Stockmarkets (Profit Summary)

In my prediction from my Blog-post on Thursday, January 28, 2010 "Stockmarket on the Rise" I predicted short term (1-3 months) positive growth of about 6% to 5600 (for the FTSE) and potential gains of 10% for more mid-term holding periods.

It turns out this prediction was spot on right, and looking back a good deal of money could have been made on this recovery push on FTSE index futures of ETFs.

Currently this is where we are price-wise on the FTSE index (source: yahoo finance)



In fact, let's look at what would have happened if we'd traded long (buying / speculating on an up-move in the market) over the period, which is the trade you'd do given my brief analysis from 28th January.

Bought at the non-optimal price of 5142.2 and sold at the common price over last days and not quite high of 5820. The transaction size being the smallest allowed with most brokers of only 3 pounds-per-point, then the profit generated would have been a respectable £1'800 and bagging in a 12% profit. This would be even higher would it not be for the daily financing costs of the trade. Table below summarises such a trade:

Markets are on a big move!!

Most main markets are very highly correlated (correlation is a statistical measure, it indicates strength of relationship between data). Specifically, the big falls and rises tend to happen in tandem. DAX and CAC, or FTSE and DowJones on a daily basis on average might move by differing magnitude and direction. However, what correltion tells us is that there are some moves that tend to co-occur. A simple analysis of the indices data shows that it is the large moves that tend to co-occur most often.

Today the 6th July (Monday) is one of those days, a large and negative move throughout all main markets has pertruded world markets. Also on a larger granularity, over March, April, May FTSE market has steadily increased in value, and a negative trend is clearly emerging during June and July! Dow Jones, DAX, CAC, NYSE, etc... show all the same pattern, not surprising since mass psychology affects every market participant to a degree.

In my opinion, July will with certainty see some decrease of valuation over all major indices. Reasons??! A number of them: Macroeconomic figures, Company outlooks, political, environmental stability and most Technical Analysis points towards investors' uncertainty surrounding recent price advances.

44th US president and the Markets

Yesterday (20th January 2008) saw the Dow Jones drop by a massive 4%. The fall on the market came on the same day Barack Obama was sworn in as the 44th US president. Notice all these 4, by the way, only joking lets better not look for such patterns :-)!

As explanations and analyses for this drop began to appear in the financial media, I was just thinking to myself, this is just very, very, very bad. The media, brought forward a number of reasons for the drop;

1. the first reason - bad company reports, such as Bank of America, JP Morgan, City Group, Bank of New York Mellon (88% fall in profits) or others - just check out this bbc.finance article.
2. the second reason - apparently the speach that Obama gave at his inauguration, highlighted how bad the challenges for the US economy really are.

It is clear the bad company news are negative and the challenges highlighted by President Barack Obama might have hit a nerve with investors.

Imagine this however;

1. a young, determined president takes office and promises to adress and deal with the economical challenges directly and as swiftly as humanly possible
2. after an avalanche of negative quarterly reports, finally a positive one appears as IBM announces surprisingly good profit forecasts above analysts expectations.

So among all the bad news... especially yesterday had the chance to be a good day, but the markets decided otherwise. This shows that current market mood seems to fuel negative moves and if the mood isn't right, the whole market won't be.

..so predictable...!!

Today, the FTSE-100 has been traded between 4330-4270 so nicely with 1% zig-zags between support and resistance that I am blown away. There were at least 8 beautifull trade opportunities within the day. With a standard trade size of £10'000, one could easily have made about £1000. Who's to say one cannot get into these markets during a recession??!

Turbos

You may have heared about Turbos recenty! These are relatively new derivative products that are linked to various shares and indexes. Hehehe, I know you are thinking "YATDP" - YetAnotherTradingDerivativesProduct, but this one looks quite sweet.

Turbos are interesting for at least these reasons:

1. Price Transparent - Turbos are listed & traded on the London Stock Exchange
2. No Stamp Duty - even thought Turbos are listed products, the no stamp duty "treat" applies :-)
3. Geared - the higher the price of Turbo the more gearing it provides. There are usually several Turbos for an asset with different payouts and risks asociated with, so trader can pick the most suited gearing levels.
4. Guaranteed Stop Loss - Contracts usually come in 3 month expiry times and have a Knock Out levels. It is the same as the strike level. For a long turbo, the turbo has value as long as the index is above the knock out level, and for a short, below that level. Otherwise position gets closed even with up or down gaps in the derivative. This guaranteed stop loss feature is incorporated into the derivative price, there are hence no extra charges.

They are accesible through most private investment brokers and certainly deserve some attention.

Placing a Stop loss the RIGHT way

Stop loss orders are incredibly important in managing transaction risks, as is diversification and optimal asset exposure time-spans. So how do we place good stop loss orders?

• Usual approach - given an entry point at which I get into a trade I just place the stop loss p% below the buy price (where p depends on a recent volatility window, as measured by range or standard deviation)


• This is often a reasonable strategy as my entry point would be at some optimal price pattern (or fundamental land-mark) and hence the stop loss should be relatively well place.


• However it is quite a blind-folded approach... somewhat like a defender passing back to your own goaly without looking whether the goalie is really there - see this metaphor in action. Usually this would work, but it could cost you a lot if the goalie isn't there. Hence when placing a stop loss, make sure it is reasonably well placed. Bruce Konver sumarises this nicely in Market Wizards [pp. 65]: Whenever I enter a position, I have a predetermined stop. I know where I'm getting out before I get in. The position size on a trade is determined by the stop. If the market is in the midst of a trading range, it makes no sense to put your stop within that range since you are likely to be taken out. I always place my stopn beyond some technical barrier.

There are 3 important elements (or reasons) related to stop losses:

• The reason to place a stop loss by inspection rather than "blind" rule of thumb rule is not to get executed too easily when I as a trader strongly believe the market will move the opposite direction, however when I also want to avoid a loosing position in case my initial market conviction was faulty.


• The transaction size is determined based on the stop loss, the farther the stop loss the smaller the transaction size should be.


• The stop loss should not be static, it should change with price. To illustrate, I have a position that moves in my favour by quite a few points (maybe the initial stop loss - buy margin), now I want to hang on to this open position in order to ride the current trend for a little longer, but I also feel I want to protect my gains (this is the only safe way of trading a trend). I therefore move my stop loss to a higher price. So that 1st I protect some of my gains, and 2nd, the new stop loss is placed into a reasonably intelligent / significant price landmark, so that it does not execute with the next price swing, (the stop loss must be based on a good measure of volatily, I will run some empiricall experiments on this when I get spare time).

Catching the big Moves

Most trading seems to be sideways (I'll do an empiricall analysis sometime soon, when I get a spare moment), however at breakout points strong trending action tends to occur and this are the best places to get into positions with good stop loss order strategy. Especially then (with a loss limitting strategy) when you are wrong, it doesn't matter too much!! Famed trader Bruce Konver talks about this in Market Wizards [pp. 59]: Michael Marcus taught me one other thing that is absolutely critical - You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgement, being wrong, making your next best judgement, being wrong, being wrong, making your third best judgement, and then doubling your money.

I just experienced such a situation yesterday. Friday close & Monday open FTSE-100 rolling bet price was at around 4200 and I felt dead sure on selling short. Unfortunatelly I lacked the concentration & peace of mind to execute this trade, during the day the price fell down to 4000 with literally no big %tage up jumps that could trigger a good stop loss with reasonable bet sizes. With a 20 bet-per-point transaction size this would have produced a £4000 profit with only ever giving a virtual loss of around £500 during the trading day. The best thing of all, if I didn't manage to sell at end of trading, I would be able to sell for even less the next day untill 10am Greenwich Time.

You could say it is a shame I missed this trade, but this is completely beside the point. I have learned a lot by observing what my trade action would have been without putting money at stake. Next time a market price builds up that I am completely confident about its point moves, I hope I will have the guts to listen to my intuition and trade on it. Quite obviously it is conforting and true what Robert Petcher sais about this psychological problem all serrious traders epxerience at a certain point: It is difficult enough to develop a method that works. It then takes experience to believe what your trading method & intuition is telling you. But the thoughest task of all is turning analysis into money.

Trading in the current environment!

hmm.... I am really starting to believe that trading is again becomming somewhat less riskier. With most governments now having had reacted to the immediate crisis events. Secondly volatility is calming somewhat since October.

1st - Markets have been too volatile for most risk limiting strategies. Even with the correct anticipation of price moves, it was very easy to end up on wrong side of the trade. Stop-loss orders have recently been very prone to execution due to outrageous volatility.
2nd - Rescue and other aid packages by governments cannot by any practicall means be predicted. This just ment more volatility and scope for unanticipated price action.

I'm starting to get convinced again that going short or long rather than staying out, is the way to go forward. Rescue package approval has strongly slowed down, and volatility seems to be a little more behaved. Anyway, I know what way I'm going to trade ;-).... selling short, except anticipated market corrections on the long side, but search for proper growth is just a little to soon.