TAFX

The Concept of Risk – Abraham

Dr. Alexander Elder was a former psychiatrist who worked in New York prior to his involvement in investment. In one of his popular books, he emphasized the importance for investors to master three aspects of investing: (1) a sound individual psychology, (2) a logical trading system, and (3) a good money management strategy. In order to win in the game, it is crucial to strike a balance among these three. More than just developing a sound investment philosophy and gaining conscious awareness of internal emotions as you trade, a good money management strategy is also important.

Every investor is exposed to varying levels of risk. And I like Dr. Van K. Tharp’s definition of risk. Instead of viewing risk as the probability of losing, he believes risk is the amount of money you are willing to lose if your judgment of the market is wrong. Therefore, your total risk can computed based on the amount of money you’re willing to risk per share multiplied by the number of shares. This will be based on your stop loss point as part of your risk management strategy. Total risk will be the amount lost when you indeed exercise your stop loss strategy.

Let’s face it: cutting losses can be painful. However, if you establish how far you are willing to allow the price to move against your favor prior to trading, and make calculated risk, then you have better mental preparations for the trade. There is a need for discipline when cutting losses and not allow emotions to dictate your next move; we have to overcome natural tendencies to postpone taking losses. William O’Neil says: “If you want to be a losing trader, follow this rule: hang on to your losses and watch them grow”.

How much risk should I take?

1)   Your NEED to take risk
How much returns are you looking at?

2)   Your ABILITY to take risk
Can you afford this level of risk?

3)   Your WILLINGNESS to take risk
How comfortable are you with this investment?
Can you fall asleep at night or are you worrying sick?

You can get a gauge of your risk tolerance level from this profiling: http://njaes.rutgers.edu/money/riskquiz/

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Impact of market news on currencies – Chia Yikai

When technical analysts analyze currencies, they make various assumptions. But there is always one common premise that majority of the technical analysts hold onto, to allow them to spot entry signals and subsequently make trading decisions just by drawing lines and shapes on the charts – market discounts everything. From inflation rate data to investors’ emotions, all past, current and future information and data are factored in and reflected in the prices of stocks and currencies. But the question is, how long does it take for our indicators take to react to price movements after a data is released? Will we miss out potential entry signals if we rely solely on the combinations of indicators? In this post I am going to show how market news and data drive the movements of prices, and how the indicators responds after them.

Let us look at the M5 chart of EURUSD, GBPUSD and USDJPY on 15 Oct 2014 (Wednesday).

EURUSD M5

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GBPUSD M5

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USDJPY M5

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Note that at 8.30 a.m. UTC-5:00, the USD experienced a sharp decline in all three charts. So what exactly happened to the USD?

At 8.30 a.m. UTC -5:00, several agencies released their reports which contained data that would negatively impact the dollar (details can be found on www.forexfactory.com).

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The actual data in the reports were lower than the forecasted values from economists and analysts, which is not good for the USD. Therefore, forex traders started selling it, causing the dollar price to fall dramatically (more than 100 pips!). Traders who had reacted immediately after the news would have bagged in the most profits.

However, traders who relied on moving averages crossovers or MACD crossovers just like I did would missed the entry signals and lost the opportunity to make money out of the weak performance of the US economy. (I will just show one of the chart as the other two are similar).

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As a conclusion, indicators may be miraculous at times, but there are also times where they fail to show any potential setups. Therefore, we should not be too over-reliant on indicators and chart patterns, spending some time to read market news can help in making trading decisions too!

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Technical Analysis on STI and Genting Singapore (GENS) – Constance

The Straits Times index dropped 1.39% or 44.51pts to 3154.21 (day range: 3179.35 – 3154.21) on Thursday. The index is below its 20d MA (@ 3254) and below its 50d MA (@ 3295). 7% of the index constituents are above their 20D MA (vs 7% the previous session) and 3% of the shares are above their 50D MA (vs 3%). Appx. 23% of the stocks are ‘oversold’ based on the RSI14 indicator. From a technical point of view, the index remains on the downside and is looking for a lower bottom. Meanwhile, the daily RSI indicator is capped by a negative trend line and is badly directed.

Pivot: 3280

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Genting Singapore (GENS)

On Thursday, from a chartist point of view, the immediate trend is down and the momentum is strong. The daily RSI is below its neutrality area at 50% and is negatively oriented, calling for further decline. In conclusion, below 1.2, look for further decline to 1 and 0.9 as possible.

Pivot: 1.2

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Technical Analysis and Indicators – Zhi Heng

Technical analysis emphasizes principally on price, believing that every factor affecting the value of a market – economic data, geopolitical instability, weather etc.  – is reflected in price.

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Trading opportunities on GOLD – Jerome Ong

I have always shied away from trading the XAU/USD pair because of the high risks involved. However, I was recently inspired to expose myself to this pair because I saw a friend trading the XAU/USD pair on the M15 timeframe.

On 24th September, I zoomed into the H4 timeframe of XAU/USD and noticed a distinct pattern in currency.

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In the 1st blue circle, a pin bar with significantly long shadow had formed, signalling a reversal. To make matters simpler, the pin bar had formed at a tested support/resistance level. I jumped in the trade at the purple triangle, and set a TP (take profit) level $1 above the support level I marked out. This trade worked out perfectly.

However, I missed out on the opportunity to ride on the support level bounce immediately after I took profit.

On 26th September, another pin bar formed at the same resistance level. As soon as the bearish candlestick broke the low of the pin bar, I took the trade, again with TP level $1 above the support level. This trade is again marked out by the purple triangle.

For all the traders out there afraid of trading the XAU/USD, there are a lot of opportunities presented with this “risky” pair, as I have only recently learnt. Besides, it is currently trading in a channel. There are 2 ways forward:

  1. Typical method of trading a channel (when price bounces of the support/resistance levels of the channel).
  2. Trading a breakout.

If I were to hazard a guess, there would be an upside breakout sometime next week, simply because the resistance seems to be tested more heavily than the support. Then, aggressive traders could trade immediately on the candle after the breakout candle, while more prudent traders can wait for a retracement before jumping into the trade.

Lesson learnt: Risk is defined by the trader, not the currency pair.

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Will Mario Draghi initiate a Global Currency War? – Sandeep Paul

When an economy witnesses stagnation, what can policy-makers and central bankers do to resuscitate it?

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Personal lessons/experiences gained from investing/trading – Wei Liang

Hi. My name is Wei Liang and I am from the Technical Research Analyst Team in NUS Investment Society. Today, I will share about a position I recently closed in the US equities market, in which I made both good and bad decisions.

Everyone knows that Alibaba Group Holding Ltd, the giant Chinese e-commerce company, had an Initial Public Offering (IPO) on Friday, 19th September 2014. It was a massively hyped-up event which had everyone in the investing world, be it retail investors, institutional investors or hedge funds, eagerly anticipating and waiting for. About a month ago, I was having a chat with my broker (from Phillips Capital) and we discussed the Alibaba IPO and the possibilities that this event throws up. It is known that Yahoo! Inc. is a major shareholder of Alibaba, owning about 23% of Alibaba, an investment they made sometime back in 2005. My broker suggested taking a look at Yahoo since the sentiment on Alibaba was very bullish at that point in time, and Yahoo could be used as a proxy to leverage on the strong demand for Alibaba. Alibaba was projected to raise approximately USD20 billion in the US markets, meaning that the IPO would be worth more than the likes of Facebook (USD16 billion) and Google (USD1.6 billion). Also, on the face of simple fundamental analysis by looking at Alibaba’s financial statements, they reported very impressive earnings (sales rose 46% and net income nearly tripled). Hence, the mainstream opinion was that Alibaba was a highly-sought after stock.

I went home and did some technical analysis on Yahoo.

 

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The yellow circle in the chart of Yahoo above shows the price that Yahoo was trading at on that day (04 Aug 2014). I noticed a pretty obvious range that Yahoo has been trading between, a support at around USD32.80 and a resistance of USD37.23 (indicated by the two horizontal white lines). I added Yahoo to my watchlist and started observing it on a daily basis. Around 20th Aug, prices broke out of the range and above the resistance. I was tempted to buy into Yahoo at that point in time, however, I resisted until 23rd August when prices continued rising, confirming the breaking of resistance. I bought into Yahoo at the price indicated by the blue circle.

As you can observe, I believe this trade to be considered a positive one as I combined fundamental analysis (by researching on Alibaba’s growth potential in the e-commerce market and looking at their revenue and income trends, and understanding Yahoo’s stake in Alibaba and what it entails), with technical analysis (the usage of support and resistance), which resulted in the eventual upside as depicted by the chart of Yahoo above. Just before Alibaba had their IPO on 19th Sep, I was up about 13% in just under a month.

This was where I made a few mistakes, which I will touch upon now.

Mistake 1: I was greedy and bought into Yahoo again on 16th Sep, just 4 days before the Alibaba IPO. I thought that the sentiment on Alibaba (and hence indirectly via Yahoo) was only going to become more bullish in the final run-up to IPO, due to reasons such as Alibaba re-pricing their IPO price upwards during this period. The price of Yahoo did not rise above the price that I bought it at the second time. I guess the lesson I could learn here is not to make ‘gambles’ and try to ‘chase the market’ based on little solid fundamentals or technicals.

Mistake 2: On 19th Sep, when Alibaba finally started trading on the NYSE, Yahoo’s price dropped rapidly at the same time. I did anticipate this possibility, because I intended to sell my Yahoo shares and re-invest it directly into Alibaba. I guessed the other investors out there must have felt this way, which caused a fast and substantial drop in Yahoo’s stock price (Alibaba’s price was shooting up at the beginning). When it dropped by 6% within an hour of Alibaba’s trading commencement, I sold all of my Yahoo stocks. It turned out that 6% was the lowest that Yahoo would drop and it eventually recovered to a 2% loss at closing bell. I realized that I was very hasty and panicky in my decision to sell Yahoo. While things could have turned out very differently (Yahoo could have crashed further and not make a recovery, or Yahoo could drop further during next week’s trading), I felt that I could have drafted an action plan before the opening bell of 19th Sep, using a strategy which could have assisted me in rational decision-making given different scenarios.

Also, I had a mid-term the next day and I spent 2 hours staring at stock charts. Not the most sensible of decisions. Mmm…

Mistake 3: In selling of all my stocks in Yahoo, I forgot a key factor of the Alibaba IPO: the fact that Yahoo is required to sell approximately a quarter of their holdings in Alibaba during the IPO, and that the CEO Marissa Mayer has promised to return half of the cash raised by the sale of Alibaba stocks to shareholders. This meant that I had completely disregarded an opportunity to receive cash as a shareholder by giving up my position in Yahoo on Friday. In my haste to get rid of the stocks when it was falling rapidly, I did not consider the benefits I could have obtained as a shareholder if I held on to my Yahoo stocks long enough. This taught me to be more diligent and careful before making hasty decisions.

Through this experience of buying and selling Yahoo, I accomplished certain objectives which I was proud of and I made some mistakes which could be rectified. It is indeed a very critical experience for me as I learnt the importance of doing research, and of the importance of removing emotions from making trading decisions, just to name a few. I guess everyone makes mistakes along the way, but of course, those who make fewer errors and eradicate repeated ones will be the ones who go furthest.

 

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Adventures of a Currency Trader – Jeremiah Li

Recently, I’ve read up on a book titled “Adventures of a Currency Trader” by Rob Booker published in 2007. It is a story of an office worker named Harry Banes who eventually became a successful FX trader.

Harry Banes started off trading because of an advertisement that baited him into buying software to do all the trades for him and the fact that his family was tight in finances made him want the cash for minimal effort. He started off earning some money but eventually lost everything even though he followed the recommended trades of the software.

Ultimately, Harry Banes lost almost every cent he had won and even more. This continued to happen even after he met Harvey Winklestein. A senior trader in all fields who was introduced by another friend. It took him a long time to realize that trading and investments was not about a magical formula that will be able to make money by itself.

Trading and investing is probably harder than working in essence. Unless you plan on losing your money, it is crucial that you do your homework and planning on each and every trade you make. Today we have a whole set of different methods. Just within technical analysis, people are using hundreds of different indicators. And yet every method can make money. But most of the time, we succumb to our ill – discipline and greedy side. Harry Banes might be a fictional character but traders are able to relate to him closely. It does not matter which market we go into as long as we work hard in training our minds to continuously learn about the market, and out eyes to look not just at the rewards but at the potential risks as well.

As a new member of NUS invest club, I look forward to learning more about different methods and new markets that I have yet to explore to improve my knowledge as a trader. But it is more important to remember which method suits your financial requirements best. We will never want investments and trades to become a gamble where the odds are against us.

Jeremiah Li

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