$tochastic Trader

Long Term Investing Dead?

2009-04-03T15:50:00.003+11:00

Article from Trading Tutors Newsletter.

A lot of comparisons have been made between the current Global Financial Crisis and the great depression, and indeed there are many similarities. Unfortunately though, such comparisons seem to provide little scope for optimism, especially for the longer term investor. After all, anyone who bought prior to the crash in October of 1929 would have had to wait 25 years before their capital was recovered!

Similarly long periods are quoted for more recent market crashes, such as the 1987 crash where it took 9 years for new highs to be created. So there is little reason to think that even if the market is close to the bottom, we will see a swift return to 2007 levels. But does this mean that people who were invested in the market prior to this most recent correction should abandon all hope?

The long recovery periods that are quoted assume that all your capital is invested at the absolute high of the market. For those who had been regularly contributing to their positions in the years prior to the crash, their breakeven point will be well below that of the market high. This is because a significant run up is usually seen in the lead up to a crash. In the case of the Great Depression, the Dow advanced 244% in the 5 years prior to the crash, and 54% in the year prior. An investor who had been regularly adding $1,000 to their portfolio each quarter for 5 years prior to the crash would have seen their invested capital recover in just 7 years instead of 25. This still isn’t fantastic, but it’s a significant improvement in recovery time.

Continued investment following the crash helps improve the situation further still. In the above example, had the investor continued adding $1000 each quarter, they would have seen a 42% return on invested capital over the same period. This is because we tend to see substantial gains from the low of the market. Following the low of 1932, the Dow rallied 63% in just one year. The annualized growth over the next 4 years was a massive 31%.

Professor Jeremy Siegel, a noted expert in financial markets, has conducted some interesting research in this area. He has demonstrated that for the 7 largest corrections over the past 145 years, the market showed an average improvement of 24% in the year following the crash.Moreover, he noted that there was an observed 21.4% improvement per year over the next 3 years, and 18.4% per year over the next 5 years. Clearly, it pays to invest into the markets following a large correction.

The worst thing investors could do at this point is to pull up stumps and walk away from the market. Indeed, investors should be looking to add to their portfolios, average down their entry prices and position themselves for recovery. It may well take the market 10 years to get back to 2007 levels, but that doesn’t mean you have to wait that long.

Andrew Page.

Weekly Stocks Watchlist - Wk 6/09

2009-02-11T21:35:00.006+11:00

Dominion Mining Limited

Current price: $4.15 (11/02/09)
Sector: Resources/Gold
Key Indicators:

New 35-wk high observed last week, due to current rally in gold prices (US$914/oz).
STO[50,10] crossed over 50% last week, and looks set to rise; have been rising from low of 8% since Sept 08.
EMA[30] crossed over EMA[100] 4 weeks ago.

Weekly Chart:
Buy Order (IG Markets), as at 11/02/09:

Order price: $4.14
Qnty: 200 shares
Total: $828 (+ $8 transaction)
Stop loss price: $2.90 (-30% from order price)
Amount risked: $248 (+ transaction + interest)
Leverage: 75% (margin: 25%)

Trading Forex Using A Breakout System

2009-01-27T10:52:00.005+11:00

This is an article from http://theforexarticles.com/2007/10/24/trading-forex-using-a-breakout-system/.

Trading forex breakouts is one of the more basic trading strategies, but nevertheless it can deliver excellent profits. Just because a system is easy to follow does not mean it cannot produce consistent profits as breakout trading is a method used by some of the most successful forex traders around.

It's based around the whole premise that if a currency pair is trading in a very tight range for a sustained period of time, then eventually it will break out of that range and more often than not it will continue moving in the direction of the breakout.

This means that to make consistent profits you need to firstly identify instances where a currency pair is trading in a narrow range, and then place buy and sell orders at or slightly outside the current range to catch the breakout when it happens.

Furthermore if you want to look for the optimum set-up then you can use technical indicators to help you. My own method is to use a weekly 30 minute chart displaying 15, 50 and 100 period exponential moving averages.

When the price starts trading in a narrow range and all three of these EMA's have flattened out and also currently lie within this range, then this to me is the perfect breakout set-up. Why?

Well because with all three EMA's flat, something's got to give. It's like a volcano waiting to erupt. Once the breakout occurs, you could get a very big movement because the longer term EMA (100) can trend for a very long time so you could get a big points haul if this EMA follows the price and moves outside of the current trading range.

As regards targets and stop losses, I personally use the current trading range to determine where I place my stops so if I go long at the top of the range, then my stop loss will be at the bottom of the range. This is only really an emergency stop as most of the time the breakout will follow through and not go anywhere near this stop loss. My target price is usually the same number of points away as the stop at the very least.

The best thing about this system is that it works pretty well across many different time frames, plus not only does it work well for trading forex markets but it's also an equally good system for trading other financial instruments as well.

Risk Aversion

2009-01-22T09:50:00.003+11:00

There is a lot of talk about "risk aversion" in the financial markets these
days. It appears that when the markets go into free fall, risk aversion is
associated with the cause. Take this article as an example:

"SYDNEY, Jan 21 (Reuters) - The Australian dollar was on the defensive on
Wednesday after sliding to six-week lows as mounting concerns about the
global banking system hammered equities and drove extreme risk aversion..."

The following excerpt from Wikipedia explains what all this talk is about.

Risk aversion is a concept in economics, finance, and psychology related to
the behaviour of consumers and investors under uncertainty. Risk aversion is
the reluctance of a person to accept a bargain with an uncertain payoff
rather than another bargain with a more certain, but possibly lower,
expected payoff.

The inverse of a person's risk aversion is sometimes called their risk
tolerance (for a more general discussion of the concept, see risk).

Example:

A person is given the choice between two scenarios, one certain and one not.
In the certain scenario, the person receives $50. In the uncertain scenario,
a coin is flipped to decide whether the person receives $100 or nothing. The
expected payoff for both scenarios is $50, meaning that an individual who
was insensitive to risk would not care whether they took the certain payment
or the gamble. However, individuals may have different risk attitudes. A
person is:

risk-averse if he or she would accept a payoff of less than $50 (for
example, $40), with no uncertainty, rather than taking the gamble and
possibly receiving nothing.
risk neutral if he or she is indifferent between the bet and a certain
$50 payment.
risk-seeking (or risk-loving) if the guaranteed payment must be more
than $50 (for example, $60) to induce him or her to take the certain option,
rather than taking the gamble and possibly winning $100.

The average payoff of the gamble, known as its expected value, is $50. The
dollar amount that the individual would accept instead of the bet is called
the certainty equivalent, and the difference between the certainty
equivalent and the expected value is called the risk premium.

Buying on Dips and Selling on Rallies

2009-01-21T18:25:00.003+11:00

In an uptrend, a trader would want to wait for a pullback/retracement to a low, a level of support, and then go long (back in the direction of the trend) with their stop placed just below a recent level of support. This would be referred to as "buying on dips". The oscillator that you mention, could be used to time the entry. For example, entering an uptrend off of a pullback, the trader could use Stochastics as it came from being below 20 and moving above 20 as a sign that momentum would now be in the direction of the trade.

In a downtrend, the strategy would be reversed and we would "sell on a rally".

Take a look at the chart below for a visual...

The USDJPY pair is in a downtrend on the chart so we would only be looking for selling opportunities. Each time the price action moves back up/retraces within the overall downtrend, it would be another opportunity to sell the pair. The stop would be placed perhaps 20-25 pips above the highest point that the pair had traded on that particular upswing.

Also note on the chart below how MACD shows crossovers to the downside indicating that momentum is behind each of the selling opportunities on the chart.

---
Source: Richard Krivo, Power Course Instructor (strategist@dailyfx.co)

Trade Exit: AUD/NZD Long Position, 20-Jan-09

2009-01-20T21:12:00.002+11:00

Exited Short Position in Spot FX (mini) AUD/NZD
Closing Price: 1.24374
Opening Price: 1.22885
Contract: 1 (mini)
Closing Contract Value: NZ$12,24374
Opening Contract Value: NZ$12,288.5
Profit: NZ$148.9 (A$120)

Justifications:

Take profit.

Chart:

AUD/NZD Spot Fx Mini - Hourly

Trade Exit: NZD/USD Short Position, 20-Jan-09

2009-01-20T21:00:00.004+11:00

Exited Short Position in Spot FX (mini) NZD/USD
Closing Price: 0.5335
Opening Price: 0.5475
Contract: 1 (mini)
Closing Contract Value: US$5,335
Opening Contract Value: US$5,475
Profit: US$140 (A$212)

Justifications:

Take profit.

Chart:

NZD/USD Spot Mini FX - Hourly

Trade Entry: AUD/NZD Long Position, 16-Jan-09

2009-01-16T21:46:00.000+11:00

Security: Spot FX (mini) AUD/NZD
Direction: Long
Opening Price: 1.22885
Contract: 1 (mini)
Opening Contract Value: AUD$10,000 (NZ$12,288.5)
Stop Level: 1.2000
Amount Risked: NZ$288.5
Interest rate differential fee: -0.75% p.a.

Technical Justifications:

Standard & Poor’s warned that it could downgrade the country’s foreign currency debt rating, sending the Kiwi dollar on a downward spiral against other currencies; and NZ central bank expected to cut rates by at least 100 basis points on January 29, see here.
There is a breakout on the daily chart resulting in a 1-month high for the pair.

Chart

AUDNZD Spot Mini - Daily

Trade Entry: NZD/USD Short Position, 16-Jan-09

2009-01-16T20:40:00.000+11:00

(Re-Entry)
Security: Spot FX (mini) NZD/USD
Direction: Short
Contract: 1 (mini)
Opening Price: 0.54750
Opening Contract Value: NZD$10,000 (US$5,475)
Stop Level: 0.56750
Amount Risked: NZ$200
Interest rate differential fee: -4.75% p.a.

Technical Justifications:

Economic data still points to a bearish NZD - CPI figures expected to deteriorate.
NZDUSD has experienced a 200pip retracement recently, but this is expected to be short lived and resume its bearish trend.

Chart

NZDUSD Spot Mini - Hourly

Trade Entry: AUD/USD Short Position, 16-Jan-09

2009-01-16T18:33:00.005+11:00

(Re-entry No.2)
Security: Spot FX (mini) AUD/USD
Direction: Short
Opening Price: 0.67211
Contract: 1 (mini)
Opening Contract Value: A$10,000 (US$6,721.1)
Limit Level: 0.65211
Stop Level: 0.68411
Amount Risked: US$120
Interest rate differential fee: -4% p.a.

Technical Justifications:

Unfavourable economic conditions and lower commodities prices are still putting pressure on the AUD/USD.
There has been a retracement in the previous day, which saw the AUD/USD pair rally about 200pips from a 1-month low; however, if it fails to break the previous high (resistance) of 0.6811, then prices should resume its downward trend.

Chart:

Spot FX (mini) AUD/USD - Hourly

Trouble for the AUD and NZD Currencies

2009-01-15T21:10:00.000+11:00

Both AUD and NZD currencies are dropping like dead flies, after experiencing weak economic data and wide expectations that there is more bad news to come, read the full story at:

http://www.bloomberg.com/apps/news?pid=20601083&sid=aywg4bFoMxdw&refer=currency

Trade Exit: NZD/USD Short Position, 15-Jan-09

2009-01-15T20:56:00.003+11:00

Exited Short Position in Spot FX (mini) NZD/USD
Closing Price: 0.53563
Opening Price: 0.55668
Contract: 1 (mini)
Closing Contract Value: US$5,356.3
Opening Contract Value: US$5,566.8
Profit: US$210.50 (A$318)

Justifications:
Trailing stop loss reached.

Trade Exit: AUD/USD Short Position, 15-Jan-09

2009-01-15T20:45:00.003+11:00

Exited Short Position in Spot FX (mini) AUD/USD
Closing Price: 0.66060
Opening Price: 0.66721
Contract: 1 (mini)
Closing Contract Value: US$6,606
Opening Contract Value: US$6,672.1
Profit: US$66.10 (A$100)

Justifications:

Trailing stop loss reached.

Trade Exit: USD/JPY Short Position, 15-Jan-09

2009-01-15T20:37:00.005+11:00

Exited Short Position in Spot FX (mini) USD/JPY
Closing Price: 88.8500
Opening Price: 89.300
Contract: 1 (mini)
Closing Contract Value: Ұ888,500
Opening Contract Value: Ұ893,00
Profit: Ұ4,500 (A$77)

Justifications:

Trailing stop loss reached.

Trade Exit: GBP/CAD Short Position, 15-Jan-09

2009-01-15T08:00:00.002+11:00

Exited Short Position in Spot FX (mini) GBP/CAD
Closing Price: 1.8200
Opening Price: 1.8000
Contract: 1 (mini)
Closing Contract Value: CA$18,000
Opening Contract Value: CA$18,200
Loss: CA$200 (A$241)

Justifications:

Stop loss (1.8200) level reached.

Trade Entry: GBP/CAD Short Position, 14-Jan-09

2009-01-14T23:50:00.003+11:00

Security: Spot FX (mini) GBP/CAD

Direction: Short
Opening Price: 1.8000
Contract: 1 (mini)
Opening Contract Value: US$10,000 (CA$18,000)
Limit Level: 1.7800
Stop Level: 1.8200
Amount Risked: CA$200 (A$241)
Interest rate differential fee: 0.00% p.a.

Technical Justifications:

British interest rate is at 1.5%, which is the lowest in 315 years. A lower interest rate tend to negatively afftects the currency.
Currency pair is in a downtrend that commenced in Oct 08; bearish candles were seen within the last 5 days (shooting star and doji).

Chart

Trade Entry: AUD/USD Short Position, 14-Jan-09

2009-01-14T22:03:00.000+11:00

(Re-entry)
Security: Spot FX (mini) AUD/USD
Direction: Short
Opening Price: 0.66721
Contract: 1 (mini)
Opening Contract Value: A$10,000 (US$6,672.1)
Limit Level: 0.64721
Stop Level: 0.68721
Amount Risked: A$260
Interest rate differential fee: -4% p.a.

Technical Justifications:

Upcoming economic data expected to deteriorate and lead to a bearish AUD/USD.
Candlestick analysis shows bearish signals confirmed within last few days.

Trade Entry: USD/JPY Short Position, 14-Jan-09

2009-01-14T21:13:00.003+11:00

(Trade Re-Entry)
Security: Spot FX (mini) USD/JPY

Direction: Short
Opening Price: 89.30
Contract: 1 (mini)
Opening Contract Value: US$10,000 (Ұ955,400)
Limit Level: 86.30
Stop Level: 91.80
Amount Risked: US$250
Interest rate differential fee: -0.15% p.a.

Technical Justifications:

US economic data expected to worsen (Consumer Credit, Non-Farm Payrolls), see this article.
Technical strategies indicating breakout to the bearish side, see this article.
Bearish candlestick daily chart patterns observed over the last week.

Chart

Trade Entry: NZD/USD Short Position, 14-Jan-09

2009-01-14T18:21:00.003+11:00

Security: Spot FX (mini) NZD/USD
Direction: Short
Contract: 1 (mini)
Opening Price: 0.55668
Opening Contract Value: NZD$10,000 (US$5,566.8)
Limit Level: 0.52668
Stop Level: 0.57668
Amount Risked: US$200
Interest rate differential fee: -4.75% p.a.

Technical Justifications:

Standard & Poor’s warned that it could downgrade the country’s foreign currency debt rating, sending the Kiwi dollar on a downward spiral against other currencies; and NZ central bank expected to cut rates by at least 100 basis points on January 29, see here.
Recent bullish rally fail to break resistance level of 0.6000, and bearish trend developing.

Chart

Opportunities Missed!

2009-01-13T18:18:00.005+11:00

I entered into 2 Forex trades on 09-Jan-09 (short AUD/USD, and short USD/JPY). The technical justifications for these trades turn out to be accurate and the trades moved in the correct direction, as predicted. It produced profitable results; but, I just got out way too early!

I exited both these positions after less than a day of openning them and it made a meager A$93 of profit. Had I kept them until today (only 3 days later) I would have made 10 times more - a whopping A$900 in profit! Bummer!

I am kicking myself now and wondering why I got out... Actually, both currency pairs became quite volatile at the time of exit and I didn't want to lose the profit. So, it was the fear of losing money that made me close these really profitable positions (with the benefit of foresight of course).

Oh well, at least I made a bit of money. Nothing worst than losing money. Here are the charts.

Spot AUD/USD Daily Chart:

Spot USD/JPY Daily Chart:

A lesson for the future is to stay in the trade if the technical justifications for entering the trade is still valid and the stop loss levels have not been hit.

Trade Exit: AUD/USD Short Position, 10-Jan-09

2009-01-10T23:30:00.001+11:00

Exited Short Position in Spot FX (mini) AUD/USD
Closing Price: 0.70646
Opening Price: 0.71198
Contract: 1 (mini)
Closing Contract Value: US$7,064.6
Opening Contract Value: US$7,119.8
Profit: US$55.20 (A$78)

Justifications:

Take profit

Trade Exit: USD/JPY Short Position, 10-Jan-09

2009-01-10T01:03:00.004+11:00

Exited Short Position in Spot FX (mini) USD/JPY
Closing Price: 91.431
Opening Price: 91.540
Contract: 1 (mini)
Closing Contract Value: Ұ914,310
Opening Contract Value: Ұ915,400
Profit: Ұ1,090 (A$15)

Justifications:

Protect eroding profit

Trading in the Bear Market

2009-01-10T00:01:00.000+11:00

Given that stock markets everywhere around the world are pretty much in bear market mode now, I think it would be wise that any potential long position should be taken with great caution and only if there is a convincing case for it.

For example, instead of using the 35-week new high trading system to open a new long position in some stock, I might extend the period to say 50 or 60-week instead. This may ensure that any bullish reversal is confirmed and not just end up being a whipsaw.

I have seen stocks making making new 35-week highs over the last 18 months of the bear market, then immediately run out of steam and crash to make new lows. Logic would tell us that in a bear market, there is a higher probably that any bullish reversal is just a temporary retracement of the down trend.

Even if a long position is opened in current conditions, the position size should be less than usual, as to reduce the risk of trading a bear market.

Trade Entry: USD/JPY Short Position, 09-Jan-09

2009-01-09T21:09:00.000+11:00

Security: Spot FX (mini) USD/JPY

Direction: Short
Opening Price: 91.54
Contract: 1 (mini)
Opening Contract Value: US$10,000 (Ұ955,400)
Limit Level: 86.54
Stop Level: 94.04
Amount Risked: US$250
Interest rate differential fee: -0.15% p.a.

Technical Justifications:

US economic data expected to worsen (Consumer Credit, Non-Farm Payrolls), see this article.
Technical strategies indicating breakout to the bearish side, see this article.
Bearish candlestick daily chart patterns observed (shooting star and confirmations) over the last 3 days.

Chart

Trade Entry: AUD/USD Short Position, 09-Jan-09

2009-01-09T09:36:00.004+11:00

Security: Spot FX (mini) AUD/USD
Direction: Short
Opening Price: 0.71198
Contract: 1 (mini)
Opening Contract Value: A$10,000 (US$7,119.8)
Limit Level: 0.6700
Stop Level: 0.7380
Amount Risked: A$260
Interest rate differential fee: -4% p.a.

Technical Justifications:

Latest economic data (housing data) points to bearish AUD/USD, see this article.
Candlestick analysis shows bearish signals (Hanging Man and Bearish Candle confirmation), see this article.
The AUD/USD reached initial resistance from the confluence of the October 14th high / 38.2% of .9856-.6005 at .7247/56, see this article.

Chart

CFD Trading

2009-01-06T23:59:00.001+11:00

In addition to engaging in the business of Share trading, I also intend to trade CFD products such as Currencies, Indices, and Commodities.

These are highly geared product, and so, tight control on risk is essential via using the stop loss mechanism, and conducting the appropriate research and technical analysis before entering each trade.

Trading CFD products can help build your account extremely quickly, but it can also wipe out your account even more quicker. However, it provides a great way to diversify your portfolio if done right.

Happy New Trading Year

2009-01-06T00:51:00.000+11:00

My resolution for this year is to get back into share trading.

Not only that, I will go into the business of share trading. I will trade according to my trading system and business plan, and have the discipline to stick to it at all times.

Trading System

My trading system will revolve around two strategies: The 35-week New High with Bear Range [10, 3.8x] Exit, and the Stochastic[50,10] 50% Crossover.

These 2 strategies yield very similar results in back testing simulations. The average open position for both is a little over 1 year. So it's a medium term trading system. I will elaborate on these 2 strategies in future posts.

Initial Capital & Funding

The initial capital is $10,000. I may add additional funds into my account if it is required.

I intend to use the power of gearing through Contracts For Difference (CFD) and/or Margin Lending trading. The brokers shall be IG Markets and Commsec.

Profits made will be initially reinvested into the trading account, as to build it up to an adequate level.

Position Sizing

The initial position size of trades is extremely important at the early stages of a trading account. The aim is to use suitable position size so that your risk is low enough to prevent you from going going bust early on due to limited funds, while at the same time steadily building your account.

I will use 2.5% of my trading account for each trade (up to a maximum of $5,000). So, initially I will place $250 (2.5%) of equity into each of my trades and use CFD gearing to obtain more funding.

Ideally, I will seek a margin level of 10% (that is, 90% leverage).

Using the 2.5% position sizing rule means that I could take on 26 consecutive losing trades from the outset before going bust. I think the chance of this happening is very, very low.

Monitoring

I am only required to conduct my research and monitoring of open positions on a weekly basis, as I shall be working with the weekly chart only. So, I will dedicate a few hours on the weekend to my share trading business; this should suffice.

I will also keep this blog updated regularly to assist with my trading activities and share my knowledge with those who may be interested.

Weekly Stocks Watchlist, Wk 1-09

2009-01-05T16:27:00.009+11:00

Newcrest Mining (NCM.AX)

Closed at 31-week high on 24/12/08
STO[50,10] reached 40% and rising at 02/01/09

Open a long position for this stock if it makes a 35-week new high.

AGL Energy (AGK)

One of the best performing stocks of 2008 (+22.6%)
Trading near its year high
STO[50,10] currently at 89%

Open long position in this stock if prices drop to $14 level due to temporary pullback.

Origin Energy Limited (ORG.AX)

One of the best performing stocks of 2008 (+82.1%)
Independently valued between $28.55 to $30.71 by Grant Samuel & Associates.
Rejected BG Group's $13.7 billion ($15.50 per share) takeover bid in Sept 08, while receiving $9.6 billion to sell half its coal seam gas (CSG) reserves to ConocoPhillips, which will "fund a decade of growth".
Trading near its year high.

Open long position if prices drop to $15.00 - $15.30.

Good riddance to 2008, the worst year ever

2009-01-01T01:06:00.001+11:00

Allison Jackson | January 01, 2009

Article from: The Australian

THE Australian share market yesterday ended its worst year ever with investors looking back on losses of more than $700 billion.

Some maybe hoping that 2009 _the Year of the Ox in the Chinese zodiac_ will strengthen the market, which fell 41.3 per cent in the past year.

The Ox is meant to symbolise patience and inspire confidence.

While market participants are not expecting a stampede of bulls to drive shares higher, they are hoping the oxen trait of strength will bring an end to the worst financial crisis since the Great Depression.

``We would believe in anything at the moment,'' a weary institutional sales trader said yesterday. The benchmark S&P/ASX 200 ended the year in positive territory, rising 68.1 points, or 1.9 per cent, to 3722.3, paring losses for the past 12 months to 41.3 per cent, or about $680 billion.

The broader All Ordinaries rose 67.9 points to 3659.3, taking losses for the year to 43 per cent, or $718 billion _ the worst annual percentage fall in the history of the Australian share market.
Almost half of that was lost in the last three months of the year following the collapse of US investment bank Lehman Brothers in September.

The Australian dollar closed locally at US69.08c, down 30 per cent from the July 15 peak of US98.49c and 21 per cent lower than the start of the year.

In a year most people would rather forget, 536 companies fell while only 41 finished higher.
Among the leading blue chip companies, BHP Billiton rose 2.7 per cent to $30.44 yesterday, paring its annual fall to 24 per cent after walking away from its takeover bid for smaller rival Rio Tinto.

Rio rose 2.6 per cent to $38 for a loss of 71.6 per cent since the start of 2008.

A solid finish among the Big Four banks trimmed losses over the past 12 months to between 39 per cent and 51 per cent amid concerns over their bad debt exposures.

Telstra finished the final session of 2009 higher at $3.83, but was down 18.3 per cent for the year after the federal Government dumped the telecoms giant from the bidding process to build the high-speed national broadband network.

Big losses were felt in stock markets around the world as investors cashed in their shares and sought shelter in safe haven investments such as government bonds and US dollars.

What started as a sub-prime lending crisis in the world's biggest economy in August 2007 has morphed into a global financial and economic disaster.

Despite the doom and gloom hanging over the global economy, some market participants believe they can see light at the end of the tunnel.

Eight senior analysts by The Australian forecast that the All Ordinaries would rise by an average 20 per cent in 2009 and oil would climb back up to $US62 a barrel after trading around $US30.
Their average estimate for the Australian dollar was US72c.

Most of the gains in the share market are expected to come in the second half of the year.
AMP Capital Investors chief economist Shane Oliver said he expected shares to remain volatile in the first six months as investors digested more grim economic data.

``We are yet to see the rise in unemployment that the rest of the world is seeing and we are yet to see the full impact of the China downturn,'' he said.

``Economic news will be getting worse before it gets better and we will tip into a mild recession, I would expect.

``But in the second half of the year we will be starting to see signs that the worst is over and that should start to provide a bit more confidence for share markets.''

Dr Oliver expects the share market to rally to 4500 by the end of the year and history is on his side.

The debt-laden Babcock & Brown won the unenviable title of worst-performing stock of 2008, while two of its funds Babcock & Brown Power and Babcock & Brown Infrastructure ranked in the top 10 worst-performing stocks.

The three companies recorded falls more than twice that of the broader market.

Despite the annus horribilis, some companies managed to record performances that would be rated exceptional in any year.

Linc Energy surged 162.5 per cent to $1.995, pipping AGL Energy and Origin Energy for the title of best-performing company in the top 200 index of 2008.

New High Breakout Over 21 days

2008-12-30T22:08:00.006+11:00

A popular trading strategy among stock traders is to look for some sort of price breakout from current ranges or limits. For example, if a stock has been trading in between clearly defined resistance and support levels for the last few weeks and then it breaks through and close above the resistance level traders might buy or take a ‘long’ position in the stock, as illustrated in the chart below (click to enlarge).

Another way, which is easier, to determine price breakout is to look at the previous ‘n’ periods (for example 21 days) and wait for the price to make a new high within this period. When this happens, it is generally believed that there is renewed strength in the stock, and so traders would look to take a long position in the stock.

Once a long position has been taken, we could set the initial ‘stop loss’ level using the Average True Range indicator. The good thing about this indicator is that we could also use it to ‘trail’ the position as it starts to make a profit, and it also provide clear exit points for the position should the price start to come back down again. The chart below explains what I am trying to say in a much clearer way (click to enlarge).

Note that the ATR Trailing Stop indicator has 2 parameters which need to be defined (i) the time period and (ii) the multiplier. In this example, I have used 21 days as the time period and a multiplier of 2; I will refer to this indicator as ATR[21,2x].

Our system entry and exit rules are as follows.

System Rules for New High Breakout over 21 days:

Open a long position in a stock when its price makes a new high over the last 21 trading days.
Exit position in a stock when its price closes below the ATR[21,2x] trailing stop.

There are multiple parameters that could be varied in this system, including:

Time period ‘n’ for measuring the breakout range (e.g. 10, 21, 50, 100, 200, etc.)
Time frame of the chart: intraday, daily, weekly, monthly, quarterly or yearly
The 2 parameters of the ATR Trailing Stop indicator

Instead of using the ATR indicator as the trailing stop, we could have used any other trailing stop indicator, such as other volatility-based stop loss, Count Back Lines, and Bear Range Exit just to name a few.

Changing any of these parameters could significantly affect the performance of the system. Therefore, it is important to determine the effects that each parameter have on the system in order to achieve the optimal performance.

I will discuss the performance of this particular system in a future post. Stay tuned!

The Rule of 72 and Various Rate of Returns

2008-12-19T12:00:00.008+11:00

The following table demonstrates the rule of 72, which gives a good guide to how long it would take for your investments to double in value.

The starting investment value in this example is $10,000 in January 2009. As can be seen below, the rate of return on investments significantly affects performance over a long term period of, say, 15 years.

The Australian stock market has managed to achieve an average rate of return of 13.9% over the last 30 years (with dividends reinvested). If you can achieve the same rate of return over over 15 years, you could have turn $10,000 into nearly $80,000 as your investment value would double every 5.2 years (72/13.9 = 5.2) at this rate.

However, many professional traders out there can probably earn about 20% or more consistently over the long term (without gearing). So, if you could achieve this rate of return, you could have turn $10,000 into more than $160,000 in about 15 years because your investment would double every 3.6 years (72/20 = 3.6).

I have tested multiple stock market trading strategies combined with gearing, and have been able to achieve an average return of 38% over a 20 year testing period. This would mean my investment (or trading account) would double every 1.9 years (72/38 = 1.9) if I could achieve this rate of return consistently, which I believe is possible. So, $10,000 could have turn into $2.56 million in just 15 years.

All this is possible due to the powers of compounding interest and gearing.

What is gearing? It's simply borrowing money to invest or trade, and it can be achieved through Margin Lending or Contracts for Difference (CFD), which are readily available to traders in Australia.

The Rule of 72

2008-12-17T20:00:00.003+11:00

This post is written by Andrew Page from Trading Tutors Newsletter Issue #288 12 December 2008.

We all know that the share market can be a very scary place in the short term, in fact given the past 12 months we should now understand this very well indeed. But that doesn’t alter the fact that the market offers amazingly attractive returns over the long term. So as long as you can afford a longer time frame and ride out any short term volatility, your investment dollar is well placed.

With dividends reinvested, the average total investment return for the Australian market is 13.9%pa. That might not seem like much, but over time it can yield phenomenal results. This is due to the power of compounding, and although we usually associate this with savings accounts, it applies to any investment where your income returns are reinvested.

Chart 1 is the Long term performance of the Australian share market. Represented by the All Ordinaries Accumulation Index 1979 – 2008. Logarithmic Scale.

Chart 1 - click to enlarge

To gauge just how powerful compounding is we can apply what is known as the “rule of 72”. This provides a reasonable estimate of how long it takes your investment to double given a certain rate of return; all you do is divide 72 by the annual investment return. So assuming that the long term rate of return on the market stays close to 13.9%, we can expect an investment in the market to double in just over 5 years (72/13.9 = 5.18). Of course in reality, it’s not likely that you will experience a nice even rate of return from one year to the next, but over the long term it provides us with a very reasonable estimate.

To put this into dollar terms, imagine you invest $2000 into a mix of quality blue chip shares when your child is born, and you reinvest all the dividends. By the time the child reaches 21, they will be sitting on a portfolio worth over $27,000. Still not impressed? Well, what if you decided to contribute an additional $1000 per annum (that’s less than $20 per week)? Again, based on the long term historical average return of the market, your child would receive for their 21st a portfolio worth over $105,000! Furthermore, the portfolio would be generating thousands of dollars in dividends each year (not to mention the tax benefits of franking credits). It really is the gift that keeps on giving.

Chart 2 illustrates $2000 invested in 2008, with dividends reinvested and $1000 added each year. Based on an average annual return of 13.9%

Chart 2 - click to enlarge

So if you are struggling to think of presents for the children or grandchildren (or even yourself), why not consider putting some money into the market? The DividendKey program specifically focuses on building substantial wealth through conservative long term income investing, and is perfect for those wanting to generate these kinds of returns. (www.dividendkey.com)

Ask yourself what your child or grandchild would prefer for their 21st birthday - an engraved pewter, or a portfolio worth close to a hundred thousand dollars...?

Moving Average Crossover - SMA[100] & SMA[200]

2008-12-16T23:00:00.004+11:00

Stock Market trading systems are usually constructed from one or more technical indicators and are used in such a way that gives clear signals to the trader or investor regarding the entry and exit points of a trade.

By far, the most well known and used technical indicator in the stock market is the moving average (MA). So, a good starting point in reviewing trading systems is to look at something that involves using the moving average(s) in some way.

In fact, the 100-day simple moving average (SMA-100) and 200-day simple moving average (SMA-200) crossover system will be discussed here. Why use the 100-day and 200-day periods? I believe that’s an excellent question, and it is the sort of questions that traders should be asking themselves all the time. But for now, the answer is because they are widely used by everyone out there including traders, investors and analysts.

Our system entry and exit rules are as follows.

System Rules for Moving Average Crossover - SMA[100] & SMA[200]:

Open a long position in a stock when its MA-100 indicator crosses over its MA-200 indicator.
Exit position in a stock when its MA-100 indicator crosses under its MA-200 indicator.

This is illustrated by the chart below (click to enlarge):

There are multiple parameters that could be varied in this system, including:

Method of calculating MA: simple, exponential, weighted, etc.
Period of the shorter (faster) MA
Period of the longer (slower) MA
Chart timeframe: intraday, daily, weekly, monthly, quarterly or yearly
The exit condition could also be altered, such as using a trailing stop loss to lock in profits

Changing any of these parameters could significantly affect the performance of the system. Therefore, it is important to determine the effects that each parameter have on the system in order to achieve optimal performance.

I will discuss the performance of this particular system in a future post. Stay tuned!

About Me

2008-12-15T20:00:00.005+11:00

Hello World!

As this is the first of what I hope to be many long, happy and profitable postings, I think it's a good idea to start off by breaking the ice, so to speak, and introduce myself, my ambitions and talk a bit about the aim of this blog.

Well, where do I start? OK, I live in the land of Oz (that's Australia), and I am an electrical engineer by profession. Have been working for a few years now after finishing Uni and basically getting paid peanuts.

I am a bit short on cash, and can't afford to buy things like a house, my future BMW or that trip around the world. "But you're an electrical engineer, how can you be short on cash?!?" I hear you ask. Let explain...

I've been doing a bit of trading over the last year and a half and, to put it mildly, haven't been doing too well... Alright, I'll admit it, I got burnt like a house on fire and lost a lot of money.

The last 18 months have been one of the most volatile times in the stock market's history. You are either laughing all the way to the bank or feeling sorry for yourself if you are a trader. I know for a fact that most people are feeling sorry for themselves in these times. There is only 1 person that I personally know of that is making a massive amount of money from the markets. I'll tell you more about him in future posts.

My great ambition in life is not to work until I reach retirement age. I want to retire young with a couple of million dollars in my pocket. Then I can do the things that I really enjoy doing, such as spending time with family and friends, make a positive difference to the community, and travel around the world.

Life, to me, is too short to spend around 1/3 of it at work. When you also consider the fact that most of us also spend 1/3 of it sleeping, we only have the remaining 1/3 to do things that really matters to us.

I have decided that working from 9-5 for the next 40 years will not allow me to achieve my ambitions. If I were to make a lot of money and retire young, I would have to create a another stream of income.

After trying out a few business ventures, it seems the best option for me is to make money in the stock market. Although, I've gotten off to a false start, I genuinely believe that a lot of money could be made in the stock market.

So finally, the purpose of this blog is to record and share the strategies I use in the stock market and discuss the back-testing results of these strategies; I'll also publish my actual trading portfolio and activities on the blog, as well as any other useful information relating to making money in the market.