Friday, April 29, 2011

Lesson No 4 - Characteristic of Successful Traders

Found it printed and pasted in front of a trader in our room. Are they relevant? Are you able to follow each and every one of them? Will you read them everyday before the start of trading as a reminder?

Important Characteristic of a Successful traders:

1. Successful traders do not blame. They accept the losses they have, and they don’t dwell on them, or blame other people or conditions. They learn from their mistakes and move on with their trading.

2. Successful traders have a system. They stick to their system of trading religiously.

3. Successful traders have patience. They know that most positions will not be profitable the minute they are opened.

4. Successful traders do not overtrade. They realize that overtrading puts their account at risk, and they know that not every day is a day for trading.
They wait for high probability opportunities.

5. Successful traders realize that nothing is 100% foolproof.
They trust in their indicators, but they are aware of other factors that may influence their trades.

6. Successful traders do not stay in a losing trade. They honor the stop losses that they set, and they do not hold their position in the hopes that the market will eventually “go their way.”

7. Successful traders do not rush into trades. They take their time while selecting trades and they are picky about which trades to jump on. They don’t place orders just for the sake of having a position in the market every second.

8. Successful traders stick to a successful strategy. They have one to three techniques that really work, and they use them over, and over, and over again.

9. Successful traders have the ability to adapt. They adjust their trading methods and decisions to changing market conditions.

Sunday, April 24, 2011

Lesson No. 3 - Understand Yourself

Below are some of questions an aspiring trader need to ask himself and answer them honestly. It's important to understand yourself as trading is in a big way a psychological warfare you are pitting against the opposite party holding a different view. It's going to be an ongoing war that will not end until you give up and hang up your weapons. You may lose some of the battles, injuring yourself sometimes badly, but as long as you still survive and determine to fight on, the war is not over.

Believe and have faith in yourself for the task you set out to achieve. In life, you have to give yourself that opportunity, a chance to prove that you too can make it. Another option is to go all out and sell your abilities to someone who appreciate it and offer you the opportunity.

Here are the questions:

1. What are the reasons you want to be a trader?

2. What motivates you to be a trader?

3. Are you passionate and hungry to succeed in Trading?

4. Do you consider yourself a pro-active person?

5. Do you take the initiative to make things happen or you just wait for things to happen?

6. What is your initial capital?

7. How much are you going to risk in this endeavour?

8. What is your expectation?

9. Do you have a time frame for calling it quits?

10. Have you spoken to your family members and discuss with them?

11. What is your risk tolerance level?

12. What type of trader you want to be?

13. What type of knowledge have you acquired to prepare yourself?

14. What are the strategies you already know?

15. If you are still not making money using them, what are the reasons?

16. What are your strengths?

17. What are your weaknesses?

18. Can you focus on doing a job well?

19. Are you prepared for the hardwork and the challenges ahead?

20. Do you have the courage to take this giant step?

I will continue to update them as and when more questions come to my mind and welcome contributions from the old birds.

Friday, April 22, 2011

Lesson No 2 - What Instrument to Trade?

My focus on these lessons will be for aspiring new traders with limited capital of less than S$30k and how they can take small steps in trading and shorten their learning curve.

I will also showcase a trader with a small capital trading from home using the Pats system platform and monitoring his progress without any pressure for him to perform. His result will be posted on my other blog on Trading Performance. He has many years of experience in trading and now experimenting with different strategies in Forex Trading which he felt have better growth prospect. I'm surprised!

I have longer term investments in properties and shares but for short term trading, I have chosen to trade in futures for my bread and butter. The major reason is that the transaction cost is the cheapest, please let me know if there are any other instruments that are more competitive and secure, I will definitely look into it.

By joining as a member of SGX costing S$1,200 a year, I enjoyed preferential comm rate for all Exchanges given by my broker over a retail customer. But of course I have to pay taxes on my profit after cost while most retail customer even some full time, treat their profit as capital gain which they felt is tax free. (Grey Area)

The difference in comm is quite substantial, from the statement you will notice that the comm for trading Simsci is S$1.70 and US$0.65 for the Taiwan contract. While retail customer might be paying anything from S$8 to S$12 for the Simsci and for those who trade higher volume, they can bargain the comm down to maybe S$5 which is still more than double. Comm for trading the Nikkei is US$0.70, with a tick value of roughly US$30, making it one of the best contract to trade in term of costing.

I have chosen to specialise in the Simsci because of the scratch trade rebates given to members even though the comm is among the highest. For any trade at the same price in a given half hour time bracket (ex. 8 am to 8.30 am or 8.30 am to 9 am), SGX will refund me the clearing fees of S$1.50 per contract. Thus I only need to pay S$0.40 to my broker for a round turn of Simsci contract.

Another reason for choosing Simsci is that most of my funds are in Sing Dollars which I can use as margin to trade without incurring any interest for holding the Simsci position overnight. If I will to trade the Taiwan contract I will need US$ and I need Yen for Nikkei as margin for my overnight positions. Interest is charge by my broker for extending these foreign currency loans to be put up at the Exchange as margin while I receive a very small amount of interest for my credit balances.

For those who are non members, one of the most competitive broker is Interactive Brokers, check out their website, they offer very good rates for trading overseas contracts, free trading platform and some Exchange fees for charting services.

Many felt that trading futures is risky compared to other instrument because of the leverage. They are just ignorant. What can you do with S$30k in your account and wanted to trade for a living?

Any Fund Manager who can consistently return 10% nett per annum to their client is a damn bloody good manager because 90% of them failed to do so. A return of 10% for $30k is only $3k a year which is only $250 a month. Can you survive on it doing full time trading? So your goal will be to make at least $3k (10%)a month or 120% a year.

Those who are thinking of quitting their job for full time trading career need to consider it very carefully before taking the plunge because you will need to be a super trader making 10% a month less all cost in order to survive. Of course, there are many who made it, the journey is long and tough.

I will use Simsci as an example in my illustration, a basket of 27 blue chip stocks listed on SGX at the current price of 3770 x 20 per tick which has a value of S$75,400.00 for 1 contract.

Futures trading requires margin because of the high leverage of up to 20 times depending on the volatility and this margin will be adjusted accordingly by the Exchanges periodically, it's not fixed.

Paying a comm of only S$1.70 to trade a value of S$75,400 worth of blue chip stocks is extremely cheap and you need to put up a margin of less than $4k. Nikkei at the price of 9670 x 500 gives us a value of Yen 4,835,000 or around US$59,000 worth of 225 blue chip Japanese stocks. Buying 1 contract cost only US$.70 for the professional traders, this is the reason why I traded futures.

A retail trader paying S$10 for 1 contract of Simsci worth S$75,400 is still cheap compared to buying stocks, probably he need to pay around S$200 comm for that value of stocks. The only difference is that retail traders can choose individual stock to trade and pick those that he feels have better potential of upward price movement.

One big advantage of futures over stock trading is that you can go short the futures naked and hold that position until expiry. Another is you are investing in a diversified portfolio of blue chip stocks, no headache in stock picking.

Another fact that most are ignorant is that interest cost and dividends are being factored into futures pricing. Dividends are paid for those buying into futures when there are dividends to be paid out by some of the stocks in the basket. For example the price of the April Simsci contract is now trading at 3770 while the May contract is trading at a discount of about 28 ticks at 3742, implying a S$560 dividend to be paid out. Historically, investors holding and rolling over their long term positions are assured of returns over time due to inflation and dividends.

The April Simsci contract was also at a discount of 28 ticks over the previous March contract making a payout of S$1,120 over a 2 month period. So for the long term investors, when they roll over their position forward, their pricing will get cheaper and cheaper over time due to the dividends and low interest rate now. One exception is if one were to buy the Nikkei at the peak in 1990 at 39000, he will be losing his pants and still rolling his position at a loss after 20 years. Thus the importance of cutting losses.

So for a investor who used S$4k as margin to buy one contract in March and roll over to May contract, a period of 2 months, can reap a dividend of S$1,120 as long the the futures price remain the same till expiry. He will have additional capital gain if the price move further up while suffer losses if the price depreciate. For 1 Simsci contract value of $75k that yield 3% dividend, one would expect to get S$2,250 worth over a 1 year period with a margin investment of S$4k. That's 50% return if the price remain the same a year later.

Rolling over position from April to May is call calender spread which will be active towards the end of the expiry date for any futures contract. There is a spread quote which is heavily traded too by those who specialise in spread trading. April contract now is known as the near month while May, June, July the far month.

With a $30k account, a trader can easily day trade up to 20 Simsci contracts at one go, that is where the risk comes from. The leverage of up to S$1.5 million worth of stocks with just S$30k. If make use properly, that is where you can reach your million dollar dream.

For those who are not currently members of any Exchanges, find a good and cheap broker. There are many futures contracts that are very liquid with good volatility, it's one's preference, to name a few, mini S&P, Nasdaq, Dow, FTSE, DAX, Gold, Oil, Currency futures, etc. Traders now have plenty of choice. Understand the contract and monitor it closely for some time before you attempt to trade.

Sunday, April 10, 2011

Lesson No 1 - Cost of Trading

The reason why 90% of the traders are losing money is because trading is a NEGATIVE, NEGATIVE sum game.

With $100 on the table that 90% of these traders lose money, how much will the 10% make? I asked a fellow trader this question, and we both felt that probably only half the amount or just $50. (Just our opinion) The other $50 disappear into the black hole of the system known as cost of trading.

All form of trading involve cost to facilitate the transaction whether you make or lose money. Rightly so because we need to pay for the services provided to ensure that the transaction is in order, safe and legal.

Traders even need to pay the government tax upfront in the form of 7% GST on the comm, no running away. For professional traders, they have to declare their profits which is subjected to taxes while they can't claim a penny if they lose money the following year except carrying the losses forward. Thus, the negative negative sum game.

Some gains are considered capital gain if taken in as an investment under their personal name. It's a grey area whether one derive this income solely from trading or trading as a part timer. Best to check with the acccountant if one is making lots of money.

Understanding the cost of trading is important for a trader who should treat trading as a business.

Let's look at the transaction cost of the various instruments.

1. Property - Basically for long term investors, 1% comm for the agent, stamp duty, valuation fee and lawyer's fee making it one of the most expensive in term of transaction cost. With capital gain tax and additional stamp duty thrown in for profits made within a year, only very savvy property specuvestors having good connections with developers and inside information should flip and trade.

One major upside on property investment is the depreciating value of our money and the limited supply of land in major cities. Thus, it is one of the easiest form of long term investment, it will always go up in the long run, no worries about mismanagement compared to listed companies.

The downside of property investment is liquidity especially when the market is down with transaction taking months to complete. Sellers might be squeezed to get out if there is an urgent need for cash.

2. Stocks - Cost of trading stocks have come down tremendously over the years but still the comm from trading Singapore stocks range from 0.4% to 0.25% for retail customers. It's still quite hefty but very liquid with narrow spreads and most traders treating profits as capital gain. Professional stock traders are registered with the Stock Exchanges paying yearly membership fees with comm below 0.1% but paying taxes on their profits.

3. ETFs, CFDs and Warrants - I'm not too sure about the comm structure but I'm sure it won't be cheaper than stocks with plenty of hidden costs factor into the prices by the banks that issue them and kiss your investment goodbye if these banks fail like Lehman Brothers.

4. Forex - "No comm, the best instrument to trade", claimed a very ignorant trader brain washed by some Forex course that he had taken. In actual fact, the spread between the bid and ask price is the comm for the brokers. It's very much cheaper now to trade Forex as the Euro/US$ pair spread sometimes narrow down to 1 pip which is US$10 for a round turn of buying and selling US$100k worth of currency. While some not so liquid currency pairs have spread of more than 3 pips which is US$30 per round turn transaction.

But, in time of volatility, the spread may widen to 3 or 5 pips making the transaction rather expensive. Moreover, Forex brokers are like bucket shop where they trade against the client's order. With the advance in computer software, its easy for the brokers to take advantage of client's order without them knowing it.

Forex Brokers are not well regulated, if they collapsed, say bye bye to your money. Most firm offering Forex courses are also introducing brokers for recommending their students to the Forex Broker, earning a comm for every transaction done. Rather good recurring income.

Futures - It's the cheapest in term of transaction cost and Interactive Brokers offer the most competitive rates for retail customers.

Options - About the same comm as Futures but some strike price may not be liquid with rather wide spread from the market makers. This instrument is meant more for the professional traders.

In my next post, I shall discuss more on the cost of trading Futures compared to the other instruments.

Saturday, April 9, 2011

So, you want to be a Trader?

The definition of a trader is someone who buy a certain product and sell it later at a higher price to make a profit.

I have received an email from a reader asking me to share on my blog how someone can begin his career as a trader. After giving it some thought, I shall begin lessons on trading and readers decide whether they should take up trading as a career.

I would also appreciate readers to share their views and comments on the various subjects that I will touch on. I'm very thankful to Coconut for being my constant companion for the past one year and have contributed tremendously in sharing his experience. I look forward to sharing that little knowledge that I know.

Can traders be train? Is there such thing as Natural Born Traders?

The answer is Yes to both of the above.

Smart people learn fast and slow learner don't be despair, as long as one is passionate, hardworking and determine, it just take a little longer to accomplish your dream. It took me quite some time to realise my dream too.

Below are some common instruments for trading;

1. Properties
2. Stocks
3. Forex
4. Futures/Commodities
5. CFDs
6. Warrants
7. Options

Trading, speculation, investing and gambling, they are brothers and sisters in the same family trying to make money from each other.

Statistics have shown that up to 90% of the traders lose money, it is a cold hard fact. I have asked many what are the reasons for such a high percentage of losers versus only 10% who make money. Not many can give me a good answer, it's the usual, no discipline, no money management, cannot control their emotions, etc..

Similarly, the percentage of Equity Funds, Unit Trust, Hedge Funds, etc.. losing money or under performing their benchmark is around the same at 90% even though they are managed by professionals. Choosing one that give consistent return year after year is just as tough, might as well learn and do it yourself, losing money yourself is much better than paying someone else to lose money for you. (refer more to investors, because most are told to hold for the long long term)

Think about it and I shall discuss this topic in my next post. I will be away next week for a holiday to the Chinese Capital with my wife.

Sunday, April 3, 2011

TIme for some correction?

Two weeks ago, I felt the Simsci was a good level to buy at above 3460. Any more room for it to go further? Are the foreign funds back pushing the Index to close at a 2 weeks high? With the looming election approaching, can we short the market?

I will still buy on retracement.

My friend called on Wednesday to short the Nikkei above 9800, he felt that there should be some window dressing in Japan and the market whould correct down again in the next few days. Let's see.

My short term trading strategy will be to buy 2 Simsci and sell 1 Nikkei.

Some reistance for the S&P at 1334 level.

It has been a good week for traders because of the increase volatility, for those who missed it, just too bad, wait for the next opportunity.