I had an idea for a feature to run on the site and today is the first day of it.
One of the things I have wanted to encourage on the site is greater user involvement. There are a lot of sensible, well reasoned, educated and friendly readers on here and I think it will enhance what we try to do if we can tap into that in more detail than we do on the comments.
So with that in mind the feature is designed to put a willing participant centre stage over the course of a week and allow him or her the freedom of their views analysis and general thoughts on all things trading related.
First up is reader Schubes who I kindly conned asked to be my guinea pig.
This is just a trial run at the moment and we’ll see how it develops over the week. If it all goes to plan then we will be looking at other contributors from the readership, but we’ll cross that bridge when we come to it. It’s only day one and Schubes might royally fudge it up
Once you’ve had a read then please direct any comments you have in the normal way and I’m sure Gavin will be happy to answer them.
Go easy though as it’s his first day, bless.
Hello Europe,
My name is Gavin, and Ryan has asked me to be ForexLive’s first guest trader. Naturally, this is a great opportunity to talk my book and encourage gullible morons to take the other side of crappy positions that I wish to exit. This is a great honour and each day this week I’ll be leaving you with an insight into the swings and roundabouts of my trading experience. As the week progresses, I hope to provide some insight into some of the trades I’m looking at, and topics such as how I manage risk and maintain discipline.
Ryan has given me some questions that he’ll ask of each trader, to build a profile. So I’ll start with these.
Trading Experience:I have traded forex on and off for about three years (although I casually traded other derivatives prior to this). This year, I ramped up my forex trading activity, and it is now the main consumer of my time.
Why you started trading:
Initially for better management of longer term discretionary capital than I could get with mass-marketed funds with inelastic asset exposures, benchmarked to mediocrity. I’m now doing to build a solid capital base from which I can create an income (albeit lumpy, but that’s okay) that I can grow over time by managing the proportions of capital I withdraw and which I add to my risk capital. I’m also hoping to take advantage of the huge opportunity that is cheap property in Britain and Ireland. This is not for investment purposes. This is about my human goals. In this way, real life is the master and money the servant – not the other way around.
Time zone you trade in:
I principally trade during the European session.
Trade platforms/chart systems/screen setup:
Boring. MT4 on my laptop. I’ve no intention to keep it this way. MT4 is a dog, and its charts are worse. As my capital base grows, so too do my opportunities to obtain better trading conditions. This will continue to provide good opportunities to address this issue. I’ve got plenty of plans, but then there’s the time factor. They’ll happen one by one as I find the time. More on this later in the week, probably.
Methodology (scalper, short, medium, long term etc.):
I take mostly medium to longer term positions. I like to be in for at least a week, and up to a few months. I’ll trade over a longer time-frame on the right position, and have no time based targets for exiting most trades (just price). I look for trades with a high risk/reward ratio. I don’t trade tight stops unless there’s a good technical reason for it (e.g.: very strong support/resistance) – I won’t doctor the risk/reward by using randomly placed stops.
Intra-day trading has proved quite unsuccessful for me in the past, so I don’t do it. Besides, the heart attack every minute is not for me. I prefer reliable income over a long time frame. I wont take unnecessary risks to smooth the frequency of payouts (i.e.: trade closures).
So, onto the trades:
After the big dollar rally and Aussie’s trip down the u-bend against all-comers, I await to see whether we see trends re-assert themselves, reverse or move into ranges. So, my main positions are in share indices. Some of those are near moments of truth too, so this trade could prove quite fluid this week. I’m short S&P500, FTSE, DJIA and Nikkei contracts for difference, with more skin in the S&P and FTSE positions.
As I write, the American indices are at interesting levels. Both have upward sloping trend channels dating back to December. The S&P is trading within its channel, but the DJIA broke below it’s channel bottom last week. In the charts I have provided, these are shown in blue. Both also now have a capping trend line (shown in green). This has capped the S&P since 22/5/2013.
The DJIA didn’t test it’s green line until 28/5/2013, but was trading flat since the 22nd (well below where the line would have been) when the line started capping S&P. These green lines are now being re-tested. The S&P is testing from inside it’s channel, but the channel bottom and the green capping trend-line are forming a wedge which is quite close to its apex.
The DJIA is testing it’s capping trend-line from below the channel bottom. The DJIA capping trend-line is also at the 50% fib retracement of the move from 15521 on 22/5/2013 when the green line started capping the S&P (and DJIA hit its peak and flattened) to the low of 14834 on 6/6/2013. The S&P is between the 38.2% and the 50% of its equivalent move from 1685 to 1597 on the same dates and has been rejected at the 50% level for both of the last two trading days. The FTSE’s activity leads me to prefer the DJIA techs (not that the S&P looked a great deal better), and I’m awaiting a break to the downside in the S&P.
FTSE breached a supporting trend-line dating back to 11/11/2012. This is grey in the provided chart. I note that this trend itself followed an acceleration higher where it broke away from a longer term supporting trend-line dating back further to 7/8/2011 (shown in purple). Bump and run?
I’m positioned for a sizeable drop in all of these indices, but some stops have been lowered and some profits already taken. I also stand ready to exit and accept what would likely be an average break even if we move decisively higher. I’m not going to go long at these levels. US Share prices are at record levels on signs that the economy may be showing signs of turning the corner. This is bollocks.
Were we off to the races having breached the neckline of an inverted head and shoulder base, I would be buying up big. That would be an appropriate position for the indices, given the actual economic conditions. Record highs on these mediocre conditions smells of over-exuberance.
Did I mention what I think of shares as a replacement for fixed interest investments? This resembles the story long spruiked by lazy fund managers selling shares as a “safe” long term investment before the GFC. We all know what happened next. The story varies only by country. In Australia, plenty of people nearing retirement found that their compulsory superannuation (which is managed by private sector pension funds) was aggressively invested in local equities with their portfolio breakdown identical to that used for younger investors with a higher risk profile. Then there’s other risks. Take BP shares, for example. These were a staple of the retirement incomes of many Britons. However, they were too risky an investment for people relying on them for income. When you also note the concentration risk many of these retirees were taking, it’s clear that they were in an investment class they didn’t understand.
Does that think I mean that “Mammy and Daddy” investors are the main movers of the market. Hell no. Much of the equity investments that have landed in unsuitable hands have been via fund managers. The talk of shares rising on the yield trade screams to me of big money taking dumb risks with the wrong investors’ funds. Is the yield differential between equities and fixed interest enough to compensate for the insanely higher risk? Remember that creditors always get paid before shareholders in a liquidation. As an aside, I know the DJIA index is often derided as a “Mammy and Daddy” index for it’s poor reflection of the broader market (and favouritism of small numbers of issued shares relative to company size) compared with the S&P which is weighted by market capitalisation.
Could the DJIA’s earlier break of channel support be a sign of the type of money that this rally was based on? Perhaps some experts in the funds management industry, or anyone with a good understanding of ETF/Index fund money flows can shed light in the comments.
Another thing to keep in mind is that I don’t believe in the rational markets fairy. Just look at gold, bitcoins (yes, I know Adam is sick of those things trolling him) and residential property. Bubbles can feed off fear or hysteria for longer than anyone betting against them can remain solvent (I think Adam said something similar in one of his early bitcoin pieces). They don’t last forever, though.
I think this could be one of them (albeit over a shorter time frame). I think a move back to realistic levels that properly price the risks could facilitate an appropriate long entry point for long term investors with appropriate risk profiles. In any case, plenty of these “yield seekers” could simply bump the returns on their income funds by taking a capital gain on these equity investments. There’s no need to wait for the meagre dividends.
This move has been enormous, and I suspect there’s plenty of investors with inappropriate risk profiles who are well in the black on this trade even below current levels. If risk is not their main game, it’s time to take profits. No time for greed when you’re playing with other people’s money. Dumb money in the wrong assets getting too greedy can end quite badly.
Stay tuned. I’ll be back throughout the week. I’ll expand on some of the points in my profile and what keeps me trading, offer more thoughts on trades I’m looking at, and offer some insights into my risk management and trading discipline.
Comments welcome.
