Most Traders Loose Money?

There is a believe that 80% of investors earn money but 80% of traders loose money… How true is this? Hmm… Logically, I think this is sad but may be quite true. Why do I say that? Well, I believe the answer lies in the time frame…

I think one of the major differences between investing and trading is the time frame. After all, sooner or later even investors need to sell their shares for the profit. The difference is the holding time. The shorter the time frame, the more accuracy is needed in the entry and exit. This is why, investors who are supposed to hold their stocks for a long time, can use time to dilute their accuracy of entry. This probably explains why the chances for investors to make money is so much higher.

As for traders, the time of holding is a lot more shorter. So, accuracy is far more important. However, lets not forget that trading also has different time frames, from intraday to trend following. So the accuracy needed will also differ. So, it is the accuracy of entry and exit that will determine the success rate of trading. Since we mentioned that the success rate of traders is so low, that means the accuracy of most traders are extremely low… Hmm… Why is it so?

For traders to time their entry and exit, a method called Technical Analysis (TA) is used. However, this method is not as easy as we would hope it to be. Not only that there is no single method that can be used to time the entry and exit perfectly for every counter, this is complicated more when the market changes. This makes it crucial for traders who use TA to keep on learning and adjust to the market. Which is why, I believe it is always important not only to know how to use the indicators, but it is even more important to understand how the indicators were made. Only by knowing how it is made, we are able to adjust them to fit the market. The market is a highly fluid condition, so if we are not able to adjust, our so called super accurately winning strategy of indicators may turn you into the biggest loser that walk the earth… Hehe… Just trying to make my point more dramatic… But seriously, never ever stop learning and adjusting. In market, the concept of “Survival Of The Fittest” is very real.

So, if you want to make it into the winning 20%, make sure your accuracy is high enough by remembering to learn and adjust… Happy learning…

The Magic Hand

Recently, this term of “Magic Hands” is heard really often… I wonder why is it so often heard these days? “Magic Hand” or “Operator” has been there since the beginning of stock market and has been continuing since then. So, why now? Is it because it is like some fashion that has been popularized by some model? Hmm…. Maybe, or I guess might be because of a few reasons; 1) Timing 2) Easy to accept.

Timing:
Why do I say it is timing? One, it is believed that the upcoming and ongoing elections have its effect… It is believed that the government is behind and supporting the KLCI.
Two, recent price movements of KLCI. It is believed that the massive price movements recently is due to the supposed to come corrections are supported by the “Magic Hand” or the government. How true is this? I don’t know… But I will give my views later.

Easy to accept:
Why do I say it is easy to accept? It is because we have been in a community where we believe that the stock market is like a gambling place and it is controlled by the “Big Boys”, so small potatoes like most of the people only go to gamble their luck. With this mentality in mind, of course people will subscribe to the believe that the “Magic Hand” controls all the movement of the market.

My views:
Now, I will give you my opinion, but of course just my comment. I’m not saying I am definitely right. But maybe just for reference. As I have said, I fully believe that the so called “Magic Hand” or “Operator’ exists, but they have been here all these while, so there is nothing new about it and we need not get too paranoid with it. Very often these days when the KLCI goes up, we hear people saying the “Magic Hand” is doing its work, the KLCI goes down a bit, we hear people saying “Magic Hand” tired. But I believe the right thing and the right perception should be the same as before, the KLCI is up because buyers are buying and it goes down because the sellers are overwhelming the buyers. Isn't this the correct approach towards the stock market? An even more interesting phenomenon is that whenever the KLCI shoots up at the end of the day’s trading session, people will say it is the work of the “Magic Hand”. Well, maybe it is, but it is also very common for heavy buying at the end of the day. This can be read in “Trading For A living” by Dr. Alexander Elder.

The question now is, why are we so fascinated by this “Magic Hand”? Maybe it is because by believing that the movement of price is all controlled and fully manipulated, we need not learn anymore, because no matter how we learn, the price is beyond our understanding because they are controlled by something else. But HELLO! Since the work of operators are here all these while, and if you really put the effort into learning Technical Analysis (TA) properly, you would understand that the work of these so called “Magic Hand” is all written in the charts as any abnormal price movements will be plotted down as charts. Of course you can argue by saying that they will manipulate the charts to trick those TA believers. This is true, which is why we have a thing called cut loss in TA as a countermeasure.

We need to set our mentalities right to survive in the stock market. One, please wake up! Almost 95% of us are not stock operators and we would not get any information into how they work and how they plan to work. Thus we should not go into speculating. And we need not care about how they manipulate the price. Since we are here to make money, why don’t we concentrate on how to use their activity to make money? In order to do this, there is no such thing as a short cut. You will have to LEARN and READ. As I have mentioned, people take shortcuts by believing in “Magic Hand” because they would like to believe there is nothing they can do to predict their actions. So please, think again. TA may not be able to predict their actions, but they are are most accurate method to track their action that is readily available to the public (Who Are Willing To Learn).

It is always true that government tries their best to prevent their people from being too superstitious and believing only in the supernatural because this will stop the people from exploring into other means like science. Which means the country will not be developing. There is nothing wrong to ponder about their existence, but lets not get too carried away.

I know this piece of posting will offend a lot of people, but please… All I want is to give a wake up call to the readers. And it is to the benefit of the readers, not mine. So please do take some time to ponder over this. We are not operators, and we cannot see things through their perspective. All we can is to try to move along with their actions and effects through a method called Technical Analysis. Please do pick up a good TA book and read it To Understand. Please don’t just read to finish, get into the basis of how the method is derived. Please…. I do not want to see my dear friends to succumb into the mystic world and forget that they are living in a real world of science and art any analysis…

Investor & Trader Similarity (Stock picking)

Ever since these two terms come into existence, there are arguments of which is the better among the two. Not only that, the list of differences among the two goes on and on. From time frame to stock picks to method of play, differences after differences were listed out. Pros and cons of the two schools of thought were being raised. But for now, let us put all the differences aside and let us look into the basis and find the similarities, shall we?

I’m sure some of you will be thinking,” Wow…. Wait a minute…. Investors and traders… Similarities?” Actually there are a few, not to mention that both are to make money through stocks… Agreed? Haha… This is one similarity already… How about that for a good start?

Ok… Now we move on to some more serious ones…. Let us look at stock pick.Basically we say that investors and traders choose their stocks using different methods right? We say investors use Fundamental Analysis (FA) but traders uses Technical Analysis (TA), right? I’m sure you will agree if I say TA is made up of methods and tools to assess the interest or demand of the crowd towards a particular stock, by using MACD, EMA, RSI, etc. There is no doubt about that. This is what people call as the “Trader’s Style”, to buy a stock that is in demand. Now, investors actually also do the same thing, only the method they use is different. They use FA instead of TA. Why do I say that? Let us look into the basis of FA. FA is composed of areas like earnings, P/E ratio, ROE, NTA, etc. Actually, what are these methods measuring? It is to assess if the company is fundamentally strong. Correct? Now, why do investors choose fundamentally strong company? Have you ever wondered what are the real reasons behind that? Well, some say that they want to make sure the company is strong and is earning money. Well, that may be the reason, but actually investors uses FA to value a company’s performance in order that they will be able to select a company which will have price appreciation in the future because the demand for their stocks will increase. They believe that a fundamentally strong company will continue to become stronger and as time goes, the demand will always be on the hike. So, the price will go up together with the demand in the long run. Which means FA is the same as TA, they are used to decide if the stock will be in demand. And both investors and traders choose stocks that will be in demand... The only difference is the time frame… FA looks a lot further into the future.

So actually, there is a similarity when it comes to stock picking among investors and traders, both pick a company with the believe that the price of the counter will go up after their entry due to the increase in demand. There are a few other similarities that will be posted in the future… In the mean time, let us embrace both our investing and trading brothers and sisters in understanding and peace... hehe...

Testing… Testing..

I picked this interesting test done by Dr. Shapiro in the book “Trading For A Living”written by Dr. Alexander Elder. Do try this out for it is very important concept to grasp in stocks, so please be honest. First, try not to think too much and use your instinct or feeling to answer, then try again after thinking properly and carefully… See if your answers are the same before proceeding to the explanations, hehe… this can be quite fun:

Part 1:
If I give you two choices: 1) A 75% chance to win RM1000 with a 25% chance of getting nothing. Or 2) A 100% chance to get RM700. Which would you go for?

Part 2:
If you are given two choices: 1) A sure 100% loss of RM700 Or 2) 75% chance of losing RM1000 but a 25% chance of loosing nothing and keep all your RM1000?


Explanations:
For part 1, four out of five subjects will take the second choice. The majority makes the emotional decision and settles for a smaller gain.

For part 2, three out of four will take the second choice, condemning themselves to lose more in their effort to avoid risk, they actually maximize their losses…

Emotional traders want certain gains and turn down profitable risks that involve uncertainty. However, they will go into risky gambles to avoid taking certain losses. It is our human nature to take profits quickly and postpone taking losses. Irrational behavior increases when people feel under pressure.

If you were to look into your account, you will realize that the major burns that you have is a few large losses that was there because of your inability to cut loss. Or it might be the continuous small loss made because you were under pressure to cover back the loss you made. All these only proves once again how important money management and cutting loss is in trading…

Cut Loss & Affordability (Mentality)

Before you proceed to study Technical Analysis and become a trader, please be reminded to get your mentalities right. To me, the first thing that you need do before you even think of becoming a trader is to calculate how much money you can afford to loose. Pathetic don’t you think? People go into stocks to earn money, but this stupid guy tells me to think about how much I can loose first?

Wait… Let me explain…. First of all, technical analysis (TA) is not a miracle method that can give you 100% accuracy. No matter how much you have read, how many charts you have studied, how great indicators are, technical analysis is just not correct all the time…. Especially when you are just starting to try this technique. You may hear your friends or some super guru on TA tell you about this miracle setting or indicator that will help you pick out winners… But once you try things out… You may find that it is just not that simple… So many things can go wrong… Misinterpretations, misleading and contradicting indicators, unexpected change in crowd behaviour… etc… So, how can you make sure that you are correct 100%? Whether you like it or not, TA is actually using the chart to predict the behavior of the crowd based on history… But whipsaws do happen… a simple bad news may cause mass panic which leads to panic selling…

The key to be a successful trader is to survive all this mistakes long enough in order to find the correct way to get it right… Which is why the rule of thumb for trading is to “keep loss small and let profit run”.

But how small is small? When to cut loss? This will be discussed further in future postings… But to make it simple, when you enter a trade, there has to be a buy signal that you use. It doesn’t matter if it is trend, MACD, Moving average, breakout… etc. But you must know why you entered in the first place… So, you must be prepared to cut loss once you find that the reason is no longer there… For example, if you entered because of uptrend, you must be prepared to cut loss once you realized you made a mistake when the price violates the trend.

However, another important point to remember about cutting loss is affordability. As we know, the financial status of everyone is different and this can affect the cut loss level to a certain extent. Some people like to say that your cut loss level should not be more than 2% of your capital. I would like to say that your cut loss level should be kept to the amount that you can afford if you were to make 5 consecutive losses, or 2 % of your capital, whichever lower.

With this affordability in mind, you will use them when choosing counters. I think we should not enter a trade when the cut loss level is above your affordability. It is safer to pass those trades. So, please remember this two points, Cut Loss & Affordability when you choose to trade.

Happy trading…

Be independent, but do not go against the crowd

How do you make decisions regarding your trade? According to Dr. Alexander Elder in his book “Trading for a living”, a successful trader must think independently. He needs to be strong enough to analyze the market alone and carry out his trading decisions. Sounds simple huh… Maybe not for everyone. Most people are sucked into the crowd and start to behave alike. The crowd behaves in a predictable manner because their actions at many times are repetitive and primitive. So, if you are able to think independently and make wise decisions, you will be able to take money away from crowd members.

However, there is one very important and crucial point to remember. Although I said that we should be independent in our decision making and we should not go against the crowd. As I have mentioned in my previous posts, the price of stocks are determined by their supply and demand. These two factors are directly determined by the crowd. If the crowd suddenly increases their demand for a particular stock, the supply will be short and the price will rise. The demand may be unjustified or may seem ridiculous to you, but you should not be going against it. The crowd may be stupid, but they are the most powerful force that will determine your gain or loss. They are the one that will determine the trend, so you can either tag along, or you stand aside.. Do not attempt to go against it. For example, you do not buy on a downtrend and you try not to sell in the middle of an uptrend. The more you are able to manipulate the behaviour of the crowd, the more successful you will be in the stock market.

So be independent without going against the crowd.

News and Effects

Good news! Good news! Good news about a particular counter is out everywhere.. newspapers, television.... You name it.... Maybe a large dividend, large project, huge profit... Anything.... Now, the basic instinct that we have is that when good news is out, the counter will sure have demand... When there is demand, the price will rise... So we jump in and grab the share by hook or by crook.. Whatever price also we are willing to pay as long as we get it fast. Then we can always sell at a higher price. This can be called, “Buy on news”. Is this concept true? Well, I would say the chance is 50%. Why do I say so? Let us investigate further....

Never forget that there is a group of people called speculators out there that will turn this logic upside down. They will cause the effect of “Sell on news”. They will snatch up the shares of a particular company before the news even came out. They will somehow get the information far earlier than anyone and they will start buying the shares at the lower price… Once the news is out, they will sell because by then the price would have risen and they take away the profit. Because speculators normally would grab a huge number of shares, so when they sell, they will cause the price to drop significantly.. And by then, everyone would panic and start their panic selling mode.. So the price will dip….

Case study: Stocks like Tebrau and UEMWRLD was rising tremendously before the announcement of the Nusajaya project.. By right, when the news actually came out, the shares should rise, but they took the other way instead….

So, “To buy, or not to buy?” Hehe… This is a tough question… That is why I don’t normally go for speculative stocks… But to know if there is already speculation in, you can tell by looking for clues. If the price of the stocks suddenly rises tremendously with super high volume for no particular reason, both from fundamental or technical point of view, it is a clue that something is fishy. Especially when there are rumours around about the company getting a huge project, etc… Be extra careful.. For those who have a huge taste and tolerance for risks and want to try out these stocks, you need to be very familiar with technical analysis… Make sure you enter early, place your stop loss plan… and FOLLOW it.. Try not to fall into the “last man on the block” syndrome.. That means, don’t be the last to enter or leave the building. Meaning don’t be the one to pay the highest but sell at the lowest price for the stock… Hehe…. These kind of stocks is like air filled balloons, they jet up when the air is released, but once all the air comes out, it makes a fast vertical fall…

Good luck and happy hunting…