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In this Newsletter:
Market Comments
Churning
Traders Email
More movement
The market has been challenging of late, below are some comments and suggestions that may help. Remembering that the method I use to trade, which may or may not appeal to you, is a medium term time frame using weekly charts for analysis. Also remembering that this is my opinion and that may differ to yours, however I am sure it will give you food for thought.
I am a trend trader, and I choose to trade in a weekly time frame. That sounds quite simple doesnt it? However most traders struggle to decide the following 2 important questions.
What sort of trading methodology will I adopt? (trend trader, swing trader etc)
What time frame will I use? (daily,weekly, intra day)
So what is a trend? Putting aside software indicators, TV commentators, economic forecasts or any other method, the most simple analysis of a trend is when the price on the graph goes from the bottom left corner to the top right hand corner. Looking at the chart below on the All Ords (ASX 500) for the last 2 years that is what has been happening.
Chart of the Aussie 500
Trends are challenging things to get your head around because they dont tell you when they are going to end until they are ending! Pity about that. Indicators can give you a quide, but the price is always the ultimate indicator.
Will this trend continue? If I knew that I would sell all my assets and buy an index future, but I dont know, so I (and we) are stuck with using the next best options, probability and risk control.
Whats probable?
Trends do tend to continue, and sometimes longer than most people expect, so the best way to play this market is to hold stocks that are going up, sell them if they fall, and re employ the money into other stocks that are rising. Simple methodology but difficult psychologically.
The market is churning
In my opinion the market has been churning, that means money is sloshing around the sectors looking for the best place to be, the result being a choppy sideways market. This bull market has been driven by a number of sectors, some of those sectors are slowing, others continue to rise, and some new ones appear to be asserting themselves. Dont take my word for it, lets have a look at some of the sectors in WEEKLY chart form.
Above the chart of the Discetionary sector continues to rise, suggesting consumers are confident.
Above is the chart of the Financial sector, it too is strong.
Above is the chart of Health stocks, they have been strong, but are slowing.
Above is the chart of Information Technology sector, it has been strong and continues to be.
Above is the chart of Telecoms, they have slowed but the uptrend is in place.
The sector of Small resources is really struggling
However Mid size resource companies sector, the XMR, show some investor interest recently.
Utility stocks have been strong the last 6 months
So it's all this money looking for the best or safest home that creates a sideways and or churning market, as well as uncertainty of course. But it's the uncertainty that creates the movement because everyone has a different view of where the best place for their money to be . So there is a lot of grasping at different ideas, methods and places, creating movement and a feeling of uncertainty.
Dealing with uncertainty.
There is a saying in the market "if it doesnt sell you out or whip you out, it will wear you out"
This is one of those times that it can wear you out. Look at the graph below.
The above is a monthly column graph of the system I trade, all the trades are posted for free on the website in the portfolio section. The above graph is a backtest over the last 2 years of a group of stocks with fundamental strength I select to trade.
The point is that weekly trend trading rarely makes your money smoothly and consistently, it does so in bursts, as you can see from the graph above. At the moment the system is in drawdown, that means it's pulling back. This is a weak time of year in the markets cycle, it could pull back more, or it could not. What stocks are in an individual portfolio and the size of those trades will make an impact too.
As you can see from the last red column some stocks will probably be stopped out as the portfolio falls, however I take the attitude that if a stock is not strong enough to stay in the portfolio then I dont want it. I will sell, wait in cash and re position into something better later. This is a sort of natural attrition process....selling weakness and buying strength. The market is changing, and if you want certainty then here it is: there is one certainty with the market, it will change.
Now! This is the hard bit you need to decide......what's your time frame and exit? Presuming you decide to become a weekly trader, because you are sick of the daily grind, you still need to decide what your exit will be, and that will be determined by what you feel comfortable with and if you can stick to it. If you can determine and commit to those two rules of time frame and exit, your trading could possibly be a lot easier pschologically for you.
There is absolutley no doubt that the hardest part of trading, and thats any sort of trading, is the sticking! I know many traders with great systems but they wont stick to them. Why? The system probably doesnt suit them and the only way to discover if it does is to give it a go for a while.
Traders Email
With all that in mind you might identify with the following email discussion I had recently with a client, Chris, with permission I have posted our discussion.
Question:
I hold fast to certain principles that guide my behaviour but I thought I had been working hard to be flexible and adaptable in my trading and through my personal life.
So how will I know when I am stubbornly sticking to a trade/system when conditions have subtly changed? What red flags do you use to check? More importantly how can I be flexible and adaptable when events and people in their interaction with me act in contrast to my principles - how do I not be dogmatic about what I believe?
We might be veering away from trading per se, but I think it will benefit my awareness of how I trade, so would be interested in your personal opinions.
Answer:
No we are not veering away from trading as your life mirrors your performance in the market. Your opinion of you being dogmatic is an opinion, my experience is that people that make judgements on others personality do so, or can do so because they have that character trait also.... are those judging you dogmatic too?
My observation and experience is that there are 3 methodology levels of trading,
1/ mechanical(you have fixed rules based on a tested methodology of when to buy and when to sell, regardless)
2/ mechanical with some discretion(you have fixed rules based on a tested methodology but occasionally use some discretion in your decision making, understanding that at times it benefits, other times it doesnt.)
3/ all discretion. (you have no fixed rules or tested methodology, or if you do have a method you dont stick to it, you tend to trade emotionally atempting to pick tops and bottoms, a few may be very consistently successful at this, but it is rare)
Most people want to or feel like they can start at level 3, my experience is that they cant.
So a good place to start is mechanical, to get used to being in the market, buying, selling position sizing etc.
The principle of trend trading is simple, buy something going up, position size, sell if it falls. But traders lose the simplicity in the complexity of emotion. Of course you need to learn to trade, but it is the emotional part of trading that is the hardest and brings most undone. It is only after some time learning the important principles that the trader realises that trading is like music...the sound is created in between the notes, and you learn to flow a bit with the market and not fight it. The fight is within, not without. Profits are created in between the trades, not by over trading and controlling.
Q/ So how will I know when I am stubbornly sticking to a trade/system when conditions have subtly changed? What red flags do you use to check?
Answer
I stick to my method the best I can, if I see something grossly over bought or I feel the market is also overbought I may use some discretion and wait a day or too, even a week or two, because I understand the principle of trend trading well, something you only get from sticking to something a long time, most people dont stick it out and never get the realization, red flags come with experience as do recognition of subtle change. However when begining its best to just stick to the system with small amounts of money.
Q/ More importantly how can I be flexible and adaptable when events and people in their interaction with me act in contrast to my principles - how do I not be dogmatic about what I believe?
Answer
I am sure you realise by now the incredible compatibility between spiritual concepts and trading. That is that you need to be an observer not a reactor. People who are calm learn to observe life, not jump into the emotion of it. Meditation for example teaches you to observe your thoughts so you can have more clarity. You have reacted to others comments, are they correct or not? Does it matter? No it doesnt, its one persons opinion and I would suggest laced with a degree of life conditioning on their part. One of the most difficult things about trading is to detach from our beliefs and observe. It's difficult because we all want certainty which doesnt really exist. If we knew what was going to happen trading would be a breeze, but we dont so we worry and look for security.
At the moment I am being contacted some by traders frustrated their portfolio is not performing, it doesnt mean to say that it wont get better...or worse! If you can observe and stay in the game then the profits will come, but few stay because of their emotions.
Of course one cannot get carried away with philosophy, a reason I encourage people to trade a small account to get used to the market, also it is being in the market with a system that teaches you about yourself and what suits you , and if you need to change it, unfortunately there is no other way as most of us have no idea when we start trading how much we can cope with.
Wrapping up
To consolidate what I am saying: the market is changing, some stocks are being sold and some held. Flowing as a trader and system means you accept what's happening, take the signals, re position and wait. I know its difficult but it gets easier with time.
More Movement
As many of you know the last 20 or so months I have been livng in a Buddhist Meditation centre. I have now moved to MacMahons Point in Sydney, I mention that so Sydney clients know I am now more accessible. Recently I was asked by another trader "how was your time there in the Meditation Centre? Here is my answer.
It was tough at times but great, I learnt an enourmous amount. Buddhist monks believe in a simple system to cope in a difficult environment... that difficult environment is called life. Like traders they have a system to cope.
That system has 3 rules.
1/ Discipline
2/ Staying focused and having good concentration, achieved through meditation
3/ Faith ( not necessarily religous faith but a conviction in what you are doing)
There is a lot of stuff in between of course and when you study Buddhism you can really go down the rabbit hole and get lost for years ( like trading )
If you could apply those three principles to your trading do you think you would perform better?
I hope that helps you understand a little of what the market is doing, I get comments from people saying its crazy, ah, no, its not, the participants are crazy!
Until next time, Peter
"Only through freely chosen discipline can life be enjoyed and still kept within the bounds of reason"
Mihaly Czikszentmihalyi (author of the book FINDING FLOW)
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