Tag Archive: ATIC

May
09
2008

7 Pillars of Successful Trading

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by Martin Lee

May 9, 2008

Today, I’m sharing a few points that I got from Brandon Wendell a few months ago when he spoke at the Asia Trader and Investor Conference. Brandon is a former stockbroker, brokerage trader and hedge fund trader.

  1. Fundamental Analysis
  2. Technical Analysis
  3. Execution
    1. Ability to execute at most favourable points
    2. Confident exits
    3. Conditional orders
    4. Automatic executions
    5. Three sided orders
  4. Live data feeds
  5. Risk management
  6. Psychology
  7. Trading plan based on your capital, time frame, risk tolerance and trading style

I think most of these terms should be quite straight forward. I will take this opportunity to explain more about conditional and three sided orders.

You will probably be familiar with the basic single order. This is the typical buy or sell order that you perform when you execute a single trade. This is also the only kind of order that most traders use.

There are a few other kinds of orders that help in automating trading and are used by most professional traders:

One Cancels Other

This is a type of order where either one of two orders will be executed. For example, if I already hold 1000 shares of SGX bought previously at $10, I might have two sell orders. One that is triggered at $9 and another at $11. The $9 is the stop loss order while the $11 is the limit order. Once either one of these orders gets filled, the other one will be automatically removed from the system.

If Then

This is a simple conditional order. If the first order is filled, another order will go live. For example, the price of SGX could be currently $10. I put in a “if” buy order of $9.50 and a “then” sell order of $10.50. If the buy order gets filled, the sell order at a price of $10.50 then goes live.

If Then One Cancels Other (Three sided order)

If the first order is filled, another two orders will go live. For example, the price of SGX could be currently $10. I put in a “if” buy order of $9.50 and two sell orders, one at $8.50 and one at $10.50. If the buy order gets filled, the two sell orders will become live. Once either one of the sell order gets filled, the other sell order will be removed.

Trailing Stop

This is a single order that will move in the direction of the order. For example, if SGX is trading at $10 and I have a sell order with a trailing stop of $1, the sell order will have an initial price of $9. If the stock price moves up to $10.50, the sell order will be moved to $9.50. If the price moves further to $12, the sell order will be moved to $11. A trailing stop is useful to ride out your position in the direction of the trend.

The pillars given by Brandon Wendell are very real and practical. There really isn’t any “secret” or “know-how” that can change a person into a master trader overnight. It is the application of all these pillars and real time practice that will gradually hone and improve your trading skills.

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Apr
21
2008

Creating a Trade Plan Using Pivot Points

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by Martin Lee

April 21, 2008

One strategy that I learnt from Richard Kang during the Asia Trader and Investor Conference is on the use of pivot points to create your trade plan. This is a very simple trade plan that doesn’t require much monitoring of real time charts.

Before I go into the plan, let me first explain what a pivot point is.

A pivot point is a technical price indicator that is derived from the numerical average of the low, high and average price. Here’s the formula for calculating the pivot point:

Pivot point = (Previous high + Previous Low + Previous Close) /3

This indicator is used to predict the price direction for the next time frame and also to calculate the support and resistance level. The formula for calculating the support and resistance is as follows:

Resistance 1 = (2 x Pivot Point) – Previous Low

Support 1 = (2 x Pivot Point) – Previous High

Resistance 2 = (Pivot Point – Support 1) + Resistance 1
Support 2 = Pivot Point – (Resistance 1 – Support 1)

Resistance 3 = (Pivot Point – Support 2) + Resistance 2
Support 3 = Pivot Point – (Resistance 2 – Support 2)

Depending on the time frame you are going to predict, the respective low, high and closing prices will be used for the calculation.

For example, if you use the day’s low, high and closing price to calculate the pivot point, it can be used to predict the next day’s direction. If you are using the week’s data, then the week’s low, high and closing price will be a prediction for the following week’s price instead.

Richard mentioned that he prefers to use the weekly pivot points when he is trading stocks as a day’s data might have too much noise. For my forex trading, I prefer to use the daily pivot points. Remember a day in forex is 24 hours – this is almost 3 times the trading hours for the stock market.

Now that you know how to determine the pivot points, let’s move on to the trade plan.

The trade plan is extremely simple. The closing price is compared to the pivot point to predict the price direction.

  1. If the closing price is above the pivot point, go long for the next trade. Buy only if price dips and hits the pivot point. Conversely, if the closing price is below the pivot point, go short for the next trade. Short only if price rises and hits the pivot point.
  2. If you are long (after condition 1 has been triggered), take profit with a limit order set at R1. Stop loss level is just below S1. If you are short, take profit with a limit order at S1. Stop loss is just above R1.

As you can see from the trading rules, this plan is very simple to execute. It is purely mechanical with not much inputs or judgements required. Let’s look at one example. These are the latest daily pivot points of EUR/USD based on Friday’s close, high and low.

High 1.5958
Low 1.5711
Close 1.5814

R3 1.6192
R2 1.6075
R1 1.5945
Pivot 1.5828
S1 1.5698
S2 1.5581
S3 1.5451

The closing price is 1.5814, which is below the pivot point of 1.5828. Therefore, I will be looking for a short trade for the day.

If the price goes up to 1.5828, I will open a short position with a stop loss near R1 (1.5945) and limit order near S1 (1.5698).

The risk/reward ratio is 127:130 which is roughly equal. If you think it’s not good enough for you, you can alwasy choose to skip the trade. As it turned out, this trade will result in the stop loss being hit with a loss of 127 pips.

Some modifications to the basic plan might be possible. For example, if the closing value is very close to the pivot point, you might want to use R1 or S1 as the entry level instead. If that is the case, the stop loss and limit order will have to be shifted.

Based on the same example, I will use R1 as my entry level. R2 will be my stop loss and S1 my limit order. One characteristic of using this plan is that you will enter into trades much less often.

Another way is to use the pivot point in conjunction with the technical charts to detemine the exit prices.

No matter how you tweak the plan, be sure to test it out to determine the best strategy for yourself.

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Mar
19
2008

Stuart McPhee on Developing a Trader’s Mindset

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by Martin Lee

March 19, 2008

I kind of liked Stuart McPhee’s first day lecture on money management, so I decided to fork out some money to attend his second lecture titled “Developing a Trader’s Mindset”.

Just to recap, Staurt attributes 60% of a successful trader to his psychology, 30% to his money management and 10% to his system. Thus, this entire one and a half hours is solely dedicated to the mindset.

The core foundations to trading success lies in having:

  • The correct altitude
    • Confidence
    • Patience
    • Persistence and Perseverance
  • Having goals. As a new trader, set yourself a goal of being in the black after your first year in trading.
  • Discipline
    • Control of emotions
  • Taking action
  • Reduce distractions from TV and internet
  • Continual education through books

I became a winning trader when I was able to say, “To hell with my ego, making money is more important.” – Marty Schwartz

The reality is that most traders fail. Everyone experiences the same emotions. To succeed in trading, we need to think and act differently.

Stuart has the following advice for new traders:

  • Be humble
  • Be committed
  • Educate yourself
  • Be patient
  • Keep it simple and realistic
  • Focus on the right things
  • Protect your capital

Here’s a personal insight I want to share with you. If you think about it, most traders focus on making money (and not losing money). That is where the mistake comes in.

If you consider any professional sportsman, he always focus on his game when he is playing. If he plays well, money comes naturally as part of his reward. If he starts thinking about the prize money when he is playing, very often he will play badly and ends up with less money.

It’s the same with trading. To be a successful trader, the focus has to be on the trading. Making the correct trades. To do what your trade plan tells you to do even though that trade might lose you money. If you can do that, making money in the long run will come naturally.

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Mar
14
2008

Daryl Guppy on Market Myths

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by Martin Lee

March 14, 2008

One paid session of the ATIC that I attended was the one by Daryl Guppy. The title of his presentation was “Myth Breakers – Understanding real market behaviour“.

Market myths are commonly accepted thinking or explanations related to the stock market. These myths do not really reflect the real situation.

“Uncommon results, such as superior market returns, do not come from common thinking.”

Daryl started his presentation by listing out seven common thinking, and then explained to us each one of them.

  1. Exclusive information or technique are required before you can make money in the market.
  2. The market always goes up over time.
  3. Volume and price are related.
  4. Market manipulators, inside traders, or syndicates win and we lose.
  5. Markets where you cannot trade short are more volatile.
  6. Expensive shares.
  7. We can all be rich trading options/secret systems/forex.

Which one do you think are myths? Let us look at them.

Exclusive Information is Needed

These point was illustrated to us by having us play a game. Daryl started by showing us the chart of a stock and told us to assumed we had bought it. Throughout his presentation, we were shown the price movement and then asked to buy a decision whether we would sell or hold the stock.

Obviously, everyone made different decisions and so the profit made were different. Now, no one in the room had any exclusive information, yet some people made more money than the rest.

The point is:

Your results ultimately depends on your skill, personality, psychology and trade discipline. You don’t need a secret tool or technique.

The Market Always Go Up Over Time

You might have been told before that the market always go up over time and were shown tables or charts of indexes to prove the point. While inflation really has a part to play in ensuring that prices will generally go up, looking solely at the index can be misleading. Why?

The index has a natural survival bias built into it. Periodically, the stocks representated in the index are often added or dropped to more accurately reflect the successful companies in the market.

This means that losers are often dropped while winners added. In such a case, naturally the index will go up.

Volume and Price are Related

These are commonly told to us:

  1. Changes in price and volume are related.
  2. Price follows volume.
  3. You need liquid markets.

Using a series of charts as examples, Daryl Guppy has the view that:

  1. Volume tells us little about trend changing points.
  2. More often, volume follows price or is simultaneous.
  3. Your smaller trade size gives you an advantage about trading in low liquidity stocks.

Market Manipulators and Insiders

These sort of thing does happen even though it is illegal. But it doesn’t mean that they win and we lose. With a disciplined trade plan, we can also take advantage of such volatility.

Markets that You Cannot Short are More Volatile

Sometimes, you can read newspaper reports telling you that short sellers cause the market to go down. But really, is it the ability or inability to short that adds to volatilty?

The truth is, shorting is not the only cause of market decline. Short sales only only contributes about 5-10% of the daily turnover. Forced margin calls on long positions contribute more to price drops.

Ultimately, markets fall or rise because of market sentiment and investor confidence.

Expensive Shares

If given two shares, one that trades at $5 and another at $10, the novice investor might immediately conclude that the $10 share is more expensive. This is a big mistake.

The correct way of comparing the relative price is the compare the earnings per share (EPS) or book value per share. Of course, other valuation methods can be used.

We Can All be Rich Trading Options/Secret Systems/Forex

There are often advertisements for seminars that claim all sorts of numbers. 20% in a month. 1000% in a trade. 10,000 students, and so on.

If they are really so good, how come your fund manager missed the opportunity?

Using an excel sheet, Daryl Guppy showed us how rich we could become if we could achieve those returns. We would become richer than the richest person (and investor) in the world, Warren Buffett after a number of years.

Now, how would that appeal to you? :)

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Mar
13
2008

Richard Kang on Becoming a Full Time Trader

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by Martin Lee

March 13, 2008

Another session that I attended during the Asia Trader and Investor Conference is a talk by Richard Kang (江来泉) on “What you should prepare if you intend to trade full time in futures market?”

Richard is a professional trader and Senior Market Strategist from NextVIEW Group. He’s a regular contributor to various publications such as Nanyang Siang Pau, Money Compass and Sinchew, and also a sought-after mandarin consultant and trainer in Hong Kong, Malaysia and Singapore.

Even though the title of his talk mentioned futures market, what he covered can be applied to other markets as well. Richard delivered his lecture in a lively and informal manner, often sharing with us his own personal experiences.

One thing that he faced as a full-time trader was constant nagging from his mother. His mum will often tell him, “Kang, you shouldn’t be sitting in front of your computer every day. You can’t be like this for the rest of your life. You have to go and get a job.”

And so Richard did. He got a job with flexible hours as a trainer/speaker with NextVIEW so that he could continue trading. :)

These are some of the criteria which Richard mentioned that a professional trader should have:

Mindset

  • Risk Management – Limit of maximum loss on each position, limit of maximum loss in each month
  • Confidence
  • Trading plan

Capital

  • Funding source
  • Monthly overheads and expenses

Knowledge

  • Fundamental analysis (FA)
  • Technical analysis (TA)
  • Probability

Tools and Software

  • Able to help you execute your trading plan and system
  • Able to do backtesting on your system
  • Trading records

Data/News

  • Television
  • Newspapers
  • Internet
  • Reuters
  • Bloomberg

Broker

  • Easily contactable
  • Access to reuters and bloomberg
  • Commission rate

Coach

  • Richard himself had learnt from some of the other speakers at the event and he encouraged us to do the same.

Control of Emotions

  • Greed
  • Fear
  • Hope

Richard delivered his session in Mandarin. This was actually the second talk by him that I attended. The other one was on using pivot points to formalate a trade plan. I will talk about that in a future post.

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