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In this news letter

ATAA thank you

Market Comment

When to Sell

Welcome to this newsletter.

Regarding my recent presentation about trading in Sydney on the 20th January.

I would like to say a thank you to Sydney ATAA, the organizing committee and all attendees. The feedback I got was positive, so it seems the majority got a lot from the night. I hope to see you all again soon.

The market

The market over the last month has drifted slowly down, however the overall trend is still up. The market has bounced a few times around 5100 in the last 6 months and a significant trend line exists around 5000. As always the markets climb a wall of worry, having concerns over China growth, US stimulus, the inflation v deflation debate, global debt etc. It is impossible to predict multiple outcomes, best to have a rock solid plan in place to respond calmly rather than react emotionally every time the market falters. The trend is your friend until it bends at the end.....this trend is still up as far as I can see.

Speaking of responding, during the last month I had a shocker of a trade. NEN was in the top 300, an oil explorer with interests in Vietnam. A negative report was enough for this stock to be slaughtered, and I was stopped out with a 83% loss.

Fortunately, because of good risk control,  I had a small amount of money in this trade and although a bruising to the psyche, not too much of a bruising to the portfolio. I am now out of this trade, one could argue and say why bother selling, just hang in and see what happens. However experience has taught me best to eliminate the experience from the mind and portfolio, seeing that stock sitting in the portfolio is just a constant reminder of one that went wrong.

Some may ask what about a fixed or electronic stop? Why didn’t I employ that strategy instead of a moving average crossover? (when the green line crosses below the red line its a sell signal) A fixed or electronic sell order in the market in this case would not have saved me, as the stock gapped down overnight and I still would have got out at the best price available to me on the next open......7 cents.

There are always debates about what the best stop is, as I always say, no method is perfect and they all have there advantages and disadvantages. However after many years of trading and testing I still prefer moving averages.

At the beginning of most of my presentations I present this slide. Its my business trading statement.

“The idea of trading or active investing is this, you buy a stock and hold it until it continues to rise, once it stops rising and either goes sideways, or falls, you sell it and re employ that money into another stock that is rising. This method done correctly and not too often, far outperforms the standard method of buy and hold as well as most short term strategies.”

That leads me to this trade below.

Unlike the NEN trade this is an example of when moving averages do work well. The first trade was a quick loser. It bought the 52 week high but travelled south immediately, a disciplined stop taken would have saved a lot of anguish as the price fell further.

Now you could say “oh yes but the price recovered” but we were not to know that and trading is not about predicting but responding, the price was falling , we had no idea of how far it would fall. If you agree with the statement above...then

"hold it until it continues to rise, once it stops rising and either goes sideways, or falls, you sell"

 you sell the falling stock and employ the money into another stock that is rising, or sit the money in the bank and be out of a stressful trade.

This trade was re bought using the 52 week high signal at $13.00 and sold 4 cents short of  $16.00. A 7 month trade for a 22% return. (around 38% annually) and that's not including dividends recieved  of 40 cents a share, kicking up the return to 43% annualised.

However the main point is this .

"once it stops rising and either goes sideways, or falls….you sell"

TRS had an extended sideways period of 7 months after being stopped around $16. One of the advantages of moving averages is that they “time you out” of sideways trades. When stocks go sideways for a long period of time they tend to do one of 2 things, break up or break down. A moving average will get you out if the price goes sideways because  they cross over giving a sell signal. Trading is about employing money for the best possible return, without doing lots of stressful trades, not having it sit sideways for 7 months.

TRS after being stopped at $16 never gave another 52 week high break out signal so it wasn’t bought again, just as well with what happened to it. After taking the sell signal back in May 2012 that money could have been re employed into another trade or left in the bank, rather than have it go sideways for again another 7 months, the result being an eventual heavy loss. Not to mention the frustration of seeing that happen.

A GOOD SYSTEM IS ONE THAT IS PSYCHOLOGICALLY SIMPLE TO TRADE

"This method done correctly and not too often, far outperforms….."

The important thing here is time frame. The trading statement is a simple method and works well, the problem is most traders over trade, or panic and sell at the worst times. Now is one of those times, the market is falling and the news is negative. The market is also “whippy” with stock prices moving around looking for certainty and and reasons to rise or fall. Indecision creates volatility as many traders panic and sell, then buy again. Trading methodology is relatively “easy” the psychology is difficult, weekly time frames and weekly systems give you time to breathe and respond without over reacting.

If there is a “trick” to trading it’s this. Try not to obsess about every little price move, the market will do what it wants to, with or without you. If you are constantly worrying and stressing then I suggest you have too much invested in the market for your personal risk tolerance. Having too much in there probably will make you worry and over trade in an attempt to control what’s happening.

You can’t control the market, we live in a world of control, and we expect to control, but the market is different and that’s hard for most to accept. You cant control the market but you can control things like.

     The portfolio amount (keep it small until you are experienced)

The risk per trade (keep it small until you are experienced)

                       The trade time frame (trading short term is extremely challenging, are you experienced?)

Medium or longer time frame trading is easier, and often gives better results than the frequent trader racking up brokerage , losses and taxes.

What else is happening?

A few months ago I featured these two sectors, they have stopped falling and there appears to be some interest in the resources sector...on low volume though.

The XEC has more volume but is yet to break the trendline and the blue 10 EMA is still pointing down.

The XAO has been under performing the US SP500, which is unusual as we normally track that index quite closely, I suspect an increase in the resources sector would change that but at the moment it is'nt happening with any conviction.

As always thanks for reading, trade well, dont panic, stick to your method and good luck this year. May you avoid trades like NEN and TRS!

all the best

Peter Castle

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