ALSI daily range

During last several months, most of the systems that are traded by members of some South African web based trading communities are producing very different results when compared to their historical performance. Systems are based on moving average crossovers or penetrations on different time frames, including 5 and 15 minutes. Idea behind those systems is to catch 2-5 days long directional movements and to score as many points as possible. Somewhere in May number of points won by systems dropped significantly. What can be the reason for that?

Picture on the top clearly shows that daily range (High to Low) on ALSI dropped from around 900pts a year ago to 500pts at present. On the top of that, from mid Jun ALSI had only 6 (SIX) trading days when daily range was above average for the year. Best part of last three trading months daily range was bellow first standard deviation.

This can be one of the reasons why systems are not behaving like they did, but probably not the only one.

Becoming better trader

Many people started with trading or investing on stock exchange for one simple reason - to make money. This reason is valid, but will it help one to survive out there? I don’t think so and there are numerous reasons for that.

First and the most important is that one doesn’t have any experience or knowledge about the game and still wants to play with the pros. Following the same principle - Would you take boxing match against world champion and, on top of that, would you expect to win it? Would you expect to go into surgery and do heart operation and expect to be successful? I guess not. So, why trading is any different?

To become profitable trader one must invest time. First on to do list is to read as many books as one can. That way one will develop very broad knowledge about what is going on. Only after extensive education one will be equipped to make his conclusions on what is to be liked, if anything at all. Following step is to read as many book as possible on specific field of interest.

However, if one after all the reading realizes that one doesn’t like anything related to trading, then do something else.

Finally, after one finds niche and market that one wants to trade, that is when one more educational effort is to be undertaken as one has to find out as much as one can about it. After all of that, paper trading for few months in real market and day-to-day conditions is to be taken seriously, simulating trading as much as possible. Please note: It will never be the same with money on the table, but please try it.

So, let’s refresh - We want to trade to make money.

From day one money was not made, while a lot was spent on books and courses, while precious time was spent too. That is correct way, as at the beginning one should forget about making money. One should focus on becoming better trader; one should focus on following his system 100% of the time, while finding better ways of trade execution. Making money is result of all actions previously stated – it is not a cause! Simply, if one focuses on efforts to make money, one is placing the cart before the horse. One must focus his attention on improving his trading. To make money one must forget about making money.

Of course, one shouldn’t get stuck in his head. It is very beneficial not to get caught up daydreaming about all the different things one could do when first 1000 points winner is made. Grand plans and spreadsheets considering development are not to be created. Those activities may seem intelligent, but they don't actually help one become better trader and all they do is keeping one stuck.

Although, the road to making money may seem long, the process of getting there is actually quite simple: One should do whatever it takes to make a daily habit of improving his knowledge, even if baby steps are being made at first.

Again, this is marathon, not the sprint.

Trade with trend!

J200, End of the day chart

Let’s take a look at daily charts - J200 or Top 40:

First one is from February 2009 till Friday, September 4th, 2009. It is easy to notice that there is strong and obvious trend upwards from low that was made on March 3rd, 2009. Two black lines are parallel, making channel that was tested twice at the bottom and twice at the top. Also, we can see as well that there are some negative divergences that were developed before recent drop which was 7 days long with 6 red days and 1 green day. In the mean-time some hidden divergences developed on Stochastic and RSI. (Hidden divergences are when indicator makes lower low and price makes lower high.) Both of them are shown with green lines, with one that was on August 17th, 2009 and another that was very recent. These hidden divergences usually point towards another upswing on Top40 in weeks to come.

The other chart shows bigger picture for Top40. Starting from mid 2005, we see strong move up; then strong move down which is followed with trend that started in March 2009. This chart is telling us why market is so reluctant to go higher: There is a massive resistance around 22700-23000 (thick red line) which was tested 11-12 times from bottom and top (from December 2006) and it is coming into play again.

Looking as first chart, it is clear that area around mentioned line was tested so many times in last few days.

Of course, the most important is to see if that trend line gets broken. If it does, market will go up strongly and get to 24500-25000 area fast. However, if market decides not to go over resistance, then we will have big pull back that can take us all the way down to 21000.

In both cases, J200 will resume its direction shortly.

Trade with trend!

Long term success

From a very young age, we are ingrained with a powerful short-term reward system. We are incentivized to eat on day one with the reward of satisfying our hunger. Such immediate gratification teaches us to always eat when we are hungry. As we began with our education, we were rewarded to learn with grades in mind. And grades, we soon realized, yielded the reward of approval (and love, I suspect) from parents, teachers, and peers. We would study non-stop for days to take an exam, with the assurance that we will receive a grade within a week. As we entered the job-market, a day's work was rewarded with a monthly salary. In many cases, an immediate commission was rewarded for each sale - or aggregated into a bonus at the end of the year.

So, how all of this reflects on trading?

Very small percentage of people makes it in trading and my personal opinion is that most of the people who were bumped out of this game have placed short term rewards in front of the long term goals. Most of the people will take small profits instead of letting them go, just to be satisfied with their short term reward. They will keep losers for much longer then they should because they will not be rewarded if they close them early, so they chose to hope that positions will probably swing back to positive territory. This approach is absolutely wrong as in trading one must keep winners as long as he/she can and cut losers very fast. Only by doing this one has a chance to make it in this game. Problem is that there are just a few people who understand this and that is the reason why we have so many losers in trading game. But, I guess, this doesn’t apply only to trading – it applies to everything around us. Only few people make it in big league, starting alone simply because they were not satisfied with their salaries at the end of every month. So, they took bigger risks and started their own companies.

Trader who is just starting with trading should encounter many setbacks during which he/she must always keep long term goals in his/hers head. Short term reward will be so tempting (at the beginning) to take profit and to break system rules when you are in good trade. That’s when your mind must work towards achieving long term goals by following/respecting trading system, money management and trading discipline as long lasting success will simply wait at the far end of this endeavour.

Trade with trend!

Keeping Journal

“If you don't know where you are going, you will probably end up somewhere else.”

Laurence J. Peter
US educator & writer (1919 - 1988)

If one wants to be good trader and if one wants to make it in trading field, then one should keep his/hers trading journal. This is second step for every developing trader (as well as for established traders) and trading journal is to be created immediately after trading system with positive expectancy is in place.

I would suggest that one should have not only one, but TWO trading journals. First one should be the journal where one records all trading metrics - position, sizing, profit/loss and any other metrics that one can think of. Second journal should be the journal in which one will record one’s thinking, emotional state, etc. That second journal should carry honest information on how did one feel when trade was entered; how did one feel during the trade; what were the matters of discipline in terms of closing trade and disobeying trading rules; and anything that comes to your that will help you maintain your positive thoughts/actions in place, while providing feedback if something (that is not that good) should be corrected.

Both of those journals should be reviewed often - how often it does depend on one’s trading strategy: At lease once a day if one is intraday trader; every week if one is swing trader or once a month if one keeps his/hers positions over longer periods of time.

Please note that attached picture represents what I’ve came to after six years of trading. Shown example is trading journal in which trading metrics are recorded and please fell free to change what you want, but keep in mind that with more metrics you have more details to focus on in order to fine-tune your trading. Also, please feel free to send me e-mail and I will be happy to share this form of trading journal that I’ve designed in Excel 2007, which has some new features.

Top right corner shows T and F formulas, which are, as statistical formulas, very important for your trading.

For your system to be good, T (field BQ7) must be higher than 1.6. Just be aware that T formula is function of the number of trades, so more trades you have better you can judge your trading system.

F (BQ8) formula is something that is called Kelly formula and determines how much money (per contract traded) you need in your account to avoid risk of ruin. For example, if you have R100.000 on the start of the month you can trade R100.000/(R15.000+R13.661) and that is exactly 3.79 contracts. That number is shown in filed BQ43 .

Most of the fields are updating automatically so you should just put new trade in and check them from time.

In order to read full paper on T and F formulas, please visit:

http://www.verticalsolutions.com/notes/intro_to_testing.html
http://www.verticalsolutions.com/notes/simple_tools.html

The second journal is as important as the first one, but for that journal one should use blank peace of paper and keep his/hers thoughts – it is amazing what one is going to find there after few months of honest recordings.

Trade with trend.

When you have trading system

In my recent blog post I’ve stated that first and the most important step in trading is to have trading system, which matches your personality when it comes to instrument which is traded, gearing, time frame, intraday or swing trading, etc.

Let’s imagine that you‘ve done everything possible to find data supplier; you have tested many systems over different time frames and thorough different market conditions. At the end, finally, you have found something that you like and as all is looking good, the question is: What’s next?

Of course, you must find broker which you need to use in order to trade instrument(s) you are willing to trade. For my liking, broker must have online trading platform; over the phone support in cases when platform or your Internet connection are not working, and, of course, the most important one – BROKER MUST BE REGULATED, ideally with your money staying in third party account, which is usually some of the big banks. 

All in all, after you open your account you should deposit money and start trading. Yes?

NO !!!

This is where most of beginners make first mistake. After one has an account with broker which provides online trading platform; after trading system is in place, one should start to paper trade system in live conditions for, at least, 3-6 months, subject to time frame used, which shorter time frames (tick, 1min) asking for minimum of three months of paper trading, while longer time frame systems will ask for more practice time, if one assumes that longer time frame system is going to generate less trades per month than, let’s say, system used on 1min chart.

Main reason to paper trade system which has proven (during test phase) to be of your liking and profitability goals is that, both, beginners and seasoned traders should get experience and “feel” for trading system. Some of the questions that one should get answers for through live paper trade are: How a system behaves in the different market conditions? What it does when market gaps against the position? How it reacts to foreign and local news? Of course, these are just basic few questions that one can’t get answer for by just looking into numbers thrown by his/hers testing program.

In addition to all mentioned one should start trading like real money is on the line - With journal in which all entries and exits are recorded live with: corresponding dates, time, profit or loss, weekly and monthly results and any other measurement that comes to one’s mind. 

Just as peace of personal experience – boredom of paper trading and feeling of missing money making opportunity will definitely settle in, but your job as trader is to brush it off. Also, please note that for some serious statistical calculations you need to have minimum of 400 trades recorded during paper trade phase. The more you have - the more accurate results are due to general rules of statistics which are pointing to relation of sample size, margin of error and level of confidence. 

Simply, by paper trading, among other benefits I’ve mentioned above, you will get more chance to understand your system and your emotional reactions to it. Also, paper trading in live conditions will teach you DISCIPLINE which then you need to bring when money gets on line, as you will be in much better position to stick to the system, once you start trading it and when system hits some rough patches, that could be reversed before you know it.

Finally, with good trading system that you paper trade in live conditions and with numerous trades that you have collected, you are going to be in better position than probably 95% of people (didn’t want to call them traders) that are starting on stock exchange.

Trade with trend.

Is trading gambling?

As I was at the very beginnings of my trading endeavor, I had many of my friends saying something along these lines: “It can’t be done!”; “You are going to lose money.”; “It is gambling and nothing more!”. 

Five years later I am getting various questions from the beginners and one of the most frequently featured question in regards to trading is if, eventually, trading is being just another form of gambling. Through this Q&A involvement I’ve also realized that, somehow, from my experience, wives of successful people are the most skeptical about trading. 

Looking for outside of trading arena, I assume that trading might and probably does look like gambling. On another hand, by being a trader for half of a decade now, I know what the difference is between gambling and trading:

Gambling is gambling for gamblers only! So, when one steps in casino and when he/she places money on the table or in the machine, that’s when one becomes gamblerer. At the same time, Casino/House is involved in the process and the question I need to ask is: Do you consider Casino/House to be gambler too? I shall say no, because Casino/House has exactly calculated odds and mechanics of winning: Simply, every casino in the world will earn exactly 55% of every coin that one places on table or in the machine. Somewhere and sometimes, casino is going to earn every coin that gamblers or bored tourists donate and sometimes and somewhere casinos are going to pay somebody millions, but on average, over long run, they are going to earn 55 cents out of everything that was used on the tables or machines.

Trading is kind of similar. Our job is to turn ourselves into Casino/House. Sometimes, we are going to have big winners; on other occasions we are going to sustain big loses (within our stop-loss levels or even more in unfortunate black-swan events); while most of the time winners and losers will be average. Finally, when we add all of this together at the end of every day, week, month or year, one should make more than he/she lost. 

Logical follow-up question is how to become Casino/House?

It is very simple – We need to have trading system/approach with consistently positive expectancy; sound money management rules and we need to be able to consistently execute our trading and money management rules. If one would check Casino/House when they pay out, let’s imagine, one million rand jack pot and if one takes that single event and judge their business sustainability, then chances are exactly 100% that business will not be sustainable for longer period of time. The same is with trading - If one measures his/hers trading by looking at losing trades only, or after losing stint, as an example, of five trades, then one would guess that business is not sustainable anymore. What actually matters is to check your trading business after X number of trades and to understand if you are making money or not.

If one doesn’t know what he/she is doing, then we are talking about gambler in trading or, in deed, in any other field. Let me be free to even more stress my point - in life as such!

When/if you become casino, then trading is going to be easier.

Trade with trend.

How David Beats Goliath

Trading is the game in which Goliath and David are consistently fighting: On one side we have institutional traders, mostly banks, with all computing power of the world; with best quants on the world; with guys that are paid millions of dollars to make decisions. On the other side, there are small guys, operating in small rooms, armed with one or two PCs and Internet connection.

If you face and ask any of these Goliaths if there is a way for David to beat them consistently and survive in trading game, they would probably simply say that such path doesn’t exist. Is there truth in it? For sure there is! Big institutional traders think that small retail trader cannot make money consistently enough to survive. (I guess, statistics is on their side too.) I kind of agree with such thinking, but I would say that retail traders can’t make money if they are to play the same game that institutional traders are involved with.

History is showing us many examples in which David beats Goliath and one simple recollection from the top of my head is from the world of sports - as small teams do beat big teams often enough. How they do it, and how retail trader can make money in the game where his odds are much smaller than odds of big guys?

I believe that first and most important decision is not to play the game in a very same way institutional traders play it. They move millions or billions in one transaction. Retail traders don’t have that capital, so there is no reason for massive movements to occur. Big guys make decision based, mostly, on fundamental information - small guys don’t have to do that. Big guys must buy newest and best performing PC systems every few months, while small guys don’t have. Big guys must pay massive salaries to all those cleaver guys working for them - small guys don’t have to fork out fat pay-cheques at the end of every month.

Even though big guys have big advantage, they still have more than few disadvantages stacked against them. So, don’t worry what institutional trades are saying and simply go and find a way to attack them when they are the weakest. And then, just take portion of their money.

Many wars were won by smaller and less equipped armies and numerous underdogs won in sporting events when nobody gave them a smallest chance of winning.

It was done, it is done daily and it will be done as long as we are around.

Trade with trend.

Tour de France

You must be thinking this market is making me crazy: What Tour de France, the most prestige bicycle race in the world, has to do with trading?

I shall say: It has much to do with trading. It is very nice business and, for that matter, trading lesson could be learned by watching Tour over last two weeks: It's very difficult to improve your performance on the downhills. 

Yesterday we had one of the stages with many hills, followed by many downhills. Best riders, including Lance Armstrong, were pushing hard uphill, making their time difference grow and then they would just fly downhill being more relaxed and just keeping their advantage intact. Simply, the biggest portion of leaders’ advantage was made on uphills. 

So, we are hitting some sideways market and that’s when system like ours is not to produce stellar results. Not that we are losing money, but net winning number of points dropped substantially when compared to historical average of the system’s performance in various market conditions. Simply, we are in period when trades that were few hundred points in profit are closed flat and trades that were green get closed at the stop loss level. All in all – it is very frustrating period for trend followers.

However, we are on the uphill section of our trading, so we must work, learn and find better ways of trading. Hills are where all work is done - When trend develops, downhill section of our trading will start and that is when maybe 2000 points, maybe more, will be made per month. 

I believe that most of traders spend their days looking forward to those rare moments when everything goes right. Imagine how much leverage one would have if one spends his/hers time maximizing those common periods during which everything is not absolutely smooth and easy.

Trade with trend.

Trading system

I’ve exchanged some emails with readers of this blog, so it looks to me that some information was wrongly interpreted. I would like to use this post to clear things up a bit:

Trading system is one of three important components of one’s trading and I believe that we start our development with trading system which should be foundation of our success. 

Three components of trader’s development:

1. Trading System

2. Money Management

3. Discipline/Psychology

As I stated above - trading system is the first component profitable trader has to have under his/hers belt. Without profitable trading system one will not be able to make it, simply because systems with negative expectancy DO NOT make money.  

Finding proper trading system for each person is difficult task as system that suits me, might not suit somebody else. We all have different personality and it is absolutely OK not to have same interest in life and same trading systems. But, what matters to all of us: System must deliver, as it must have positive expectancy!

Expectancy: 

(Average Win * Winning %) - (Average Loss * Losing %) > 1

or

(Average Win * Winning %) / (Average Loss * Losing %) > 1

As there are thousands of blogs/web pages about trading systems, let’s simplify things a bit: 

Systems are either mechanical or discretional. 

Mechanical systems are driven by strict rule(s) and they trade every time condition(s), defined by rule(s), is (are) met. Some typical mechanical systems are: moving average crossovers, moving average penetrations, price brake outs, etc.

Discretional systems are designed around some of trader’s observations. As an example: Trader notices that if market does not make new high of the day in first hour of trading, then there is good probability for the market to fall. Then, in each and every single situation of this kind, trader might use news, technical or fundamental analysis, etc. to accept or reject assumption that market might fall and with all of that in mind he/she will make his/hers decision.

Systems could be designed around different time frames and some are to be used intraday, while other will hold position overnight. Simply, there are numerous systems - in many time frames, based on many different criteria, but all of them must have one common quality, to even be considered by a trader: Systems must have positive expectancy. 

I shall recommend one thing here: When you design your system, please write down all criteria for execution of trades. If you don’t have a system on paper with everything stated nice and clear - you simply don’t have system, as what you have are just words that might-work-or-might-not when money is on the line.

Trade with trend!

Taking a loss

Why many people are not making it in game of trading?

My guess is good as yours about this, but I would like to point that I personally know few traders and investors who are very uncomfortable with taking a loss.

Losing traders often bring a measure of perfectionism to their work, as these trades create some extra pressure. They equate a good trading day with a profitable day. No, no, no! A good trading day is one in which you have followed your well-researched plan with focus and discipline. Good trading days, over time, will generate profits if your trading plan and risk & money management make sense. But, the uncertainty of the markets means that even the best laid trading plans can go awry. 

In the short-run, you cannot control your profitability.

You can control whether or not you have good trading days, which will generate profits over the long haul—if you have adequately researched your strategies.

The perfectionist trader equates taking a loss with experiencing failure. The loss thus sets up a rash of negative internal dialogues and subsequent trades born of frustration. A more realistic trader realizes that there is a degree of uncertainty built into the market and that losses are simply a cost of doing business. The goal is to limit these losses as effectively as possible, not exclude them or become preoccupied with them.

System which is used here by us to trade ALSI is always in the market: It will stop your position and, at the same time, it will give entry for position in opposite direction. So, we should not worry much about stop losses, as price levels and chart structure are there to act as stop loss for every trade we take.

If you are using different system, you can base your stop losses on:

1) Price – when certain price level is broken (to upside or downside) you close your position;

2) Time – this one is for intraday traders who are closing their trades at the end of the day w/o any consideration;

3) Indicator – if your indicator clearly suggests that your position is not correct. 

Once stops are set, they should be mentally rehearsed while the trade is on, as a way of ensuring that they will be honored. A good loss is a planned one; the only true market failures are the ones that are unintended.

Discipline is at the heart of exemplary trading: When you set, rehearse, and honor stops, you are building that discipline and using your losses to reinforce the qualities needed for success.

Successful traders plan for “failure”; unsuccessful ones fail to plan.

Trade with trend!

This blog post is dedicated to work of Dr. Brett Steenbarger.

Realistic goals

I believe that almost all of inexperienced traders came to trading field with very nice and defined goal: TO MAKE MONEY.  

Is goal of making money in markets realistic or not?

If one just has started with trading, then this is not even remotely realistic goal. Same would be to ask first year medicine student to perform open heart surgery or to ask somebody who just started going for music lessons to play some complex piece by Mozart or Beethoven. 

What would be realistic goal for beginners?

Short answer: Their goal should be to survive for as long as possible.

Long answer: To be around in 10 years time.

Above is table that shows how one could progress as trader. Assumption is made with ALSI trading example in mind and in this scenario there is enough start-capital to trade one contract. (Just a reminder: That start-capital should be, at least, equal to two times margin requirement.) Let’s assume that during first year of trading one makes no profit or loss. After 12 months one improves and learns something about trading, so for the following 6 months he/she makes on average 100 points per month. Time is passing and our novice trader manages to survive for 30 months since first trade was placed and he/she now knows how to trade and he/she is making 1000 points per month on average. This is what the table below is showing us - how the money, despite we are looking into very conservative scenario, is growing exponentially and why is important to consider this as marathon run, as trading is definitely not a sprint. 

Numerous novice traders come to trading and dream about millions they are going to make after first few trades. Sometimes, one could be lucky and make it in a very short period of time and with little effort, but same goes for lotto. 

This is not game of luck - it is game of probabilities. 

* Required capital – As of July 9th, 2009 margin amount equals to R 15,500.00.

If you need an Excel file that you can play with, please contact me by mail or post a comment here on blog.

How to find trading system

How to a find trading system is a question that I’m asked very often.

There is an ever going quest to find a good trading system and once you have one that is making money, you will probably try to get an even better one - by trying to improve existing one and by squeezing even more points out of it.
Web is full of trading systems, sold for $99.95 or so, with promises of making you million or three over next month or so. I would like to ask - If it is so profitable, why the owner would sell it for that amount, when he/she could trade it and retire after few months.

Finding a trading system is a time consuming process. One should have reliable data for market that one plans to trade and software with back testing capabilities. I use Metastock for back testing (same software is used for charts) while for ALSI data feed I am subscribed to local data provider - Hisat.

Metastock has very nice back testing capabilities and it comes with approximately 40 trading systems, ranging from simple to very complex. All systems are explained and focus is on what they are using as signal and what is being done with optimization parametars, with possibility to test across array of numerous time-frames, stop-losses, etc. So, it is possible to input any parameter that you can think off and see what the outcome would be.

There is somewhere on the web a trading idea to optimize some trading system by going only long after winning trade and short after a loss. So, absolutely anything is testable and tradable.

When it comes to data that is to be used for back test, one should choose market and time frame first. Also, one should have idea what one wants to trade - ALSI futures or white maize maybe; maybe gold; pork bellies or government bonds. There are hundreds of markets out there, so one should be wise when choosing one. There is no need and urgency to go for main-stream markets, but for one that is liquid and relatively easy to trade. Time frame could be changed, as back test will allow you to look into all time frames you like - from 1min to weekly chart.

I would recommend starting with some trend following system, i.e. moving average penetration or crossover. After one finds system that has positive expectancy, next step is to paper trade it in live market conditions. One should record all trades - every winner and every loser and I would recommend for that trial phase to last for at least six months. System must prove itself over as many trades as possible, with some bare minimum of 400 trades. Only after all these steps are completed, I would recommend that one should go in with real money.

This is just for starters. From there on, one should develop as a trader. System is only 10-20% of success, as there are many other factors one should work on after system with positive expectancy is in place.

Trade with trend.

NOTE: Positive Expectancy = (Average Winning trade x Winning %) / (Average Losing trade x Losing %) > 1

Where to start from when it comes to trading

I often get a question from various people about list of books they should read before they start with trading. My short answer is always the same - As many as possible! 

Here is a list of several books that I like a lot. 

Psychology of trading:

(Dr. Brett Steenbarger is a must – With all three books written by him.)

The Psychology of Trading

Enhancing Trader Performance

The Daily Trading Coach

Trading in the Zone by Mark Douglas

-------------------------------------

Technical Analysis:

Technical Analysis Explained by Martin Pring is a must

The Candlestick course by Steve Nison
-------------------------------------

Other: 

Reminiscences of a Stock Operator by Edwin Lefèvre

Market Wizards by Jack Schwager

Trading for living by Dr Alexander Elder

Come into my trading room by Dr Alexander Elder

These books are just to start with. When you are done, there are many other more sophisticated books discussing different trading topics.

Trading is a performance field in which one must learn every day. Even after almost six years of successful trading I’m still buying books and looking for new ideas. If one wants to be successful in trading, then that one must love and appreciate trading as endeavour - Just because of that love and appreciation one should consistently try to enhance his/her knowledge and skill. 

Isn’t that case with anything you do in your life?

Trade with trend.

Trading full-time

Few days ago I’ve spoken to friend of mine, who wants to go full-time into trading. He never traded a thing, but he wants now to do something with his life and trading seems to be something that he might be interested in. He does have some money, that he could use to trade some market and there is a wife who will support him for some time. He asked me what I think about it and my straightforward answer was that this idea would be financial suicide. 

If one wants to go into trading full-time, I would highly recommend interested person to spend some time trading while still having second job and, for that matter, second source of income, which should be stable, not derived from stock exchange and income that is sufficient enough to support his/hers living expenses, without need for money to be taken from trading account. Such arrangement would allow our new trader something that is extremely important - Trading would become activity without pressure of making money. 

This duality, in my humble opinion, should last for at least two-three years. During that time one should discover what are (for his/hers psychological and emotional traits) proper trading instruments; acceptable time-frames; comfortable trading systems and proper risk management. 

What to do after three years?

After 3-year period is over, one should have enough money in the bank account to support him/her for at least a year. Of course, some form of passive income that will cover life-expenses/bills should do too. 

Simply, if one doesn’t have that available, then that person should keep job until all is in place. One of major and first problems that new traders encounter in their new trading endeavor is fact that they HAVE TO MAKE MONEY - and good chances are they will not do it. 

Best trading comes when you don’t have to make money, 
as then almost everything comes nice and easy.
Trading under pressure is definite way of going down and
losing all the money donated to trading account.

My opinion is that, for full-time trader, there are only two types of trading: One is intraday, where one opens and closes positions during very same day; the other one is swing trading where you have your position for few days, including overnight periods while market is closed. Off course, trading has to be with some leverage - so futures or options are to be considered. For full-time trading in South Africa, I believe the best option is to go with ALSI futures contract, as costs of trading are minimal and there is more then enough volatility and liquidity for intraday or swing-trading. 

Is it possible to make a living from trading? 

Yes it is. Some of my friends who are traders are doing this successfully for many years. They don’t have to sit in traffic all day long and to fight their bosses almost every day. They job is to press buttons. 

When you get to that point, trading is just about pressing buttons and watching sreen(s).

Trade with trend!

Leverage for beginners

Liquid Trader commented on my last post and his observation motivated me to write something about leverage for beginners: Should they use it, and, if they should, how it is to be used? 

What is leverage? According to Wikipedia: “In finance, gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Deleveraging is the action of reducing borrowings.” 

As an example: The most common way of leverage is buying investment property. Simply, you borrow money from the bank to buy house; you pay your bond and all capital appreciation is for your benefit.

Leverage is widely used in trading and stock investing: Futures, options, warrants (widely used options in South Africa), contracts for difference, and the mother of all - FOREX. Many beginners are attracted to possibility of putting small deposit and having big exposure. In Forex trading normal leverage is 1:100, but you could find one with 1:200, 1:500, and even 1:1000. Futures are around 1:10 and options, at least in South Africa, around 1:5. 

Should one start with leverage and where? From my personal experience I should say yes. Please note, I never traded any stock in my life, as I’ve started from day one with warrants. Of course, these were with small gearing of 1:3 at maximum. As I’ve learned ways of using leverage and as that learning process lasted 2-3 years, I moved into trading waves with gearing that could go as far as 1:100. Currently, I trade ALSI futures contracts and gearing there is in the region of 1:10. For me, this was natural way of following steps in order to get where I am now. 

Leverage can be very dangerous if one does not know how to use it. I believe it is extremely painful to watch account going dry very fast, as the higher the leverage, the faster money disappears in front of your eyes. 

On the other hand, leverage is very powerful tool to maximize your profits, and such tool comes with price tag.

I would recommend all readers of this blog to first find out if future trading is for them. If yes, then entries and exits should be paper-traded for at least 3-6 months, in order to build confidence in system that is traded. Only after that, one should start trading it and, at the beginning, it should be done with smallest possible leverage. Maximum that I would recommend, for first year or two, is leverage of 1:3. As time passes-by one could increase leverage, but be cautioned and even afraid of going mad with it. Use leverage responsibly and you will reap the benefits.

This is marathon run. It is not sprint. It is important to be here in 5 or 10 years from now. If you manage, you will place yourself in category of very few. 

Trade with trend.

ALSI margin, leverage and a bit more

Question has been raised (here on blog) about money management, position size and leverage when trading ALSI futures contract.

Let’s start with basics:

If you want to trade futures, you have to put good faith margin down. At the moment, margin for ALSI futures is R15 500 per contract and it is a security deposit that is held by your broker, clearing house and JSE/SAFEX. For each contract that you want to trade, you have to put down additional R15 500. Margin is payable back to you when you close your positions, but your account will be credited/debited with amount equal to profit/loss that you make every day. (Even when you don’t trade, but you have open position, Market-to-market (MTM) value will be taken in consideration and your account will be credited/debited for MTM movement.) For curios readers, experienced in trading stocks - this is different from trading stocks, as there you would, let’s say, buy certain number of stocks for R R15 500 and when you sell your holdings you will have profit or loss reflecting in your account – one day, one month or even later, subject to how long you hold onto your stocks.

That brings us to second point. You must have more than R15 500 in your account to trade ALSI futures contract. These additional funds are for day-to-day movement. You could, theoretically, start with R15 500, but in that case your first trading day has to be a positive one as you have to stay afloat at all the times. Otherwise, your broker will phone you in order for you fund your account to meet margin requirement of R 15 500 per contract traded. If you don’t do that, they will close your position and use portion of margin to cover your loss.

Now, how much do you need in your account (in addition to margin required) to start trading Alsi contract? This is difficult question - and there are many answers. Ideally, you would like to find fine line between having sufficient funds in your trading account, but not too much, as interest rate that you get on this money is not massive. (There are numerous posts on internet on this subject.)

From my experience and considering system I trade, for which entries/exits are given on my twitter page, minimum to have per contract equals to TWO TIMES required margin amount. Simply said, to trade one contract you must have R31 000 in your trading account. More conservative stance is to have THREE times your margin. Again, this depends on market volatility, as if market moves faster - bigger amount is needed per contract traded. (As market conditions of the second half of 2008 and beginning of 2009 dictated - I guess even three times margin per contract was not enough). As an example, if you have R31 000 available per contract traded, you can survive market going 1550 points against you in one single trade. This is approximately 7% of ALSI price as I type this. With R46 500 per contract you will be protected from 15% ALSI drop and that could, probably, save you from being wiped out in case you were long when September 11th happened.

In order to calculate leverage for ALSI contract, please use this formula:

Leverage=(Current ALSI Price*10)/Margin

So, at current level of 20200 gearing for ALSI is 13.03 times. 

Hope this explains difference between trading ALSI futures and any other stock listed on Johannesburg Stock Exchange (JSE).  

Trade well.

One trade at the time

I was reading a book the other day, and I’ve found very nice quotation that reads as follows: 

“We are building one relationship at the time.”

That made me think about trading and how we could do the same in our endeavor of reaching our goals in trading.

Many beginners start trading big from day one. They also start with thoughts of millions that will just pour into their trading account and simply - all they think of are thousands of points that will be earned by simply pressing sell-or-buy-button. Unfortunately, it is not that easy.

Getting to the point where you start to make money consistently in trading is probably one of the most difficult, if not, the most difficult endeavor in your life. There are many reasons for this and I will address them in post that will follow, but for now, I would like to make a point that the most important trade that you will ever experience, in any fragment of time, is the very trade that you are at that particular moment. Simply, trader must be absolutely focused on current trade or trades and all important elements of that trading decision: entry, exit, stop-loss, risk and market behavior. 

Let’s assume that you are about to enter the trade at this moment – That is your most important trade that I am talking about: Trade that you are preparing for, executing, watching market when you are in trade, exiting at the end and recording all important details in your trading journal. And, of course, when you are done with that trade, then it is time to find and execute a new one and that’s how our trading lives go on.

So, if you want to make it in this game - concentrate on only one trade at the time, as trading success is to be reached just in that simple sequence of one trade at the time.

Trade well.

Alsi 30 minutes chart

This is 30 minutes ALSI (Jun09ALSI) chart showing channel that was developed from middle of April. Bottom of the channel was tested four times, while top, as well, was touched four times, with one false break-out.

Currently, ALSI (Jun09ALSI) is trading very close to the bottom of the channel again. There are two options here:

Market will bounce and will try to retest top line 

or

bottom line will be broken and market will sink a bit more. 

I prefer second option and if it happens there is a possibility for ALSI (Jun09ALSI) to retrace all the way down to 19300.

Trade well.

Chart is always right

I often get a question about other markets I follow during the day, with goal to predict potential reversal points for ALSI. As far as I see, beginners are doing exactly this - They move back-and-forth between Dow futures, S&P futures, FTSE chart, ZAR chart, US market news, Bloomberg, CNBC, etc. trying to find a reason, or two, for particular market behavior.

So, let’s get this right first time: All my decisions about entries and exits are based only on ALSI chart and nothing else. Chart always knows where it wants to go and why it wants to go there. Our task, being traders, is not to know why market is going up or down, but to jump into developing trend, and ride it as far as possible.

This morning I left a link (on twitter) to some external blog that explains what the market is doing in US. Usually, I check several blogs from US every morning before our market opens. There are very clever traders out there and these traders are preparing useful charts free of charge. These charts I check just to see, in context, what we can expect as ALSI gates open. And, at the end, when our market opens, there is only one valid chart and that is the chart you trade. 

If you are starting now, I would suggest you to concentrate on the chart that you are trading. Everything else is just noise that will contribute to mismanagement of your entries and exits; that will push you to overtrade; and make you skip good trades and get into bad ones.

Trade well.

Fear of losing money

Anonymous commented to one of my previous posts which treated the subject of what is that makes good trader and that comment inspired made me to write something about fear of losing money – together with greed, this fear of losing money is one of two most influential emotions which run one’s trading and/or investing.

Through our life, we all were, mostly, taught to go into the world and be always right about everything: To get good marks in school; to be good kids; to get into university, etc. All in all - we were never taught what to do when we are not right and how to handle situations when something, that opposes our beliefs/wishes, is happening. Unfortunately, current schooling system is still not designed to teach our offspring what to do in such situations, so they are going to, probably, follow our path.

Let’s assume the following: One day you start to trade, as your colleague told you about one guy, whom he knows and who made some money. Inspired, you’ve purchased and read books that are supposed to show you how to make money. Brokerage account is there and you are buying your first shares, based on hot tip by friend’s friend. Market starts ticking in your favor for first few minutes and then, suddenly, some bad news hit the market. Selling is coming in and your recent acquisition, in a blink of an eye, turns against you. Fear of losing money just kicks in and you don’t know what to do, as nobody ever told you what to do in this kind of situations. You decide to play it safe and in deed you phone your friend and he tells you to hold position, as this is just correction after good run. Next day comes and your position is deeper under water. Of course, you decide not to close your holdings now, because you are afraid of losing money and you stay in, with belief that this is just a temporarily pullback in price and all of this is just a “paper-loss” to you. Time goes by and one morning you face the fact that your capital is down by, let’s assume, massive 20 or 30%. 

I believe that fear of losing money is the most influential emotion you will experience during your trading career and it is very difficult to explain how one should handle it. As I see it: 

- You should have trading system (mechanical, semi-mechanical or discretional) that makes money in the long run;  

- There must be defined entry and exit signals for every trade; 

- Your trading discipline should be in charge, allowing you to follow your system without asking too many questions.

By having all three in place, you will know in advance how much money you are going to lose if trade goes against you: Stop loss will be pre-defined and if that price level is touched you will close your position. For me, trading is getting easier when I know why and how much money I am risking on each trade. 

This is one simple recipe that should help you eliminate fear of losing money. Of course, do not expect that it is going to work first time, as it takes time to get there: Someone gets it sooner, someone later and someone never!

If you are beginner, work on processes of becoming good trader and forget about money for now, as it will come later. One of the first steps is to eliminate greed and fear from your trading and I wish you all the best in that crutial process.

Trade well.

Where this market will take us in next few weeks

Today T40 index made new high for this year and it is currently trading 9.13% up for the year. Together with Top40 (J200), another index that I closely monitor (J154 – general mining index) broke up. Anglo American and BHP Billiton, as two biggest mining companies in South Africa, are part of J154 and I believe that this index is of great importance for the behavior and performance of J200. 

Two charts above are - 60 minutes chart for J154 on the top, while 60 minutes J200 chart is at the bottom. As you can see on J200 chart - thick red line was acting as resistance from the beginning of the year till approximately May 11th. J154 was lagging and finally broke same resistance only on last Friday (May 29th). We can conclude that only now, after J154 had confirmed break out, we can expect more of the movement to upside.

Do not forget that reverse head and shoulders target is around 23000 for J200 index - There is still about 1800 points to be made or almost 9%. 

J200 index can be traded with ALSI futures or Satrix 40 exchange-traded fund.

Trade well!

What makes good trader?

What makes good trader good? This is the question that I’ve asked myself on numerous occasions and so many times I couldn’t come up with an answer.

One could ask what makes good soccer player or good basketball player or, for that matter, what differentiate good participant from bad participant in any performance field?

Traders, who just have started, would probably say that it is good system what makes good trader – Give me the system that makes money and I will make money!

Traders, who are close to mid-point, would probably say that system and discipline are required.

What I’ve concluded after more than five years of trading is the following:

Hard work makes good traders, same as hard work makes good soccer or basketball players. Gary Player, one of the best golfers ever, said: “The more I practice, the luckier I get.” I believe that this simple and effective sentence explains what you need to do in order to succeed in any performance field. 

If you don’t want to learn how market works or what moves market up or down; to learn about discipline, indicators, trending versus range bound markets; to spend many hours watching for different pattern setups; to scan through different time frames and many other things, than you should not pursue trading. Rather find niche in which you will love to spend hours learning and improving. Probably, you will excel much more in what you love, then in something that is hype and what your colleague at work might have told you about.

But, if you want to spend your time immersed in the art and science of trading, then don’t forget one very simple rule: This is marathon run - it is not a sprint race! First two or three years you are going to spend learning and trying to get something out of the market, but most probably you will end up frustrated more often than not. Keep it going and one morning you are going to wake up and complete picture will be there waiting for you. And when it happens, don’t be fooled, that will not be the end of the road and money will not just fall into your lap after every click of the mouse button – On that very same morning, when you realize what you really want from trading and how you want to trade, new and even more exciting stage in your development as trader will commence. During that stage, you will have to keep up with new traders who will rush to market full of ideas, hungry to make money, as they will be very akin to what you were, in days when you were completing your first trading steps.

Path to success in this game is very long and very difficult - When you arrive there, reward is going to be massive!

I'll see you when you get there if you ever get there ...

Trade well!

How it is going to work

One of the main ideas behind this blog is to share information on ways of trading ALSI futures contracts. So, let me explain, early on, how this blog is going to work:

Before we start, I would like to provide just a little bit of info about myself –

I’ve started to trade in October 2003 and, as futures market in South Africa wasn’t very developed, I’ve decided to go with Warrants. It was all about ups and downs at the time and only two years later I was able to make some money and, most importantly, I’ve succeeded in keeping it long enough. Prior to that milestone, my trading was simple routine (profit wise): making money-losing money-making money-losing money… If you ask me what made that shift for me, or how I made that shift for myself, I will have to remain silent, as it just happened. Somehow, in December 2005, I woke up one morning and something just clicked in me and I’ve said to myself: “Silly me, it’s so easy to trade!”

From there on, I never looked back and with newly-found peace and success in trading (success on a very personal level), I’ve started to trade (in 2006) ALSI contracts listed on Safex and, at the same time, I was venturing in-and-out white maize and wheat trades.

At the moment, I am trading very simple system and I will be posting my entry and exit points – long before these price levels are breached! System is trend following and it is based on 30 min ALSI futures chart, on which I’m trying to exploit directional moves (of the market) that are lasting , on average, 3 to 4 days.

I’m, as per system, always in the market - I just reverse from short to long position and vice-versa. In order to share my trading system/approach, I’ve linked this blog with twitter, where I will post few comments during the day and where my entry/exit price levels will be shared.

I hope to utilize blog for two-way communication, as well as a space where I can post some interesting charts.
Please look for five newest twitter comments (that are on the right hand side of the screen) and if you wish to follow me there, please go to: http://twitter.com/ALSITRADER

All in all – blog & twitter are just in trial phase for now and I would appreciate your suggestions or comments.

I hope you will enjoy my live trades and that together we will learn more on art and science of trading.

Trade well.

Reverse head and shoulders on Top40

Top40 end of the day chart made reverse head and shoulders and broke neckline on 18th May. Target for this move is 23000 exactly what was previous support now resistance. Neckline of head and shoulders was in the same time 23.6% Fibonacci level for the drop from all time high on 22.May 2008 to low on 20.November 2009.

Reverse head and shoulders are usually nice pattern to trade but don’t forget possible back test of the neck line around 19700. Neckline was tested 5 or 6 times over last few months so it should be solid support now.

How I see this playing out is market will hit resistance just above at 20850-21000 then retrace back to retest neckline around 19700 and up towards 23000.

Break above 20850-21000 would signal medium term buy signal based on Dow theory.

Trade well.

Top40 Weekly Chart

This is Top40 weekly chart. For those that don't know Top40 (J200) is tradable index in South Africa. ALSI is future contract listed on Top40 index and can be traded on Safex. Currently most liquid contract is Jun09 ALSI contract.

What I want to point with this chart is very simple method that anybody can trade. There are two exponential moving averages 34 and 13 on this chart. Simple crossover strategy was used for going long or short.

Long 13.08.2004 - 25.07.2008 from 9675 to 25099 points.

Profit for one trade that lasted almost 4 years was 15424 points.

Short that was opened 10 months ago is 5482 points in profit.

Satrix40 is another instrument that could be used for trading this strategy.

First post

This is my first blog post.

This blog is designed to present how I trade ALSI, here in South Africa, with good success for over five years. I hope you will enjoy reading this blog every day and that it will lead you towards success in trading.

There are many blogs and web-pages around the world where people explain how to trade, what to trade and when to trade.

My focus is different: I will show you how to do it in real time, as all my trades are LIVE and I will try to post them as they happen.

Many people will ask: "If you are successful trader - Why do you post your trades? Why don't you just trade?"

Answer to that question is another question: Why some good soccer players become coaches after they retire from actively playing the game?
Maybe, for the love of the game, maybe for money, maybe for something else.

Feel free to communicate with me, as I will be happy to respond, within comments section, of every post.

Trade well.