Fascinating, isn't it, this stock market of ours, with its unpredictability, promise, and unscripted daily drama! But individual investors are even more interesting. We've become the product of a media driven culture that must have reasons, predictability, blame, scapegoats, and even that four-letter word, certainty. We are a culture of investors where hindsight is rapidly replacing the reality-based foresight that once was flowing in our now real-time veins... just like downhill racing, grouse hunting, and Super Bowls.
The Stock Market is a dynamic place where investors can consistently make reasonable returns on their capital if they comply with the basic principles of the endeavor AND if they don't measure their progress too frequently with irrelevant measuring devices. The classic investment strategy is so simple and so trite that most investors dismiss it routinely and move on in their search for the holy investment grail(s): a stock market that only rises and a bond market capable of paying higher interest rates at stable or higher prices! Just not going to happen…
This is mythology, not investing. Investors who grasp the realities of these wonderful marketplaces recognize the opportunities and embrace them with an understanding that goes beyond the media hype and side show performance enhancement barkers. Simply put, when investment grade securities rise in price [As they are now, with the DJIA finally putting together a successful attack on the 11,000 barrier], Take Your Profits, because that's the purpose of investing in the stock market! On the flip side (and there has always been a flip side, more commonly dreaded as a "correction"), replenish your portfolio inventory with investment grade securities. Yes, even some that you may have just sold days or weeks ago during the rally. This is much more than an oversimplification; it is a long-term (a year or two is not long term.) strategy that succeeds... cycle, after cycle, after cycle. Sounds an awful lot like Buy Low/Sell High doesn't it? Obviously, Wall Street can't let you know that it is quite so simple!
[Note that Dow Jones 11,000 was last breached during the infancy of this century, and that the last All Time High in this much too widely followed average occurred late in 1999. When the DJIA banner is repositioned on that historical peak of 11,700 or so, it will represent no less than six years of zero growth in this, the most respected, of all Market Indicators! Would the media strip the gold medal from this Stock Market Icon if it knew that during these same years: (1) There have been significantly more stocks rising in price on a daily basis than moving lower. In fact, more than two-thirds of the last 68 months have been positive. (2) Since April 2000, there have been 120 more positive days in NYSE issue breadth than negative days. (3) 250% more NYSE stocks established new high price levels than new lows. (4) We are working on our sixth consecutive year of positive issue breadth!]
So understand that your portfolio statement values will rise and fall throughout time, and rather than rejoice or cry, you should be taking actions that will enhance your "Working Capital" and the ability of your portfolio to accomplish your long term goals and objectives. Through the simple application of a few easy to memorize rules, you can plot a course to an investment portfolio that regularly achieves higher highs and (much more importantly), higher lows! Left to its own devices, like the DJIA for example, an unmanaged portfolio is likely to have long periods of unproductive sideways motion. You can ill afford to travel six years at a break even pace, and it is foolish, even irresponsible, to expect any unmanaged or passively directed approach to be in sync with your personal financial needs.
Five simple concepts of Asset Allocation, Investment Strategy, and Psychology are summed up quite nicely in what I call "The Investor's Creed":
(1) My intention is to be fully invested in accordance with my planned equity/fixed income asset allocation. (2) On the other hand, every security I own is for sale, and every security I own generates some form of cash flow that cannot be reinvested immediately. (3) I am happy when my cash position is nearly 0% because all of my money is then working as hard as it possibly can to meet my objectives. (4) But, I am ecstatic when my cash position approaches 100% because that means I’ve sold everything at a profit, and that I am in a position to (5) take advantage of any new investment opportunities (that fit my guidelines) as soon as I become aware of them.
If you are managing your portfolio properly, your cash position has been rising lately, as you take profits on the securities you purchased when prices were falling just a few months ago… and (this is a big and) you could well be chock full of cash well before the market blows the whistle on its advance! Yes, if you are going about the investment process properly, you will be swimming in cash at about the same time Wall Street discovers the rally and starts encouraging people to weight their portfolios more heavily into stocks; the number of IPOs coming to market starts to rise exponentially; morning drive radio DJ's start to laugh about their stock market successes; and all of your friends start to talk about their new investment guru or the 30% gains in their growth Mutual Funds. What are you doing in cash!
This is what I call "smart" cash, because it represents realized profits, interest, and dividends that are just catching a breather on the bench after a scoring drive. As the gains compound at money market rates, the disciplined coach looks for sure signs of investor greed in the market place: fixed income prices fall as speculators abandon their long term goals and reach for the new investment stars that are sure to propel equity prices ever higher, boring investment grade equities fall in price as well because it now clear [for the scadieighth (sic) time] that the market will never fall again… particularly NASDAQ, which could double and still not be where it was six years ago. And the beat goes on, cycle after cycle, generation after generation. What do you think; will today's coaches be any smarter than those of the late nineties? Have they learned that it is the very strength of a rising market that proves to be its greatest weakness!
Tuesday, June 1, 2010
Forex Trading
There are many markets: markets for stocks, futures, options and currencies. These are probably the most accessible markets for everyday traders like you and I. People easily understand the basics of trading shares. I began trading shares first and then I moved on to trading currencies.
If you do not know a lot about currency trading, allow me to introduce it to you. It is what I trade and I believe that it is one of the best markets to trade because of its efficiency. The transaction costs to execute a trade are minimal and most brokers provide you with the tools and data you need to make your trading decisions, they usually provide them for free. The market is open 24 hours a day which allows you to design your trading hours around your daily commitments. It is very volatile, which is great for those people who are looking for day-trading opportunities.
The foreign exchange market is the market in which currencies are bought and sold against one another. People may loosely refer to this market under different labels, including foreign exchange market, forex market, fx market or the currency market.
The foreign exchange market is the largest market in the world, with daily trading volumes in excess of $1.5 trillion US dollars. All transactions involving international trade and investment must go through this market because these transactions involve the exchange of currencies.
It is the most perfect market that exists because it has a large number of buyers and sellers all selling the same products. There is a free flow of information and there are little barriers to participate.
The currency exchange market is an over-the-counter (OTC) market which means that there is not one specific location where buyers and sellers can actually meet to exchange currencies. Instead, transactions are conducted by phone, fax, e-mail or through the websites of brokers who specialize in currency trading.
The major dealing centres at the time of writing are: London , with about 30% of the market, New York , with 20%, Tokyo , with 12%, Zurich , Frankfurt, Hong Kong and Singapore , with about 7% each, followed by Paris and Sydney with 3% each. Because of the fact that these centres are all over the world, foreign exchange traders can execute transactions 24 hours a day. The market only closes on the weekends.
THE MAIN ‘PLAYERS' IN THE FOREX MARKET
The five broad categories of participants are: consumers, businesses, investors, speculators, commercial banks, investment banks and central banks.
Consumers, including visitors of countries, tourists and immigrants, do need to exchange currencies when they travel so that they can buy local goods and services. These participants do not have the power to set prices. They just buy and sell according to the prevailing exchange rate. They make up a significant proportion of the volume being traded in the market.
Businesses that import and export goods and services need to exchange currencies to receive or make payments for goods they may have bought or services they may have rendered.
Investors and speculators require currencies to buy and sell investment instruments such as shares, bonds, bank deposits or real estate.
Large commercial and investment banks are the ‘price makers'. They are the ones who buy and sell currencies at the bid-and-offer exchange rates that they declare through their foreign exchange dealers.
Commercial banks deal with customers on one hand, and with the Interbank or other banks, on the other hand. They profit by utilizing the bid-and-offer spread. The bid price is the exchange rate that the buyer is willing to buy and the offer price is the exchange rate at which the seller is willing to sell. The difference is called the bid-offer spread. They also make profits from speculating about whether the exchange rate will rise or fall.
Central banks participate in the foreign exchange market in their effective duty as banks for their particular government. They trade currencies not for the intention of making profits but rather to facilitate government monetary policies and to help smoothen out the fluctuation of the value of their economy's currency.
WHAT CURRENCIES TO TRADE IN THE FOREX MARKET
You can trade any country's currency by exchanging it to another country's currency, however the list below are the ones that are the most popular and are usually made available by most online brokers for you to trade.
AUD (A$): Australian Dollar a.k.a. ‘Aussie' or ‘Oz'
CAD (Can$): Canadian Dollar
CHF (SwF):Switzerland Franc a.k.a ‘Swissi'
DKK (Dkr): Denmark Krone
EUR (€): European Dollar a.k.a ‘Euro'
GBP (£) : Great Britain Pound a.k.a ‘ Sterling ' or ‘Cable'
HKD (HK$ ): Hong Kong Dollar
JPY (¥): Japanese Yen
MXN (Mex$): Mexican Peso
NOK (NKr): Norway Krone
NZD (NZ$): New Zealand Dollar a.k.a ‘Kiwi'
PLN (z dashed l): Poland Zloty
SAR (SRls): Saudi Arabia Riyal
SEK (kr or Sk): Sweden Krona
SGD (S$): Singapore Dollar
THB (Bht or Bt): Thailand Bhat
USD ($): United States Dollar
ZAR (R): South Africa Rand
CURRENCY PAIRS
To trade the currencies above, you need to trade currency pairs. Think of these currency pairs as your trading instruments – instruments that you can buy or sell. Listed below are the most popular currency pairs that people trade:
1. AUD/JPY: Australian Dollar – Japanese Yen
2. AUD/USD: Australian Dollar – US Dollar
3. EUR/CHF: European Dollar – Switzerland Frank
4. EUR/GBP: European Dollar – Great Britain Pound
5. EUR/USD: European Dollar – US Dollar
6. EUR/JPY: European Dollar – Japanese Yen
7. GBP/CHF: Great Britain Pound – Switzerland Frank
8. GBP/USD: Great Britain Pound – US Dollar
9. USD/CAD: US Dollar – Canadian Dollar
10. USD/CHF: US Dollar – Switzerland Frank
The currencies on the left can be exchanged for the currencies on the right.
If you do not know a lot about currency trading, allow me to introduce it to you. It is what I trade and I believe that it is one of the best markets to trade because of its efficiency. The transaction costs to execute a trade are minimal and most brokers provide you with the tools and data you need to make your trading decisions, they usually provide them for free. The market is open 24 hours a day which allows you to design your trading hours around your daily commitments. It is very volatile, which is great for those people who are looking for day-trading opportunities.
The foreign exchange market is the market in which currencies are bought and sold against one another. People may loosely refer to this market under different labels, including foreign exchange market, forex market, fx market or the currency market.
The foreign exchange market is the largest market in the world, with daily trading volumes in excess of $1.5 trillion US dollars. All transactions involving international trade and investment must go through this market because these transactions involve the exchange of currencies.
It is the most perfect market that exists because it has a large number of buyers and sellers all selling the same products. There is a free flow of information and there are little barriers to participate.
The currency exchange market is an over-the-counter (OTC) market which means that there is not one specific location where buyers and sellers can actually meet to exchange currencies. Instead, transactions are conducted by phone, fax, e-mail or through the websites of brokers who specialize in currency trading.
The major dealing centres at the time of writing are: London , with about 30% of the market, New York , with 20%, Tokyo , with 12%, Zurich , Frankfurt, Hong Kong and Singapore , with about 7% each, followed by Paris and Sydney with 3% each. Because of the fact that these centres are all over the world, foreign exchange traders can execute transactions 24 hours a day. The market only closes on the weekends.
THE MAIN ‘PLAYERS' IN THE FOREX MARKET
The five broad categories of participants are: consumers, businesses, investors, speculators, commercial banks, investment banks and central banks.
Consumers, including visitors of countries, tourists and immigrants, do need to exchange currencies when they travel so that they can buy local goods and services. These participants do not have the power to set prices. They just buy and sell according to the prevailing exchange rate. They make up a significant proportion of the volume being traded in the market.
Businesses that import and export goods and services need to exchange currencies to receive or make payments for goods they may have bought or services they may have rendered.
Investors and speculators require currencies to buy and sell investment instruments such as shares, bonds, bank deposits or real estate.
Large commercial and investment banks are the ‘price makers'. They are the ones who buy and sell currencies at the bid-and-offer exchange rates that they declare through their foreign exchange dealers.
Commercial banks deal with customers on one hand, and with the Interbank or other banks, on the other hand. They profit by utilizing the bid-and-offer spread. The bid price is the exchange rate that the buyer is willing to buy and the offer price is the exchange rate at which the seller is willing to sell. The difference is called the bid-offer spread. They also make profits from speculating about whether the exchange rate will rise or fall.
Central banks participate in the foreign exchange market in their effective duty as banks for their particular government. They trade currencies not for the intention of making profits but rather to facilitate government monetary policies and to help smoothen out the fluctuation of the value of their economy's currency.
WHAT CURRENCIES TO TRADE IN THE FOREX MARKET
You can trade any country's currency by exchanging it to another country's currency, however the list below are the ones that are the most popular and are usually made available by most online brokers for you to trade.
AUD (A$): Australian Dollar a.k.a. ‘Aussie' or ‘Oz'
CAD (Can$): Canadian Dollar
CHF (SwF):Switzerland Franc a.k.a ‘Swissi'
DKK (Dkr): Denmark Krone
EUR (€): European Dollar a.k.a ‘Euro'
GBP (£) : Great Britain Pound a.k.a ‘ Sterling ' or ‘Cable'
HKD (HK$ ): Hong Kong Dollar
JPY (¥): Japanese Yen
MXN (Mex$): Mexican Peso
NOK (NKr): Norway Krone
NZD (NZ$): New Zealand Dollar a.k.a ‘Kiwi'
PLN (z dashed l): Poland Zloty
SAR (SRls): Saudi Arabia Riyal
SEK (kr or Sk): Sweden Krona
SGD (S$): Singapore Dollar
THB (Bht or Bt): Thailand Bhat
USD ($): United States Dollar
ZAR (R): South Africa Rand
CURRENCY PAIRS
To trade the currencies above, you need to trade currency pairs. Think of these currency pairs as your trading instruments – instruments that you can buy or sell. Listed below are the most popular currency pairs that people trade:
1. AUD/JPY: Australian Dollar – Japanese Yen
2. AUD/USD: Australian Dollar – US Dollar
3. EUR/CHF: European Dollar – Switzerland Frank
4. EUR/GBP: European Dollar – Great Britain Pound
5. EUR/USD: European Dollar – US Dollar
6. EUR/JPY: European Dollar – Japanese Yen
7. GBP/CHF: Great Britain Pound – Switzerland Frank
8. GBP/USD: Great Britain Pound – US Dollar
9. USD/CAD: US Dollar – Canadian Dollar
10. USD/CHF: US Dollar – Switzerland Frank
The currencies on the left can be exchanged for the currencies on the right.
Trading Teacher
Not all traders are fortunate enough to have a friend or relative, who happens to be a successful trader, to learn from. Like most traders, Marquez Comelab, author of book: The Part-Time Currency Trader, did not know anybody who could teach him, in person, how to trade. So he read books and attended seminars. In this article, he shares the lessons he learnt from his very first trading teacher.
When I studied the principles of investing in university, I was taught that the price of a share reflected the value of the company. With fundamental analysis, there are many methods on how one can analyse the financial statements of companies to find out whether a share is a good or a bad investment. You can conduct horizontal and vertical analyses on standardised financial statements, which are just fancy terms for comparing numbers. You can calculate certain financial ratios to get a better understanding of a company’s liquidity, working capital management, its ability to remain in business over the long term, and its profitability.
I applied these concepts when I started trading the stock market. Soon I found that if I wanted to trade shares in a timeframe of less than three months, decisions based on these analyses were not useful. I did not want to buy shares only to receive dividends. I wanted to trade for capital gains.
I was dissatisfied with my knowledge, the tools and the methods that I had to trade the markets. With my desire to trade a timeframe shorter than three months and my strengthening belief that emotions greatly impact on trading, I began to search for different approaches to buying and selling shares.
I went back to one of my textbooks in university. I wanted to know how else I could analyse the markets. From the passage I read, I learned that one can analyse the markets in one of two ways: fundamental analysis and technical analysis.
I bumped into a newspaper ad one day for a trading seminar. While reading through the ad I saw the words: technical analysis. An expert trader was going to speak on the exact topic I was interested in learning. It was a free seminar and everybody was welcome to come along. So I called a friend of mine and I asked if he would be interested in attending this trading seminar. He was.
The seminar was organised by a business selling trading courses: courses to instruct people on how to trade the share market. When we arrived, we were led into a small room. There were about thirty people. The spokesman was apparently a veteran trader who wrote two books on trading. Let’s call him Bauer for the purpose of this article. Bauer had a very strong presence. He was a huge, tall man with a clean-shaven head.
I was on the front row seat trying to listen and understand every word this man said. It was his teachings that planted the seeds of how I eventually grew as a trader over the years. Many times, I heard his voice in my head, reminding me of the lessons I learnt from his books and the lessons I learnt from him that day. I will try to enumerate the lessons I learnt from this man to help you the way they helped me.
This man had my attention from the very beginning. “The share market is a game where people try to steal money from other people. That is the objective of the game and it is legal”, he began. I wondered what the professionals in Wall Street would have thought about that statement if they heard it. I smiled. I liked him already.
He continued: “If you are going to join this game, you are essentially given permission to steal money from other people and in exchange, you are okay with them stealing your money also. Some of the brightest people in the world will be playing with you. Therefore, if you are going to war and fight an army with real weapons, you better make sure you do not go there with a plastic gun.”
He said that people rush to the markets to lose their money. It sounded laughable but I guess it was the only conclusion one can draw from the fact that most people begin trading without sufficiently preparing and educating themselves. Of course, most of us do not put on a trade with the hope of losing our money; however, that is what we are effectively doing when we trade without adequate preparation.
“They just cannot wait to lose their money. They do not bother learning about the market first. They think it is easy. Most people know that they need training before they can fly a plane or perform surgery, but I do not know why they think it is easy to make money trading”, he exclaimed. He was quite emotional about it.
“Trading is hard”, he declared. Only about 5% of people know how to trade profitably. And so the probability of finding someone else who knows what they are doing is very, very small. “Do not rely solely on the advice of your brokers, your fund managers or whoever else. Your best hope for success is to educate yourself. The sooner you do that, the better off you’ll be.”
“When it comes to buying and selling shares, there is no such thing as investing. What people normally refer to as investing means long-term trading to me”. When people hold on to their investments for five or more years with the intention to sell later, then all they are effectively doing is trading…just with a longer time frame.
“Do not buy shares solely for the dividend payments. They offer you measly rewards”, he said. “Do trade only with the purpose of making money from capital gains. Buy low, sell high and that’s how you should make your profit.”
At the time, I was juggling between the concepts of short-term trading or investing for the long-term. I did not know whether I was taking the right approach by attempting to make short-term profits. He made his stance on the matter strongly.
He asked us if we knew what drove prices up or down. Remembering what my lecturer said in university, I responded, “the price moves up and down close to the intrinsic value of the share”.
He turned his attention to me and asked, “What share are you trading?”
“XYZ (I changed the name for the purpose of this article)”, I replied quite happily. Perhaps I could squeeze a tip or two from him about the stock.
“Do you know what the intrinsic value of XYZ Company is”, he asked.
I nodded my head sideways and muttered, “no”.
“I’ll tell you what the value of XYZ is… it is zero!” He barked.
I was taken aback by his response. Zero? Then what are we paying money for when we buy a share? I thought. Then he clarified himself.
“Price is only a perception – it is people’s perception of what they think the value of the share price is”.
“The key to success in trading is psychology”, he continued. Psychology? I thought. How did psychology get involved in this? “The stock market is like an opinion poll. It is a measure of what people think is going to happen. If they think the price will go up, you will see an upward movement on the chart because there are more buyers so the sellers increase their price because some of these buyers are willing to buy at higher prices”, he explained.
He then used an example to explain a typical trader’s behaviour when he trades without a system. As he explained it, I recognised my own behaviour in his demonstration.
This was all a revelation for me. When I was buying and selling shares I wondered what type of people were on the other side of the trade because collectively, they were pretty smart. Now I know. It was people like Bauer who were on the other side of those transactions, doing the exact opposite of what I was doing, using similar methods like the ones he was using. They were looking at the share market with a philosophy and an approach that were completely alien to me. Traders like him were making all the money and traders like me were losing.
I shook my head in disbelief that other people saw things the way they did. I felt excited knowing that there was another alternative, another approach in analysing the markets.
“What you need, is to develop your own trading system.” He exclaimed to everybody in the entire room. “Without a trading system, you will fail. I guarantee you. This trading system must be something that is suited for you and you only. Even if I give you my trading system I am certain that you will fail to make money, because my system is not designed for you. It is designed for me. That is why you need to learn how to use the tools and acquire the skills needed to be a trader”.
I accepted his advice without fully understanding this concept of matching a trading system to suit the trader’s own personality. It lingered in my mind for a long time. The wisdom of his advice became apparent to me as I slowly learnt more about the nature of trading.
Bauer diverted our attention to the charts on the screen projected from his laptop. All I saw were lines, curves, rectangular boxes and more squiggly lines. The tools of a professional trader: I thought. I was being shown the tools that my market ‘adversaries’ have been using to ‘clobber’ me with all this time. My heart was beating faster than usual. I was in awe. I wanted those tools.
I asked Bauer what program he used to analyse the markets. He told me. I also asked him how many indicators he used. I had read enough about technical analysis by that time to know that technical analysts use indicators to analyse share prices. There are many indicators to choose from so I wanted to know how many of those are used by professional traders. He started counting his fingers. ‘Seven’, he said.
I think many people there had not really read up on technical analysis but I had done my homework and by that time, I was pretty much the only person in dialog with him, asking him questions. I wanted to gain as much knowledge and wisdom he was willing to give me.
Then I heard one of the most important lessons I’ve learnt which minimised my losses during my early years of trading: “Trade so small that it is almost a waste of your time. Assume the next trade is going to be the first out of a thousand trades you are going to be making in your life. Even though your profits are smaller, your losses are smaller too. There is no need to rush. Do not worry about getting rich too quickly.”
He was suggesting that novices like me should trade using small position sizes. That means to buy small number of shares at the start. I was intrigued. I did not know a person should trade that ‘small’.
Eventually, the seminar ended. I grabbed the booklets and brochures given out by some of the staff. In one of these brochures was the name of the program he uses. They were selling the software with the courses they were offering. I could not afford the entire package but I knew I had to buy the same charting software Bauer used. I decided to learn as much as I could about how to use charts and graphs to analyse the market. I needed to develop my own trading system.
As for my friend, he said he had a car loan to take care of first. He would look into trading shares later when he had a little more money to set aside.
A couple of days later, I got a call from the organiser of the seminar, telling me that based from the questions I had been asking that night, I was the type of person that would most benefit from their education package. Bauer was asked to demonstrate the need for trading education because he traded the markets. In the process, he was selling the courses well. Bauer seemed knowledgeable and experienced. He has enlightened me and probably several other people in that room about how much there was to learn. I was sold. I just could not afford the courses at the time but I wanted them so badly that I asked the sales person on the other end of the line if I could work for them in exchange for the course.
I did not get to do the course but I bought the software from a different distributor at a cheaper price. I also bought the two books Bauer wrote. I figured that I could acquire the skills and wisdom through self-education. I learnt a lot from those two books and from using the software. Having that opportunity to attend that seminar was a ‘gift from the heavens’, as far as I was concerned. Wherever you are, Bauer, I thank you. You – and others like you -- have made me recognize the value of passing on knowledge and experience for others to follow.
When I studied the principles of investing in university, I was taught that the price of a share reflected the value of the company. With fundamental analysis, there are many methods on how one can analyse the financial statements of companies to find out whether a share is a good or a bad investment. You can conduct horizontal and vertical analyses on standardised financial statements, which are just fancy terms for comparing numbers. You can calculate certain financial ratios to get a better understanding of a company’s liquidity, working capital management, its ability to remain in business over the long term, and its profitability.
I applied these concepts when I started trading the stock market. Soon I found that if I wanted to trade shares in a timeframe of less than three months, decisions based on these analyses were not useful. I did not want to buy shares only to receive dividends. I wanted to trade for capital gains.
I was dissatisfied with my knowledge, the tools and the methods that I had to trade the markets. With my desire to trade a timeframe shorter than three months and my strengthening belief that emotions greatly impact on trading, I began to search for different approaches to buying and selling shares.
I went back to one of my textbooks in university. I wanted to know how else I could analyse the markets. From the passage I read, I learned that one can analyse the markets in one of two ways: fundamental analysis and technical analysis.
I bumped into a newspaper ad one day for a trading seminar. While reading through the ad I saw the words: technical analysis. An expert trader was going to speak on the exact topic I was interested in learning. It was a free seminar and everybody was welcome to come along. So I called a friend of mine and I asked if he would be interested in attending this trading seminar. He was.
The seminar was organised by a business selling trading courses: courses to instruct people on how to trade the share market. When we arrived, we were led into a small room. There were about thirty people. The spokesman was apparently a veteran trader who wrote two books on trading. Let’s call him Bauer for the purpose of this article. Bauer had a very strong presence. He was a huge, tall man with a clean-shaven head.
I was on the front row seat trying to listen and understand every word this man said. It was his teachings that planted the seeds of how I eventually grew as a trader over the years. Many times, I heard his voice in my head, reminding me of the lessons I learnt from his books and the lessons I learnt from him that day. I will try to enumerate the lessons I learnt from this man to help you the way they helped me.
This man had my attention from the very beginning. “The share market is a game where people try to steal money from other people. That is the objective of the game and it is legal”, he began. I wondered what the professionals in Wall Street would have thought about that statement if they heard it. I smiled. I liked him already.
He continued: “If you are going to join this game, you are essentially given permission to steal money from other people and in exchange, you are okay with them stealing your money also. Some of the brightest people in the world will be playing with you. Therefore, if you are going to war and fight an army with real weapons, you better make sure you do not go there with a plastic gun.”
He said that people rush to the markets to lose their money. It sounded laughable but I guess it was the only conclusion one can draw from the fact that most people begin trading without sufficiently preparing and educating themselves. Of course, most of us do not put on a trade with the hope of losing our money; however, that is what we are effectively doing when we trade without adequate preparation.
“They just cannot wait to lose their money. They do not bother learning about the market first. They think it is easy. Most people know that they need training before they can fly a plane or perform surgery, but I do not know why they think it is easy to make money trading”, he exclaimed. He was quite emotional about it.
“Trading is hard”, he declared. Only about 5% of people know how to trade profitably. And so the probability of finding someone else who knows what they are doing is very, very small. “Do not rely solely on the advice of your brokers, your fund managers or whoever else. Your best hope for success is to educate yourself. The sooner you do that, the better off you’ll be.”
“When it comes to buying and selling shares, there is no such thing as investing. What people normally refer to as investing means long-term trading to me”. When people hold on to their investments for five or more years with the intention to sell later, then all they are effectively doing is trading…just with a longer time frame.
“Do not buy shares solely for the dividend payments. They offer you measly rewards”, he said. “Do trade only with the purpose of making money from capital gains. Buy low, sell high and that’s how you should make your profit.”
At the time, I was juggling between the concepts of short-term trading or investing for the long-term. I did not know whether I was taking the right approach by attempting to make short-term profits. He made his stance on the matter strongly.
He asked us if we knew what drove prices up or down. Remembering what my lecturer said in university, I responded, “the price moves up and down close to the intrinsic value of the share”.
He turned his attention to me and asked, “What share are you trading?”
“XYZ (I changed the name for the purpose of this article)”, I replied quite happily. Perhaps I could squeeze a tip or two from him about the stock.
“Do you know what the intrinsic value of XYZ Company is”, he asked.
I nodded my head sideways and muttered, “no”.
“I’ll tell you what the value of XYZ is… it is zero!” He barked.
I was taken aback by his response. Zero? Then what are we paying money for when we buy a share? I thought. Then he clarified himself.
“Price is only a perception – it is people’s perception of what they think the value of the share price is”.
“The key to success in trading is psychology”, he continued. Psychology? I thought. How did psychology get involved in this? “The stock market is like an opinion poll. It is a measure of what people think is going to happen. If they think the price will go up, you will see an upward movement on the chart because there are more buyers so the sellers increase their price because some of these buyers are willing to buy at higher prices”, he explained.
He then used an example to explain a typical trader’s behaviour when he trades without a system. As he explained it, I recognised my own behaviour in his demonstration.
This was all a revelation for me. When I was buying and selling shares I wondered what type of people were on the other side of the trade because collectively, they were pretty smart. Now I know. It was people like Bauer who were on the other side of those transactions, doing the exact opposite of what I was doing, using similar methods like the ones he was using. They were looking at the share market with a philosophy and an approach that were completely alien to me. Traders like him were making all the money and traders like me were losing.
I shook my head in disbelief that other people saw things the way they did. I felt excited knowing that there was another alternative, another approach in analysing the markets.
“What you need, is to develop your own trading system.” He exclaimed to everybody in the entire room. “Without a trading system, you will fail. I guarantee you. This trading system must be something that is suited for you and you only. Even if I give you my trading system I am certain that you will fail to make money, because my system is not designed for you. It is designed for me. That is why you need to learn how to use the tools and acquire the skills needed to be a trader”.
I accepted his advice without fully understanding this concept of matching a trading system to suit the trader’s own personality. It lingered in my mind for a long time. The wisdom of his advice became apparent to me as I slowly learnt more about the nature of trading.
Bauer diverted our attention to the charts on the screen projected from his laptop. All I saw were lines, curves, rectangular boxes and more squiggly lines. The tools of a professional trader: I thought. I was being shown the tools that my market ‘adversaries’ have been using to ‘clobber’ me with all this time. My heart was beating faster than usual. I was in awe. I wanted those tools.
I asked Bauer what program he used to analyse the markets. He told me. I also asked him how many indicators he used. I had read enough about technical analysis by that time to know that technical analysts use indicators to analyse share prices. There are many indicators to choose from so I wanted to know how many of those are used by professional traders. He started counting his fingers. ‘Seven’, he said.
I think many people there had not really read up on technical analysis but I had done my homework and by that time, I was pretty much the only person in dialog with him, asking him questions. I wanted to gain as much knowledge and wisdom he was willing to give me.
Then I heard one of the most important lessons I’ve learnt which minimised my losses during my early years of trading: “Trade so small that it is almost a waste of your time. Assume the next trade is going to be the first out of a thousand trades you are going to be making in your life. Even though your profits are smaller, your losses are smaller too. There is no need to rush. Do not worry about getting rich too quickly.”
He was suggesting that novices like me should trade using small position sizes. That means to buy small number of shares at the start. I was intrigued. I did not know a person should trade that ‘small’.
Eventually, the seminar ended. I grabbed the booklets and brochures given out by some of the staff. In one of these brochures was the name of the program he uses. They were selling the software with the courses they were offering. I could not afford the entire package but I knew I had to buy the same charting software Bauer used. I decided to learn as much as I could about how to use charts and graphs to analyse the market. I needed to develop my own trading system.
As for my friend, he said he had a car loan to take care of first. He would look into trading shares later when he had a little more money to set aside.
A couple of days later, I got a call from the organiser of the seminar, telling me that based from the questions I had been asking that night, I was the type of person that would most benefit from their education package. Bauer was asked to demonstrate the need for trading education because he traded the markets. In the process, he was selling the courses well. Bauer seemed knowledgeable and experienced. He has enlightened me and probably several other people in that room about how much there was to learn. I was sold. I just could not afford the courses at the time but I wanted them so badly that I asked the sales person on the other end of the line if I could work for them in exchange for the course.
I did not get to do the course but I bought the software from a different distributor at a cheaper price. I also bought the two books Bauer wrote. I figured that I could acquire the skills and wisdom through self-education. I learnt a lot from those two books and from using the software. Having that opportunity to attend that seminar was a ‘gift from the heavens’, as far as I was concerned. Wherever you are, Bauer, I thank you. You – and others like you -- have made me recognize the value of passing on knowledge and experience for others to follow.
ISA Best-Buys
It's that time of year again when savers make a mad dash to deposit their money into an ISA to earn tax-free interest on savings.
Savers have until the end of the tax year on 5 April to save into an ISA, and as the ISA deadline draws closer, banks and building societies are offering better-paying ISAs to attract savers.
Savers have the choice of putting their money into a cash ISA or stocks & shares ISA, and if you already have an ISA but want to transfer to another provider to take advantage of a higher interest rate and net yourself some extra interest before the end of the tax year, then you still have time to do so, but time really is running short.
If you want to know more about paying into an ISA, then we've put together answers for you in our latest ISA guide. And if you still have questions, visit our ISA blog where more specific ISA questions are addressed.
ISA Transfer Picks
If you already have an ISA and are looking to transfer to a better paying account, then the UBS five year structured FTSE Income Plan is paying a rate of 6.50 per cent, available as a stocks & shares ISA and transfer ISA.
Royal Bank of Scotland is also offering a three year fixed rate cash ISA that returns 4 per cent a year, available as a cash ISA or cash ISA transfer.
Cash ISA Picks
If you want to invest in a Cash ISA, then Investec has a five year capital protected deposit plan with an annual yield of 4.75 per cent or a monthly yield of 0.38 per cent and can also be used as a cash ISA transfer.
Meanwhile, ING Direct is offering a Cash ISA with a guaranteed rate of 2.50 per cent for twelve months. While, Natwest has got an E Cash ISA for existing customers only, paying a rate of up to 2.50 per cent.
Stocks & Shares ISA Picks
If you're interested in a five year structured investment plan, then Investec Structured Products is offering maximum returns of 62.5 per cent at maturity on its FTSE 100 Geared Returns Plan ISA, but returns are not guaranteed and capital may be at risk.
Finally, if you want to take a bit of a risk but don't want to tie yourself in for the long-term, the five year Investec FTSE 100 Enhanced Kick-Out Plan ISA offers a fixed return of 9.25 per cent a year with the potential to kick-out after year one.
Savers have until the end of the tax year on 5 April to save into an ISA, and as the ISA deadline draws closer, banks and building societies are offering better-paying ISAs to attract savers.
Savers have the choice of putting their money into a cash ISA or stocks & shares ISA, and if you already have an ISA but want to transfer to another provider to take advantage of a higher interest rate and net yourself some extra interest before the end of the tax year, then you still have time to do so, but time really is running short.
If you want to know more about paying into an ISA, then we've put together answers for you in our latest ISA guide. And if you still have questions, visit our ISA blog where more specific ISA questions are addressed.
ISA Transfer Picks
If you already have an ISA and are looking to transfer to a better paying account, then the UBS five year structured FTSE Income Plan is paying a rate of 6.50 per cent, available as a stocks & shares ISA and transfer ISA.
Royal Bank of Scotland is also offering a three year fixed rate cash ISA that returns 4 per cent a year, available as a cash ISA or cash ISA transfer.
Cash ISA Picks
If you want to invest in a Cash ISA, then Investec has a five year capital protected deposit plan with an annual yield of 4.75 per cent or a monthly yield of 0.38 per cent and can also be used as a cash ISA transfer.
Meanwhile, ING Direct is offering a Cash ISA with a guaranteed rate of 2.50 per cent for twelve months. While, Natwest has got an E Cash ISA for existing customers only, paying a rate of up to 2.50 per cent.
Stocks & Shares ISA Picks
If you're interested in a five year structured investment plan, then Investec Structured Products is offering maximum returns of 62.5 per cent at maturity on its FTSE 100 Geared Returns Plan ISA, but returns are not guaranteed and capital may be at risk.
Finally, if you want to take a bit of a risk but don't want to tie yourself in for the long-term, the five year Investec FTSE 100 Enhanced Kick-Out Plan ISA offers a fixed return of 9.25 per cent a year with the potential to kick-out after year one.
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