Tuesday, June 30, 2009

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!

Monday, June 22, 2009

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.

Friday, June 19, 2009

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.

Wednesday, June 17, 2009

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.

Monday, June 8, 2009

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 


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.

Thursday, June 4, 2009

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.

Wednesday, June 3, 2009

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.

Monday, June 1, 2009

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!