce and ship record amounts of iron ore. However, some unavoidable effects of a European shakeout will undoubtedly hold back overall market recovery.
MARKET SNAPSHOT
Lachlan McPherson provides up-to-date market analysis: eyeing disaster.
Market snapshot
12 YOURTRADINGEDGE JUL/AUG 2012
FIGURE 1: THE ASX 200: FEELING THE PINCH
a
FIGURE 2: EURO/US FREEFALL
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A difficult time aheadMarkets are poised for a difficult time. Australian stocks are certainly not immune to further falls. Political uncertainty continues to plague global markets and Australia is arguably more susceptible to selling pressure than is our larger counterpart, the United States.
There is likely to be more bad news. Greece is in no position to continue churning through funds and growing its deficit on its current course towards exiting the European Union. The only clear solution is to let nature take its course. That will hurt markets around the globe, none more than Greece’s already shaky neighbours, Portugal and Spain.
The good news is that global markets have had plenty of time to prepare for the
current situation. Markets are factoring in the risk of a Greek collapse – and what that would mean for global assets and for the international business environment. The ASX 200 has shed as much as 9.5 per cent of its value in less than 30 days – a stark reminder that all is not well.
There is no quick fix for Greece’s soaring debt. Government bond yields continue to climb, confidence continues to wane, and businesses lack the funds to produce exports. That no one wants to hold Greek debt is, in itself, a major problem. European bank earnings (particularly French bank earnings) have diminished in the past year. In many cases, this has not been because of poor local performance, but from write-downs as an effect of holding Greek debt. Even if Greece does avoid ejection from the euro zone, the likelihood of lenders recovering existing debt remains slim. How much of this ‘toxic’ Greek debt do global banks still hold? The answer is largely unknown, but even this
is not the biggest fear.The real worry is contagion. If Greece
falls, what will happen to surrounding countries, such as Ireland, Portugal and Spain? Although not nearly as debt-laden as Greece, Portugal and Ireland are both experiencing skyrocketing bond yields. This can be seen as a measure of risk versus reward. Just how much should one be rewarded for holding government bonds? As always, risk and willingness to accept risk dictate returns. If Greece were to fall over, attention would turn to these floundering countries. No country wants to weigh down the euro zone, and other euro zone countries do not want that either. Should Greece experience further turmoil, Spain and Portugal will need to take strong measures to show they have the
ability, confidence and willpower to make major strides in national moves towards economic recovery. Greece received more than $169 billion in its second bailout. It is unlikely this generosity will be shown to its equally stricken neighbours.
What about the dollar? In May, the Australian dollar slipped beneath parity for the first time in 2012. It appears we might not see any change in the near term, thanks largely to continued fears about the euro zone. Whatever one’s thoughts on the merits of the US dollar as a safe-haven currency, holders of foreign currency flock to the shelter of the US dollar at the first sign of global or European uncertainty. With the global financial crisis and America’s soaring debt, many have wondered if the position of the US dollar as the global currency of choice will topple. However, US dollars are still the base on which commodities are traded, and they
are still used as a store of value next to other safe-haven currencies such as gold. That situation could take years or even decades to change.
The broad range of trading opportunities resulting from market turmoil is perhaps the most positive side effect of a fall in global equities. As traders, we do not need to be on the losing end of these trades. In fact, now is perhaps the most exciting time of all. Options traders and FX buffs have been highly successful over the past few weeks, and the fun is set to continue. Foreign exchange has swiftly become the world’s most liquid market, and opportunities continue to present themselves, whatever is happening in the global economy.
For the fundamentally inclined, an integrated analysis is valuable. There
are a number of short opportunities, particularly in those stocks vulnerable to falling European demand or to weakness in the Australian dollar. Two examples are Billabong (ASX:BBG ) and Leighton Holdings (ASX:LEI).
Whatever your taste in markets, now is an exciting time. Changing times require changing measures. Maybe it’s time you looked at your portfolio to reassess its resistance to European fallout. On the other hand, if May was your month, 2012 could be your year!
Happy trading.
Lachlan McPherson is an equity analyst with the HUBB Financial Group. As an analyst and media presenter, Lachlan shares his equity research regularly on Sky News, Sky Business and Yahoo Finance. For more information, visit www.hubbinvestor.com.
The real worry is contagion. If Greece falls, what will happen to surrounding countries, such as Ireland, Portugal and Spain? Although not nearly as debt-laden as Greece, Portugal and Ireland are both experiencing skyrocketing bond yields.
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ARE YOU AN IMPOSTOR?
looked 80’s glam – big hair and blue eye shadow. Drop-dead gorgeous. I needed all the confidence I could muster. I was 17 and on my first real date with an eye-candy older guy – determined to impress. Perhaps a little too determined.
He picked me up in his snazzy red MG convertible, and was clearly proud to have a much younger woman on his arm at the
fancy Thai restaurant. He sauntered. I swayed on dangerously high, ankle-twisting heels. I felt like a sophisticated lady, out for a night on the town.
We gazed into each other's eyes over a delicately flavoured entree (so far, so good). He was so deliciously attentive. I was enraptured and couldn't break away from his blue-eyed gaze. Sure – in retrospect, I should have taken a little more notice where my coke was placed on the table. I was under his spell. (Are you sensing that things were about to go horribly wrong? You'd be right…)
Main course. Arrrrgg – too much chilli! A rushed lean forward to gulp my drink, and, before I knew it, the coke straw had stuck itself fair and square up my nose. I delicately pulled back (well, as delicately as I could between gasping for breath from the volcanic explosion of chilli
in my mouth). Yet the straw didn't dislodge. Not in the slightest.I discretely reached up and plucked out the offending object.By the time I looked up at Mr Attentive (after downing half my coke,
using the same straw), the spell had been shattered. He had seen me as the schoolgirl I really was, and with a puff of smoke, Cinderella was wearing tatters again. I was an impostor.
At some stage, everyone has felt ashamed, or unworthy of success. We've squandered a profit in the markets because it shook our estimation of how much we were worth. We got gun shy and refused to pull the trigger.
Recently, I was talking with a trader who had a big win. Within a few short months, he made a bad investment decision to the tune of several hundred thousand dollars. The conclusion we've both reached is that he was uncomfortable with such a large amount of money and was determined to get rid of it from his account as quickly as possible. Your wealth will rarely exceed your self-development.
Why some traders shoot themselves in the footIf you’re relating to these stories, or if you’ve ‘been there, done that’, it’s possible you’re a victim of impostor thinking. If you've got it, I guarantee you'll end up sabotaging yourself when it comes to trading the markets.
Let me tell you about a trader who came to me recently for advice. George had just made a huge win on the share market. As he closed the deal, the enormity of his win hit him like a blow to the gut. After all, it was more money than he would have been paid in five years of working for his old company.
What a great market; easy money, he thought. After a few more minutes he thought: I was so lucky with this one. I doubt I'll ever be able to repeat it in my lifetime. I'm a fake. I'm not really a trader at all. I just bluffed it with this one. I'm a fraud. I hope no one asks me about how I did with this trade, because then they'll realise that I fluked it.
Almost everyone has felt that fluttering of lack of confidence in their own abilities, or self-doubt, after a win. However, those with impostor thinking go well beyond this. They view themselves as charlatans, and live in constant terror of being exposed. They truly believe they've cheated their way to success without having earned their good fortune.
People who experience the ‘impostor phenomenon’ believe their successes are undeserved. The term was coined in the 1970s by psychologists Pauline Clance and Suzanne Imes, when they conducted a series of studies at Georgia State University. Those afflicted believe
that their successes cannot possibly be attributed to their own abilities. They're convinced that any recognition of their accomplishments is the result of charm, deception or good luck. Interestingly, these thoughts tend to arise in people who have had a lot of success in their life, and the effects can be debilitating.
What the research saysClance and Imes noticed that many of their successful students expressed the idea that they had somehow conned their way into getting their current position. They were overly aware of their weaknesses and limitations and they dreaded being exposed as the frauds they believed themselves to be.
Specifically, there seem to be three main components to this thinking: feeling like a fake, disregarding praise and achievements, and attributing successes to good luck. This final aspect is related to attribution theory.
Traders should especially consider the final point, so they do not jeopardise their success in the markets.
Martin Seligman of the University of Pennsylvania reveals in his brilliant book, ‘Learned Optimism’, that we all have a certain style of attribution. We believe our success or failure is a result of either our personal characteristics, or of external circumstances (internal versus
are You an iMpostor?Louise Bedford shows you how to stop ‘impostor thinking’ from sabotaging your life in the markets.
16 YOURTRADINGEDGE JUL/AUG 2012
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At some stage, everyone has felt ashamed, or unworthy of success. We've squandered a profit in the markets because it shook our estimation of how much we were worth. We got gun shy and refused to pull the trigger.
ARE YOU AN IMPOSTOR?
JUL/AUG 2012 YOURTRADINGEDGE 17
external); it may be either ongoing or momentary (stable versus unstable); and it may apply to either multiple situations or a single unique situation (global versus specific).
Emotionally robust people tend to attribute positive events to internal, stable and global factors ("I'm just clever"). They attribute negative life events to external, unstable and specific factors ("I was unlucky this time!"). However, those with impostor thinking have the opposite way of thinking.
Impostor tradingTraders with impostor thought patterns are more likely to quit trading after a series of wins or losses. If you really believe your wins are due to luck, and your losses are a result of your own flawed character, you're much more likely to give up before you've achieved enduring success. Such traders are also more likely to become addicted to short-term trading, because they need constant feedback about their abilities. They lack the emotional strength to sit it out.
Another effect is that traders with impostor thinking are likely to be very 'course and work' focused. They chase that holy grail, never realising the answer to their success lies within. Your degree of financial success will only rarely exceed your level of psychological development. Unless you fix your emotional distress, you can very well end up working 23 hours a day trying to overcome your perceived flaws. Many workaholics have some impostor thinking.
The other major difficulty is that if traders don't correct their thinking, they self-sabotage.
Unless George, our windfall trader, makes some changes to his thinking, he's destined to find a way to give the money he made from the markets back to the market – plus more. Whenever our financial thermostat has trouble accepting a win, we do everything we can to get back into our comfort zone by giving away the money that is causing the discomfort. Fix your thinking, or you'll end up broke.
Have you got it?Despite a lifetime of success, those with impostor thinking feel they are unworthy. In 1985, psychologist Pauline Clance developed a questionnaire to evaluate this phenomenon. The full 20-question test is available at www.paulineroseclance.com, but here are some sample items to get you thinking:
• When people praise me for something I've accomplished, I'm afraid I won't be able to live up to their expectations of me in the future.
• I tend to remember the incidents in which I have not done my best more than those times when I have done my best.
• I can give the impression that I'm more competent than I really am.• I have often succeeded on a test or task even though I was afraid
that I would not do well before I undertook the task.
• Sometimes I feel or believe that my success in my life or in my job has been the result of some kind of error.
• It's hard for me to accept compliments or praise about my intelligence or accomplishments.
• If I receive a great deal of praise and recognition for something I've accomplished, I tend to discount the importance of what I've done.
• I often compare my ability to those around me and think they may be more intelligent than I am.
What can you do?First, there's a lot to be said for self awareness. Knowing you could be white-anting your future will help you recognise thought patterns that aren't beneficial.
Second, take credit for small triumphs. By learning how to accept praise for a dinner you've cooked well, or clothes that match, or a new hairstyle, you'll train your psyche to accept good feelings related to accomplishments and personal choices. Learn to say 'thank you' to the person giving you praise. Don't shirk it, say it was 'luck', or make that person regret giving you the compliment in the first place.
Keep a journal and record your thoughts about your wins on the markets. Watch for any faulty thinking patterns.
Seek out constructive criticism on small items that don't really affect your self-image, and work your way up to seeking criticism on things that matter to you. To break the cycle of self-doubt and self-sabotage, those with impostor thinking must learn not only how to give themselves credit for their achievements, but also how to take constructive criticism about their errors and failures. Build this up gradually though, or you'll relapse, blame yourself and quit, or work inappropriately hard to try to overcome your perceived flaws.
Keep in mind that there is a link between impostor thinking and depression. If you need professional help, seek it quickly. The longer this thinking goes on, the more difficult it is to correct.
Your trading success lies in your ability to confront your weaknesses and revel in your successes. You owe it to yourself and your family to be the very best trader you can be. If you've got a problem, fix it, and your profits will stick like glue.
Louise Bedford (www.tradinggame.com.au) is a full-time private trader and author of four best-selling books – ‘The Secret of Writing Options’, ‘The Secret of Candlestick Charting’, ‘Charting Secrets’ and ‘Trading Secrets’.
If you feel that there are some areas you need to improve in your trading and your mindset, Louise’s newsletter and free five-part e-course are available from www.tradingsecrets.com.au.
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OPTIONS CORNER
Our resident options experts, James Cordier and Michael Gross, answer readers’ questions.
options Corner
welcome to options cornerThe primary focus of this column is to address readers’ questions relating to options. All levels of questions are welcome and all will receive a response. Given space considerations however, only some will be published. Those
that are published will have personal details withheld. We see the column as an area that will be driven by you, our readers, so please feel free to get involved by emailing your questions to [email protected].
Q: In the past, you have suggested certain options to sell. However, when I review the option, there doesn't appear to be enough liquidity. Do you recommend selling options in markets with low liquidity?
A: We do not recommend selling options in illiquid markets. That being said, liquidity is a subjective term. If an option has a few hundred open contracts, a big trader might think twice about putting an order up to sell 1,000. He might still get filled, but he is likely to have to pay up if he wants out. If you went into the same
option and sold five contracts, you might have no trouble at all. Liquidity is in the eye of the beholder.
But let’s get to the bigger point. We suggest a certain category of options you might do well with. Researching the individual strikes, margins and months is up to you (unless, of course, you are a client). My recommendation is to use the information you read here to identify the market and the strategy, then to do your own analysis of the individual strikes. Don't like the open interest in one? Then look at other strikes (whole numbers tend to have higher open interest than do fractional strikes). You can also look at other contract months. Some have higher open interest than others. We cover only markets with adequate liquidity, so you should have no problem finding an option or group of options with good liquidity.
Q: I have sold options on the S&P for years. Just recently, I started following commodities, after
reading your book. One question: It seems that commodities can be more volatile than stock indexes. Do you find that to be the case?
A: I am so glad you asked that question! The answer is no. In a study performed a few years back, stocks were shown to be more volatile than commodities as a whole. While I'm sure there are individual markets that are more volatile than the indexes at times, leverage gives commodities the false reputation of being more volatile. However, if you are trading the S&P futures, you are trading the same leveraged vehicle. A futures contract is a futures contract.
Incidentally, if you are selling options on the S&P futures, you already have more leverage than if you were trading commodities. I am scared to death to trade the S&P. It's a huge contract, the margins are gigantic and the public-opinion-driven price swings don't make sense to me. I would much rather trade a market whose price moves at least have some kind of rationality to them. However, I realise there are many traders out there who make their living selling S&P premium. I still think it's a riskier way to fill your option-selling cup. But to each his own.
Q: I sell stock options and I am just starting to venture into selling commodities options on US exchanges. I know that in my stocks, if I get assigned, I get 100 shares of stock per option. What happens when I get assigned in commodities?
A: The short answer is you get one futures contract of that commodity per option. For sizes of each contract, you will have to check the individual exchanges.
The right answer, of course, is that you don't get assigned.To sellers of stock options, getting ‘assigned’ (also known as
getting ‘put to’ or having your option exercised) is often part of the game. Sometimes, getting assigned can even be an objective. Getting assigned or exercised simply means that somebody on the other side of the market who bought the option has decided to exercise his right to convert it into shares of stock (or in our case,
18 YOURTRADINGEDGE JUL/AUG 2012
The right answer, of course, is that you don't get assigned.To sellers of stock options, getting ‘assigned’ (also known as getting ‘put to’ or having your option exercised) is often part of the game. Sometimes, getting assigned can even be an objective...
Do you have a question for Michael or James? Email [email protected]
a futures contract).Stock option sellers typically practise one or both of two basic
strategies: selling a ‘covered’ call on a stock they already own, or selling ‘cash backed’ puts on stocks they hope to own at a lower price. These are both solid strategies. But if you want to diversify into commodities, your objectives are going to be different.
In commodities options, unless you want to be a futures trader, which we would not recommend, you have no interest in owning the underlying futures contract. You are simply selling calls above the market and/or selling puts beneath the market. You are doing this for one reason: you do not think that prices are going to these levels and you are interested purely in getting the premiums. Period.
Since you have no interest in owning the futures contracts, you want to sell only deep out-of-the-money strikes – strikes that will most likely never be reached, even in an adverse market event. Fortunately, unlike in stocks, strikes are available at these levels in commodities. Some offer large premiums. These are the strikes you will be selling in your account.
Investors who pose the ‘assigned’ question to me often do so with anxiety in their voice. But there is little reason to fear being
exercised in these types of options. First, in almost every case, your option would be exercised only if you allowed it to go in the money. It makes little sense for an option buyer to exercise otherwise. Second, and more importantly, you can close out your option (buy it back) at any time. Thus, if you don't want it to go in the money, buy it back before it does so.
While these tactics sound simple and self evident, you'd be surprised how many new option sellers don't make use of them. In my experience, keeping it simple has always been the best policy. With regard to commodities, that means not bothering with the futures contracts. Stick to the options and close them out long before they come anywhere near getting exercised. If you practise selling only deep out of the money, this is quite easy to do.
James Cordier and Michael Gross are authors of ‘The Complete Guide to Option Selling’ 2nd edition (McGraw-Hill, 2009). They are co-portfolio managers of OptionSellers.com, an investment firm that offers managed option selling portfolios for high net-worth investors.
OPTIONS CORNER
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CURRENCY CORNER
ough austerity measures, large cost-cutting in European budgets, and a massive debt burden have put paid to Greece’s involvement in the euro. It hasn’t quite been signed
off yet, and the G8 are doing everything in their power to prevent it, but there is no stopping the tsunami of crippling debt that is sweeping across Europe.
Greece’s exit has been priced at up to $1 trillion, so if you think Greece will be the only casualty, you’re sadly mistaken.
In this article, I focus on what we can look forward to and on the future for the currencies. First, let’s look at where all the pain is: EUR/USD (figure 1).
The euro has already broken all short-term support trend lines, so the key from here is in the longer-term charts. You should be concentrating on the daily chart and trading off the same trend lines as every forex trader. From here, 1.2490 is the key level. There are only a couple of Fibonacci levels between 1.2490 and 1.0210, and they will not prevent this sell-off. When the currency pair has broken all existing support and resistance levels is the only real time Fibonaccis come into play.
The central banks look closely at these key levels, because policy depends on the position of he major pressure points in the market. A break of the 1.2490 level will see a mass exodus of the euro, as it will open the door for a move to the lower support line at 1.0210. Everyone will be doing everything they can to hold this line. At the moment the ECB, the IMF and the G8 are noticeably quiet, with the low around 1.2640. That’s because they need to save their ammunition for when it really counts – and that’s closer to the major level at 1.2490.
What will be the leading factor? All financial markets affect one another. It’s just a matter of determining which one is leading. The final decision for Greece to exit will be determined in the financial markets, specifically the bond and equity markets, rather than the foreign exchange market, because they are where all the pain lies. The market always moves to the area of most pain. Investment banks and hedge funds prey on these
situations and you can be sure they will be pushing hard to break these markets.
Once the yields on bonds pass the seven per cent mark, it’s all over bar the shouting. The government bond market is a bit tricky. Governments can intervene to hold bonds at current
levels. However, the equity markets are different. In them, weight of numbers, of private investors in particular, is far too much for any intervention to hold. In addition, governments are far less
CurrenCY CornerBradley Gilbert analyses the current market: There is no doubt – Greece will exit the euro!
FIGURE 1: EUR/USD DAILY CHART
20 YOURTRADINGEDGE JUL/AUG 2012
t
FIGURE 2: DOW JONES INDUSTRIAL AVERAGE DAILY CHART
CURRENCY CORNER
22 YOURTRADINGEDGE JUL/AUG 2012
concerned about private investors than investors are in their own securities. So you should focus on the equity markets. The main one to watch is the Dow Jones Industrial Average, not the European indices. Once the Dow breaks, global media frenzy will
begin. Investors globally will panic and there will be a selling frenzy. It’s important to note that equity indices are trading technically in exactly the same way as the currencies at the moment.
The Dow is fast approaching a key support level at 12290. If that breaks, the next support level is at 11375. If that breaks, the
only thing before 6440 is a bunch of Fibonacci levels. Good luck if you’re relying on those holding up. That’s where the pain starts!
What you should be waiting for is an initial break of 12290 to get the first wave of selling in the EUR/USD. The final break of
support on the Dow, at 11375, will be the death knell for the EUR/USD. If the Greeks haven’t already been ‘shown the door’, they will be soon after. I’d expect these levels on the Dow to break well before the result of the second Greek election is known.
Since we know where the pain is coming from and what the resulting impact on the EUR/USD will be, we can focus on the other major currency pairs and look for some easy cash, since all currencies are correlated in one way or another. If the EUR drops against the USD, then you can expect the rest
of the currencies to follow suit. How the pair is quoted (whether the USD is the base or the terms currency) will determine the direction of the pair.
The key to trading successfully in times where there is a major crisis is waiting for the daily trend lines to break. That way you can
FIGURE 3: AUD/USD DAILY CHART
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The key to trading successfully in times where there is a major crisis is waiting for the daily trend lines to break. That way you can be sure you’re trading with the market and not against it.
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AskFOREX.com
“Why is Australia so exposed to a European slowdown?”
Europe may be many thousands of miles of away, but right now its political situation is dominating what goes on in the Australian markets. The ASX 200 is unlikely to experience a sustainable rally if the sovereign debt crisis continues to escalate; likewise, the Aussie dollar is one of the most punished currencies and has sold off sharply since peaking in March. Not that long ago people were talking about the potential for Australia to de-couple from the West and prosper even if the rest of the developed world was de-leveraging. There was even talk of the Aussie becoming a safe haven. However, the performance of the Aussie shows that it cannot de-couple from the west. Its economy is too reliant on global conditions. Its export sector relies on China’s demand for its raw materials, and China in turn relies on Europe and the west to keep buying up the goods that it produces. When Europe is weak it has repercussions on the rest of the world. Even the Australian domestic sector is sensitive to developments in the global economy, such as inflation and commodity prices, as well as the strength of the financial system etc.
Australia does not exist in isolation, it is part of a complex global economic web, and if a domino topples in the Eurozone is has a ripple effect on Australia. This is why the outlook for the Aussie dollar is dependent on the outcome of the sovereign debt crisis. If Europe’s authorities can deal with this crisis in a sustainable and resolute way then we could see the Aussie make another stab at parity with the US dollar. But if the crisis gets worse then we could see it comes under even more pressure, back in the first quarter of 2010 - the peak of the first Greek crisis – the Aussie dipped to 0.8000 versus the US dollar, so it could have further to fall if the sovereign crisis deteriorates from here.
Your Forex trading questions answered by Chris Tedder, Research Director at FOREX.com.
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JUL/AUG 2012 YOURTRADINGEDGE 23
be sure you’re trading with the market and not against it. Once movement through these levels occurs, the currencies will move a lot further than usual. If you miss the key entry levels, your trade profile will be categorised as ‘high risk’. High risk usually means poor results; so don’t wait for these levels to break. Get ready to take advantage of the opportunity.
As well as the European calamity, other great trading opportunities are appearing. The Chinese bubble is bursting and the (pegged) yuan is going to take down plenty with it, especially the AUD/USD. The impact of the European and US debt crisis is kicking in and global growth is faltering. This is particularly evident in Chinese economic data. China is making plenty of goods, but if no one has money to buy them, once their shelves are stockpiled the only thing to do is to stop manufacturing. That will hurt Australia most. Sell, sell, and sell Aussie dollars. The Australian economy has been held up through the global financial crisis by the Chinese boom and it’s about to come crashing down in time with the departure of the Greeks from the EU.
The proof is in the AUD/USD daily chart (figure 3). The traders are already on top of this and the currency pair is under immense pressure, already touching 0.9815. The next major level is down at 0.8800 (unless you’re praying for a miracle that one of the Fibonacci levels will hold it up).
You should be looking for one of three things. First, you should be looking to sell on any rallies back towards 1.0100. This is where a lot of the conservative safe money is waiting. It’s a long shot but it’s a great low-risk level to sell. Second, you’re waiting for the Dow to break one of its key levels, or the EUR/USD to break down through 1.2490. The free-fall nature of the Aussie makes it a great trade when it’s being sold off, if you get the entry right. Third and finally, you’re looking for any weakness in Chinese or Australian economic data, to sell. The release of further weak data reconfirms the view that the currency is indeed going down, so this is a key trading opportunity. If you see any one of these points, you should be ready to sell some AUD/USD. If you see two or three occurring at the same time, well, it’s a no-brainer.
So don’t run away from the fear that the media are creating at the moment. There’s going to be some carnage as Europe unwinds from the euro, but if you focus on trading, you can make some great money very quickly. The same applies to the AUD as China implodes. Don’t focus on the news, focus on the trade. That is the true secret to making money during economic crises.
Bradley Gilbert has been an FX trader for 20 years, 17 of which were spent working for investment banks. He is currently the Managing Director at Traders4Traders and CEO of Forex Capital Management. For more information see www.traders4traders.com and www.forexcapitalmanagement.com.au.
elcome to the second half of 2012.
The periodic uncertainty that has characterised and plagued markets for what seems like aeons
(if we include the reaction to the global financial crisis that began in 2008) has returned in spades.
As asset classes go, it’s fair to say commodities have been a lot brighter than equities in Australia. We all recall wistfully the bullish days of 2003 to 2007 and how the insatiable demand for commodities of all types (energies, metals, softs) created record high prices. In economies including Australia, Canada, Brazil and Russia, there was a noticeable shift in awareness of how this once-in-a-lifetime boom could affect the bottom line of companies and the standard of living of individuals. Indeed, we saw great gains in both these areas.
But now, halfway through 2012, we are asking whether this potential has disappeared forever, or if commodities are experiencing a logical and normal cyclical pullback.
Many would say the current mood of the markets is neither logical nor normal. Credit growth – and subsequent crunch – has dominated the headlines, and will do so for many years. Yet despite this dynamic, these headlines remain ‘front-of-mind’ for all asset classes as they fluctuate. I am more circumspect and believe market gyrations are cyclical. It’s just the headlines that change, relying heavily as they do on people’s forgetting the lessons of the past.
As I write, the commodities space has been sold off quite strongly as the debt concerns of Greece (and Europe as a whole) have made it back onto the agenda. While I am
prone to oversimplification of important economic matters, I find it amusing that the news cycle has re-reported debt default concerns as a new story, this time dressed up as changes of government in France and Greece.
While the market digested the changes in government and the supposed breakdown
of the austerity measures – and, indeed, the euro zone itself – as fresh market concerns, these were really just an extension of the existing underlying malaise. Nonetheless, the euro tanked and the US dollar rallied, which heaped sudden misfortune on the values of commodities. As a simple chartist, I do my best to ignore the ramblings and
COMMODITIES CORNER
CoMModities CornerMarket expert Aaron Lynch explores commodities markets: Commodities chaos or a logical pullback?
w
24 YOURTRADINGEDGE JUL/AUG 2012
FIGURE 1: US DOLLAR INDEX WEEKLY BAR CHART
FIGURE 2: GOLDMAN SACHS COMMODITY INDEX WEEKLY BAR CHART
study the prices. So let’s go to the charts.The Dollar Index (figure 1) shows how
bullish the US dollar has been and how weak the euro has been against it. This currency shift has weakened commodity prices without reflecting underlying supply and demand. (On a related supply and demand issue, it’s important to note that China has slowed its economy and is now watching Europe to ascertain likely decline in its exports to the region.)
Figure 1 shows the US Dollar Index rising since the lows of 2011. The current price has recovered to 66 per cent of the 2008–
2009 range. The chart reveals, in relative terms, that the US dollar has some room to move before it encounters bigger-picture resistance around the 2009 and 2010 highs.
While the Dollar Index has run to 75 per cent of the 2009–2010 range, it has taken
nearly twice as long to do so, which is not a sign of a rampant bull market. One final point is that while this relative strength will be enjoyed by some in the United States, the US Federal Reserve will be uncomfortable, because the massive US debt becomes less palatable with a higher dollar. There may come a time when the United States seeks to intervene, but with limited ammunition remaining to achieve this, another round of quantitative easing could become a reality.
The next chart suggests that the commodities markets’ decline in 2012 has been quite orderly. Figure 2 displays the
Goldman Sachs Commodity Index and its relative position compared to the GFC range. Hovering around the 50 per cent point of that range most likely indicates the market is around par value, especially when we consider the overbought and oversold
levels of 2008. The longer we remain under that 50 per cent, the more concerned I am for the bulls. I have also included a basis horizontal line at 572.95, because I consider this the next level of support and that there is potential for a double bottom.
A basic strategy of the chartist is to combine measurements of (mainly) price action with time movements into joint indicators to establish trading signals. Figure 3 includes the current time perspective I am watching for the Goldman Sachs Index. I note that many major turns have occurred in the first few days of the
month and that the most recent sell-off started on 1 May, the anniversary of the 2011 high.
The Index has currently run out 200 per cent of that first range. It’s also important to note that the time count from 1 March 2012 to 23 April 2012 is 52 days, and an extension of that from 1 May 2012 predicts 22 June 2012 as a potential time pressure date.
As there has been a 200 per cent run in price, it could be that we are oversold and that a bounce could be likely from the early part of June. If this occurred (or even if a sideways pattern was displayed), we might be waiting for the time to catch up around the middle of June.
To coin a phrase, only time will tell!
Good trading.
Aaron Lynch is a trader and Chief Strategist with Safety in the Market, an education company with 20 years’ experience in training traders in a variety of markets, including commodities. For more information, visit www.safetyinthemarket.com.au.
FIGURE 3: GOLDMAN SACHS COMMODITY INDEX DAILY BAR CHART
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TRADING TAX Q&A
Q. With the financial year end approaching, is there anything in particular that we should do with our trading accounts?
A. There is plenty that you can do prior to year end. The first thing to do is to work out your year-to-date trading profit or loss. If you are running at a loss and have other taxable income then you might need to check the commercial losses rules to ensure that you are entitled to claim the trading loss in this year’s return.
If you are running at a profit, then consider realising any poor performing stocks in your portfolio before year end so that you minimise the extent of the income subject to tax. Make sure, though, that you don’t buy the same stocks back or you may be in breach of the ATO’s wash sales legislation. If you are substantially self-employed you can claim superannuation contributions as a personal tax deduction, provided no more than 10 per cent of your assessable income is from salary and wages. If you still have a sizable profit, then consider prepaying interest and other expenses (including your YourTradingEdge subscription) for up to 12 months.
Q. I retired and returned to Australia from overseas and became a tax-paying resident in 2007/2008. I kept a sum of foreign currency in an overseas business/investment account. I intended to buy AUD when it became cheaper. However, it went up 10 per cent for the year. Can I claim capital loss for the devalue of the amount of foreign currency? I am paying tax on the interest I earn from this account.
A. As an Australian tax resident who has a foreign currency bank account, you are subject to the foreign currency tax laws. These foreign exchange measures treat realised foreign gains as assessable income and realised foreign losses as allowable deductions. For tax purposes, realisation of any foreign gains or losses occurs when you have a change in the balance in your foreign currency account. So every time that you have deposited an amount (including interest) or withdrawn funds from your bank account since you returned to Australia, you have a foreign exchange realisation event that is subject to Australian tax. Each calculation must be translated at the exchange rate at the date of the transaction. As the Australian dollar fluctuates, there may be times when you incur a loss and other times when you realise a gain.
Obviously this can get quite messy to calculate, particularly if you have a small bank balance with a high volume of transactions each year. As a result, you may want to consider making an election which enables taxpayers to disregard certain foreign currency gains and
losses on certain foreign currency denominated bank accounts and credit card accounts with balances below $A250,000. For the purposes of this test, the foreign currency amounts are translated into Australian currency at the average exchange rate for the third month before the start of the income year.
There is an additional 'buffering' provision. If your balance becomes more than the equivalent of $A250,000, but not more than the equivalent of $A500,000, for (subject to certain conditions) a maximum of two periods of 15 days or less in an income year, the limited balance test is still passed during such buffering periods.
Regardless of your bank balance, you will still need to declare any interest received in your annual income tax return and to pay tax on it. You will get a credit in your Australian return for any foreign tax paid in relation to that income.
Q. I have been learning forex trading for the last year-and-a-half and have been trading a real account successfully for the past three months. I am wondering what sort of setup would be most beneficial to a currency trader who also has a full-time job and child-support responsibilities. At what stage of trading profit should I be considering setting up trading as a separate entity/business?
A. First, it depends on how much income you currently earn in your full-time job. The trigger point is when your salary income is above $80,000, as this is the level at which personal tax rates rise above the company tax rate of 30 per cent. Second, I think you need to be earning at least $10,000 per annum from trading just to cover the costs of setting up and running a company or trust structure. In relation to child support, each additional dollar of income that you earn will increase the amount that you need to pay (subject to your reaching the income cap). Please note that if you set up a company and draw the profits out (that is, take a wage or dividend), then this drawdown is added to your personal income and is subject to tax and child support.
These tax answers are provided by Mr Taxman, Adrian Raftery, author of ‘101 Ways to Save Money on Your Tax - Legally!’
This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.
trading tax q&aResident tax expert Adrian Raftery, aka ‘Mr Taxman’, answers readers’ most pressing trading tax questions.
26 YOURTRADINGEDGE JUL/AUG 2012
If you have a question you would like Adrian to answer, please visit www.mrtaxman.com.au/contact-me
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SATYAJIT DAS
BEN POWER SPOKE WITH AUTHOR AND INTERNATIONALLY RECOGNISED EXPERT IN FINANCIAL DERIVATIVES, SATYAJIT DAS, ABOUT GLOBAL MARKETS, THE AUSTRALIAN DOLLAR, GOLD, COMMODITIES, CHINA AND WHY
WE ARE CURRENTLY IN A TRADERS’ MARKET.
atyajit Das is one of the notable few who warned of the global financial crisis. In his best-selling book, ‘Traders, Guns and Money’, and in a series of speeches collectively titled ‘The Coming Credit Crash’, he outlined the risk inherent in the world’s financial system. Just a few years later his prediction came true, with horrible consequences.
Das is the classic ‘insider, outsider’. As a derivatives expert and 30-year finance industry veteran, he witnessed the creation of the finance and credit boom. But he clearly has the ability to detach himself from his experiences and to analyse them with extreme clarity.
The combination of hands-on experience, big-picture analysis and his ability to explain complex events and issues has made Das a leading public figure in the world of global finance.
His latest book, ‘Extreme Money: The Masters of the Universe and the Cult of Risk’, tells the story of the ‘financialisation’ of the world, from people, business, politics, and cities to entire countries. It’s a story where money detaches itself from any notion of value and becomes a high-stakes game for its own sake.
For those lured to trading by the prospect of easy money and dazzling wealth, reading ‘Extreme Money’ is almost like being sent to a re-education camp for a dose of reality. Everything Das writes about on a macro scale can afflict individual traders: greed, excessive debt, a disconnection from value, and implosion. Traders’ lives can become ‘financialised’, a state in which money is the only thing valued; and, as they have been for countries and banks, the consequences can be terrible.
However, shrewd traders can also take something positive and
Satyajit Das
S
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proactive from Das’s writing. It helps them prepare for a brutal new environment. That new environment, according to Das, is ongoing massive volatility but low overall returns as the world deleverages and definancialises. He believes the GFC we’ve had is just the start; in fact the real pain hasn’t even begun.
The good news is that huge volatility will create opportunities with blow ups and blow downs. To survive and thrive in that environment requires the skills of a trader. Das, in fact, says we are in a traders’ market.
As markets slumped amid renewed concerns over Greece, YTE’s Ben Power spoke with Das about his views on global markets, the Australian dollar, gold, commodities and China.
Can you tell us how you got into finance?Accidentally! I got a scholarship from the Commonwealth Bank of Australia after one year of studying Commerce and Law. It beat working in three or four part-time jobs. Getting into finance worked out well as I was suited to finance and finance was kind to me.
You’ve had extensive experience in finance at major institutions and with complex derivatives products, but I’m curious to know how you invested your own money during that period.I started work in 1977, and from the mid-1980s onwards you could see what was happening – markets were opening up and markets
were deregulating. To make money during the period from the mid 80s to 2007 wasn’t really that hard. A rising tide lifts all capital. The smartest trade was to go long equities and go to sleep – the Rip van Winkle trade; if you were brave you put a bit of leverage on.
Were you more of a prop trader or sales trader?The difference between prop and sales trading is a relatively meaningless thing. Most banks take some prop risk, but most of it is on the back of flows – so they structure and take risk. I traded derivatives; obviously different types than are traded now.
At the structured end you took a degree of risk. You tried not to take outright directional risk, but basis risk. It was like long/short trading. You always tried to be as market neutral as possible, but took basis risk. That’s where I believe you can make a lot of money.
How do you invest your own money now?In this environment, if you’re going to invest, you’ve got to first
work back from basic investment logic. I think of investing pretty simply. The number one thing is ‘capital preservation’. Then you look for ‘income’ – that’s going to be your biggest source of return. If you look at stock market returns over the past 100 years, the dividend component has been extremely important, and it’s one of those things that is far more predictable than others. Then you consider capital gains. That’s the order in which I think about things. Pre-07/08 the priority list of most investors was exactly the same but the priorities were reversed, starting with capital gains.
I am extremely conservative and have a very risk-averse portfolio. What I try to do is put all my funds into as close to risk-free assets as possible and earn income on them. But then I take some portion of that income and try to capture tail events. I believe that there are going to be huge melt ups and huge melt downs.
We’re adjusting from a period of high debt to one of low debt. In that transition we’re going to see enormous chop. You’ve got to be able to trade that. But (the chop/volatility) is going to be driven by things not easily predictable, such as policy actions. What you need to do is become completely agnostic about direction.
What do you mean by capturing tail events? What are some ways to capture that?I am talking about large positive or negative price moves – effectively large volatile changes. In 2011, after July, major stock markets were doing +/– 2 per cent of something like 30 per cent
of trading sessions. It’s hard to capture by trading directly. The easiest way is to buy out-of-the-money options, large strangles, to get exposure to the volatility and those tails.
You’ve operated at and observed the pinnacle of finance – and you’ve said some unkind things about it, including the fact that bankers aren’t as smart as they appear. But when the average trader is up against the big investment banks and their huge resources and technology and innovation, can they actually compete?Absolutely! Because what’s going to drive trading success is now very different from what it used to be. The playing field is levelling off.
One of the things banks and institutions face is restriction – banks are going to be regulated very heavily, which, for a start, will give them enormous cost overheads. There will also be controls on the amount of risk they can take and where they’re stopped out,
Private money has huge advantages – there is no regulation or strict investment mandates or anything like that. Also, private traders don’t have to trade. If they don’t like the market condition they can sit on their hands.
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so they won’t be able to afford to have large positions stopped out all the time. The Volker Rule will prevent banks from theoretically running prop desks. Fund managers effectively also have got restraints, such as investment mandates and having to report every quarter and dealing with fund flows coming in and out.
Private money has huge advantages – there is no regulation or strict investment mandates or anything like that. Also, private traders don’t have to trade. If they don’t like the market condition they can sit on their hands. They can choose the moment at which they want to put trades on.
One of the major outcomes of ‘finacialisation’ is high-frequency trading, which is causing significant issues for traders – they can’t compete with the speed and frequency of ‘robo’ traders. Is that something you think regulators should crack down on?You’ve got to put it into context. What’s HFT (high-frequency trading) doing? It’s playing the role that locals used to play and the role exchange jobbers used to play – matching supply and demand. But it’s doing that electronically, which basically means it’s done at much greater speed and there is an ability to implement certain things you could never do physically.
The fundamental thing it means for individual traders is that it gives more liquidity. Essentially, there is always somebody to trade with. If you’re trading for a living you’ve got to have other people willing to trade. There is a massive amount of institutional money that is scared to death; they’re like deer stuck in the headlights. Liquidity would have dried up a lot more without HFT traders.
But HFT also creates risk. These ‘robot traders’ have certain implications for the market: for example, they create their own volatility that comes from ‘algorithmic clashes’ where one is trying to do something and another is trying to do something else. It creates a greater chance of tail events.
We also have to think carefully about whether HFT traders increase the risk of manipulation. There’s a very fine line between trading cleverly and trading to manipulate the market. Most are trying to anticipate what a particular price movement is signalling and what other people are trying to do. It’s like shadow boxing – trying to trick others.
We also don’t want to undermine the credibility of the market. That’s one of the big things HFT threatens to do. Some 60 to 70 per cent of all market trading is now algorithmic. The stock market is designed to transfer savings to borrowers. HFT could undermine the basic function of the market as a savings allocation process, which is very dangerous.
We’ve had the GFC, which you successfully flagged, and there’s been a lot of pain. But there is still huge uncertainty out there, particularly in Europe. Where are we now in terms of this whole GFC/deleveraging/definancialisation thing playing out?It hasn’t even begun! Everybody thinks 07/08 was it. That was just a trial. The adventure hasn’t started. Around 2008 and early 2009
central banks around the world – who needed diapers they were so scared – decided they would flood the system with money. But we still haven’t reduced debt. The process hasn’t even started. It’s started at the individual and corporate levels, but governments started borrowing heavily to sustain demand and avoid a rapid reduction in debt and growth. Unfortunately, now they have become the problem and there is no one to stand behind them.
In Europe somebody is going to have to take losses – somewhere between 500 billion and a couple of trillion. An enormous amount.
But everybody wants to deleverage without reducing debt or taking losses where that debt can’t be paid back. We haven’t solved the problem of debt, global imbalances, what we do with financial institutions, and the financialisation of the economy.
Despite the gloom, stock markets haven’t been too bad – the US markets were up strongly from October last year before slipping recently. Should traders be wary of linking markets to what happens in the real and even financial economy; is there a danger they get too bearish even when global fundamentals are shot?You essentially have got a zero cost of capital. The system is awash with money. It’s a simple carry trade. If money doesn’t cost anything and stocks pay a couple of per cent in dividends, buying the stock is better than leaving it in the bank, where you have to pay bank fees and so forth. Anything with income has been bid up aggressively – high-dividend paying stocks and high-yielding bonds have been ramped through the roof.
This is not a market where fundamentals rule. I meet with investors who say ‘the stock represents value’. I say, ‘Yeah, that’s fine, it may represent value. But how do you know, when you can’t tell me what the macro environment is like? Unless you know, all your numbers could be right or wrong.’
Do you get into a debate about what’s fairly valued? It’s a useless debate. At the end of the day, trading is about buying at X price and selling at a higher price, or the reverse.
Are we in a secular bear market?I have got no idea what ‘a secular bear or bull market’ means – it isn’t a term I understand. If you look at the absolute levels of markets, you have to assume markets have to adjust. There are two mechanisms: markets stay around where they are and inflation deleverages the price in real terms, or the price adjusts.
It depends on your view of inflation. We’re not going to get very high inflation because there is no real demand and the banking system – the essential transmission mechanism for loose monetary policy -- is fairly weak. So asset prices have to adjust. If you go back in history you can see the required quantum (of adjustments) – in 1929 the stock market fell by 80 to 90 per cent; in Japan the market is off 75 per cent and is not back at its 1989 levels. We’re talking about a big adjustment process.
Can I just clarify? You’re essentially saying the macro environment is too volatile, choppy and
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uncertain, so try to focus on price movements rather than fundamentals?Yes. You can’t trade this market based on what’s the real value of anything -- currencies, stocks or whatever. You have to trade it on the basis that it’s a very choppy environment. There might be a longer-term trend line but just be careful you don’t get caught.
So it’s effectively a traders’ market?I think that’s right.
A number of traders have shifted to playing currency markets – particularly the strong Australian dollar. It’s slipped recently with renewed uncertainty in Europe. You believe that China’s growth is a mirage. Yet offsetting that is a debasing of the US currency with the printing of money. How do you think those two forces will play out?If you look at the Australian dollar, there are several dynamics at play. All currencies are relative: you have to hold one currency. No one wants to hold the US dollar, euro or yen. Other forex markets are restricted. That doesn’t leave you with a lot of stuff to buy.
Australia’s fundamentals do look better: it’s also a proxy for commodities and has got high interest rates. That’s going to support it. But as those factors start to come down (commodity prices and interest rates) the currency is going to adjust.
The Reserve Bank of Australia also loves a good devaluation. They can stand up and say ‘look, this is a free market – a free floating market – I can’t do anything about it’. A weak currency props up two parts of the economy – it helps the mining sector and helps other export industries like tourism and education.
The currency probably has more downside if China and commodity prices slow and Australian interest rates fall. They are related, so the fall could be disorderly.
Just on China. Why do you think there is a bubble there and what does that mean for commodity prices?China has been growing at 8 to 10 per cent. But it’s the quality of growth that matters. The growth since 07/08 has been generated by the state pushing debt into the economy -- 30 to 40 per cent of GDP each year. It’s an accounting trick. You can assume a portion is never going to be repaid – somewhere between 10 and 25 per cent (of the 40 per cent). If you take 10 per cent of 40 per cent, that’s 4 per cent. You’re going to write off that debt. That’s half your growth gone. If it’s 25 per cent then you have no growth.
What have the Chinese invested in? Some very nice buildings, high-speed trains, airports, and massive road networks. All those projects will generate low returns in all probability, dragging down their growth.
Their flexibility in the future is also limited. Exports have slowed and imports have fallen on the back of that. They have trillions in reserve, but it’s worthless. If they sold, the effects on the US dollar, euro and yen would be catastrophic, reducing the value of China’s reserves.
Everybody tells me China doesn’t have too much debt; that it’s net 17 per cent of debt to GDP. But it’s actually around 70 per cent,
once you do the numbers to include all government debt. That’s officially. Many suspect that the real level of debt is much higher because of the informal lending sector.
The only question is whether it’s going to slow dramatically or be managed down gradually. It’s a political decision. The only way China can manage this is to keep paying very low interest on deposits and limit investment options for its citizens. China needs its people to save, to keep putting money into bank deposits that pay returns which are below the inflation rate to keep the banking system and the economy afloat. It’s basically a system of mispricing capital to keep the game going for a little bit longer.
So what is the outlook for commodities?Prices have been driven by two factors. In the 1990s, the real price of commodities was extremely low – oil was in the $20 range. Everybody underinvested, which created supply constraints when places like China and India started to grow. This demand was not foreseen by most commentators and caught most people by surprise. Post 07/08 there has been safe-haven buying – a switch away from financial assets into real assets.
There was a huge movement in prices because of a combination of demand shift and supply constraints. That can’t continue. Every time these ‘booms’ happen, miners overinvest massively. They think they’re the only ones adding capacity; but everybody is adding capacity. And it’s going to come on line at pretty much the same time and when demand slows. That’s going to cause commodity prices to fall.
They may not fall precipitously, because many projects will never get built. I just don’t think the commodities boom is necessarily going to be of the scale and importance that people actually ascribe to it.
Gold has been a good investment over the past few years. But it has stalled and it’s drifting. Is the big run over?Gold is a funny asset. There’s 4000 years of history. It’s very difficult to strip the myth from reality.
People have been buying gold for two reasons. First, as a default currency. If they don’t like the US dollar, yen or euro, then gold functions as a default currency. There’s also the sheer lack of faith in fiat – paper – currency around the world. Many people want to diversify and gold is an obvious investment for them.
But when people start to unwind those positions it’s going to unwind very quickly.
I’m not convinced gold is a strategic asset. It’s an extremely useful and extremely valuable tactical asset to trade from time to time and that’s what people have done.
It’s all about continued uncertainty and volatility and safe-haven buying, which happens in short bursts, but can’t go on forever.
A number of traders have seen the big banks using sophisticated models to find edges and they’re now trying to become more mechanical and back-test models before they trade. What are some of the
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mistakes they should avoid?Models always work until they don’t. You can prove anything in a back test. You’ve got to keep an underlying logic to what you’re doing. Fischer Black, one of the co-creators of the Black-Scholes option-pricing model, said he didn’t care whether a trader made or lost money as long as they had a logical reason for why they did the trade. It’s a useful way to think about the world. Unless you have a worldview and actually understand to some degree the dynamics of the world, to trust the numbers blindly is simplistic. For
example, the correlation between assets five years ago and now is completely different. If you back-test over the wrong period you’re going to lose a lot of money.
Do you believe in the Efficient Markets Hypothesis? When markets are good everybody assumes they’re efficient; when they’re bad everybody gets emotional about it. The EMH is an interesting way to think about the world. But its restrictive assumptions are never realised. The information efficiencies are also almost impossible to realise.
But it’s hard to beat the market?Consistently? Absolutely! That’s why I don’t even bother trying.
A lot of what you write about concerns the psychology of human beings. Underpinning all this is greed – the expectation and almost demand that investors deserve higher returns. This is a real risk for traders, particularly leverage, isn’t it?I always say you can never rescue anybody who basically wants to get really rich, especially if they want to get rich quickly. The best you can do is shake their hands and say ‘good luck, I hope you make it’. There is nothing you can do for a person who does not understand their emotions and who has an unrealistic view of the world. Most of the world is delusional.
So what is a reasonable return traders should strive for?The returns you’re going to get on an unleveraged basis are 5 to 6 per cent. To me that is the new ‘20 per cent’. Investors tell me they’re going to get 5 per cent above inflation – I ask them where their top and tails and magician’s wand are.
Anybody who makes 5 to 6 per cent over the next 10 to 20 years will be considered a genius. Someone will net 40 per cent, but he’ll have bought a lottery ticket and won big time.
You’ve talked about the hard, even sad, life that many people in finance live. How do traders – who are operating in the world of money – keep some semblance of balance?The key is to have perspective. I think the real problem, particularly for those who work in large banks, is that they lose perspective. If you look at the life of a CFO of a bank, do they ever go to the supermarket? Do they ever walk along the street? They live in a complete bubble. What do they read? Nothing, because they’re too
busy. They live in this narrow monoculture. Charlie Munger, Warren Buffett’s partner, always says a man who
doesn’t read might be successful, but he’s unlikely to be so. If you talk to George Soros, you can have a conversation about anything in life. He reads things, he talks to people and that makes him successful. If you concentrate on one thing, it doesn’t necessarily make you more successful at it.
Trading also has a big quotient of luck. Ritchie Benaud’s advice for Australian cricket captains was that success is 90 per cent luck and 10 per cent skill; but don’t try it without the 10 per cent.
A lot of people who trade, trade for entirely the wrong reason. They think they can get rich at it and don’t see it as a vocation.
Do you, personally, regret your time in finance?I have absolutely no regrets. I think it was great. I got in on the ground floor when this was taking off. I had a privileged seat in history. I was in the Napoleonic wars, but I wasn’t a general. Generals get shot. I was a cook. I got to view the personalities and make a reasonable living out of it. I got to see history being written. If you can see that occurring around you and get a perspective, that ain’t a bad life!
Finally, what is one thing that traders can do now to improve?You can always know more. It doesn’t mean you have to learn about trading; but anything about the world and how it works. Just soak it up. It may not be obvious that the information is important, but it will be one day. You can never ever stop learning. That is a great characteristic of people who succeed.
Ben Power is a writer, journalist and trader. He has written on politics, economics and finance for numerous publications.
When markets are good everybody assumes they’re efficient; when they’re bad everybody gets emotional about it. The EMH is an interesting way to think about the world.
34 YOURTRADINGEDGE JUL/AUG 2012
TEN SHORTCUTS TO CONSISTENCY AND PROFIT ACCUMULATION
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TEN SHORTCUTS TO CONSISTENCY AND PROFIT ACCUMULATION
Consistency Profit
Accumulation
Ten Shortcuts
to
and
ANKA C. METCALF SHARES HER EQUITIES TRADING PLAN.
36 YOURTRADINGEDGE JUL/AUG 2012
TEN SHORTCUTS TO CONSISTENCY AND PROFIT ACCUMULATION
ll successful traders have a secret incorporated in their trading to make them profitable. Some market secrets come from time spent in front of the market, some come through experience, and some are those traders have learned about. All require the expenditure of time and money.
In this article, I share a secret. It can shorten any beginner trader’s learning time, suit any style of trading, define the way you trade, make you more disciplined and focused, allow you to implement trading strategies with confidence and ease, and most importantly, it can help you control your emotions when trading, ultimately creating consistent profits.
Yes! You have probably guessed that I am talking about a trading plan.
Creating a trading plan – the first stepsTaking these first steps towards creating a trading plan is hard, but it is the only way you can you can better yourself as a trader. Here are my ten shortcuts.
1. Know the rules of the gameYou need to know the rules of the game and know how to play like a pro; what to do at different times of the day; understand money management; trade your plan; have a solid trailing method, and be flexible in the market.
2. Choose a strategyChoose a strategy that suits your personality and your style of trading. How do you deal with momentum, day trading with the trend, gaps, climax trades, counter-trend trades, swing trades, core trades, and so on? Build your strategy based on your style.
3. Let the market tell you what you need to doLet the charts speak to you. If you look at a chart and it does not jump off the page, or you don’t immediately recognise a pattern, then move on. There are plenty of other stocks to choose from. If you are having a good first trade and you have met your goal, do not quit! Continue trading, if the patterns are there.
4. Respect the trading seasonsThe seasons to which I refer are the ‘earning season’ and the ‘non-earning season’ (figure 1).
Knowing how to adapt your trading strategies according to the two trading seasons is essential. Each quarter debuts with an ‘earning season’, when many stocks report earnings and create gaps. This is the only season where follow-through to larger targets
FIGURE 1: THE TRADING SEASONS
A
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TEN SHORTCUTS TO CONSISTENCY AND PROFIT ACCUMULATION
is expected (statistically speaking). It is the most active trading season and it is important to adjust your trading plan accordingly. For day traders, the beginning of the quarter is the most important season for profit accumulation. For active investors, this period can create opportunities to increase position size and reduce risk as stocks reach final targets.
The second, ‘non-earning’ season is known to be quiet and calm. Again, traders need to adjust their trading strategy accordingly. This season creates a paradise for scalpers. It occurs towards the end of the quarter, when most companies have reported their earnings. This is the time to scalp and not expect great follow through, unless a stock is completely on its own with either strength or weakness compared to general market conditions.
You should recognise the first signs of reversal in the market and be on top of your game; start trailing more tightly, and do not be afraid to move to a shorter timeframe.
Always trade the stocks that are in play on the day – the use of a scanner is priceless. If you stick to only one trading universe, you miss the best opportunities of that day. If you have difficulty identifying support and resistance, it can help if you use different indicators to identify potential targets.
5. Let the ‘volume’ speak After price, volume is the most important element in technical analysis. Volume describes crowd participation and interest. It identifies accumulation and distribution. Always make sure you have access to all timeframes for the stock you are trading. You also need the market indices, and a focus list for the day (including charts).
6. Educate your habits and control your emotionsSome educators, instructors and authors suggest that you should separate your emotions and trading. That is not possible – to try to separate emotions from trading is to fight a losing battle, because trading involves the most emotional commodity in the world, money. However, one way to help control your emotions is to have a trading plan – designed to educate your habits to standardise your trading style.
7. Execute and refine your planHave one or a set of tested strategies you can apply every day. Begin with only one strategy, and when you become consistently profitable using that strategy, add another to your portfolio. Keep a checklist with criteria for entering a trade, and another designed to organise your trading day:
• Know your risk to reward.• Have a target / exit strategy. • Ensure a damage-control method is in place.• Keep a journal.• Evaluate your trading at the end of each day.If you are not consistently profitable after one or two years of
trading; if you are not getting the results you are expecting; if you are applying the same methods but expecting different results, then it is time to change. Try trading with a successful trader who trades for a living, following their footsteps.
8. Hire a coach or mentor Get help from someone who can guide you, to let you minimise the time you spend as a beginner.
Stop being in denial, and stop being an eternal student – a trader always looking for and learning about different strategies, relying on other traders and chat rooms for trades, in search of the ‘holy grail’, and always looking for help and information. Such a person never moves beyond the student stage, can suffer from information overload, and does not know how to sort through all the information.
9. Play to win Enter the market to win, bringing an aggressively focused attitude to bear.
10. Limit your lossesBecome comfortable with your losses by:
• understanding money management and risk• determining what is holding you back• using indicators that help you identify key areas • controlling your mindset – this is most important• defining your goals.In summary, your trading plan should enable you to be like a
well-greased machine, and your mindset has to be in sync with your money-management methods.
Anka C. Metcalf has been a full-time day trader and an active long-term equities and forex trader for more than six years. Anka has extensive background experience in banking and investment banking, and is the founder and CEO of SynergyTraders.com and TradeOutLoud.com. Anka can be contacted at [email protected] or [email protected].
38 YOURTRADINGEDGE JUL/AUG 2012
It can be amazingly accurate or hauntingly wrong – Peter Mathers applies Elliott Wave forecasting to currency pairs.
elliott wave Forex trading
ELLIOTT WAVE FOREX TRADING
JUL/AUG 2012 YOURTRADINGEDGE 39
n hindsight, and once an Elliott Wave structure is completed, it is easy to understand. However, placing trades in real time can present problems because of possible patterns that could unfold. How can we strengthen the weak spots? In this article, we look at the pros and cons of using Elliott, and how to strengthen its application.
How to work with the limitationsElliott Wave is a pattern-recognition tool. However, traders tend to allow it to cross over into their trading rather than keeping it as a means of technical analysis. This is a step backwards, because new traders take trades personally, whereas professional traders focus only on exposure per trade. You should separate technical analysis, such as Elliott Wave, from trading. Build a plan for using both. Treating them individually will eventually strengthen your (trading) business.
Understanding Elliott Wave The patternElliott is famous for describing the ‘impulse wave’; the five-wave structure that is fractal in nature. An impulse wave contains Waves 1, 2, 3, 4 and 5, with Waves 1, 3 and 5 being impulse waves and Waves 2 and 4 corrective countertrend waves.
The rulesAlthough Elliott Wave is a sophisticated pattern-recognition system, it has only three simple rules: 1. Wave 2 cannot move below the low of Wave 1.2. Wave 3 cannot be the shortest wave in the
impulse structure of Waves 1, 3 and 5.3. Wave 4 cannot overlap into Wave 1 (except in
leading, ending diagonal triangles).
The guidelinesThe ‘Guideline of Alternation’ states that if one wave is simple, the next will be complex and the next will be more complex or simple. For example, if Wave 2 is simple, expect Wave 4 to be complex.
This can be applied inside the corrective pattern. For example, in the ABC Zigzag, if Wave A is simple, Wave B will be complex and C can be simple or more complex. The same applies to Flats and Triangles. There are 12 debatable Elliott patterns!
I think it is a shame that Elliott didn’t create more than three rules to strengthen the application of Elliott Wave, because having only three rules is ultimately the weak spot. Even the three rules
I
ELLIOTT WAVE FOREX TRADING
FIGURE 1: USD/ CAD 4-HOUR CHART
18 May 2012 – Base channel break; now Wave 3. USD/CAD is still rising, and even accelerating after a channel break, which appears to be a base channel. We need to respect the price, and we know that this kind of break usually occurs in Wave 3 of an impulse. So we rework the wave count and are now looking for more gains, where any contra-trend move will be considered as a corrective Wave 4. Critical/invalidation region comes in at 1.0061 on the 4-hour chart.
40 YOURTRADINGEDGE JUL/AUG 2012
ELLIOTT WAVE FOREX TRADING
can be compromised in certain situations, such as if Elliott is used in leveraged markets, which create volatility that can form overlapping wave structures. Elliott created his rules from the Dow and the Transports, not on leveraged markets.
Trading as an experienced Elliott Wave analystAn experienced Elliott Wave analyst can trade anywhere in a wave structure, as long as they clearly know where they are in the degree of wave structure. Elliott learners need to identify and justify all the structures and then bridge all the degrees of fractal structures together for the right perspective. They must also understand each market’s particular ‘personality’ and behaviour. It’s like hitting the right note in music; you know when you’ve got it. You hear it or just see it.
But seeing it is not enough to make money. Excellent Elliott analysts can lose money. They seem to struggle with the trading aspect, even though they are adept at counting waves. They often do silly things when entering trades. For example, they don’t wait for the evidence in the structure to unfold, but rush in, buying right on the turn. While getting some right, they also get some wrong, which causes continual breaking even or losing. Entering without the evidence in place can lead to the market’s continuing in the same direction while you are stuck, waiting for the turn.
Another common but different mistake is to use Elliott Wave software that is designed to recognise Waves 1, 2, 3 and 4, which then sets up a trade for Wave 5. This does not work over the long term because the software can’t work out if Wave 2 is simple or complex. In most cases, Wave 2 is simple and therefore Wave 4 will be complex, like a triangle, and the entry signal will continue to move.
The solution is to wait for the evidence and trade that evidence. That is, if there are five waves in the opposite direction to the trend, then there will be another five waves – and it’s these five waves that you trade. Elliott said, "Five waves in the opposite direction produce another five waves, so trading the second set of five waves is common sense."
Evidence through exampleSo you're waiting for the second set of five waves to trade, because it’s the safest point in the Elliott Wave structure to trade? Let’s take a closer look and then use the charts as examples. If a market changes direction with five small waves, you can be assured of another five waves in that direction as a minimum (minimum because the move can be an ABC correction, a 5-3-5 structure) but it can also be the strongest wave, Wave 3. Either way you’re going to get another five waves, and you’re going to be on the right side of the market at the right time. This is the safest entry, where you get the most consistent returns.
Look at the USD/CAD 4-hour chart (figure 1). There are five waves counted up (circled in grey). These five waves make Wave 1 (orange). Because of these five waves, after an ABC correction, we can expect another five waves of
the same degree. If you have a keen eye, you will see that the Wave 1 in grey is also five waves and will therefore produce another five waves, as Wave 3 in this case. In both instances, we have waited for evidence from a five-wave structure that is in the opposite direction to the downtrend.
The same pattern can be seen on the US gold 1-hour chart (figure 2). The move up could still be a larger corrective pattern, or we might be looking at the low in gold, but it doesn’t matter, because if we get five waves in the opposite direction we will get another fives waves of the same degree. The same can be seen on the chart for EUR/USD on the downside (figure 3).
At Trading Lounge we cover all the main currencies as well as gold, the S&P 500 and oil on weekly, daily, 4-hourly, and intraday charts, so we can work out the right degrees of wave structures. This is the safest way to use Elliott Wave as a pattern-recognition method. (It is, however, only part of the trade set up.)
The euro moved even lower during Asian hours (figure 3), but on very low volume and momentum based on the RSI reading, which shows bullish divergence. We suspect that’s wave (v) and that the coming bounce will occur in the next few sessions, and will unfold in three waves. However, we might see another test of 1.2600 if wave (v) is an ending diagonal.
FIGURE 2: US GOLD 1-HOUR CHART
Gold reached prices around 1580, highlighted for 17 May 2012, and is now moving higher. The rise is clearly impulsive after the base channel break on the previous day. Based on the latest sub-structure, we suspect that the market is now in the final stages of wave (iii) with a wave (iv) pull-back to come in the near future. The high for wave (iii) is expected in 1590–1600 zone.
JUL/AUG 2012 YOURTRADINGEDGE 41
ELLIOTT WAVE FOREX TRADING
More analytic tools – Fibonacci's golden ratio: 0.618Fibonacci's ratio is used with Elliott Wave retracements, extensions and time. Fibonacci generally works better with price than with time, but if you treat time as a spiral, you get better results for time.
The Fibonacci sequence is found by adding two numbers to get the next. The further the numbers go, the closer to the golden mean of 0.618 you get. There are other number sequences, such as Lucas numbers, but the Fibonacci sequence gets there fastest. Gann numbers are also very close to the Fibonacci sequence: 0.618, 0.382, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Using Fibonacci retracements and extensions can be very accurate – or not, so it’s also just a technical analysis guideline. However, if used with Elliott Wave, Fibonacci will start to strengthen your analysis. Nevertheless, it’s more important to count the waves than to use Fibonacci retracement levels. There is no evidence of consistency in retracements: Wave 4 and extension would outweigh a Wave 2 retracement.
TradingLevels – Using Fibonacci as price ratioTradingLevels can be a tool to strengthen your trading. They are unique in that they integrate Elliott Wave and Fibonacci and include trading psychology. TradingLevels offer exact price points to operate from, which is the most valuable element of all.
The TradingLevels use the Fibonacci sequence as price ratios 1, 2, 3, 5 and 8 (applied to dollars and cents for shares, forex, and CFD prices as well as points for Indices or sectors). Every price point is accounted for and has meaning. Many traders know the value of whole numbers and even numbers, because the market works around such numbers – it’s how traders think.
Using Fibonacci as price, you start to see the waves working to these price points, simply because they fit the ratio. You will start to see an impulse wave fit into the price ratio. (There is an example of sublevels in figure 2.)
TradingLevels are price points used as support for entry and to strengthen the point of entry when using Elliott Wave. TradingLevels are used as target price points at which to exit, because we can expect that other traders will be thinking of certain numbers and taking profits. The number ‘1’ is the strongest number in the market, followed by 5.
The final part of the strategy: volumeYou may have heard that everything you need to know is in the price. If that is true, where does it leave volume?
Volume creates price. Volume also creates momentum. Trend, changes in trend, price, and volume, are closely connected. There is a relationship that a competent trader can interpret. The importance of this is that volume confirms price action. If you’re going long, you want more volume coming in.
A few basic rules can get you started; a trend in either direction requires expanding volume to expand the trend. If you’re shorting a market and the volume is increasing then you’re happy to stay in that trend. If volume starts to decrease,
the selling volume is drying up and the trend down will slow. If you see a trend or correction moving down on lower volume, they aren’t selling and you can get ready to cover your shorts.
If you see a correction, say the common triangle pattern on low volume, then once it’s finished it will continue in the same direction as the original trend. You can read the price/volume relationship bar for bar or as a group (trend or correction).
We run mechanical end-of-day trading systems in which the setups are chosen from price and volume/price action.
In summary, you can use Elliott Wave for market direction, and TradingLevels (or price support and resistance) for the trade setup and targets. Volume is for confirming price action on support or at resistance.
Peter Mathers, Director, TradingLounge.com.au, has been trading since 1982. He is author of ‘Trading CFDs in Today's Markets’. He is regularly asked for comment in the financial press. In the last couple of years, Peter has won a national Technical Analysis Competition against 20 other analysts.
FIGURE 3: EUR/USD 4-HOUR CHART
18 May 2012 – Wave 3 is looking for a base. The euro reached a new low as expected, and is now trading within Wave Five of an impulse from 1.3060. We made some slight changes to the wave count and are now looking for the bottom of a Wave 3, which means that any bounce will be a temporary and short-lived Wave 4. Key resistance for pullbacks comes in at 1.2755. The current Wave 3 may extend as low as 1.2560; there is EW channel support.
rue chartists would say that all necessary information regarding a stock is already shown in the graph. Nevertheless, we suggest that the more information you have when trading, the better for your profit and loss at the
end of the year. After all, adding $5,000 to the ‘win’ column or removing $5,000 from the ‘loss’ column has the same effect on your bottom line.
Volume analysis can be added to most standalone graphing packages. Even though volume analysis might have fallen out of fashion with many retail investors, it is still a cornerstone of Dow theory. Institutional investors look closely at volume size to help confirm price moves.
Dow stated that volume confirms the trend, meaning that volume should increase when price moves in the direction
of the trend and should decrease if price moves against the trend. If volume declines as price continues to follow the trend, weakening of the trend can be expected.
Volume can be shown in several ways: as a histogram beneath the price action, or by using one of the derivatives, such as On Balanced Volume (OBV) or the cumulative volume indicator. We will concentrate on the first two. It is our experience that the cumulative volume indicator does not give such good signals as the histogram or OBV, and also gives false signals more frequently than they do.
Volume as a histogramThe simplest way to view volume is as a histogram underneath the price action of your market. If you trade an index, it is most practical to have the histogram showing the value of shares traded, rather than the number of shares traded. Doing so
removes the variation of price and reduces the effect of price shocks that would adjust volume proportionally to price: higher price, lower volume, and vice versa.
With simple volume histograms, we look for a continual increase or decrease in volume over time to confirm significant moves in the underlying product. For example, moves in price on weak volume can be interpreted as false, and a reversal of trend can be expected.
Many market participants reject moves on light volume, and place greater significance on price action moves on greater or an ongoing increase in volume. To be able to determine if a move is on low volume, it can be useful to place a 200 SMA on the volume histogram on your chart. This makes spikes in volume easier to see, especially if you are looking at a number of different charts. A practical example of this occurs when looking at volume on
42 YOURTRADINGEDGE JUL/AUG 2012
Steven Mayne and Nicholas Tidswell, on how traders can benefit from volume analysis to create a clearer picture of the technical setups on the market.
Examining Volume Analysis
EXAMINING VOLUME ANALYSIS
T
JUL/AUG 2012 YOURTRADINGEDGE 43
EXAMINING VOLUME ANALYSIS
44 YOURTRADINGEDGE JUL/AUG 2012
EXAMINING VOLUME ANALYSIS
the American indices before a non-farm announcement. In general, trading volume will be low. We can therefore see sharp
moves in the Dow or S&P 500, which are reversed on greater volume on the trading day of the announcement.
On Balance VolumeJoe Granville developed the OBV indicator in his book ‘New Key to Stock Market Profits’, published in 1963. The OBV was one of the first indicators to measure positive and negative volume flow. On Balanced Volume appears on a chart as a simple cumulative indicator. You can compare its trend with the price trend. The line is calculated by adding volume when the price closes up and subtracting volume when the price closes down. For times when price is neither up now down, nothing is added or subtracted from the cumulative total. OBV becomes a trending tool in itself, rising when volume on up days outpaces volume on down days, and falling when volume on down days is greater. Of interest to chartists is that Granville notes OBV often shows signals before the price move.
Many institutional investors look purely at volumes on the day, assessing the magnitude of the volume to hit the market. Although they might consider that price does not mean anything when there is low market volume, OBV takes the next derivative of volume and lets you see the trend of volume alongside the trend of price. With OBV, we look for the trend, support and resistance levels and inflection points for a change of trend. The support and resistance levels on OBV, when broken, are used as a sign that a move in the price line will occur, in exactly the same way as when price breaks support or resistance. The absolute OBV value is not important. Any volume spikes that occur will take time to settle, but must still be considered in the analysis.
OBV trending is clearly seen in figure 1, which shows the bear market move from 2007 to 2009 on the FTSE 100.
From the initial top in 2007 the market went through a correction phase. On the weekly chart the trend appears to be changing. The OBV remained negative throughout the whole move, so market participants were not increasing the number of their trades and the volume in the market was not following the trend. We could therefore conclude it was was a bear market rally, and were not fooled into buying the move. Rather we would consider increasing short positions.
Figure 2 shows that at the end of the bear
FIGURE 1: FTSE 100
FIGURE 2: FTSE 100
JUL/AUG 2012 YOURTRADINGEDGE 45
EXAMINING VOLUME ANALYSIS
market, in May 2009, the OBV was rising with price. Since the market as a whole was participating in the move, it was not
a bear-market rally but a change in trend.Thus the OBV can help us remain in the rally
when we see a possible change of trend.
In figure 3 the OBV is holding a line of support, suggesting buyers are still confident. This in turn led to a further rally, with price action bettering the previous high.
Risk-reward ratiosAs well as following the trend with the OBV and looking at lines of support and resistance, divergence is also very important (as it is with most indicators). Generally, the pattern that forms before a change of trend occurs in the price action. Spotting this type of formation can help in making trades that have very advantageous risk-reward ratios. Figure 4 looks at the S&P 500.
Figure 4 shows the OBV forming negative divergence. This helps to confirm that the bullish move in price action is coming to an end. Coupled with similar divergence on the RSI and a topping pattern this gives a strong bearish signal that eventually becomes a potentially lucrative trade.
Anyone who trades regularly knows that no single technical indicator is the ‘holy grail’ of trading, highlighting every move before it happens. We are not suggesting that volume analysis or, more specifically, the OBV, can do that. But it should be used as a very useful confirming indicator. We generally use the OBV along with the RSI, MACD, Stochastic and candlestick patterns to help create a clear technical picture of the market. We consider a solid knowledge of volume analysis can also help to prevent losses.
Steven Mayne is Managing Director of EGR Broking. He specialises in advising private individuals on short-term moves in the market, concentrating his research on the UK and US. For more information go to www.egrbroking.co.uk
Nicholas Tidswell (MSTA) is a technical analyst who previously worked for Legal & General, assisting in the running of global macro funds that had £450 million under management.
FIGURE 3: FTSE 100
FIGURE 4: S&P 500
SEVEN DAYS
46 YOURTRADINGEDGE JUL/AUG 2012
seven daysDavid Burton explores the trading methodology of WD Gann:
Weekly period, seven days.
SEVEN DAYS
JUL/AUG 2012 YOURTRADINGEDGE 47
ne to 30 yearsWD Gann compiled a weekly timetable of from one to 30 years, which, used in combination with his square of 52 (the weekly chart) is one
of his most important time and price charts. This information is on page 308 of WD Gann’s ‘How to Make Profits in Commodities’ and in his commodity course in the section ‘Cash and May Soybean Futures’. Most people know that Gann’s seven-day time period is taken from the Bible. Gann knew that the Bible cycles were too complex to teach, so he taught only the number periods and not his coded astrology.
Table 1 runs to only 15 years. Gann had a table that ran to 40 years and I have made one for up to 90 years. This can be used in conjunction with the square of 52 overlay, as mentioned previously.
The week in scriptureBefore we get to the Bible and Gann's weekly timetable, we should first look for codes in his book ‘The Tunnel Thru The Air’ (TTTTA).
Of course the weekly timetable code is there as expected, in the same way as all Gann’s information, which can be found coded in TTTTA. The words ‘7 days’ appear in TTTTA 15 times from page 271 to page 404, which equals 133 (19 x 7). ‘Seven days’ appears 12 times, from page 0 to page 392 (56 x 7) and 56 is the number of Aubrey holes at Stonehenge (however, that’s another story). Page 392 starts the chapter on ‘Robert Gordon's seven days’. Chapter 39 is a code for 309, because there are only 36 chapters. The term ‘week’ is in there 12 times; ‘weeks’ appears 21 times (3 x 7) and the word ‘forty-nine’ (7 x 7) appears five times. Multiplied, 49 x 5 = 245. Page 245 has five instances of ’Dr.Descartes’. René Descartes was a great Bible scholar and mathematician. Similarly, 245 x 2 = 490, which is another Bible number. Then 490 – 418 (numbers of pages in TTTTA) = 72, half of Gann's overlay of 144. The words ‘The tunnel thru the air’ are in the book 28 times (4 x 7). Codes are riddles throughout the book. If you understand ancient astrology and the Bible cycles, you will know where to find them.
The following are various weeks appointed under Jewish ritual:1. The week of days.2. The week of weeks.3. The week of months.4. The week of years.5. The week of weeks of years.
The seven days of the week stand for the planets:1. Sunday = Sun2. Monday = Moon3. Tuesday = Mars4. Wednesday = Mercury5. Thursday = Jupiter6. Friday = Venus7. Saturday = Saturn
The days are based on the old Jewish calendar, not the calendar we use today, which is why the planetary hours and days no longer work. You can't take the systems of the ancients and put them with today's calendar – it's like chalk and cheese.
There are many examples of seven days in the Bible. The feast of tabernacles lasted seven days, the siege of Jericho had seven priests bearing seven trumpets for seven
o
TABLE 1: 15-YEAR WEEKLY TIMETABLE
SEVEN DAYS
48 YOURTRADINGEDGE JUL/AUG 2012
days and on the seventh day they went around the wall seven times, and so on. The number for the Moon is seven and for the Sun is one. The Sun and Moon together make eight and a new Moon. New Moon to new Moon is twenty-eight days (7 x 4).
Next in order came the week of weeks. This period was chosen to elapse between the two great annual gatherings of the Jewish sacred year, Passover and Pentecost. (The Jewish calendar starts in September and the Christian calendar starts in March.) This period is seven days times seven weeks, or forty-nine days.
The week of months starts in Abib or Nisan and all the feast days are contained in the first seven months of the year. The seventh month ends and starts the Hebrew new year, with the new moon closest to 23 September. The date 9 September 1926 was 242 days from 9 May 1927 when Gann wrote TTTTA, which proves he was using Hebrew astrology and the Jewish calendar, because 242 is two-thirds of a circle.
The week of years included seven Sabbath years, which is forty-nine years. From WD Gann’s birthday to 1927 is 49 years, and Robert Gordon's birthday plus 49 years is 1955, the year Gann died. The 490 years added to 1492 (when Columbus arrived in America) gave 1982, the last date in the book.
The example from Gann's commodity course (May Soybeans)On 27 July 1939, the low was 67 cents, the lowest price at which May futures ever sold. On 15 January 1948, the high was 436-3/4, the highest price at which May Soybean futures ever sold. From 27 July 1939 to January 1948, the total time was 3094 days or 442 weeks. The 45-degree angle moving up from ‘0’ on the weekly chart crossed at 442, and the price reached 436-3/4, just below this angle. Time and price were in balance.
From 27 July 1939 to 23 December 1954 was 5628 days or 804 weeks. Based on days, this was 84 squares; based on weeks it was 12 squares.
To get the angle moving up from ‘0’ at a rate of 1/4 cent per week, we divide 804 by 4. This gives 201, and adding 67 gives 268, where the angle of 4 x 1 crossed on 23 December 1954. If we add 1/4 of 67, which is 16-3/4, it gives a resistance point of 284-3/4. Divide 804 weeks by 1/3 and we get 268. If we add 22 to this, we get 290, with 22 being half of 44 – the extreme low for Cash Soybeans.
Based on the above, Gann was looking to short beans between 23 December and 15 January. Beans topped at 285 on a lower top on 29 December 1954, from 4 November 1954. Looking at the weekly time periods, 442 is on nine and a half years; the 806 weeks was two weeks more than Gann stated but also occurred at 16 and a half years. The half is 26 weeks or half a year. The Soybeans fell
FIGURE 1: JEWISH CALENDAR
SEVEN DAYS
JUL/AUG 2012 YOURTRADINGEDGE 49
to 220 in August 1955, a few months after Gann’s death.
At the time of writing (3 May 2012) May Beans have hit a high of 1508, the exact price in the 29 years’ column. We are 3781 weeks from 1939, which is in the 72 years and 3/4 column. Added to 67, 3781 gives 3848, which is the end of the 74-year column. The number 3781 divided by one-third gives an angle crossing at 1260, plus 67 gives 1327 as strong support. This is likely to be broken later as major cycles are down. We are 182 weeks up from the low in 2008, which was 787.5 – just above the 16 year and 1/8 column. In this way you can how measure all highs and lows on weekly time periods to get support and resistance levels.
The square of 52 weekly overlayThe square of 52 was explained in the Mar/Apr 2007 issue of YTE, where we looked at how the 68 square of 52 ended in July 2007. There was a small sell off and it went up for another year, stopping in the 69 square in July 2008. Way back in the Nov/Dec 2003
issue I also gave a buy signal on Soybeans at 550. The Beans rallied to 1064 on the May contract, the highest since 1974. The July/Aug 2008 issue, about the affect of planetary lines and angles on the Soybean market, showed the planet Uranus hit the secret soybean scale of Cash Beans at 44 cents (22 degrees Pisces) from the low in the Great Depression of 1932. This is one reason it topped in July 2008. You can see from these three previous articles, plus this one, how Gann was working on markets. Making money isn't very interesting once you have money. In fact it's boring. It is much more interesting working out how markets work, which is why Gann studied this way. Gann always said the hard way was the best way and that no one can ever take away your knowledge. You should obtain all my YTE back issues if you are interested in studying the true Gann method.
The square of 52 is on the May Soybeans chart (figure 2). I have drawn the square of 520 from the low in 2004 so it’s clearer to see. You can see that at the half square in
time (five years) and the half square in price there was a change in trend before the market shot up to record highs. That price was at 680 and time at five years. On the weekly time and price table, 682 and a half is also 14 years and one-eighth. Just recently, the price crashed in the 520-week or 10-year cycle (which is Jupiter/Saturn opposition) for a change in trend before it went to new highs May 2012.The market made a double top at 1460, which is two 520 squares in price from the low in 2004. As well, 1461 is 365.25 x 4 (1461 is a great cycle in years, and 365.25 is the number of days in a year). Once we get a few closes below 1460, we will be in another great bear market, preparing for a great crash.
David Burton has been studying and using financial astrology and the methods of WD Gann since 1980. Visit www.schoolofgann.com, www.corporateastrolgers.com and www.commhedge.com.au or email [email protected] for more information.
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FIGURE 2: GANN MAY SOYBEANS – 1-WEEK BAR CHART USD
hen you see a fork in the road, take it! We are about to enter what might well be the most volatile financial markets in economic history. You can’t understand what lies ahead if you don’t understand the past. Markets have given us a taste of volatility since the 1 May high. The use of charts and of technical analysis has
never been more important. This issue of YTE shows you the different types of charts to guide you through the months ahead. Lessons are always there to be learnt.
What other people are sayingOnce again my favorite columnist, Marcus Padley, in his must-read column in the Saturday edition of the Sydney Morning Herald on 19 May 2012 was inspired by the activity in the falling Aussie dollar – it’s harami and doji all the way.
“So the Australian dollar goes through parity in the other direction and again every Tom, Dick and Harry is suddenly a currency expert. The same thing happened when it first rose through parity in October 2010. It’s as if the Aussie dollar hitting the big figure miraculously releases a previously absent foreign-exchange-predicting hormone into the community at large.
“But the idea that you can suddenly speculate in foreign exchange and make money just because it’s through $US1 is ridiculous. What could you possibly know about the future direction of the forex markets? What edge could you possibly have on the whole currency trading world? Where could you have possibly obtained this wisdom? I’ll tell you. You ripped it out of your a---, because that’s the only possible place your complete guesswork, your seat-of-the-pants, mean revision, media-fed instinct, could have come from.”
He went on to say that the currency markets are for businesses to exchange one currency for another, for hedging and for the professional systems trader. They are a graveyard for the part-time speculator. There is no edge for the mortal man, no matter how many home-study DVDs you buy. Trading is a full-time job for technical experts. It’s not for idle amateurs.
Mr Padley’s column in the Sydney Morning Herald on 26 May caused me a few chuckles.
“Hindsight is a wonderful thing and so is the market.” Mr Padley cited examples from his old Marcus Today newsletters from 2003 – Billabong, Aristocrat Leisure, Chemeq, Nylex, ERG, Cochlear, Metal Storm, Fortescue, Telstra and lastly Paladin moved from 1.7 cents to a 10.80 high in April 2007, up 63,529 per cent. Some are now 1.19. He concluded by saying whilst it is great to play Harry Hindsight, if the above examples tell you anything, it is this: the share market is an unknown and is full of opportunity. Not just in 2003 but right now. The next Paladin is right in front of us somewhere. So is the next disaster. You have to love this game. There is no better playground for your intellect or your money!
YourTradingEdge Magazine regularly features excellent articles on FX, with great charts. In this issue I have focused on some of the
important charts you should maintain to trade all currencies; but while investment money management is important for any investment, it is especially important in leveraged markets and needs a good trading plan. FX markets are great technical markets and, generally speaking, by the time they make front-page news they are generally late in their current trend. Charts and technical indicators assist with timing, which is all-important.
In his Fibonacci Forecaster Futures Update of 19 May 2012, Jeff Greenblatt of Lucaswaveinternational does some great analysis, supported by his stunning charts and his experience as a great trader himself. His incredible knowledge of markets provides excellent value for his subscribers. Traders would benefit greatly from his tutorials as well as his latest book ‘The Ultimate Guide to Pattern Recognition Rough Cut’ (www.lucaswaveinternational.com). You’ll learn macro conditions few people ever know about and you’ll also learn about micro conditions to help you navigate the price action and know when you have an edge.
Jeff made the point that if you blinked or took a couple of days off you missed one of the more important weeks in the market in recent memory. “Every so often a set of conditions develops that, if the lesson gets learned, will guide you successfully for years or even the rest of your career. Some weeks aren’t worth much but others have the potential to create a breakthrough in your career if you are dialed in and paying attention. In case you missed it or didn’t totally get it, that’s why I’m here – to be sure you don’t miss it.
“On the Facebook sequence it’s probably one of the most important psychology lessons you’ll ever get from the markets. They were telling viewers to pop the champagne while the VIX was accelerating on the first real technical damage to the charts, then we have a serious case of congruency. The takeaway is that traders need to understand a bear market lasts until they wipe away complacency. You could not predict they’d get all excited about a Facebook IPO on the day the technicals broke down. These are golden nuggets you take and file them as they happen.
“But there was another one, which wasn’t as obvious but was just as important. Our theme this month has been to keep you safe and sane.”
A comment from the final chapter of ‘The Ultimate Guide to Pattern Recognition Rough Cut’ is worth repeating:
“The stock market is not Wal-Mart. You don’t walk in and buy the red-light special unless you know how. If you don’t treat the market like the live mechanism that it is, you are missing something. So at the end of the day, what we are working at doing is getting to a flow state. It all ties in with the 10,000 hours. You have a left brain and a right brain. The left brain represents analysis and the right brain intuition. You do it by getting to a flow state. You do it by feeding your brain the right kind of food or fuel and wait for the feedback to come out. You’ve heard about putting in garbage, why would anything good come out? If you study enough of the right stuff, the right brain is always watching. At some point in time it manages to take over and give you a signal. For some people it’s an inner knowing. For others it could be as simple as an itchy nose. But it’s my hope you’ll come
Dawn Bolton-Smith
another Fork in the road!
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w
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to a day when you wake up and know exactly what to do and don’t know why you know. When you get there and trust it, you are on the gateway of mastery and flow state. You now have an edge in financial markets you’ll have for the rest of your life and I wish you all the best and all the success life has to offer.”
I have asked our Editor to put Jeff’s chart on the Aussie Dollar on my blog at YTEmagazine.com. You are missing something if you are not on the list for his free Fibonacci Forecaster, which is also extremely educational.
On educationDr Mircea Dologa has posted another of his splendid articles, included in eSignal’s Weekly Learning section, which I am sure will be of interest to Elliott Wave disciples. The article concerns the relative merits of trading Elliott Waves and Wolfe Waves.
Elliott Waves and Wolfe Waves are two advanced efficient trading techniques, which not only assist us in interpreting financial chaos through a systematised approach, but also help us to get a clearer view of the decision-making process than we would otherwise have.
Those familiar with these two techniques know that Elliott Waves are able to guide us in the preparatory stage of a trade. Through the creation of the most probable patterns scenario, the trade will be established in advance, and will then be invalidated or definitely validated, thus allowing the trader to take the most appropriate decision. We must underline a fact already established: Elliott Waves are based on impulsive and corrective wave patterns. Thus we know, well in advance of the crowd, where the market is coming from, where we are in an organized regional context and, finally, where and when the local market will take the most probable direction, so that the trader will obtain the most profitable income. And this is done day after day. It’s simply a way of life for some traders!
Bill Wolfe, of www.wolfewave.com, a dedicated trader and teacher, has discovered this natural vibrating pace in financial markets. He takes advantage of it through the waves of supply and demand of the market prices, which he has called ‘Wolfe Waves’. Whatever the market flow direction is, the Wolfe Wave (WW) set up consists of five waves, labelled 1 to 5, which are followed by a high steamed-momentum movement delineated by the target line. The birthing nest of a ‘Wolfe Wave’ set up is formed by an equilibrium zone – a balanced sideways move, containing four waves (labelled 1–4) – followed by a single out-of-balance volatile move (wave 5) and then the final return-to-balance single volatile movement (the trade itself).
Even if the sideways market flow does not strictly occur on a single-storey formation, but rather on a two-storey rectangle pattern formed by the initiating rectangle and its first lower extension, the trader can clearly visualize and understand the WW formation nest.
Dr Dologa has provided two examples using Light Crude Oil between March and September 2008, which I found extremely interesting. My point and figure chart complemented the WW formation – the end of that bull market. Dr Dologa has dedicated several chapters to Wolfe Waves in his trilogy of professional trading manuals. Excerpts are available on his website. He is currently working hard on his new volume on Elliott Waves, which I understand will give a deeper understanding of them. His ‘World Chart Report’ is available on his website.
Fullermoney – free daily commentAn email to David Fuller concerned semi-log scales: “On occasion you have made reference to log scale or partial log scale charts as a way to gain better perspective when viewing longer-term charts, particularly gold. Do you have any rules as to when to refer to log scales, and what do they tell you that the normal charts do not?”
David replied: “One could write a chapter on this subject but I will resist the temptation. The short answer is that it is a matter of personal choice, and the more you view price charts, the better qualified you will be to select the presentation best suited to your own analysis. In other words, it is important that you feel comfortable with the graphic presentation that you are using, and reasonable men and women can have different views on this subject. Generally, I prefer semi-log for viewing long-term history, particularly where significant gains have occurred and I wish to view the earlier price history. I can illustrate this with these longer-term monthly charts of the S&P Index on an arithmetic scale chart and also a semi-log graph showing percentage changes.”
The hourly chartIn his book ‘The Geometry of Stock Market Profits – A Guide for Professional Trading for a Living’ published by Traders Press Inc. Greenville. SC 29606, Michael S Jenkins states: “An hourly chart is our primary indicator of major turns.” The book has an extensive chapter explaining the reasons for his view that the very first place to start our practice of professional trading is with the cornerstone of all professional trading, the hourly chart. “This is the smallest chart, for practical purposes, one should maintain. If one uses an hourly chart we are talking about short-term trading that is good for three days to three weeks at a time. If you trade for three months to a year at a time we are really talking daily or weekly charts.
“However, for most trading activity like the speculative markets, especially commodity markets, S&P futures, bond futures, gold, wheat, soybeans, stocks and certainly all options, we want to stick to trends that last three – or six – days to two weeks. We will be using options and futures where we can make 50 per cent to 100 per cent on our money in just a few days.
“A properly drawn hourly chart can forecast price events several months into the future, as well as minute to hour fluctuations each day. Hourly charts are better than daily charts, in that there are many waves or patterns that develop within the market, day to day, week to week, that are only observable on an hour-to-hour basis. These are easily identified by their shape and pattern, but these patterns are only visible on an hourly chart. It is one of the best-kept secrets I know, but I tell you that you will never understand the market until you use an hourly chart. It is only with the hourly chart that you will see the patterns that repeat over and over in the course of several months, and that are the key to the market. Daily and weekly charts are good but rarely show the common key patterns that clearly identify the market’s activity.
“It is my practice to use six hours in a day, 11.00am being the first hour. There are many reasons for this. One reason is numerological, in that the number 6 is the basis of a great many structures in mathematics, including the cube. God also created the world in six days. The six hours of a day will be labeled 11.00am, 12.00pm, 2.00pm, 3.00pm and 4.00pm, which is the close. We only keep a line drawing, which is merely drawing a dot at each hourly price and
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connecting the dots with a straight line. It is usually best to use an ‘X’ for the 4.00pm close each day, so when going over our series of line drawings we will see little ‘X’s’ that demarcate one day from the next. I would like to emphasise that it is imperative that one draw an hourly chart by hand and does not use a computer. I believe that the reason this works has to do with our subconscious mind. It is a well-known fact that under hypnosis we can recall all kinds of elaborate details from our subconscious mind, which is much more aware of what is going on than we realize. When we actually sit down and
draw an hourly chart on a piece of graph paper by hand, what we are actually doing is integrating our conscious, rational mind, with our subconscious mind. As we draw these various price levels, we have a much better feel for the market when reversals take place. It is much easier to recall where these highs and lows are placed, than with a chart-book publication or a computer printout that we just have a cursory look at. Keep in mind when we are trading, that these impulse waves, patterns and cycles are used to develop a trading strategy concerned with whether we want to be bullish or bearish. If we want to be bullish and the main trend is up, we want to buy every dip and scale out of our positions on rallies. If we are in a long-term bearish trend we want to sell short all the advancing rallies and cover on the dips.”
The rest of the chapter has many trading tips – you will be well advised to have this book in your library. Michael has another website still under development, but you will want to check it monthly for all the tips and free programs on it, perhaps including a stock of the week item.
On readingI attended a seminar in 1996 given by Welles Wilder, who was the inventor of the Directional Movement System, RSI and other well-known technical indicators that were born out of the commodities boom of the 70s. He has written two books that are well worth investigating: ‘The Adam Theory of Markets or What Matters is Profit’ and ‘The Delta Phenomenon or The Hidden Order of All Markets.’
Both ‘Delta’ and ‘Adam’ are about market symmetry. ‘Delta’ concerns the market’s outer symmetry, ‘Adam’ its inner symmetry. Wilder paid Jim Sloman one million dollars to learn the ‘Adam’ theory – the concept that is presented in this book. Nothing about that concept has been omitted. The first thing he learned was that “There is really a lot less to trading that most people think.” The second thing he learned was what not to pay attention to.
The ‘Adam’ system is about making profits trading the markets – any freely traded markets anywhere in the world. ‘Adam’ presents a special way to look at markets and an even more special way to trade markets. ‘Adam’ is the purest, most simple, and easiest way to make profits trading the markets, using only what the markets are telling
us about themselves, never introducing anything arbitrary. Though ‘Adam’ is the simplest and purest concept, it eludes most traders.The book is well worth reading for its ‘Ten Trading Rules’, which are typeset so as to be covered on one page. Wilder recommends that you copy that page and place the ten rules in a convenient place beside the telephone that you use to place trading orders to your broker. Be sure that you never place an order that contradicts one of these rules.Enquiries about the books should be directed to Trend Research Ltd,
Trend Research Building, PO Box 128 McLeansville, N.C. 27301.Another interesting read is ‘Adventures of a Currency Trader’ by Rob Booker, which is billed as ‘A Fable about Trading, Courage and Doing the Right Thing’. In a series of insightful and entertaining vignettes, Rob teaches both the novice and the experienced trader some hard-won truths about the currency markets. It is described as a must-read book, written by a guy who survived the trenches and went on to prosper in the biggest and most competitive financial market in the world.The book is published by John Wiley & Sons Inc. 2007 (ISBN 978-0-470-04948-8). Rob’s Web site, www.robbooker.com, and blog, www.piptopia.com, are two of the most popular destinations on the Internet for traders. Do try to see the movie ‘Margin Call’– a must for all traders.
Market Analyst 7 – Winners and Losers ChartsThese charts are a regular feature in YTE and serve to illustrate the benefits of an excellent piece of software, using a basic knowledge of the importance of pivot-point reversals and the significant support and resistance areas. Fortunes can be lost by not understanding the importance of real charts, especially in these uncertain times. The special section of eSignal charts on a broad section of stocks is good value; because they use only line charts and a 30 period moving average, they are very clear basic charts. Developed chart-reading skills can tell you whether to buy, sell or hold.I try to make traders aware of the benefit of doing some hand charts. In this way you get the real feel of a market by simply keeping your hand-plotted charts as up to date as possible. Combined with a great piece of software, they will greatly assist the preservation of capital. PEs and dividend yields are meaningless in bear markets, especially where panic phases are the destroyers of support levels. You need this information in visual form and you also need to be aware of the implications of breaks of major support levels. We currently have one in some of our market leaders.I love point and figure charts. The latest Market Analyst 7 software allows you to do these; and a good example in this issue is a chart on BHP. David Fuller, when asked whether a point and figure chart or candlestick chart was his favourite chart opted for the point and figure: that is my favourite too!
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Keep in mind when we are trading, that these impulse waves, patterns and cycles are used to develop a trading strategy concerned with whether we want to be bullish or bearish.
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cHArt WAtcHOnce again copy deadline for YTE occurs at an important pivot point in the market. In a previous comment for 30 March 2012 I concluded that the end of the then-existing uptrend would bring in some profit taking, which indeed it has – blowing away most of the gains for this year. On 1 May there was an important high, and then the wheels started to fall off our market and global markets. The sharing of a common date for the highs in individual stocks and the importance of the lows of 18 May will be borne out in the weeks ahead. Some of our major stocks are on their support lines, so they assume special importance in the big picture. There is now a trail of losers who bought in at the rally high.
I have often explained in some detail the benefits of Directional Movement – a methodology that works well in all time periods; and if there was ever an example of how well, you don’t have to look past the May top, after which we have had some great momentum moves combining with Directional Movement crossovers. Full marks to Mr. Wilder and Phyllis Kahn for their incredible contribution to technical analysis. It is important to be on the right side of the market, especially when the turn is somewhat unexpected. Lord Keynes said, “The inevitable never happens, it is the unexpected always.”
In addition to our normal section of Market Analyst 7 charts of winners and losers, a special addition in this issue of YTE is a separate page of eSignal charts of various stocks to illustrate their current technical position in the market, using simple line charts with a 30 period moving average. You can draw conclusions from these charts as to whether to buy, hold or sell the stock. Space precludes other than a brief comment.
GolD BUllion pref. (154.9)This is a proxy for gold, and is currently at a decision point. You need to plot the $A gold mint price. It makes a great chart of the long-term trend. It is a good point and figure chart as well, which gave a perfect upside target at the high.
cotton FUtUres (73.62)This provided a simply amazing chart of the big bull run, which has ultimately turned into a ‘bubble’. Recently YTE featured the analysis of Michael S Jenkins, Jeff Greenblatt and Dr Mircea Dologa, who subsequently wrote a further brilliant article and advised growers that they must use technical analysis. I recall a similar chart of wheat futures, which topped in February 2008 and bottomed in June 2010. In fact, I have a huge Ganntrader chart taking up the whole of my drawing board.
croWn (8.54)It was a gamble to hold this one in the bear market. Price bottomed at 4.18 on 28 Nov 2008 and staged a mild recovery to a high of 9.01. It is trading in a broad sideways pattern, with 7.50 as a major support area. A low of 7.78 followed by a rally to a high of 9.29 on 4 May 2012 brought in the sellers. The 30-week moving average coincided with 8.41 pivot support.
KinGsGAte (4.99)The analysis is contained in the main section, but it does make a spectacular chart since 2003 and demonstrates a good reason you must keep charts. There is a case for buying low and selling high, but it is now coming into an area of significant support.
oriGin enerGY (12.97)A well-traded stock, which shows it could have run out of steam with the topping out in 2008/2011 and a sell signal at 16.15 on 3 Jun 2011, with a Directional Movement crossover. A low of 12.77 on 23 Sep 2011 brought in support for a rally to 14.80 on 2 Dec 2011. It is currently in a falling trend, with clear evidence of lower lows and lower highs. The major support area comes in around 10.50.
WesFArmers (29.00)There was a spectacular weekly chart that illustrated the extreme price action from the all-time high of 42.54 on 29 Jun 2007 (with a huge bearish candlestick on the monthly chart). The bear market low was 14.24 in Dec 2008. The recovery rally high of 35.26 topped out on 28 Feb 2011, with a 27.81 spike low getting support. The rally failed at 33.00 on 11 Nov 2011; and price is currently making lows, with a huge bearish candlestick on 25 May 2012. The $64 question is whether the 27.81 support will hold. A possible square of range target area is 22.00.
Trading tips which can be used on all markets• When the ADX is trending strongly, it is a measure of the strength of
the trend and not the direction.• A falling ADX implies a correcting phase.• When the ADX falls below the DIs and is moving sideways it is a non-
trending market, but one to watch to identify when it does turn up.• Parabolic stop with a trending market will stop you out at a level to
maximize profits.• It is not a good idea to short a rising trend until there is technical
evidence that the trend has run its course.• Wilder says that when the ADX rises above the DIs and then turns
down it is time to take profits. ADX levels of 40 – 50 – 60 indicate strong markets. Watch for ‘even stacking’ signals, which sometimes appear for only one day. The implication is that there will be a correction back to 15 and/or 30 period moving averages.
• The use of point and figure charts will greatly improve your skills, especially in fast trends.
• Stochastics have their function at times but when you have markets that are trending strongly, they can stay in either an overbought or oversold area. That is where the ADX is the best overall indicator.
• The 3- and 5-day moving averages provide early warning signals of an impending change of direction. In an uptrend, when the 3-day crosses below the 5, and conversely when the 3-day crosses above the 5 in a downtrend, it is an early warning signal. Sometimes it occurs approximately 3 days before the change and is more apparent than some of the more popular and well-used indicators.
• The 30 period moving average is especially important in all time periods, down to 1-minute charts.
• Price is the leading indicator upon which all others are calculated.• Keep a ‘work book’ that is written up each day by hand, with open/
high/low/close, RSI, Stochastic, Parabolic Stop, 3, 5, 10, 15 and 30 period moving averages. This will keep you in the flow of the market and allow you to observe the important signals. A green line can be ruled across the page when an up signal is designated and conversely a red line for a down signal.
• Observation of candlesticks – everyone uses them. You will see these on your screen dump.
• Front-page news and media interest generally come fairly late in a trend. If you make use of the technical tools outlined above, it will add to your profitability as both investor and trader.
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Amp (3.89)The tweezer bottom candlestick on 1 May was a bear trap. There were three days of bearish candlesticks, with a crossover in Directional Movement at 4.21 on 4 May 2012. Clustering moving averages set the stage for the current momentum move, which made a low of 3.81 on 18 May, with a strong rising ADX up to 40. I previously cited 4.19 as the support level AMP needed to hold. Support ahead is the close low of 3.75 on 23 Nov 2011. The monthly chart has a range low of 3.52 from 31 Mar 2009 – not far away. Overall a disappointing performance for long-term holders. The Facebook high of $42 after listing reminded me of the day AMP was floated, hitting that level as the champagne corks popped. It has since been adjusted for some issues. The high was 10.97 on 31 Oct 2007; the bear market low was 3.52 on 31 Mar 2009.
AnZ (20.38)The high of 23.68 on 29 Mar 2012 brought in some selling, but it found support at the 11 Apr low of 22.69. Once again it was a May Day high at 24.05, close to resistance at 24.23. The ADX had risen to 42, with a nice sell signal from the Stochastic. The rest is history, with a somewhat extraordinary plunge to 20.62 on 18 May leaving a big price gap from 22.86 to 22.35. ADX on the daily chart was 49.8. The monthly chart close low can be viewed as potential support. The next serious support is the 18.60 low from 25 Nov 2011 and the close low at 18.77. Could there be more troubled waters for the banking and finance sectors?
AsX (29.43)Not a happy stock, with a dark cloud cover candlestick at the 33.49 high on 2 Apr. After falling to 31.24 on 11 Apr, there was a somewhat feeble rally to 22.62, a shooting star candlestick on 2 May and clustering moving averages. Directional Movement crossover occurred on 3 May, with the ADX at 18.5. The current waterfall decline reached a low of 29.09 on 18 May, with the ADX at 44.3 mirroring the strong downtrend, which is starting to get some support. If there is a failure to hold here, next support is 27.52 from 16 Sep 2011 and 25.83 from 12 Aug 2011. The monthly chart has a huge bearish candlestick at 43.89 on 29 Oct 2010 – a warning signalling ‘buyers beware’. It is a long way from its all-time high of 61.00 on 31 Jan 2008.
BHp (31.61)In recent issues I have commented on the weakness in our No. 1 stock, which has been subject to continuing selling pressure since the Apr 2011 high, as is evident in the Twiggs Money Flow Indicator. The reality is that BHP formed a ‘double top’ from October 2007 to March 2011. The monthly semi-log chart tells the story, having broken a 45-degree support line in August 2011, and a support line (A), leaving the way open for a move down to the next support level at 28.00. On the weekly chart, Directional Movement crossed to a short market on 13 May 2011, falling below the 30 period moving average (currently at 45.22) which has proved resistance in the February and May rallies. The latter made a third point on the semi-log downtrend line. The possibility exists for a test of the $20 support level, which is one of technical significance.
There was a stunning point and figure chart from Market Analyst 7 software – a 50-point 3-box close point and figure chart supports these conclusions. It also serves well to illustrate the sequence of lower highs and lower lows and highlights the current importance of the 34.00 support level as potential resistance if there is any rally from here.
The monthly chart shows a zigzag pattern of lower highs and lower
lows in recent months, along with the break of support line (A). If I am correct in my assumptions, a decline of such magnitude would have a considerable impact on the ASX 200 Index and our roadmap. This presents an opportunity for long-term holders to hedge through CFDs and/or put options.
The reality when viewing the monthly chart is that those who bought BHP above the 32.00 price are now in the losers’ column. There is a case for supply overcoming demand, which will lead to lower prices. I recall at the April 2011 highs it was said, “You never sell BHP.” Having physically plotted and analysed the price charts since 1964 at the time of the Bass Strait Oil discovery, I noted a breakout on huge volume in the very early stages of that bull market, which finally topped out at 25.00 in 1968, and the 1974 crash low of 4.00 (the levels adjusted for issues). After the 1987 crash, BHP traded at a low of 2.16 on 31 Dec 1987, whilst the May 2003 low was 8.60. Directional Movement gave a buy signal at 9.80 on 31 Jul 2007 for BHP’s dazzling run to its all-time high of 50.00 on 30 May 2008.
The 30-week moving average is falling at 35.43. Pivot point resistance is 36.00. Could this be the time you don’t buy the dips but sell the rallies?
BlAcKmores (25.86)The 32.10 high on 4 Mar 2011 could well have been as good as it gets for this former growth story. It had a spectacular recovery from the 31 Mar 2009 low. Retracements: 38.2% = 23.95, 50% = 21.44. The major support area is 23.21 from 30 Apr 2007. Directional Movement on the daily, weekly and monthly charts is on short market. There was an advance block candlestick on the weekly chart’s close.
cBA (48.72)Long-term holders were rewarded when price made a 53.09 high on 2 May, up to the levels of May 2011. There was a bearish candlestick and a classic Stochastic sell signal, after which it fell away to 51.35, with the ‘bargain hunters’ taking it back to 52.90 on 14 May. In five trading days it plunged to 49.20 on 18 May, where it was getting a little support; but it closed lower on 25 May. It proved a good trade for the put options. The question now is where to for the market’s favourite bank stock? Continuing weakness in the finance sector suggests it could come back to the support low of 47.55 from 7 Mar. Best to be aware of where the next pivot support would come in at 45.39 from 25 Nov 2011 and 42.40 from 23 Sep 2011, lest we forget the horror days of the 24.03 low on 30 Jan 2009.
cocHleAr (61.86)The recovery from the panic low of 45.11 on 4 Oct 2011 continued to a high of 67.25 on 18 May, just below the breakout point and an obvious place to bring out the profit takers. A low of 61.57 on 21 May moved into a possible retracement area: 61.8% = 60.55. The 30-month moving average at 59.48 gives potential support.
csl (37.18)There was a buy signal on 22 Feb at 31.72, with Directional Movement crossover: +DI 33, –DI 23, ADX 15; and it became the strongest stock in the 20 Leaders Index. It made a high of 38.38 on 14 May, with topping out evidence on the daily and weekly charts, closing on 25 May with a shooting star candlestick. The Parabolic Stop close was 36.26. Moving averages are clustering on the daily chart. Directional Movement: +DI
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21, –DI 20, ADX falling at 19.9. The current overview is for a correction back to the 32.50 support area. It is worth looking at the monthly charts, which show strong resistance at 38.07 from 31 Nov 2011 and 37.56 from 30 Apr 2010. Range retracement: 50% = 32.25. A rewarding stock for long-term holders, but this could be as good as it gets for the time being.
DAViD Jones (2.27)Still no joy for the retailers. The brief rally off the 2.23 low of 12 Apr failed at 2.59 on 3 May, and there was a new low of 2.16 for the week. The next real support comes in at the 2.02 low from 31 Mar 2009. Patience is needed until there is some real basing after the huge markdown from the all-time high of 5.90 on 30 Nov 2009.
FliGHt centre (18.45)We have seen another nosedive for this popular trading stock. Following the high of 22.19 on 28 Mar, moving averages followed over with a cluster on 23 Apr. There was Directional Movement crossover on 24 Apr at 20.76, setting the stage for the current strong momentum move down to 18.16 on 23 May. ADX is 42.6 on the daily chart and moving above the DIs. The serious support comes in at 16.12 from 30 Dec 2011 and 16.01 from 31 Oct 2011. There is an interesting cluster of moving averages on the monthly chart. A square of the range target if support at 16.01 breaks is 6.94.
FortescUe (4.31)The rally high at 6.18 on 22 Mar 2012 sported a bearish shooting star candlestick. I stated in my comment in the May/Jun issue of YTE that bearish candlesticks on this stock are not to be ignored. There was a neat pullback to 6.03 on 19 Apr with Directional Movement crossover at 5.68 on 26 Apr, with clustering moving averages. Price is currently in a waterfall decline with a low of 4.29 on 25 May. There is a strong ADX on the daily chart at 51.2, moving above the DIs. Support at 4.23 from 30 Dec 2011 on the weekly chart needs to hold. The next real pivot support is 3.28 from 21 May 2010. The monthly chart always tells a story – the bear market low was 1.16 on 28 Jan 2003. The all-time high was 13.15 on 30 Jun 2008. Fluctuating fortunes for Mr. Twiggy.
HArVeY normAn (1.95)A well-known sad story. The high of 2.22 on 29 Feb has put the cap on any immediate recovery, with a low of 1.85 on 10 Apr 2012, and price failing again at 2.07. Moving averages are coming into a cluster at 2.00 on the weekly chart. Pivot support close levels are 1.86 and 1.84 from 19 Aug 2011.
KinGsGAte (4.99)I did warn you about the roller-coaster rides providing some good short selling opportunities. The current one was from 6.42 to hit a low of 4.92. ADX was 52.1 on the daily chart and moving above the DIs. Range retracements: high 12.30, low 2.20 – 50% = 7.25, 61.8% = 6.06, 78.6% = 4.37. You need to do proper chart work before entering this one.
lYnAs (89.5 cents)Rare earths are still out of favour. The downtrend continues to make lower lows – 87 cents on 23 May, followed by a feeble rally to 1.19 that brought out the bears again. There was Directional Movement crossover on 2 May, with ADX at 16 and clustering moving averages.
Daily, weekly and monthly charts are all on a short market. This stock has provided an interesting history from the 31 Mar 2009 low of 9 cents and an all-time high of 2.70 on 29 Apr 2011. There is support at 46.5 cents from 30 Jun 10. Let the market dictate here – don’t pick bottoms.
mAcQUArie GroUp (25.83)Here is a good point and figure stock, giving the 30.00 target area. The high was 30.17 on 28 Mar, with lower highs of 30.07 on 18 Apr and 29.55 on 2 May. At that point the moving averages were clustering. There was a price gap from 28.73 to 27.99 on 7 May, with Directional Movement crossover: +DI 22, –DI 34, ADX 23. Support came in at 27.02 with a four-day rally just closing the gap. Subsequent action moved price to 25.15 on 18 May. A look at the weekly chart shows the 30 period moving average at 25.97 just holding. Range retracement: high 30.17, low 19.94 – 50% = 25.06. The market now needs to show its hand. The bear market low was 15.00.
meDUsA mininG (4.98)Watch the candlesticks on this one. There was a 6.60 high on 24 Feb, with a shooting star. It got support at 4.85 from 10 Apr, with a rally high to 5.98 on 1 May providing another signal to go short. The 30 period moving average was still falling. The weekly chart showed support at 4.31 from 30 Dec 2011, then the 3.73 low from 20 Aug 2010. It had a great bull run from a 37 cent low on 28 Nov 2008 to its all-time high of 8.71 on 31 May 2011, when ADX was 66.1 on the monthly chart and still falling.
minerAl Deposit (4.88)I suggested a potential double top with a focus on pivot support at 5.50, which then brought in support for a rally to 6.13 on 30 Apr, closing under the 30 period moving average and turning down. Prices again retreated to 4.76 on 2 May. The 4.70 low from 6 Jan needs to hold. The 4.11 low from 19 Aug 2011 provides the next pivot point support. Beyond that is the 2.95 low from 30 Jul 2010. A good point and figure stock, which has been good for traders.
neWcrest (24.75)A somewhat devastating stock in the 20 Leaders Index. The downtrend after the 36.10 high on 23 Feb saw a shooting star on the weekly chart and price hit a downtrend line on the point and figure chart. A low of 23.56 on 16 May brought in some buying support. It is still below the falling 30-day moving average of 26.33. Directional Movement suggests a possible bottom here. A defensive stop loss is required for what has been a fantastic trade for put options. ADX 43.7 on the weekly chart mirrors the strong downtrend. Optimism on the gold bull market is misplaced for this one. Copper is also a consideration. The big top on the weekly chart is well worth studying.
Dawn Bolton-Smith is the matriarch of technical analysis in Australia, with a career spanning 50 years. A female pioneer of trading in Australia, Dawn successfully predicted the 1974 share crash and called the bottom of the market to within four points.
CHART WATCH
CURRENT AND NEW CHARTS
56 YOURTRADINGEDGE JUL/AUG 2012
cUrrent AnD neW cHArtsAsX 200 inDeX – Weekly close (semi-logarithmic) (4029)I often marvel at the simplicity of plotting a weekly close and how important it is to the successful navigation of the twists and turns in the bull and bear cycles. The sequence of higher lows from August 2011 provided a springboard for the somewhat unexpected rally, which came to an abrupt end on 1 May 2012. The ensuing straight-line move has taken the Index back to December 2011 levels. A resistance line (A) can now be drawn on the chart with a support line (B), which will be invaluable in the months ahead. Technical odds favour
a continuation of the bear cycle and a possible test of the long-term support level.
An interesting prediction by one well-known economist puts the Index at 4750 at the end of 2012. At the beginning of 2008 the same economist predicted a year-end price of 7300, which was well off the mark. It is interesting to make a note of the various predictions at the top of your chart. Given the current position of the market, in my view it would have to get above 4400 again for me to take a more optimistic view.
The Gann dates listed have been extraordinarily useful for cycle turns. Because they are based on Gann’s Master Time Calculator of 144, I have added some more dates to watch based on a 177 cycle, which is becoming more apparent in the shorter-term time frames. Why 177? One
explanation is that 177 days is the interval between solar eclipses.
Gann datesFrom Apr 2011 high 2 x 177 trading days (TDS) = 15 Aug From Aug 2011 low 288 TDS = 12 SepFrom Sep 2011 low 177 TDS = 30 May, 180 TDS = 1 JunFrom Sep 2011 low288 TDS = 31 OctFrom Oct 2011 high 177 TDS = 3 Jul, 80 TDS = 7 JulFrom Nov 2011 low 144 TDS = 13 Jun, 177 TDS = 31JulFrom Mar 2012 low 72 TDS = 13 Jun, 144 TDS = 24 SepFrom May 2012 high 72 TDS = 13 Aug, 144 TDS = 20 Nov
AsX 200 inDeX – 20-point 1-box point and figure (4029)A useful chart to maintain, as each 20 point (on close) keeps you aware of the demand. The rising trend of 0s continued to a 4420 close. Whilst the Index traded as high as 4448 on 2 May, with the last X at 4440, the next 0 was 4400, with the 0s continuing to 4060 on 18 May. The Xs rebounded to 4120 before price came back, with the Friday 25 May close at 4029 – but 4040 remaining as the last 0. Come Monday will it be 4020 to 4000, or lower? A flatter angle (G-H) now appears on the chart. It serves to illustrate the 3900 support area. We can see a trend in motion.
AsX 200 inDeX – Weekly close (Arithmetic) (4029)Another favourite chart on a weekly close
CURRENT AND NEW CHARTS
JUL/AUG 2012 YOURTRADINGEDGE 57
basis sharpens up the pivot points. The decline off the May 2012 top speaks for itself. It is a good idea to keep a copy with a workbook. Colour printers allow you to do lots of useful things to increase your awareness of changing trends. This chart is a good example – up by the stairs and down by the lift!
AsX 200 inDeX – Half-hourly (4029)This is a mind-blowing chart since the 30 March update, demonstrating again the importance of the hourly chart (in our case half hourly) as stated by Michael S Jenkins, which has been covered in
detail in this issue. This chart produces incredible trend lines, very apparent on a 1 mm chart grid. The return line (C-D) joins the tops at 29 Feb and 2 Apr with the final top at 1 May. The neat uptrend off the 11 Apr low takes in the 1 May high – so neat and concise to the very millimetre. The severe break of the uptrend on 7 May set the stage for the amazing impulsive wave down, wiping out the gains for 2012 with a Friday low of 4025 at 1:00pm. I ran the Gann 177 mm square over the chart from the high on 1 May and it made a low at 12.30 pm on 21 May, precisely 177 time periods from the high which prompted a failed rally to 4121 on 22 May, with subsequent action continuing the downtrend to the Friday 25 May close. I ran a Gann 144 square off the 4300 high on 14 May and it squares out in time and price at 4012 on 30 May. Sycom on Friday night trading went to a low of 4013. We have an interesting start to the week. A truly remarkable chart when viewed together with that published in the
May/Jun 2012 issue of YTE. You be the judge of its value!
AsX 200 FinAnciAls inDeX – Weekly close (Arithmetic) (3935.4)After trending up strongly to 4349.1 on 1 May with considerable optimism surrounding bank stocks and then moving sideways for three days, this chart made a bearish candlestick on 4 May. Parabolic Stop on the daily chart was at 4243 and, after an ADX reading of 50.2, there was a high risk for new positions. It then fell almost unmercifully, decimating bank stocks that had risen from a 7 Mar low at 3931.6. The Index is now within 4 points of the key support level. It is a truly remarkable chart and, again, not expected.
58 YOURTRADINGEDGE JUL/AUG 2012
CURRENT & NEW CHARTS
There will be a testing time in the coming week for a bottom here. The price action would certainly have made an interesting hourly chart. In a nutshell, bank stocks are certainly not the safe havens they used to be, especially for long-term investors.
AUD vs UsD – Daily candlestick (0.9754) Another remarkable chart for the history books. There was a dramatic change of
trend after the double top with Directional Movement crossover at 1.0665 on 5 Mar, falling to 1.0221 on 11 Apr, which brought in a countertrend rally to 1.0474 on 27 Apr. There was a harami candlestick on 30 Apr and the ADX was positioned at 17.8. On 25 May ADX was at 48.7, rising well above the DIs. Parabolic Stop on shorts was 0.9845. Price is currently approaching support at 0.9659 from 25 Nov 2011, and below that at 0.9386. From its high of 1.0844 to
the current low of 0.9686 on 25 May is a decline of 1198 points. A bonanza for the bears! The magnitude of the fall, somewhat unexpected, has been good news for some and bad news for others. It serves to illustrate the importance of maintaining the right charts. Currency trading is around the clock.
At the time of Mr. Keating’s banana republic statement in 1986, I had not long been back from a Gann seminar with Phyllis Kahn, armed with a Gann square which, assisted by the late Peter Pich of GannTrader, was great for capturing that bottom. Between 3:15pm and 4:00pm it rose 4 cents. There were many sore heads in the dealing room on that remarkable day. Lucaswaveinternational’s weekly chart makes good viewing here. Jeff Greenblatt’s Gann calculations pinpointed the actual high.
AUD vs USD – Hourly chart (0.9754)A colleague has recently commenced trading currencies as his primary source of income. Inspired by Mr Jenkins’ insistence on the importance of the hourly chart, I decided to produce one on the Australian dollar. I downloaded the text data from eSignal and took a good day to plot it out. This chart is the result. I update the hourly closes using eSignal and Net Dania and, given the broad daily trading hours for markets, it produces nice charts for intraday plotting, especially using the Gann 177 and 144 squares – they work!
The hourly chart is fast becoming wallpaper, having used up one huge sheet of Aarque A2 1 mm chart paper. It must hold 0.9700 cents to stay above the bottom, having had a range of 768 points on this chart. On 7 May it fell down to the bottom of the 177 Gann square, which prompted a two-day rally of 34 points. Then 2 x 177 brought in a low of 0.9814, which supported a rally to 0.9926 on 22 May before being smashed down to a 0.9708 low on 24 May. At close of trading at 7:00am on 26 May at 0.9754 it was into the ¾ division of the 177 square in time and the mid-point of the two-day range, with Sydney the ‘first cab off the rank’ on the commencement of trading on Monday 28 May 2012. There was a triangle formation with an uptrend line off the low at 0.9730 and resistance line at 0.9780. My next update will come in
copy written in July for the Sep/Oct issue of YTE. My colleague, I am pleased to say, is doing very nicely with his trading and is developing technical skills along the way.
AUD vs USD – 5-minute candlestick (0.9754)A perfect accompaniment to the hourly
chart is a 5-minute candlestick from Market Analyst 6 using eSignal data. Watching the clusters of the moving averages after a sideways consolidation and the breakaway moves provides good setups for traders. When rising and/or falling, the 30 period moving average holds the price action for ‘safe’ trading. The 8 period Directional
Movement provides good crossover signals and the ADX highlights the strong intraday trending moves.
comeX GolD FUtUres – Daily candlestick Volatility is still the name of the game and since the all-time high of 1924.3 on 9 Sep 2011 gold futures traded to a low of 1532.3 on 18 May 2012. Directional Movement on the daily chart crossed to a short market on 29 Feb with a huge bearish candlestick – a one-day range of 110.5 points. The ADX fell to 16.6 and turned up, with a bearish engulfing candlestick on 1 May 2012 at 1665.4, with clustering moving averages. A sharp decline followed, finding support at 1532.30 on 16 May with the ADX at 42.2. Subsequent action over the last eight trading days suggests a possible bottom in the making. An interesting observation occurred in Directional Movement on the monthly chart: +DI 21.1, –DI 18.9 – an equilibrium point, with the 30-month moving average rising at 1442.7. If we are seeing a resumption of the bull market, it is still in its early days, the 30-day moving average acting as resistance. During the bull market the 30 period moving average was extremely important and acted as significant support in the corrections.
silVer (244.8)No chart is provided, but silver is showing more relative strength than gold. However, it too could be making a bottom. The 30-day moving average is still falling at 298.4.
For more analysis and additional charts from Dawn Bolton-Smith see Dawn’s blog on http://www.ytemagazine.com/blogs/blogger (the select ‘Dawn’ from the list).
Dawn Bolton-Smith is the matriarch of technical analysis in Australia, with a career spanning 50 years. A female pioneer of trading in Australia, Dawn successfully predicted the 1974 share crash and called the bottom of the market to within four points.
JUL/AUG 2012 YOURTRADINGEDGE 59
CURRENT & NEW CHARTS
DAWN'S SPECIAL CHARTS - WINNERS AND LOSERS
60 YOURTRADINGEDGE JUL/AUG 2012
DAWN'S SPECIAL CHARTS - WINNERS AND LOSERS
THE GREAT PYRAMIDDAWN'S SPECIAL CHARTS - WINNERS AND LOSERS
JUL/AUG 2012 YOURTRADINGEDGE 61
TRADER'S STORY
tim Sutherland works from his home in Salter Point, Western Australia. He has been involved with rural property sales for much of his working life. Tim
is also involved in property development projects in Perth and in other centres in Western Australia. He is an active trader of Australian equities and enjoys breeding stud sheep and goats. In his spare time Tim enjoys wood carving and stick-making in the English tradition. He also enjoys water-colour painting and is a keen cyclist.How and when did you first become interested in the markets? The introduction of compulsory superannuation created the opportunity to manage my own super fund. I have always thought that no one else can look after your money as well as you look after it yourself. In the earlier stages I entrusted my funds to a stockbroker with carte blanche to make all buy and sell decisions. I soon learnt that this was not such a good idea. It was then that I decided there had to be a better way. After I moved to the city upon ‘retirement’, my interest in trading was stimulated when I attended a wealth creation course over several months.
And then what happened?After that course, believing I had now gained the knowledge to start trading, along with all the right words with which to instruct a broker, I engaged a stockbroker and began trading. I was to make the decisions on buying and selling options and stocks on the ASX, and he was to lodge the orders on my behalf. That worked for some three months before I became disenchanted with the mix-up in orders and the exorbitant fees charged. My then broker suggested to me that with my knowledge I would be better off trading online. I began to do so in November 2002.
How have you been able to educate yourself about the markets?I threw myself into the learning process by attending as many seminars as I could in Perth; and even travelled to Sydney for a couple. I joined a Sunday Traders Club; and, best of all, read and studied more than forty books, which are still in my library. I say ‘best of all’ because the books are where I believe I learnt most. For
the cost of a book, there is a far greater benefit than can be gained from attending a seminar. The books are always there to refresh the mind. That’s not to put seminars down – I have attended some excellent ones and gained considerably from them.
The best-value and lowest-cost seminar or course that I attended was conducted in Perth by a private trader I met at a trading club. Her efforts in putting together a down-to-earth, well-documented set of papers, along with her presentation, were second to none. It was during this course in 2004 that I saw the software used by Share Wealth Systems (SWS) demonstrated. I considered it more user friendly than the software I had been using until then and duly made the change.
In all, the learning process has been one of the most challenging I have undertaken, but it has been well worth the effort. Having said that, learning is an infinite in the world of trading. It just depends how far you want to take it. Even if you are happy with a given status quo, there will always be more to learn.
I consider the quote most apt to trading is Lao Tse’s “He who thinks he knows, doesn’t know; he who knows he doesn’t know, knows“. This quote is on my wall adjacent to the computer to keep me from becoming complacent.
Did you make mistakes when starting out?Yes, of course mistakes were made – without mistakes we can’t learn. Fortunately none of mine were major and I’ve come through relatively unscathed. Although hearing that question certainly triggers memories of cold panic and frozen thinking!
Would you define yourself as a discretionary trader, a mechanical trader or a combination of both?I’m not keen on categorizing myself into a particular box but, I guess, I could be defined as a mechanical trader who uses discretionary common sense.
Who have been some of your mentors and role models? What impact have these people had on you personally as well as on your trading style?Without question Gary Stone of Share Wealth Systems is the most influential person I have met in my trading journey. He has delivered to me a safe and effective trading system that has made trading a stress-free pleasure.
Quite some time after purchasing the SPA3 methodology from Share Wealth Systems I was jolted into reality. The guest speaker at a Sunday Traders Club meeting was explaining how he traded the E mini S&P futures contract online. He was obviously a gun and making big money. There were some forty people in attendance and the speaker, trying to gauge the experience of his audience, asked who was earning x percentage from their trading, starting at around five per cent. By the time he got to 30 per cent, there were only a couple of hands up and at 40 per cent there was only one. This person traded SPA3 (Sustained Profit Advantage) with SWS. I
trader's storY
62 YOURTRADINGEDGE JUL/AUG 2012
Get to know your fellow traders: Kel Butcher speaks with equities trader Tim Sutherland.
JUL/AUG 2012 YOURTRADINGEDGE 63
TRADER'S STORY
believe he is still trading the same system successfully. That was in 2006. I made the decision to trade with the SWS SPA3
system. I have traded this system, and the SPA CFD system, ever since. Even though we have been through some fairly challenging times, my trading results consistently outperform the All Ords Index.
Another person worthy of mention is Tony Oz. His books have taught me how to trade effectively with systems for short-term and day trading.
Can you give us a brief overview of your trading style? Because I am more than seventy years old and have no other form of income, I am fairly risk averse. You will appreciate that at this stage in life you don’t get a second crack at it. Therefore my trading style and the system I trade need to be sound. I must have complete faith in them. The SWS SPA3 system delivers this for me. It is a medium-term ‘active investing’ system that suits my style and the time I have available. I also trade a SPA3 CFD portfolio; but in these uncertain times I have elected to stay out of that market.
From time to time I indulge in short-term trading with CFDs as a bit of a hobby and for something different to do. I was the first Australian
CFD client of MF Global, who have since folded. I now consider the risk of a broker going broke greater than the risk I take in trading.
Is there any one trade (win or loss) that sticks in your mind that had a profound effect on your development as a trader? If so, what did you learn from the trade?One that comes to mind was a loss trade in an exploration company. This was from a tip given to me by a very old and valued friend who, years before, when I had no interest in shares, told me to buy Poseidon (before they took off), which I didn’t. With that sort of background and since he was highly respected in the mining industry, I thought I should now take his advice. This share just kept going down, despite some of the best deposits being confirmed. The company chose to keep exploring rather than mining and of course issued more shares to raise capital. This trade confirmed the oft-given rule for traders – not to indulge in tips. I have witnessed the same scenario with friends who keep taking ‘red hot’ tips. I am now content to check the technical analysis of such tips and watch from the sidelines.
Can you tell us about your best and worst trades?
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64 YOURTRADINGEDGE JUL/AUG 2012
For me, the past is the past. I don’t really recall any specific trades, either best or worst. I appreciate that many inexperienced people view trading as making great profits or great losses but I have found that, in reality, trading is a fairly mundane occupation and not the exciting and lucrative pastime that a lot of people perceive it to be. Having said that, I do recall that on a trip around Australia we pulled into Darwin and connected to the Internet to find that our portfolio had gained some $30,000. This was a cause for some excitement, but by the time we checked again in Broome the gain had disappeared. Ah well, this is where experience is useful.
Would you classify yourself as a short-term or a long-term trader? What advice would you offer to people getting started as traders on the relative merits or otherwise of each?The term of a trading system is directly related to the amount of time and effort you are willing to put in and the amount of risk and reward that goes with each. That is, with a long-term buy and hold approach there is less reward for less effort; but there is little or no stress. With a short-term approach there is opportunity for greater rewards, but with that comes more effort, greater expenditure of time and some stress. The requirements for each person, and their risk tolerance, will be different. I think it is a matter of knowing who you are and aiming for your area of comfort. If you don’t understand your tolerances, the market will very quickly tell you what they are! The main thing before making any decisions is to write a trading plan, just as you would a business plan. This is essential before you start trading; and it will also help in forming a picture of yourself.
What markets do you trade? Which markets do you prefer? Do you have a favourite, and why?I trade only stocks and CFDs on the ASX. It is the simplest market, with local currency and local brokers. SWS have been researching FX and US stocks with a view to completing their research very soon and releasing a system for these markets. I believe the US markets and forex will give me greater opportunities and I am interested in trading them.
What makes your trading style different from others? What sets you apart from other traders?It is a well-known fact in trading circles that over 90 per cent of traders fail. Whilst I consider myself a good trader, it must be understood by aspiring traders that there are no shortcuts or golden bullets that will deliver you a fortune. Yes, it has been done and it is possible. But, as they say, “the harder I work, the luckier I get.” When I say I am a good trader, I don’t mean that I am smarter or making more money than others but merely that I am someone who is trading a good system and following the rules explicitly. I guess discipline is one of the traits of a good trader.
What sets successful traders apart from those who do not succeed is their approach to trading. This includes trading a system that has been back tested over long periods in different market conditions. In trading any system, rules must be written to manage money and risk. The rules that you write into your trading plan must then be adhered to.
Do you have a favourite trading rule?No. But if I did, it would be to follow all of the rules without exception.
Ed Seykota says, “Everybody gets what they want from the markets.” What does Tim Sutherland ‘get’ from the markets?Trading has provided me with mental stimulation after leaving the workforce and gives me something to look forward to every day. It has given me a great deal of satisfaction after reaching a level of understanding of the markets. In turn, the monetary rewards have been a bonus to the learning journey.
Whilst I am not making a fortune, trading has maintained our financial status through all the recent ups and downs and enabled my wife and me to enjoy a modest lifestyle with regular travel to different parts of the world.
How has trading affected your lifestyle?That sounds as though you are looking for the downside of trading. The only downside I can relate to is that there is a commitment to be near a computer every day to maintain continuity of trading. At home, that is not a problem. It does sometimes become a bit of a nuisance when travelling, because of different time zones and areas that do not have Internet access.
What books, seminars and courses have you read or attended and which would you recommend?Some of my favourite books on trading include ‘Reminiscences of a Stock Operator’ by Edwin Lefevre – the fictionalised biography of Jesse Livermore; ‘How I made $2,000,000 in the Stockmarket’, a true story by Nicholas Darvas, a great advocate for technical analysis and systems trading; ‘Technical Analysis of Stock Trends’ by Edwards and Magee – the bible of technical analysis; ‘Secrets for Profiting in Bull and Bear Markets’ by Stan Weinstein, a real all rounder; ‘Market Wizards’ by Jack Swager – interviews with top traders; ‘The Stock Trader’ by Tony Oz – the best book for short-term trading I have seen; and ‘Trading in the Zone’ by Mark Douglas, which is a great book for the psychology and mindset needed to trade.
I would also strongly recommend studying technical analysis. This will help you to understand how systems work and will give you greater confidence in a system. It has provided me with an extra edge within the system I trade.
What does the future hold for Tim Sutherland?The future for me is looking really good. At this stage of life my wife and I get to do the things we want, when we want. From a trading aspect it will be more of the same; enjoying the benefits of the SWS research and new systems as they develop.
Kel Butcher is a full-time futures, equities, forex and derivatives trader. He is the author of ‘20 Most Common Trading Mistakes and How You Can Avoid Them’, ‘A Step by Step Guide to Buying and Selling Shares Online’, and ‘Forex Made Simple – A Beginner’s Guide to Foreign Exchange Success’. He also acts as a mentor and coach to other traders. Kel can be contacted via email at [email protected]
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66 YOURTRADINGEDGE JUL/AUG 2012
TRADING LIFE
Dale Gillham shares his trading life.
trading liFewas once told by a wise person that investing without knowledge is gambling. It was not until I started investing that I understood the essence of this message. Over the years I have learned that gaining knowledge is one thing; gaining the right knowledge is critical.
When I was 19 an insurance broker introduced me to the share market, an introduction that would be life-changing. He got me excited to be investing in managed funds for two reasons; first because it encouraged me to save a percentage of my income, and
second because it meant I would have a sufficient deposit in years to come to purchase a house.
Unfortunately, five years later I had less than half the funds I had initially invested.
It has since been my experience that the vast majority of information and education offered to those learning to trade is of little use to most people; and this explains why so many fail. More importantly, I found that once I had gained some knowledge, I wanted to know if I really understood what I had learnt. As a result, I chose to find a thorough education to achieve my financial goals.
Trading the share market is not always easy, but during more than 20 years it has provided a career that is full of surprises and exciting challenges. The cold reality is that trading is one of the few things you can do where you know from the outset you will lose money. I have found that while all traders agree with this statement on an intellectual level, most never believe it will happen to them. Some people say ignorance is bliss; in trading, ignorance can be very expensive.
During a long trading career I have witnessed failure many times, normally involving people who seem to be in a hurry to make their millions – thus making uneducated, emotional, irrational, and, ultimately, unsuccessful ventures into the financial markets.
I became tired of an industry saturated with quick-fix gimmicks and free seminars, and so in 2002 I co-founded Wealth Within. My belief in the necessity of knowing how to trade, or how not to, led to a profound career decision. In 2006, through Wealth Within, I launched Australia’s first and only nationally recognised, government accredited Diploma of Share Trading and Investment course.
The key to learning how to trade successfully is to learn how to think and behave like a professional trader. I encourage everyone to learn more, but it is important to remember that if you change
your trading plan you change its effectiveness, which might not be for the better. Therefore, each time you change a plan you must back-test it. If you don’t, you are gambling with your money and increasing the probability that you will join the 90 per cent of share traders who lose.
It may surprise you that I do not trade using common lagging technical indicators such as MACDs or moving averages. I find that relying on the latest techniques or computer software is of limited value and I prefer to use the tried and tested techniques and strategies of masters such as Gann, Elliott and Dow. These techniques are leading indicators and as such they provide more consistent entry and exit signals than lagging indicators provide.
Over the years my journey has provided me with many highs and lows; but essentially it has provided me with a career I am passionate about each day. It’s not luck if you are successful in this industry – it’s knowledge and hard work. I truly believe that.
Dale Gillham is founder and chief analyst at Wealth Within, a private investment company supporting individuals to maximise their investments in the share market. He is a respected television market commentator and regular keynote speaker on the share market internationally and at ASX forums.
i
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TRADING LIFE
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The key to learning how to trade successfully is to learn how to think and behave like a professional trader. I encourage everyone to learn more...
Future Trends from Past CyclesBrian Millard (114 pages, Harriman House, ISBN: 9780857190864)
This is the second book that I have reviewed recently that is based on Hurst’s wave analysis, the other being written by Christopher Grafton. While Brain Millard sadly passed away before this book was published, his son has collaborated with the publisher to get the book out.
As with Hurst and Grafton, Millard came from an engineering background. Hence the application of wavelengths and associated scientific principles to markets and trading.
Millard starts by explaining basic probability, normal distribution and some wave analysis. He then investigates moving averages, trends and trend turning points – all from the perspective of his cycle and wave analysis. At every step there are clear diagrams to illustrate the points the author is making. I should add that there is some intermediate level mathematics involved in this book.
It is not for me to say whether this sort of analysis works or not, but I do have some concerns with this book. The risk analysis in the early pages is too simplistic and in my opinion suggests a limited understanding of trading.
The discussion of probability and normal distribution was also at times too simplistic and rarely took account of the potential magnitude of smaller probability events. An example would be the suggestion that as a stock had risen for 784 out of the past 1596 days it had a 49% probability of rising in the future – there is a naivety to such statements and I believe they have no place in a good trading book.
I was also very interested in the completely contrary views of Millard and Hurst regarding whether all contracts exhibit the same cyclical components. Hurst believed they did, and his analysis showed this. However Millard’s research gave a completely different result, which raises obvious questions over the validity of Hurst’s beliefs. In an attempt to explain the differences, Millard states that just because there was a lack of correlation in the period he studied, it does not mean that they did not exist when Hurst was researching; but surely this is the whole basis for the book – past cycles are repeated?
In summary, whether you like this book or not depends on whether you believe waves, cycles and other engineering principles apply to markets. If you do, then you might well find this book interesting. If you are still to be persuaded, then I doubt this book will change your mind.
Book reviewsYTE provides a roundup of the latest book titles to hit the shelves.
68 YOURTRADINGEDGE JUL/AUG 2012
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The Guts and Glory of Day Trading Mark Ingebretsen (199 pages, Harriman House, ISBN: 9780857191480)
This book was first published in 2001 and was subsequently republished in 2010. However, the bulk of the material dates from the tech bubble times of the late 1990s into 2001.
‘Guts and Glory’ is a collection of stories, told by different traders. The stories detail their experiences of trading – some good, some bad. They have been collated and written by Ingebretsen, a financial journalist.
The first point to make is that the author (and he admits this) has been loose in his definition of ‘day trader’; some of the traders hold positions for days and weeks, so most of us would not term them day traders. Ingebretsen has defined day traders as traders who analyse and study the markets every day.
There are 12 different trading stories, all written in an easy-to-read manner. As we are primarily dealing with the late 1990s, there is much discussion about the tech bubble and its associated ups and downs. Some traders experienced extreme highs followed
by extreme lows; others held profits; some never really made anything. In some ways the book’s subjects are a typical collection of private traders.
At the end of the book there is a set of trading rules, based on the experiences of those interviewed. They add nothing of value to the book and I would question some of them.
As a collection of anecdotes and trading experiences, particularly explaining the period of the tech stock bubble, this book is interesting and is a decent read. While there are obviously some lessons to be learned from the mistakes of those interviewed, readers will have to draw their own conclusions as to whether everyone was brutally honest in the summaries of their own trading.
JUL/AUG 2012 YOURTRADINGEDGE 69
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Trader OneInstead of just allowing would-be clients the chance to sample their product for a week or two before sending a cordial email asking for credit-card details, Barchart Professional appears to be 100 per cent free. You don’t get many deals that are better than this.
In many trading packages, simplicity is often the first thing that falls by the wayside. They are all about algorithms, complex equations and boasting more bangs and whistles than the competition, and sometimes the customer – the person who uses the software – is forgotten.
User guides can run for hundreds of pages and you need a degree in complex astrophysics to understand how the software works. Not so with Barchart Professional. This package is designed with traders and investors in mind. It’s easy to use, took all of two minutes to download and, just for the record, runs on Macs. With a concise user guide of only 19 pages, even the most technologically challenged person can be using the software correctly within an hour.
Barchart Professional is a charting package with 60 technical indicators on offer. But it’s much more than that. Detailed stock and futures quotes are available with the click of a mouse, as are market histories, news reports and a wealth of other useful information.
If you want an intuitive piece of software that doesn’t require thousands of hours to figure out how to use, you could do worse than download Barchart Professional. And did I mention it’s free?
Aaron Lawton trades options part time on the US stock exchange.
Trader TwoBarchart Professional was simple to install and easy to use, with almost no learning involved. The free version of Barchart Professional updates every 30 seconds. However, a real-time version is available if you wish to upgrade. The historical data on ASX stocks extends back to 2000 – longer for some stocks on other exchanges, although I could not seem
to access LSE data.The instrument search
function is standard but I liked the file-tree feature, as it enabled browsing instruments. I found the charting uncomplicated – ideal for entry-level traders. The program offers a good deal of technical data in summary form, but customisation is a little limited; I could not see how to resize the chart except by increasing the period, e.g. from daily to weekly.
The program offers many classic indicators and some studies, such as Fibonacci retracements and Andrew’s Pitchfork. The Technical Opinion option provides a survey of common indicators, translated into buy/sell signals, great for an overview. Naturally,
it has watch lists and alerts to ensure you don’t miss entry signals and to help manage your portfolio.
Barchart Professional is a handy program, but I urge you to look at combining it with the Barchart.com site, which provides even more information for identifying trends in stocks, futures, tracking your portfolio and performing inter-market analysis. The website provides data reporting on equities, futures, ETFs, forex and funds. If you are in equities, check out Sectors Change and the Sector Heat map to gauge where you might find trading opportunities.
If you are new to trading, take a look at the education section for information about the indicators, and, more importantly, about how they are being applied on the Barchart site.
In summary, I found Barchart Professional to be simple, free, and accessible; ideal for new traders.
Ulla Decken is a part-time forex trader and a full-time financial planner.
soFtware reviewThree traders at different levels of experience test Barchart Professional.
70 YOURTRADINGEDGE JUL/AUG 2012
YTE welcomes feedback on the Software Review. If you have any comments on what the reviewers have discussed, or would like to take part yourself, let us know! Send an email to [email protected]
Trader ThreeBarchart Professional is a desktop trading platform offering trading in leading equity, futures exchanges, indices and forex.
Barchart Professional has a friendly, simple interface that is easy to use. Adding charts, quote lists, news, and market history is straightforward. All trading windows can be placed anywhere within the workspace. Users can have as many windows as they want – even detached and placed on the desktop without the application window. This is great for traders who want to keep an eye on the market while working. Trend lines, including Fibonacci and Speed Resistance are a standard feature.
Barchart Professional also includes watch lists, an options analysis window, spread matrices, and a useful technical data feature, which provides moving averages, standard deviations and volatility analysis for a symbol over a given day. A convenient performance feature, based on Barchart Opinions, provides profit/loss results for the most widely used technical trading strategies.
Barchart Professional's most notable feature is Barchart Opinions, which analyses up to two years of historical data for thirteen technical indicators and formulates an opinion. Barchart Opinions can be a starting point to position analysis and can greatly assist the trader with buy/sell/hold decisions. Barchart Professional also offers mobile quotes, available on any text device with Internet. The real-time visual alerts, configurable to the trader's pre-defined values, is a necessary feature in fast-moving and complex markets where timing is essential.
I would recommend Barchart Professional as a market-learning tool, due to its price and accessibility. Inexperienced traders can benefit from the friendly and straightforward features of the application, which enable quick learning and are great for helping make decisions. Experienced traders could find the Barchart Opinions, mobile and real-time features are attractive, as they can be tailored to specific trading styles and trading systems.
Tom Frtunik is an FX spot trader.
Barchart Professional responseBarchart Professional is a premium, high-end solution for all individuals and institutional firms seeking advanced features and tools from their real-time trading software. Professional is an application that provides high-end, professional-grade data, charting software and trading tools in an easy-to-use format. Barchart Professional provides the same quality and service available in terminals that might otherwise cost thousands of dollars a month.
With a heritage dating back to 1934, Barchart has substantial experience in meeting the information needs of the financial, media,
agriculture and energy industries. As a full-service provider of equity, index, mutual fund, futures and foreign exchange market data, Barchart provides a wide range of market-data products and solutions for customers ranging from institutional to retail. As an established leader in an industry that demands accuracy and innovation, Barchart’s goal is to form partnerships that deliver comprehensive solutions for success.
For more information or to download the free software, visit: http://www.barchart.com/professional.
JUL/AUG 2012 YOURTRADINGEDGE 71
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JUL/AUG 2012 YOURTRADINGEDGE 73
AIA Adelaide Investing in ASX-listed securities in a global context
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AIA Gold Coast An introduction to investing in the share market seminar
10:00am - 4:30pm 29 Jul 1300 555 061
AIA Gold Coast National Conference : Investing strategies for all markets
3 days 29 Jul 1300 555 061
AIA Brisbane Brisbane Information Meeting 6:30pm - 9:00pm 02 Aug 1300 555 061
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AIA Sydney EFTs 7.00pm- 9:00pm 08 Aug 1300 555 061
FXCM Sydney Online Forex Webinars 6:30pm 03 Jul 1800 109 751
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THE RUB
the ruB
ne of the great mistakes, frequently made, is to think the people at the top know what they’re doing, that they have been chosen to lead because of their great perspicacity, their measured empathy, their problem-solving genius, because they are smarter than everyone else. Nah, it’s at least as much luck
as genuinely good management.Obviously I’m talking corporate here, not politics, as we’ve long
since become jaded about those nominally in charge of government. The common feature of Western politics is the electorate’s disdain for those in power, not its enthusiasm for those in opposition.
Beyond politics, there are of course exceptions. I trust that the pilots flying the planes I catch have indeed earned their wings through ability and good judgement, not because they happened to be in the right place at the right time, were mates with someone on the board and managed not to crash during training flights. In addition, pilots are tested regularly on specific skills and knowledge, which maintains pressure on them to keep up to speed. And stopping, which is important.
But the role of the pilot, occasional black-swan events notwithstanding (landing on the Hudson River, flying through volcanic ash clouds, that sort of thing), has been refined and defined. The plane needs to take off and land, and so forth. Management, on the other hand – exactly what is that anyway?
How can management be measured in a genuinely meaningful way? Sure, you have your matrices of random KPIs dreamt up by the HR department and a tame psychologist to justify their own existence and salaries, but the attempts to make something objective out of the highly subjective business of marshalling people and systems for the greater good are about as reliable as weather forecasting.
I have trouble just taking the phrase ‘key performance indicators’ seriously. Have you met your KPIs? No, I haven’t; who the hell are they? From my mother’s side of the family I suspect…
And, like all box-ticking exercises, they are designed to be gamed anyway. Set a goal and results will be massaged to meet said goal. That the means to the required ends might be disastrous shall be hidden under a convenient carpet until someone subsequently steps on it.
Then there are the slick aphorisms that try to elevate scrambling up the corporate ladder to something nobler. “Management is doing things right; leadership is doing the right things.”
Oh please. History is littered with the tragedies created by leadership doing the wrong things and occasional accidental successes as well. ‘Management’ is being in a position to have someone else do the work. When times are good and economies are growing, any fool can look good just by keeping the doors open. And when times become difficult and growth is not served up on a platter, it seems every second CEO is second rate and soon for the high jump.
So, after this lengthy opening digression, we can finally start
the column with a healthy scepticism about taking the grand announcements of CEOs and chairmen too seriously. Half the time, they really don’t know what’s going on and it’s very difficult to tell which half that might be.
But that doesn’t stop them. Having spent a quarter century or so observing the rise and fall of various CEOs, I can attest to the position’s deleterious effect on the average human being’s psyche. There’s something about being surrounded by sycophants and smiling, nodding, agreeing lesser ranks that eventually gets to most people.
The average board’s main job is appointing the very best person as their very expensive CEO – and he (nearly always he) has to be very expensive to prove that the board has done its job well by appointing the very best person. Thus the board begins life with a new CEO in a little mutual admiration society – everyone backing each other as a way of backing themselves.
With a fawning board and underlings desperate to please, the rot soon sets in. Doesn’t take long before the average CEO is believing his own claptrap.
Which is where it gets interesting. Despite all we know about the success/failure rate of CEOs, silly markets start taking notice of them and any old statement by a CEO on a bad day can become an excuse to move markets.
When the company is really big, the movements can match that size. In May, we had speeches from BHP Billiton’s CEO and chairman that painted a picture of demand for Chinese commodities flattening in a dozen years or so. That is not unreasonable, but it was put in such a way that it became an excuse for hinting at a curtailment of BHP’s investment plans.
A cynical soul might suggest it was also a way of covering the fact that BHP has once again been unsuccessful at the takeover game, plunging into US gas at the top of the market after a series of failed takeover attempts, and therefore management needed to find a face-saving way of pulling its collective head in. (There’s also an implication that BHP believes India won’t do a China, that it won’t get its act together and industrialise in the east Asian manner, which is a significantly more serious suggestion for a billion or so people than are passing stock market concerns.)
No one ever claimed that making it to the top of a company, no matter how big, necessarily means you’re brilliant. Just ask the American and European bankers.
Michael Pascoe has worked with newspapers, radio and television since the 1970s, providing specialist financial journalism for the major broadcasting networks, and is in high demand as a speaker and facilitator, bringing his trademark wit and insight to both roles. Michael is a Contributing Editor for Fairfax Media’s BusinessDay.com.au.
Michael Pascoe: The dangers of listening to the boss.
74 YOURTRADINGEDGE JUL/AUG 2012
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