A Trader Girl's Guide To The Universe

As I was catching up on my weekend charting today (better late than never, right?) I noticed something special.

I didn’t trade yesterday, it was a holiday here and the markets looked junk so I took the day off.  I expected to see something happen today, but nothing really did and now I understand why.

All the USD pairs are sitting right on significant long-term zones of support.  I love a good support line, but like everything in trading they aren’t a rigid thing and a degree of flexibility is required.

Check out these charts.  This really seems to be a turning point for the world, a bit of a make or break situation.

Aussie 200

As you can see here the Aussie 200 is just a sneeze away from breaking the only support that’s preventing a test of last August’s lows.  And if those lows fail it’s a short trip to hell.  Oh alright, not hell – just the 2009 lows.  Which felt a little hell-like at the time, admit it.

AUD/USD

If the AUD/USD fails here, the next significant level is around 80c.  If this pair gets comfortable below 96c there is nothing to stop the bottom falling out of this, which will provide some amazing shorting opportunities in all timeframes.

EUR/USD

EUR/USD has an interesting chart, with more of a resistance ‘zone’ than a definite line.  But you can see that price has already penetrated the zone, and if it pushes through 1.2 we can expect some serious downside.

GBP/USD

This pair has been great fun to trade, there’s nothing not to like about a pair that has no brakes :)  Not only has the GBPUSD price broken the support line, it has also broken the long-term up-trend line so if this pair trades below 1.52 it could be a base jump to 1.44.

USD/JPY

This pair is really flirting with danger.  It’s already dipped it’s toe into the nether-world, and come scurrying back begging for another chance.  The damage might have been done here.

S&P500

The S&P500 is the exception to the rule here.  They too are on a significant support level, but are still supported under that by 1225-ish.

There’s a lot riding on these instruments holding their life-support lines – if they all fail together things will get very messy and I believe very crashy.  There’s too just much out there holding onto the cliff-edge by the tips of their fingers, and one by one they will fall…unless they don’t.

And the thing is, the world doesn’t want them to.  We know about what’s going on in Europe, and we’re okay with it for now.  But it won’t take much more than a rumour to loosen that already precarious grip.

Chart-wise, we’re not far away.  It’s gonna be fun – I’ll see you on the downside.

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Unless you’ve been living under a rock, you know the only thing of note that has happened in the last fortnight is Facebook.

Europe?  Bah!  Facebook has floated!

Trading opportunities?  There aren’t any.  Except in Facebook.

In fact I’m entirely surprised that any other stock in the world had any trading volume at all with everyone so laser-focused on $FB.

Experienced traders and newbies alike have flocked to the stock, but why?  What’s so amazing about $FB?

Well, there’s obviously the controversy – traders love a juicy story and the hoopla surrounding the IPO has certainly given us all something to gossip about.

But the real question is – why the heck are people trading it?

The number of experienced traders I’ve witnessed trading $FB so early in the piece has surprised me. People seem to have missed the memo that’s it’s actually not illegal to leave it alone.

The thing is, most traders have rules to follow. A technical trader, for example, has next to nothing to base a trade on in $FB at the moment because not enough has happened yet.  All the support and resistance is in the process of being created, and moving averages haven’t yet got enough data to produce a line.

$FB options have only just started trading and with no history to speak of, historic volatility has to be a guess, at best.

And fundamentally everyone knows the IPO was wildly over-priced, so I can’t see much of a basis for a trade there either.

So why are people insisting on trading it?

If traders have rules to follow for IPO’s that’s great.  But if that’s the case, they should’ve also been trading stocks like $PDH, $WAGE and $IRG and I’ve heard precisely zero about any of those stocks.  Funnily, there was a buck to be made by ignoring the $FB hype and investing in those babies instead.

Everyone’s trading $FB because it’s cool.  It’s just like everyone buying Crocs clogs, despite the fact they have as much appeal as over-priced gardening shoes.  We’re suckers for the limelight, and are happy to look ugly and trade ugly if it means we get some cred with the crowd.

Here’s a tip – just because it’s fashionable, doesn’t mean you should wear it.  Or trade it.

Realistically, unless you have an explicit set of rules created for trading IPO’s you aren’t trading Facebook, you’re gambling.  Don’t forget that it’s our job to make money, not be the coolest kid on the block and sticking with your worn-in favourites is often a much better look.

Enough said.

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We all know the stats.

Apparently, only about 20% of traders actually make money, while 80% don’t.  This is really interesting because it makes websites like Twitter and StockTwits somewhat of a phenomenon.  You see, in these places the stats are different.

Socially, only 10% of traders lose money, 20% are legitimate traders earning a buck and the other 70% are world-class Trading Gurus who in reality are either –

  1. pre-major-loss newbies who haven’t yet had the stuffing knocked out of them,
  2. self-proclaimed experts with a mediocre website and an over-priced mentor program, or
  3. the genuine article.

Only true Guru’s can pull off white pants.

Separating the Wheat From The Chaff

With the relative anonymity of Twitter and StockTwits, it can be a bit tricky to know exactly who we’re dealing with.  When it comes to knowing who to listen to, the devil is in the detail.  There are attributes that real trading gurus possess and things that they do that types ‘1’ and ‘2’ do not.

  1. A face.  Real people have real faces.  Please don’t hand over $5k for a mentor program run by Borat.
  2. A reputation.  The really great people to listen to will attract you through their connections.  People will be retweeting them, talking to them and following them.
  3. The real deal generally won’t search you out and make contact out of the blue.  They don’t need to because you will find them.  If a big name follows you and you’re new to the scene it means either a) you’re awesome, or b) they’re selling something.  Sadly, no matter how awesome you are the odds are on the latter.
  4. The real gurus are humble.  They don’t try to impress you with their biggest win, they don’t beat their chest and they don’t try to make you feel inferior.  They build trust through providing real value for free, and even better value at a cost.
  5. They realise that one winning trade does not a trader make, and emphasise risk management rather than mega-wins.
  6. They don’t pick arguments, don’t sledge and don’t give unsolicited ‘advice’.
  7. They are great in their niche, and realise their niche is not everyone’s cup of tea.
  8. They are real traders, rather than analysts or economists.

So if Borat approaches you and innocently starts asking questions about your method, then proceeds to beat his chest and try to convert you to his method regardless of the fact you didn’t ask for his opinion, you know you’ve got a type 2 guru.

If an egg, or a StockTwits default avatar start regularly boasting about their 20 pip wins and never seem to lose, you have a newbie who’s about to get his face torn off.  You can stay for the show, if you like – but it’s more likely they’ll just fade into the distant shadows.  If you listen carefully you might hear some wounds being licked, assuming a portion of his face remains.

And if you’d like a short cut to find some real traders you can learn from (and learning is not just for newbies) this link is a great place to start.

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People are interesting.

On the one hand, you get people like me who find out just enough to be dangerous and promptly leap into the fray, arms flailing and whooping like an Indian.

People like me are idiots, really.

And on the other hand, you get other people who sit down in a very calm manner and proceed to read everything they can get their hands on, ask questions, take notes, and get everything in order before cautiously moving forward.

These people are wise.

People who don’t rush in avoid making stupid mistakes.  I once tried to wax my own eyebrows – wise people wouldn’t try that, because they know that trying to apply hot wax to a vertical surface will result in a) hot wax dripping in your eye, b) nasty burns to the eyebrow and c) men at the hardware store wondering if you’ve had an accident with a nail-gun.

I learnt this the hard way, the same as I learnt about the markets the hard way.

But what happens when you’re not like me?  Sometimes, the theory reading types are so carefully organised and so well prepared for any eventuality, but when push comes to shove they can’t quite bring themselves to leave the safety of the shore and kick off into deeper waters.

Right! Who’s ready to feed the ducks?

Trading is kind of like swimming – you can read about it, learn about how to form the perfect stroke but once you’re in the water you realise all the theory in the world has not taught you how to swim.  You can’t learn to swim without getting wet, and you can’t learn to trade without being in the market.

But that is not to say all the theory is wasted, because it’s not.  Once you adjust to the water and get the feel for being wet, all that theory will come in very handy.

Getting Going

Yesterday I got an email from a trader named Archana, who stood out to me because she has done a lot of homework but has not yet placed a trade.  I have so much respect for that because she won’t go through the learning process (aka ‘torture’) that I did.

She has read loads of books and studied charts and has gotten to a place where she’s ready to trade but doesn’t know how to start.

“All this to say, I am at a point where I want to put into practice what I have been reading and charting, to some extent. The objective really isn’t to make mega $ right now, but I feel like I’m…ready to practice and find my own way.

Problem is, I have no idea how to start practicing.

So….may I ask what advice/suggestion do you have for me to start getting my feet wet?”

I definitely do have suggestions for how to get started, and funnily enough it still doesn’t involve placing a trade straight away.  I know, not what you’d expect coming from Impulse-Girl. Here are my top tips for taking the plunge in a controlled, no arms flailing manner.

Write a Plan.

The very first thing any new trader in Archana’s situation has to do is to gather all the knowledge they’ve acquired, and filter it.  Regardless of how much information you have about trading, you need to filter it into something that makes sense.  That is – you need to make a plan.

I’ve put together a basic one that will get you started which you can download at the end of the post.

If you don’t have a clear method to follow, all the knowledge in the world will disappear when you have a position in the market and you’re asking yourself 1.5 million questions.  If you have a plan, you don’t need to ask questions because you have the answers right at your fingertips.

Open a Demo Account

This is a bone of contention for many people because they argue that it’s not real trading, but people who love to plan, love to be organised and don’t like surprises will get heaps out of a demo account because it allows them to get used to their chosen platform and test their strategy with no money at risk.

Personally, I like to recommend demo accounts because it is a real test of discipline.

In some respects demo trading is way harder than real trading because it’s boring, there is no monetary reward and people like me just want to do it already!!

But demo trading gives you real insight into any internal flaws you might have.  For example, if you can’t follow your new plan to the letter in a demo account for 20 trades, log all your results, conduct your analysis and trade reviews just as you would in a real trading environment, you’re fooling yourself if you think you’ll be disciplined enough in a real trading environment where you’re dealing with raging emotions to boot.

Use a Baby Account

Any time I’m working out a new strategy I use a tiny little account to do it.  It’s money I can lose – although clearly that’s not the plan – but it’s there with the explicit knowledge that it’s testing money.

Once you can see a consistently rising equity curve, you can start adding funds gradually – I suggest gradually because when you’re used to seeing a loss of $20 per trade, suddenly upping your risk to $1000 can be a bit of a nasty shock.  It’s much better for the heart to get used to a higher risk level in increments.

Get Your Spreadsheets Ready

Trading is not a hobby, and if you treat it as such it will cost you money the same as every other hobby does.  If you want to be profitable you need to treat it like a business, and track your results.  You need to know at a glance how many trades you’ve taken, how many wins, losses and breakeven, your transaction costs, your profit and loss and your expectancy.

You need to document your risk so you can see how your Risk/Return graph is looking.  The more records you keep, the better placed you will be to find any anomalies and fix them quickly.

And with that, you’re pretty much ready!  My only other suggestion would be to take it easy, go slow, and keep your arms firmly by your side.

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Click here for your free Trading Plan!

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Charting Bare Naked.

I’ve been emailing a trader recently – let’s call him Carlos – who is in the process of refining his method.  To date, he hasn’t experienced too much success and is on the hunt for answers .  Which is quite a common story, in fact every succesful traders story tends to start that way.

The thing I love about Carlos is that he’s not one of these.  He actually listens to what I suggest, and makes the changes.  He’s heading in the right direction, and I reckon he’s going to make it.

But he did make me laugh, because he’s doing what nearly every trader does at the beginning of their journey – he’s working off charts that look like this.

Noisier than a night club.

Now, if you have a chart like this and you love it and it makes you money, that’s brilliant.  Sometimes people who start like this never stop.

But the problem here, especially for new traders is that there is so much noise distracting them that they can’t quite figure out which way is up.

They read about ‘essential’ indicators like the stochastic and MACD, then add a couple of MA’s and of course a few Fibs – everyone knows all the cool kids use Fibs – and base decisions on them not realising that –

a) They’ve got 3 indicators that do the same thing,

b) All indicators are derived from price,

c) No-one has ever been arrested for saying the MACD is a piece of crap.

Compare this.  This is chart-porn.

See?  It’s naked!  Isn’t it lovely?

When you ditch all the colour, the noise and the hoopla, you actually have a fighting chance of seeing things as they are.  A quick glance tells you everything – and I mean everything – that you need to know.

I don’t trade BHP.  This isn’t a carefully picked chart, designed to prove my point.  And as you can see, all it takes is a fleeting glance to establish that we have a double top at $50.  We have a broken up-trend line after the second top.  And we have a break of support at $34.

What more do you need to know?  This is a sell, sell, SELL, with a target of about $20. (Of course, this is not a recommendation, it’s an opinion – but you know that because you’re smart😉 And you also know that I’d wouldn’t sell BHP because of my Number 1 Shorting Rule )

There is so much information in a bare-naked chart that simply gets drowned out by the overbearing presence of gaudy indicators.

Looking at an indicator is like getting a rough translation of what the price is saying – chinese whispers in a chart.  And when you layer indi upon indi upon indi, every layer takes you further and further from what’s really being said.

So try it.  Strip your charts back to naked, and discover how clear things suddenly become.

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While I was in the shower this morning, my mind was drifting and somehow I recalled having read something nasty about all the traders who were shorting $AAPL.  I love secretly laughing at idiots – I get it from my Dad, although he’s not so secret about it – and my immediate thought was that shorting AAPL would have to be one of the dumbest things you can do.

AAPL would simply have to be one of the worst shorts ever.  It’s quite literally the best company in the world, and as such violates my number 1 shorting rule which is “Don’t short the best company in the world.”

But then I thought about it some more.  I put myself in the delusional shorters shoes and tried to see what they could see.  Eventually, after much anguish I actually found a few things that might make selling $AAPL seem attractive.

Five Things That Make Selling APPLE Not Quite as Idiotic.

1. The US market was clearly topping, and as Apple had been selling off prior to the almost-double-top in the S&P500, it could be a justified case of kicking a (top) dog while it’s (slightly) down.

2. One of the risks of shorting is that the company you’re short could get taken over, resulting in a huge loss when the share price jumps to the take-over offer.  There is zero chance Apple will get taken over because it has more money than the whole world combined.

3. On a weekly chart, the price has moved well away from its up-trend line.  In conjunction with number 1, this could’ve been seen as a catalyst for a revert-to-mean kind of momentum trade.

4. Sadly, Steve Jobs is gone.  Does anyone else in the world have sufficient vision and spunk to not only continue, but improve on what he started? (Sorry, just trying to think like a fundamentalist – I realise it’s unbecoming.)

5. There is no 5th point. Sorry.

Think Different – Don’t Short $AAPL

There just aren’t that many ‘good’ – if you can even call them that – reasons for shorting a company like $AAPL.  If you want to short something and actually make a high-probability trade, look for the limping stocks, not the market leaders that have just reached $600 a share.

To be honest, I think there are traders out there willing to pay money for the opportunity to tell their grandkids, “I shorted Apple when it was $600 a share, and do you know what laddy?  That was the highest it ever got.”

A teensy chance, but worth a shot, right?

People love to rip down the worlds successes, it’s a small way we can make ourselves feel better about our own under-achievement and shorting Apple is a prime manifestation of that.

If you want to be successful in trading you have to let the great stocks be great, and kick the dogs while they’re down.   Both the greats and the dogs have the potential to make you rich, but you have to get them the right way around.

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It seems the world has noticed us.  Australians tend to get ignored a little on the world stage, like some backward country yokel sitting in class with bare feet and grubby pants.

But not now.  The cool kids seem to be paying attention to us, if only to tell us that we’re about to get our head stuck in the toilet.

Recently I’ve seen a variety of articles looking at our property markets and commenting on the great big fat bubble that is about to pop in our faces and doom the whole country.

Australia has some of the most expensive property in the world which seems to mean it’s over-priced.  And perhaps it is, in terms of affordability for the average Joe.

I’m not denying it looks like our property market is in a bit of a bubble.  But there seems to be assumption that bubbles have to burst in a most spectacularly gloopy messy fashion, and it just isn’t the case.  Sometimes they just kinda go pffffffft.

Pfffft....slightly down, but fully functional.

The thing that people seem to overlook is that Australians need somewhere to live.  We don’t have the same problem as the US had, where there were just way too many houses built that no-one really needed.  Our rental markets are tight – lower than 1% in some capital cities and rents are rising.

There is an under-supply of housing, and new buildings take time to construct.  New land development takes a notoriously long time to get through the miles of governmental red-tape so it’s not an under-supply that can be remedied in the blink of an eye.

Australians need houses.  It’s basic supply and demand at work here, and it’s this demand that will keep our property markets from having a US-style bust.

We also don’t have weird bank policies that allows us to walk away from our homes if the financial pressure gets too much.  If we sell our homes at a loss, we have a debt to pay back and it’s this nuance that will stop people selling their homes in a blind panic the minute they lose their job or can’t pay the mortgage for whatever reason.

Oh yeah – we don’t have sneaky balloon-payments, either.  I don’t think.  Better check my paperwork.

The other thing is that our property markets have been flat, to slightly down-trending for a while now – pretty much since the GFC.  There’s been localised booms and busts, but on the whole pretty flat for the last 5 years.  This is not a bust, it’s just a normal sideways position that markets go through every cycle.

From a personal perspective, a period of very tight vacancy rates in conjunction with a falling interest rate environment and lower house prices is just screaming opportunity for those who can look past all the woes of the world.

Not only that, there’s streamers, confetti and carnival music – although it’s quite possible I’m just channelling “The Price Is Right”.

Am I the only one who’s going to Come on Down? (under)??

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