A Ponzi scheme certainly doesn't help...

I woke up this Monday (15th December) to check the business news and what a nasty surprise this was!! One of the largest frauds in history that could cost around $50bn has been uncovered. A certain polite looking gentleman who used to to direct and sit in several prestige posts, such as heading the NASDAQ exchange, has been accused of transfering primary investments of some clients to simulate profits and returns for other clients. Something like this is well known as a Ponzi scheme, a simple idea that can make the organizors of such schemes super rich in super short time.

Michael Covel's blog, one of the blogs that I read had a funny link the other day. A link to an article on how the Social Security Administration really is a big Ponzi scheme. I thought a good joke and it carries some truth but then looking at the comments I found that these people are quite serrious and really believe this stuff!!??
For one the SSA certainly does not qualify as a Ponzi scheme, it certainly does not promise huge returns, we all know that it is a necessity of a social system and that will not make us rich but the idea is to help the less fortunate among us. In fact this is just criticism of a socialist policy and calling it fraud or ponzi scheme's is ridiculously far-fetched and simply - hmmm, how should I say this, well - silly!!

http://blog.mises.org/archives/009099.asp

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.

Monday 8th Dec 2008

FTSE rose to 4300 by 6% today. A good time to sell short might be tomorrow, this depends on overnight movements in markets. However 4400-4600 is a strong resistance against upward moves, so plunging into any long trades with both feet would yet not be a wise move.

Todays' bullish world market performance (Nikkei 5.20%, DAX 7.63%, CAC 8.40%) is attributed to Barack Obama's rescue package plans [see http://biz.yahoo.com/ap/081208/wall_street.html].

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.

New Wave of Government Intervention

Wednesday & Tuesday have seen positive market action since that huge 10% rise in Western Europe Markets. The current consolidation seems to have some momentum!!!

New Wave of interventions have been anounced this week:

• Monday, the UK anounced it will cut VAT to 15% from 1st Dec. 2008
• European Union anounced a $200bn euro recovery plan http://news.bbc.co.uk/1/hi/business/7749382.stm
• Barack Obama began detailing his rescue plans for the economy, http://biz.yahoo.com/cbsm-top/081126/210d57da98961961a24ddd903b6b0cec.html
• China Slashes interest rates by 1.08% (biggest decrease in 11 years) http://biz.yahoo.com/ap/081126/as_china_economy.html

However the crisis is on, and untill any help propagates through the system many months will pass.

Jobless claims remain at recessionary levels, Americans cut back on their spending by the largest amount since the 2001 terrorist attacks, orders to U.S. factories plummeted and homes sales fell to the lowest level in nearly 18 years. [source: http://biz.yahoo.com/ap/081126/financial_meltdown.html]

9.84% Up day

The FTSE-100 opened with an up gap and rallied towards the end of the trading session to close at 4153 points. The psychological price level of 4K is being highly disputed by nervous market participants, as Citigroup receives a bail out package of over 20bl and the UK treasury announces further tax rate cuts in an effort to inspire more consumer spending and pump money into the economy.

Germany and France have also seen over 10% growth, whereas Nikkei 225 performed poorly with 2.7%.

To be honest it seems the 4K level will not be given up without a fight. It is always easier to find reasons for a move after it has occured and I am certain nobody expected such a strong rally on European Markets today.

Monday... the last week of November

Here we are :-), the month of November is comming to an end, and what a month it has been. October 2008 will unquestionably go down in history as black month on world markets.

However November wasn't much brighter either, on the 20th (Thursday) the FTSE-100 fell below the psychological 4000 level and Friday has seen more trading down in these regions. The Dow as well as the just mentioned british index are at their lowest for over 5 years this month.

More falling is to be anticipated, governments around the world however are actively fighting the oncoming avalanches of disaster, such as a sheduled statement in the UK on Monday 24th and plans to reduce VAT to 15%, see http://news.bbc.co.uk/1/hi/business/7739749.stm, http://news.bbc.co.uk/1/hi/uk_politics/7744273.stm

As for the comming week, who knows, it might be a very bad week indeed, however as for tomorrow FTSE-100 will likely open with a positive gap, due to the large Dow Jones gains on late trading hours on Friday, positive intervention plans by UK government and finally 3 continuous days of ~10% drops might call for some new interest from traders.

A lot of hope has been lost and long term or even mid term positive trends are extremely unlikely. But there is still hope, by mid-2010 we might be out of this recession http://biz.yahoo.com/ap/081123/lt_apec_summit.html!

hehe, oh my :-((

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.

Market update, 2 weeks after Obama election

It's been exactly 2 weeks since the election of Barack Obama, who is sheduled to be sworn in as the 44th President of the USA on January 20, 2009.

On the day of election the Dow Jones was up 1.5% from previous close, in fact 4th November was the highest price for past month. Since Obama's election, markets haven't been doing too greatly, but also there is some talk about an easing situation in media. Compared to month of October this clearly seems to be the case, however the bottom of markets is ony beeing tested at 8K (Dow Jones), 4K (FTSE-100), 7K (Nikkei 225), 4.2K (DAX), 3K (CAC 40) and another drastic drop might be around the corner. For the next 2 days or so, we might however see some positive consolidation, as the 8K (Dow Jones) bottom is beeing tested.

More rescue packages have been approved by the likes of emerging economies such as China (over $500bl) and today a drop in inflation was reported to 4.5% from 5.2% (United Kingdom). Yet the crisis may be still worse than it appears. There are huge manufacturing decreases, redundancies and problems (at least unexpected changes) with implementing rescue packages are starting to creep out with the USA $700bl plan.