“In the fields of
observation, chance
favours only the
prepared mind.”
Louis Pasteur (1822 –1895)
By The Same Author
Share Analysis and Company Forecasting
The Business Plan: A Manual for South African Entrepreneurs
The Millionaire Portfolio
Jungle Tactics: Global Research, Investment & Portfolio Strategies
A Guide to AltX: Listing on SA’s Alternative Stock Exchange
Become Your Own Stockbroker
The Corporate Mechanic: The Analytical Strategist’s Guide
Richer Than Buffett: Day Trading to Ultra-Wealth
The Millionaire Portfolio: New Edition
The Guerrilla Principle: Winning Tactics for Global Project Managers
Women & Wealth: Footsteps to Financial Freedom
Contents
BY THE SAME AUTHOR
DEDICATION
NOTE FROM THE AUTHOR
Searching for Perfection
Intelligence does not always equate to success
PREFACE: HOW THE BOOK WORKS
Not Like Other Technical Books
Designing a Trading System
o
The Three Fundament Steps
o
The Three Technical Steps
PART ONE: RULES OF THE GAME
CHAPTER 1: INTRODUCTION
Your Trading Business Plan
o
Private Issues
o
Establish A Routine
Trading Plan Sections
CHAPTER 2: ARE YOU CRAZY?
A Story to Offend
Predictable Habits of Traders
o
Still Crazy – The Following Is For The Uninitiated
o
What are shares?
o
Is it risky to buy shares?
CHAPTER 3: RULES TO GET STARTED
35 Essential Rules
o
General Trading Rules
o
Rules To Consider Before You Trade
o
Rules That Are Trading Specific
o
Rules That Relate To Actual Trading
CHAPTER 4: FORMS OF ANALYSIS
A Day In A Newsroom
o
Analytical Method 1: Fundamental Analysis
o
Analytical Method 2: Technical Analysis
CHAPTER 5: SOME MARKET FUNDAMENTALS
Where Do You Start
o
Economic Growth
o
Capital Flows
o
Interest Rates
o
Trade: Flows & Balances
o
Monetary Policy
o
Consensus Forecasts
Using Economics To Improve Trading Strategies
CHAPTER 6: GRASPING THE CONCEPT OF TECHNICALS
Why Technical Analysis?
o
What Is Technical Analysis?
o
Technical Analysis Versus Fundamental Analysis
Contrary To Popular Belief - Technical Analysis Does Fail
CHAPTER 7: MAKING BOTH ANALYTICAL METHODS WORK FOR YOU
What Are You?
Both Systems Have Advantages
o
The Fundamental Perspective
o
The Technical Biases
Basic Recommendation For Novice Traders
o
Checklist For Novice Traders
Have You Made Up Your Mind: Which Is Best?
o
Where Do Your Go From Here?
PART TWO: GETTING READY
CHAPTER 8: STEP 1 - PORTFOLIO STRATEGY
CHAPTER 9: THE THREE PORTFOLIOS OF BILLIONAIRE TRADERS
First – An Outline Of Basic Portfolio Types
o
Common Portfolio Types
Aggressive Portfolios
The Defensive Portfolio
The Income Portfolio
Speculative Portfolio
The Hybrid Portfolio
Trader’s Asset Allocation
The Three Portfolios Of Billionaire Traders \
o
Portfolio 1: The Foundation Of Wealth
o
Portfolio 2: Taking Advantage Of Market Anomalies
o
Portfolio 3: The Day Traders’ War Chest
PART THREE: FUNDAMENTAL PERSPECTIVE (WHAT TO BUY)
CHAPTER 10: STEP 2 - CHOOSING COMPANIES TO TRADE
A Time To Forget
The True Issue – Be Prepared
Phase 1: Find Growth Sectors
o
Volume Based Technical Analysis
o
Indices – Three Identifying Trend Indicators
Indicator 1: The Advance-Decline Line
Indicator 2: Upside-Downside Volume Ratio
Phase 2: Reducing Share Filter
o
Step 1: Market Cap
o
Step 2: Share Price
o
Step 3: Liquidity/Tradeability
o
Step 4: Earnings Growth
o
Step 5: Strength Of Financials – Ratio Analysis\
Solvency Check
Liquidity Ratios
Profitability Ratios
Efficiency Ratios
Gearing Ratios
Investment Performance Ratios
Testing For Market Volatility
CHAPTER 11: STEP 3 – ESTABLISHING A PRICE RANGE
Phase 1: Understanding Cycles
o
Using The 4 Phases
Elliot Wave
Fibonacci
o
Prepare For The Trading Week
Phase 2: Correlation Analysis
o
Concept Of Correlation
o
Market To Global
Leading Vs. Lagging Indicators
More Information: Leading Indicators
More Information: Lagging Indicators
o
The Magliolo Expense Ratio
Company PE To Sector Averages
The Single Company
Company PE Vs Competitor PE
Phase 3: Share Price Analysis
PART FOUR: TECHNICAL TRADING CONFIRMATION (WHEN TO
BUY)
CHAPTER 12: ESSENTIAL SIGNALS
Good Place To Start: Essential Signals
o
Line Charts
o
Bar Charts
CHAPTER 13: STEP 4 – PHASE 1: IDENTIFYING TRENDS
Phase 1: Methods To Identifying Trading Trends
o
Step 1: Candles
o
Step 2: Is There A Trend?
How Do You Draw Trend Lines?
o
Step 3: What Are The Support & Resistance Levels?
The Bounce
The Break Through
o
Step 4: Draw The Channels
o
Step 5: Superimpose Moving Averages
Simple Moving Averages
Exponential Moving Average
Sma Vs. Ema
Moving Average Crossover Trading
o
Step 6: Volume Is The Final Variable
o
Three Sets Of Volume Sentiment
CHAPTER 14 : STEP 4 – PHASE 2: IDENTIFYING PATTERNS
Phase 2: Detecting Trading Patterns
o
Step 1: Head & Shoulders
o
Step 2: Double Tops & Bottoms
o
Step 3: Triangles & Rectangles
o
Step 4: Wedges
o
Step 5: Pennants
o
How Traders Use Chart Patterns
o
Take A Glance From Magliolo’s Detection Strategies
CHAPTER 15: STEP 5 - FINDING MOMENTUM & STRENGTH
Phase 1: Looking For Momentum
o
Step 1: The MACD
o
Step 2: On Balance Volume
Phase 2: Finding Strength
o
Step 1: Relative Strength Index (RSI)
Other RSI Indicators
o
Step 2: OB/OS
PART FIVE: POINT OF DECISION
CHAPTER 16: SENTIMENT ANALYSIS
Financial Modelling
o
Negative Aspects of Financial Models
o
Positive Aspects of Financial Models.
Basic Trading Systems
o
The Cost Averaging System
o
The Du Pont Model
o
Factors That Influence ROI
o
The Modified Du Pont Formula
o
The Constant Rand System
o
A Word of Warning
Stock Splits
Reverse Stock Split or Share Consolidation
Share Dividend
O
The Free Cash Flow Method
O
Calculating An Investor’s Total Return
Market Sentiment
Everyone Influences Markets
o
Sentiment-Based System
o
The Global Market Sentiment
o
South African Market Sentiment
CHAPTER 17: STEP 6 - TIMING
Three Steps To Timing
o
Step 1: Determine Strength Of A Share
o
Step 2: Determine The Share’s Trend
o
Step 3: Determine The Potential Future Price Strength Of The Share
Entry & Exit Points
o
The 3-2-1 Method
o
Exit Strategies
PART SIX: ADVANTAGED TRADING
CHAPTER 18: THE IPO – NO TRADING HISTORY
New Public Issues
The Magliolo Indicative Valuation Method
o
Phase 1: Peer Analysis & Gross Value
The Indicative Valuation Methodology Example
o
Phase 2: Three Discounts
Discount 1: Industry Cash Flow
Discount 2: Industry Tradeability & Liquidity
Discount 3: Company Specific Analysis
Looking At Prospectuses
CHAPTER 19: VALUABLE INVESTMENT TOOLS
Too Many Indicators Equates To Failure
o
The Watch List
Avoid Mixing Your Trading Signals
o
Avoid Market Madness
o
Ability To Measuring Liquidity
o
Cash Flow Per Share: The New Bottom-Line Filter
o
Patience
CHAPTER 20: CUTTING-EDGE DAY TRADING
Combining Averages
o
Step 1: Determine Whether To Trade Or Invest
o
Step 2: Establish Substance
CHAPTER 21: CONCLUSION & FINAL WORD
Conclusion
Final Word
APPENDICES
REFERENCES
GLOSSARY
Note from the Author
This is my second financial book for The Penguin Group, but my 12th published manuscript on stockbroking, trading and related fields. For me, however, the importance of writing Six Steps to
Trading Like A Pro has been nothing short of knowledge which I have gained from clients as a
consequence of all the workshops, seminars and personal mentorship programmes provided since 1995.
The contents of this book have become a standard methodology for those interested in coming to grips with the countless facets of investment and, more specifically, trading the vast array of financial instruments available round the world. Yet, despite its title there is no doubt that anyone who has completely mastered the art of trading successfully in a hostile and ruthless global environment, will dispute that there are only six steps to moving from a complete novice to trading like a professional.
I do not dispute such allegations.
The mere fact that this is my 12thbook on finance acknowledges that investment and its intricacies do not stand still and that these will continuously adjust as new instruments are developed and introduced into a world economy that moves to new demand and supply variables.
What I can stress, though, is that too many experts complicate the route to understanding the basics of trading and populate books with complicated economic, taxation and stock broking rules and regulations. I am not advocating that such regulations are unimportant; simply, these are secondary to trading like a professional.
Interestingly, each of my new books have introduced such complexities, but usually in small bite sizes – so that the growing army of private investors around the world can improve their personal knowledge while improving their trading strategies.
Bear witness to the following:
In 1694, when the Bank of England was formed it was already dealing with over 50 companies. The National Debt in that year was less than UK£415 million, while today the UK’s National Debt is over UK£900 billion.
Despite this debt, London Stock Exchange (LSE) has become the most important in Europe and, in fact, one of the largest in the world. There are over 3,000 companies listed on the LSE, with 350 of these coming from 50 different countries. About 1,800 of the LSE's company listings trade on the Main Market, and the total value of such companies is over UK£3.5 trillion.
In the US, the advent of mutual funds led directly to investors’ buying shares. In the UK, the 1968-69 boom in unit trusts led to investors buying shares. How does the above help private investors to better their trading skills?
Other than the knowledge that the UK and US markets are large and stable, the information only helps to confuse investors with too much economic and market information. There really is no need
to know what the national debt is, or that unit trusts helped investors’ to shift their interest to ordinary shares.
There seems to be an unbelievable compulsion by many financial writers to give in to popular trends and fashionable thinking during specific economic circumstances, such as highlighting trends in boom or bust markets. This book is not driven by a compulsion to provide you with yet another book on popular trading methodologies. Rather, it happened as a consequence of a culmination of a number of very specific events. Three of these events are as follows:
The first happened in 2008, was when a client asked me the following question: “Is it
possible to break up the complexities of trading into a few very pertinent steps?
The second event took place in Durban in 2009, during a share trading workshop. I had just explained to the group that trading is a logical process, determined and ruled by strategy and market emotion, when an attendee asked: “Doesn’t market sentiment ultimately kill any
logic?”
The third event took place when the massive Japanese earthquake happened in 2011. I was hosting a conference for Chinese entrepreneurs when the news of the devastation broke. Instead of sympathetic comments, one entrepreneur simply stood up and said: “I have to get
back to Shanghai. There is market share to be gained”
These started to make me think:
Is it possible to break down trading into a simple set of
basic rules?
How can one take illogical market sentiment into the
equation?
How do we do this in a ruthless global environment?
From such simple questions, Six Steps to Trading Like A Pro was born; the above influencing events will become clearer as you read this book. In fact, its composition comes from the mere fact that the raw material gathered from workshops during these past three years stemmed from many questions asked by intelligent men and women anxious to broaden their knowledge of trading and, eventually, investment as a whole.
Ultimately, if increasing trading logic helps to create successful and more sophisticated online investors, then increased tradability should result in a better economic environment that, in turn, promotes a climate in which companies can prosper; bringing benefits to a wider scale than many people suspect.
This book thus builds upon the knowledge gained from working with novice traders and professional stockbrokers since I started my career in stockbroking in 1990. Through them, I have gained a deeper and more pertinent understanding of the role of sentiment in markets and, as such, my analysis has become more succinct and accurate.
The purpose of this book is to give beginners and more experienced traders a fresh look at the principles and applications of using charting signals in conjunction with fundamental analysis. These methods are important, because when a trader applies them with precision, they provide him or her with a deeper understanding of the strength of their chosen investment, taking into account market sentiment as well as current trends.
I hope that this book will engender debate on how many steps it really takes to get from novice to experienced trader. Recently, I read an article that stated: “Only 140 steps to trading perfection!” My first thought was that, by the time you get to step 15, you will have lost the advantage of any profitable trade. If nothing else, I hope that the new trader will find an enhanced ability to detect and act upon changes in prices and to benefit from such action. The use of fundamental analysis provides you with better understanding of what you have to do before you buy shares, while technical analysis is used to determine investor interest in the share before you time such trades. I have also noted from lengthy discussions with professional traders that only a handful of their clients are happy with their personal trading strategies. As one said: “Few traders are perfect, and most can certainly improve their performances,” adding, “the aim is to be more consistent in trading, before trying to make big profits.”
Searching for Perfection
The search for easy answers to trading is usually equated to using new signals and complicated techniques. This all-consuming and encompassing search is, in fact, not necessary. Rather, the novice trader should first understand what his or her true trading ability is as the skill to improve trading does not rest on new techniques, but actually centres on the trader’s own personality, behaviour, discipline, personally developed strategies and what his or her trading aims are.
Since the publication of my first book, Share Analysis & Company Forecasting (1995), I have trained hundreds of traders and found a simple truism: traders start out well as they following their own rules, but quickly become inconsistent and then trading losses surpass profits. While there are many reasons for sources of trading errors, this book focuses on reducing complexities of using a combination of fundamental and technical analysis to trade in a rapidly shifting global environment. The question arises: What is different about Six Steps to Trading Like a Pro?
The book does discuss, as do many other books, how technical signals work, including candlesticks, MacD, Bollinger Bands and Moving Averages. This is where similarities end. This book uses both fundamental variables and technical signals to assess, choose and buy shares in a simple to understand methodology.
Instead of identifying a host of fundamental variables that could affect shares, and then throw a ton of technical signals at you, I have limited the all these issues in steps that can be easily and - more importantly – quickly implemented to enable you to buy any form of stock exchange security.
AND TO DO THIS TAKING INTO ACCOUNT INVESTOR SENTIMENT AND TIMING.
Why now? Aren’t popular technical signals enough? Surely, candlesticks have become the accepted form and shape to analyse any market or individual share? I am sure that experts have told you that using the MacD and RSI are enough to determine buy and sell signals and, therefore, investor sentiment? Do we really need alternative chart signals to improve trend forecasts? The short answer is that markets are no longer independent. Global factors radically influence market sentiment to the extent that candlesticks cannot alone efficiently represent a definite trend.
Essentially, as global markets become more inter-connected, fundamental analysis will play an increasingly more important role; lagging/leading indicators between markets need to be better understood to become more efficient in trading. As such, the ability of traders to understand these variables forms the basis of all trades before technical signals can be used to identify potentially profitable trends.
Under current globalised market conditions, where world economies have been influenced by earthquakes, ballooning national debt levels and civil upheaval, the trader’s ability to compare one
market to another can significantly impair his or her ability to make consistent profits. Hence, the ability to apply charting signals in conjunction with pertinent fundamentals will enable the trader to understand a share’s price data, possible changes in that data and enable him or her to project key trading ranges. The aim is to establish areas of resistance or support before implementing technical signals. By using these alternative methods to forecast key price ranges, the trader actually gains skills and enhanced confidence to shape his or her long-, medium and short-term strategies and tactics.
The result is improve decision making and thus profitable trades. The Six Steps to Trading Like A
Pro should provide enhanced confirmation and better understanding about trends and related
direction and strength. When used correctly, the Six Steps should also reduce traders’ reliance on subjective opinion, whether from media, corporate or Investor Relation news and releases. In fact, too much technical analysis without a foundation of sound fundamentals will hamper correct trading decisions.
Consequently, I hope that the proposed approaches set out in this book help you to evaluate trends in an easier and quicker manner. It is also my hope that this book will promote new research into fundamental analysis and how to use these factors with technical signals. Charts should track global market cycles, differences between world major economies and political systems. Currently, they do not.
Charting analysis usually focuses on price and price history. The norm is thus to ignore all outside influences and forces that could move prices. I have heard technical analysts say: “You don’t have to understand anything other than technical signals, as everything is already included and accounted in the securities’ price.”
What about new company listings? These do not a price history, so should we ignore all of IPOs? How can you tell that an earthquake will happen? Is the potential of a future disaster already taken into account in a securities’ price?
Least of all, politicians often make capricious statements which move markets in unpredictable ways. Technical analysis on its own ignores such influencing events. There is thus a very urgent need to assess world trends and patterns in a simple format and then to relate these variables to a set of technical signals and guidelines.
Once such combined fundamental and technical variables have been assessed, a final decision to trade must be based on a filter that incorporates sentiment analysis and timing. While all this may sound too time consuming and complex, relax - all these factors are amalgamated in this book in a simple set of guidelines.
Intelligence does not always equate to success
I have met many professionals, who have read a number of my books and quickly made the decision to become professional traders. Surely, you can easily change careers and become a trader? Other people do it, so why can’t you?
I am in no way discouraging you to change your career to that of trader. I am merely pointing out that stockbroking is a profession that takes many years to achieve a reasonable level of success. Image a dentist changing to trader. That seems reasonable. Now imagine a trader changing to dentist. Also reasonable, if the trader is willing to go back to university to study dentistry. Now, why is it any easier for the dentist to assume that – without study – he or she can become a successful and profitable trader?
Trading is not a Get-Rich-Quick scheme. New traders will encounter obstacles and major problems that must be immediately resolved. Trading is thus not for the faint hearted.
I believe that day trading necessitates complete and in-depth knowledge of industry and markets and the ability to rapidly assess the tsunami of contradictory information that will engulf you if you let it. Build a character of discipline and patience to endure boring routines and you will have a starting point to changing your career.
To many professionals, who have approached me to change their careers to that of trader, the idea of trading means long lunches, spending more days at the seaside than in front of their computers and a life of luxury. It takes time, patience and diligence to achieve a life of uncompromised wealth. The good news is that all this is possible!
If you want achieve unbelievable wealth, contact me on [email protected] and I will assist you to effortlessly move from your current career to that of trader. So, come with me on this journey and let’s set simple rules to trade effectively.
As always, enjoy and contact me personally if you have any question, whether theoretical or practical.
Jacques Magliolo
[email protected] www.magliolo.com 2011
Preface: How the Book
Works
Not Like Other Technical Books
From the outset, I must stress that this is not a book about the advantages of any one trading system over another, whether technical or fundamental, nor is it a preference treatment of free market ideologies over socialism. It is also not a book about globalisation, or the promotion of emerging markets over first world trading systems.
I have no desire to compare, promote, criticise or lament one financial system to another or – for that matter – to shout loudly that my recommendations are the only worthy ones in the world of trading. The ultimate message is simple – to succeed in the business of trading and investing, as in all aspects of political and economic life, it is crucial to note that the world is rapidly changing on all environmental fronts.
Therefore, while the objective is to set out trading methods for both shareholders and traders, it does so with the knowledge that under a globalised world it is financial suicide to ignore forces that are literally changing everything; from the way a company operates in the global environment to the manner of political governance.
Without a mindset to embrace global forces, the politician cannot budget for changing world supply and demand factors, the entrepreneur becomes vulnerable to international competition and the risk profile of a trader’s strategy increases and thus becomes more inefficiencies and less profitable.
Six Steps to Trading Like a Pro is a book about reducing complexities of the myriad of fundamental
factors that dominate the corporate world and to take the intricate mathematics out of technical analysis. It is a book that suggests that – from my experience in stockbroking since 1987 – both the systems of fundamentals and technicals can cohabitate to the ultimate benefit of traders.
Here is a blatantly obvious statement: Many policy mistakes and its consequences to world exchanges by Western governments come from a misunderstanding of globalisation.
Stephen D. King, chief economist of HSBC said in a recent interview: “In the 1990s and 2000s, they (western politicians) patted themselves on the back for ‘achieving’ low rates of consumer inflation, which in reality was driven by cheap exports from places like China. As a result of their erroneous thinking, they left interest rates too low and allowed a gigantic asset bubble to swell, culminating in the spectacular collapse of the 2008 global financial crisis.”
After the financial meltdown, some western politicians have targeted globalisation as the bad boy of
business, who has caused unemployment, many losing their homes and eroding the real wages of
workers.
Their aim: clamp down on globalisation and punish export-driven emerging market countries. What nonsense, I hear you say. “And, besides, how can that really affect my trading?”
I concur about globalisation being a bad boy is nonsense, but do argue that trading will be influenced by such thinking. Image a major country deciding to place heavy import duties on some
product; or even prevent the importing of any such goods to protect their own workers. What do you think will ultimately happen to the country, its workers and the product itself?
Even more pertinent: What will happen to those listed companies producing or selling this product? This book looks at how these unbelievably complex fundamentals can be simplified to produce a set of conclusions that will help traders to make better choices. As such, the principles, theories and ideas presented in Six Steps to Trading Like a Pro calls for novice and professional traders and investors to think and understand what it takes to achieve success in an increasingly growing global elite that operates on ruthless free market ideals.
Therefore, there is a need to stress that, without an understanding of factors that affect overall markets, business and share movements, investors and traders alike cannot make informed decisions for the short or the long term.
Among the many factors assessed, this book can be explained in a two- fold structure: The first looks at three steps that explain fundamental analysis and the second looks at three steps in the technical analysis area. Of course, there has to be chapters dedicated to setting the scene and some to conclude and explain the various chapters.
Back to the globalisation debate: if free trade across the world does force companies to be more efficient and provides all nations with the ability to gain wealth, then all this simply means is that stock markets around the world will see new ones open and proposer; a global trader’s dream to be able to diversify across new global exchanges.
From this book’s perspective, globalisation is merely one variable to successful trading. However, more specifically, the fundamentals outlined in this book account for correlations between various exchanges, so that the trader is able to achieve his or her desired trading targets. So far, globalisation has created millionaire traders around the proven We have seen Western traders become ultra-wealthy individuals, with many using their knowledge of global economics and business trends to make profitable informed trading decisions.
Alternatively, I have seen traders who have become obsessed with technical systems. These so-called “Systems Junkie” or “Techies” believe that they can become ultra-wealthy by only using a few well-placed technical signals. When markets become volatile, like in the 2008 financial crises, many simply become bankrupt and disappear from the trading scene. The main reason is that they were focused on one system, while the other was ignored, to their financial detriment.
Quietly, they leave trading and their voices are no longer heard.
The problem is that many novice traders don’t take the time to build skills, experience, knowledge, discipline and control. Those who do, even pure technical traders, do become wealthy. So, Six
Steps to Trading Like a Pro may mention the psychology of trading, but not in great depth. It is,
however, a book, whose lessons are simple and easy to understand and implement.
The idea – after all – is to get you in front of a trading desk quickly, but not before you have learnt the seriousness of becoming a trader. If you are really serious about trading, I strongly recommend that you spend as much time with drafting logical trading strategies as you do with looking at technical indicators and charts.
THE SIX STEPS TO TRADING LIKE A PRO
STEPSTHE FUNDAMENTAL PERSPECTIVE (WHAT TO BUY)
1
SETTING UP A PORTFOLIO STRATEGY
2
CHOOSING COMPANIES TO TRADE
3
ESTABLISHING A PRICE RANGE
TECHNICAL TRADING CONFIRMATION (WHEN TO BUY)
4
IDENTIFYING TRENDS & PATTERNS
5
FINDING MOMENTUM & STRENGTH
6 TIMING (BUY & SELLING STRATEGIES)
DECISION TIME
FINAL DECISION MATRIX IMPLEMENTED
Designing a Trading System
Two parts – six steps: unlike many books on trading, the aim of this book is to use an equal and evenly based system, with unbiased emphasis on fundaments and technicals.
THE THREE FUNDAMENT STEPS
o Step 1: Setting up a portfolio strategy must include an ability to build wealth for the long term, while taking advantages of short-term market mishaps and anomalies.
o Step 2: once your three portfolios have been designed and set up, you need a system to choose companies to trade. There are literally thousands of companies around the world to choose from, so how do you go about finding investment and trading opportunities? o Step 3: Once companies have been chosen (Step 2), these have to be investigated and
understood in great depth. Among the list of required information is an understanding of the company’s share price. How has the company price moved during the past 12 months? How does this relate to the company’s net asset value?
THE THREE TECHNICAL STEPS
o Step 4: In the first three steps, the trader has identified – through fundamental strategy – a list of shares that offers potentially solid investment and trading opportunities. These companies’ shares have been investigated. Now, the trader needs to assess what patterns and trends are dominant.
o Step 5: The list of shares have been filtered down to ones with strong trends and investment patterns. The strategy now is to look at these stocks and to identify which have strength and momentum. It is pointless buying a share that has a strong trend, but the momentum of that trend is weak.
o Step 6: all issues and strategies have been implemented and the trader is ready to buy his selection. This final Step sets out buying and selling levels to enable the trader to optimise returns.
Each of the above steps should be applied as follows: Establish a fair and reasonable time frame:
o For share section, identification, fundamental and technical analysis.
o Type of trader you are: In Lore of the Global Trader the various forms of trading are set out.
The issue here is that you need to decide what kind of trader you want to be. Do you want to trade every day, weekly, monthly? This influences the amount of time you need to research stocks and also the amount of time you need to assess trading patterns.
Define Your Risk: When developing your system (or trading style), it is crucial to define how much you are willing to lose on each trade. This is a personal matter and only you can determine that amount. A general rule of thumb is that you should never commit more than 2% of your total capital on any single trade.
There are many systems that do work, but many traders simply lack enough discipline to follow their own set of designed rules. Consequently, many end up losing serious money. In essence, a trading system should attempt to:
Enable you to identify trends quickly. Enable you to confirm the above trends.
Enable you to confirm when a trend has started to die
If your trading is profitable, but you use only some of the above steps, then you have done well. Once you've tested your trading system for at least 2 months (as a demo account) and you are still profitable, you are then ready to trade on the exchange.
However, you must always remember to stick to your rules.
Opportunities will always arise from improved knowledge. How can the shareholder or trader position himself or herself for future growth if they do not have an understanding of how current worldwide trends could affect their business?
In addition, how can they position their trading business without a fair prediction of how current trends could change in the future.
So, this is a book of investment and trading strategies. I need to stress that the only way a strategy can work is if it is used in a logical manner. Therefore, don’t ignore one system of the other. Use these to your benefit and to improve your trading; especially with world economic forces continually moving and changing investment techniques.
What and where will you be as a trader in future if you don’t understand global macro-economic and political trends?
Chapter 1: Introduction
“The four most dangerous words in investing are, It’s different this
time.”
Sir John Templeton (1912 - 2008)
US-born British stock investor, businessman and philanthropist
Sir, sir , sir….
I looked around. No-one else was walking along the long austere corridor of the Johannesburg Stock Exchange in 1990. This young women was waving at me. Who was she?
She came up to me, breathless from the long run. “Sir, sir, sir…” she repeated.
“Catch your breath,” I said, adding, “aren’t you a dealer for Sid?” Sid was the name of the owner and managing director of one of the largest stockbroking firms in South Africa. I had just been appointed as junior industrial analyst.
“…and stop calling me sir! After all, you must be less than two years younger than me.”
“Ah, but you are an analyst,” she said, with a heavy tone of sarcasm, “and I’m just a dealer.”
That made no sense. I knew that most dealers earned more than twice what analysts made in those days, and I was late for a meeting …...
So, not wanting to debate the issue, I asked: “was there something specific you needed?”
“Your last company report was absolutely accurate and I was wondering whether you have updated that report? The share hit the 120 cent mark as forecast. What can we expect in the next couple of weeks?”
Being accurate wasn’t a compliment; just confirmation that she had made a commission on one or more successful trades.” Now she wanted to know what was next for the company, so that she could make yet another commission.”
“Aren’t you supposed to be conducting technical analysis on analysts’ recommendations?”
“Caught out,” she said, and turned away, walking back towards the trading room. “Thanks anyway, sir. I’ll wait for your next report to be published.”
The easy route to trading is to accept what market experts say, follow rumour and conjecture. The more accurate way is to do the work yourself and follow your own analysis; waiting for someone else to complete a report is a waste of time and trading opportunities. This is obviously more difficult and time consuming, but ultimately will be the single most differentiating factor between traders who are ultra-successful and those who trade as a hobby.
Now, there are libraries full of books on how to set up personal trading strategies. I have written many articles about trading journals, how to establish strategies and how to trade world markets, from local and global securities. This book cannot cover all these issues in great depth, but can start by telling you what the pertinent facts are to establish yourself as a serious trader.
The first step in any serious venture is to conduct your own analysis of the market or business you are about to enter. I don’t know of any real business that is free, so I am assuming that you intend to spend hard earned cash to start a trading business.
Trading, like any business, takes patience, time and funds to establish. There is no point in saying that all you need is the funds to invest in securities and “everything else you will learn as you go
along!”
That is the easiest recipe to financial ruin.
I have written many business plans in the past decade, some complex and running into several hundred pages; covering issues relating to corporate profiles, shareholder structures, strategies, financials and growth plans. A trading business plan is important, but should cover two main issues, namely those relating to personal daily routines and, secondly, issues relating to the trading business itself.
These two topics are set out in the following text.
Your Trading Business Plan
Definition: A business plan is a formal statement of a set of business objectives, reasons why you believe these can be achievable and a set of strategies to reach such goals. It usually contains data pertinent to capital providers, such as (among other) background information about the organisation, directors and financials.
PRIVATE ISSUES
You are about to enter a complex financial world where greed, panic and hope are the order of the day and often takes place at the blink of an eye. I have told the story before: a colleague spent 12 hours watching markets – nothing happened. He decided to take a 10 minute break. Guess what happened? In those 10 minutes, the market he had invested in had fallen by a staggering 20% as the World Trade Towers fell in 2001.
In 10 minutes, he had lost an unbelievable R7.3 million. To make matters worse, his portfolio was
not diversified and the shares that fell represented 60% of his portfolio, so he lost - in that 10 amazing minutes – 50% of his entire wealth.
Not to put a finer point on the issue, I asked him if he had a business plan to set out how and when he should trade. He just glared at me, which in itself was an answer. He seemed to have ignored the premise that trading is a business where people lie, cheat and create rumours just to influence share prices. In addition, professional traders can today trade for clients and simultaneously for their own book. Many market observers say that this is a conflict of interest and often creates unrealistic share movements in favour of brokers and thus to the detriment of private clients.
Maintaining a positive attitude during such trying times is in fact extremely vital for success, and negativity is one of the greatest challenges a trader must overcome; especially when massive earthquakes render the world’s third largest economy useless. In addition, I have seeing successful traders doubt themselves at crucial times and that loss of confidence – no matter how brief – renders traders useless.
You cannot expect to succeed in the long-term if you cannot see trades in an objective and unemotional manner. If you lack confidence and skill to take logical trading steps without hesitation, then I suggest that you look for a less tense career.
The answer is to start your trading career slowly, to enable you to build confidence while assessing your risk profile. You do this by first establishing a long-term share portfolio, which concentrates on blue chip stocks.
The three portfolio of billionaire traders is outlined in Chapter XXX.
What I can reiterate in this section is that the first goal is to look at why you are negative in aspects of trading. As a trader, you need to be positive, but always have a healthy and realistic respect for the market. Some experts suggest that you only have to stop reading negative media stories to build a positive attitude.
I believe that this is – in a world where you can make money in a bull or bear market – insufficient and actually sets a dangerous precedent. The aim is to actually see negative events as a positive trading opportunity. Look at the various needs around the world and ask yourself: “who will benefit from such an event?”
The answer is usually: those who will rebuild that which has been devastated. Look again, and ask: “which listed companies will benefit from such rebuilding?”
While many of the older professional traders will see the above as a complete waste of time, newer market players in the field of futures will tell you that trading equities does help you to improve your trading results. Don’t try to trade Futures without skill, knowledge, trading savvy and, of course, the ability to trade with confidence and positive thoughts.
Yet another obvious statement to make is to stay away from people who are trading as a hobby. You want to associate with professional traders. After all, it is through such associations that you will develop necessary skills to build confidence and trading skills. I have a wide cycle of colleagues in the market, who exchange trading ideas and debate new issues.
As an analyst and trader, therefore, I am constantly on the lookout for trading ideas that will make me think and possibly rethink my strategies.
There are many groups in South Africa that enable you to discuss market and company related issues. Apart from chat rooms on the internet, look for professional business associations. These will be made up of analysts and traders who are making a living from these professions.
ESTABLISH A ROUTINE
Start the day with a lengthy fast walk; at least 30 minutes. Remember that you will be sitting in front of a computer for hours a day – so start the day with an exercise that will keep you strong. Spend at least the first hour of the working day with administrative tasks. Get these out of the
way as they become a distraction during the crucial trading hours. Have a designated strategy for the day.
Set entry and exit points before the market opens.
Check the profile of world market indices for the past 24 hours. Determine the financial commitment you wish to make in each trade. Determine how much time you intend to invest in your trading day.
o For some traders this might be a few hours a day or even a week. It is important to keep a record of all trading transactions in a journal.
Trading Plan Sections
A solid trading plan should have well defined plans and strategies:
Trading Objectives and goals: What is your trading objective for the day and how does this apply to the overall trading strategy? For instance, how many trades do you intend to do each day and how much will you spend on each trade?
Trading programme: Do you have a tactic to improve your trading ratio of profits over losses. Defined Trading Plan: A professional trader will always clearly define the point at which he or
she will buy a security and also the point at which he or she will sell that security.
o Entry method: based on market conditions, such an entry point may be on the down -or upside.
Examples:
if ABC Limited’s share falls by 15% off its current high, I will buy R10,000 worth of stock.
If ABC Limited’s share breaks the Resistance level twice, I enter the position if the moving average confirms the buy.
I will always only buy if the position is supported by significant volume. o Exit method: Always choose a trailing stop loss and clearly define the sell point. There
must not be an ambiguity to the statement. Examples:
I will sell my entire position when the share has climbed by more than 30%.
I will sell my entire position if the share falls below the second stop loss. The exit will always be just under the support of the first hour range. If a trader is making continuous losses, there is something wrong with his
or her strategy. Continuing to trade under such conditions is suicidal. Stop trading and review your strategies before you resume any form of trading. Examples:
o Stop trading immediately if losses account for 50% of your portfolio value.
If the above happens, many traders decide to stop trading for at least a week, while they re-evaluate their strategies and trading techniques. In addition, check out and conduct more analysis on the market and trading conditions and risk management.
Finally, what about you?
If trading is a business, then you have to have a section of the business plan that covers salaries. Ask yourself: what do you need to cover your expenses? If trading doesn’t meet your expectations, maybe you should review your trading objectives or stay in your current career.
CHAPTER SUMMARY
This chapter stresses that homework has to be done before the real business of trading can commence. Novice traders need to be prepared to spend time laying down a serious foundation of knowledge, before they can expect real success and also real returns from trading.
IN THE NEXT CHAPTER
In Chapter 2, beginners are frightened by jargon, level of work and sheer technical and fundamental expectations.
Chapter 2: Are You Crazy?
“Rule No 1: Never Lose Money. Rule No 2. Never Forget Rule No 1.”
Warren Buffett (1930 - )
US Billionaire Investor, Industrialist & Philanthropist
A Story to Offend
I apologise if the following story offends you:
And so it has been said in ancient script that ….
….. one day, Odin - chief of all Gods and the ruler of the universe – came down to Earth on his great white steed. He roared over the clouds, bringing thunder and rain to a small South African town.
The steed swept past vast landscapes filled with flowers and shrubs. He finally came to a standstill on a quite beach and dismounted, rubbing his one good eye. He surveyed the world he had won when he had overthrown the primeval giant Ymir and fashioned the world from his remains.
He shook his head: “I left my home in Asgard (near Valhalla), where I feasted with the spirits of slain warriors, to come to this? He said, with sadness. He threw his spear into the soil and – again – rubbed his good eyed, having exchanged his other eye for wisdom millennium ago.
“If I really had wisdom,” he thought, “I would have slayed Frey, so-called God of Peace and Prosperity eons ago.” Odin stood tall and thought of Thor, his son and also Gold of Thunder. “Now, if I had combined the God of Prosperity with Thunder, maybe I would be back home in Valhalla.” He waited patiently, knowing that the person he sought would soon be walking his way. The most beautiful mansion in Asgard, where the heroes slain in battle feasted each night would have to wait for Odin, for more urgent matters needed his attention.
Trader Jack – for that was what Odin would call him – came walking rapidly and Odin smiled. That was what he liked - warriors gathering accurate information.
“You. Come here.” Odin had never quite understood the meaning of politeness. But it was Trader Jack’s turn to smile. He too didn’t know the meaning of politeness.
After a brief introduction, Trader Jack waited no time to answer Odin’s question. He said: “Odin – there is a fundamental contradiction in your setup.” Odin listened.
“After natural disasters, like the one in Japan in 2011, two things seem to happen almost simultaneously. The first is that religious zealots immediately claim that it’s retribution for some misguided policy, such as Aids in Africa after famine or not been a Christian after floods in India.
“The second is that economists and analysts will claim that natural disasters are good for economies and companies.”
Trader Jack added: “If the above is true, then you cannot have a God of BOTH Peace and Prosperity. Death and destruction thus leads to wealth as rebuilding starts. It is therefore not peace that results in wealth.”
Trader Jack continued …. pure destruction results in significant construction (often paid for by world economies through charities) which, in turn results in jobs being created for the poor. More people become more wealthy. GDP and GDFI are boosted as labourers spend wages that stimulate all facets of their economy.
“Japan must surely be better off after its earthquake and tsunamis?” asked Trader Jack.
Odin looked at Trader Jack: “For that matter, then what is the difference between Wealth and Prosperity?”
The truth is that the wealthy can more easily overcome disasters thrown at them by Mother Nature. Prosperity, on the other hand, is derived from the Latin word for “hope” and confuses the goals of attaining prosperity with the means of achieving such targets.
Trader Jack finished by saying: ”In essence, during peaceful times wealth can be attained, but money flows stronger during disasters that affect people.”
“So you don’t really care that peace is good to attain?” Odin said.
“I am a trader. My job is to look for short term market anomalies which will make me wealthy. I know that if I continue to do this, that over time, I will become prosperous – whether there is peace or not. In the longer term, disasters are obviously not good for world economies, as these divert much needed funds away from important projects to life saving ones. Those important projects still have to be done – but often at higher costs.”
“And let Peace be left to the Gods.” Odin roared with laughter. “You, “said Odin, “ will be my next God of Wealth.”
And with that Odin was gone - back to Thor and Freya, his son and Goddess of Beauty and Love.
There were three reasons for the above near-blasphemous story:
If you are offended by a mere story – stay out the market.
If the thought of taking advantage of the weak in society appals you – stay out
of the market; if you don’t, others will.
Remember, you are competing against other traders. Disasters are resolved by
world politicians, organisations and banks – it is not your responsibility.
Predictable Habits of Traders
The stance of many professional traders is that traders ultimately only trade against each other in a competitive pursuit for profits at the exclusion of all other variables. Therefore, if you – as a trader – understands how other traders think, you will have a definite advantage no matter what is happening in the economy; disasters included.
The heading for this chapter is Are You Crazy? The full heading should actually be Are You Crazy
To Be Entering This Industry With So Many Unpredictable Variables? One minute you are making
so much money that you are stunned and living the life of a millionaire, the very next minute you are losing it all, facing the Sheriffs-of-the Court and having repossession orders lodged against you. Yet another trader will be making trades based on solid fundamentals and lose his or her capital, while a complete novice (without experience or skill) will pick the right stocks and become instantly wealthy.
Do you really want to be part of such an industry?
Years ago, I started looking at the habits of traders (novice to professionals) and noticed a number of common threads among their behaviours. In fact, there are surprisingly few threads that should enable you to become more perceptive before we plough through serious fundamental and technical analytical theories in later chapters.
The answer is quiet simple: Yes, you have to be a little crazy to be a trader, but it is fun and certainly beats working for a boss. And, again – yes, you can make serous money if you are professional about trading. There will always be the lucky and inexperienced trader who will make serious money – you can take comfort that they usually lose it all in the end.
Of course, depending on how markets behave, trader’s perception also change. Trader habits can be narrowed down to a number of market-linked reactions. Imagine that you could determine how other traders will react when a set of economic statistics is released. If such data is negative, will they sell or buy? Knowing such information would enable you to place your securities in a better and more profitable position before data or environmental events take place..
The key is thus to know what the relationship is between trader and market. The first thread (or common behaviour) is that of traders who simply react to events without analysis. They sell on negative news and buy on positive. They wait for the market to react before they take a position. The norm is that they make little money and often not enough to cover their costs. These are, what I call, the Market Sheep.
Another common behaviour is that of traders who buy based only on long-term trends, called an
Investor – as opposed to A Trader.. They also do not really affect short term traders, other than to
provide a sense where the long term trend is.
I am more interested in the next two types of trader habits. The first is that of the professional trader who sticks to his or her belief no matter what happens to the market. The second is that of traders who speculate. In the first, someone who believes that the market will always be in an uptrend ignores that markets do fall (The Ultra-Bull or Ultra-Bear), while the second is merely following rumours and innuendo, called The Speculator. the
To take the above habits into account, I have also developed a set of personal habits; as follows: Never let a trade fall or rise to a point where you start to worry. Remember that Market Sheep
will continue to trade until overall sentiment changes, then you will be on the wrong side of the trend.
Anxiety, hope or greed should never be part of a trading habit. Ultra-bulls or Ultra-Bears will be there to take up your sale or buy orders, but waiting too long makes you susceptible to loses. Concentrate on realities and analytical forecasts instead of probabilities and rumours.
Speculators have already taken up most of profits on short term rumours. Stay with trading market anomalies on strong long term trends.
Remember, equities will always outperform banks’ interest rates – so, getting into the stock market is not really crazy. A simple look at the JSE All Share Index over a 10 year period confirms this.
Still Crazy – The Following Is For The Uninitiated
While this book is really for those who have some understanding of how markets work, the following is a simplistic overview as a precursor to the more complex issues outlined in further chapters.
What are shares?
Imagine you are an entrepreneur, who owns a fishing boat.
Now, over time you have managed to build your business into a fleet of six vessels. You know that your private company has reached its zenith. Without additional capital, you cannot buy more boats, or maybe expand into related businesses, eg. Have a fish restaurant. You start off with a plan to go to the bank and raise some funds to build a restaurant. The bank insists on seeing a business plan, three months bank statements and so on. After some assessment, the Bank agrees to provide you with a loan of R5 million at an interest rate of prime +2%.
You go home – elated – that you can now build the restaurant, and maybe buy an additional two vessels. After a few years, you realise that – in fact – your restaurant wasn’t as successful as you first envisaged, because advertising costs are too high and your boats are too small to go further out to sea.
And a whole lot of other issues …. So, you are prepared to sell part of your business to private partners. That may be easy – or extremely difficult, depending on your type of business, cyclical nature of profits etc.
A common problems is placing a value on the company.
Now, imagine that the above business went to the stock market to list instead of trying to find a private investor. The stockbroker (called a Sponsor for a JSE Main Board listing or a Designated Advisor for a JSE Alternative Exchange listing). The broker would split the ownership of your company into millions of shares.
These shares would be offered to investors through the stock market trading facility. If these investors believe in your company, they would buy these shares and you would have effectively raised capital by selling a portion of your business to a mass of private investors.
These investors are now part owners in your business and are called Shareholders. This gives them the right to, among other, share in the growth and profits of your company.
There are several different types of shares, but the most common type is called 'an ordinary' share. The reason investors buy shares, therefore, is not to help you, but because they believe that your company will do well in future and the share price will rise. A higher share price is called capital
growth, while payment to shareholders of a Dividend can be described as an interest paid to
shareholders. A dividend payment is not always undertaken by the company.
Most economically developed countries around the world have one or more stock markets, either run as an Open Outcry system or an Electronically-based one.
There is an stock market saying that the higher the risk, the higher the potential reward. This means that if you buy a share that is risky in the sense that the company is small, has not made great profitable strides, then the potential reward – if the company does perform well – is high. For instance, some years ago io was analysing the coal-related market and came across a share trading at one cents. The company had only one contract, had not made profits in years, but it did have unique technology. Further analysis indicated that this technology was highly sort after in the US. It does not take a genius to see that the company must, surely, be in discussions with potential buyers.
I recommended the share as a High Risk - High Gain speculative stock.
As expected, the company soon announced that it had plans to “join a foreign partner in developing new markets.” The share rose from one cent to 300 cents in a matter of two weeks.
The alternative is that the company could have continued to perform badly and even be delisted; shareholders would have lost all their investments. The less risky shares tend to be the bigger companies, which make up the Indices. These multi-nationals are called Blue Chips and tend to have strong finances, a long history and are far less risky than small, recently-formed companies. Such companies are unlikely to go bust, but the safety aspect tends to give you less capital growth than the higher risk ones.
Chapter 2: Are You Crazy?
CHAPTER SUMMARY
Basic concepts were discussed to provide a basis for novice traders to start composing their trading plan. A story was told to offend the uninitiated in the typically ruthless nature of stockbroking. If you were unaffected by the story, read on; if not, trading may not be for you. IN THE NEXT CHAPTER
In Chapter 3, the work starts with a set of crucial rules to help you to trade both effectively and efficiently. Know these intimately, before moving onto more complex issues.
Chapter 3: Rules to get
Started
“Markets can remain irrational longer than you can remain solvent.”
John Maynard Keynes (1883 – 1946)
UK economist who influenced theory and practice of modern
macro-economics
35 Essential Rules
Here is a truism: people hate losing money. I am no exception. They will go to the extent that they will deny having made a loss in the market! They will blame market conditions, or slow and inefficient computer software before they will stand up and take responsibility for their actions? Personally, I hate admitting that I am wrong even more than making a trading loss. How do these relate? Well, if you follow your own set of rules, then you should achieve more profits than losses. However, if you deviate from your own rules, and make a loss – whose fault is it?
If you do ignore your own rules, either change these or admit that you made a mistake and say that you have learnt from the loss. In this manner, you can move on to becoming a better trader.
The focus of trading is not to never make a loss! That will simply not happen. The goal is actually to have more profitable than losing trades. With this in mind, the following general rules should provide you with some helpful hints for you to start building a solid foundation for your trading career.
Remember that a very small percentage of all new traders around the world are successful within the first year of trading. Yet, some traders do accumulate immense wealth very quickly. What do these successful traders do that is so different to enable them to benefit from intimidating world markets? Searching for the answer to this question is what started the process of gathering the raw material for Six Steps to Trading Like a Pro. Some of the following rules are very basic and obvious, but many have been used often by millionaire traders. As such, it offers you a basic start to the more complex rules that are set out in this book.
The following are some of the more important rules that were generated from the many workshops carried during the past decade.
GENERAL TRADING RULES
Rule 1: Ask the question – who are you? In my book on global trading, called Lore of the Global
Trader (Penguin 2011), I set out a list of basic questions to enable you to determine what your level
of trading knowledge is; the list is available on request, so send a query to [email protected]. The interesting aspect of the list is that many wannabe traders return to tell me the obvious: they are not ready to actually trade. The following questions can be used as a precursor to the mentioned list:
Do you have an objective temperament, in a subjective environment?
Can you make a position and sleep at night?
Can you focus enough not to drown in the massive amount of market information (often contradictory) continuously made available on the internet?
Rule 2: Can you afford to lose? There is a rule which suggests that you should never trade with funds which you need to live on. In other words, don’t use money to buy shares if you need that money for groceries. Then, there is a school of thought which says that people get mortgages to buy vehicles and homes, so why not do the same to buy shares? After all, if you have a well-defined trading plan, shouldn’t your risk profile be minimal?
The reason that many pundits suggest that you do not use funds needed elsewhere, is that such funds will affect and influence your trading decisions. Often, the emotional aspect of trading is much more severe for beginners than for the more skilled trader. When you are staring out, there is a greater likelihood that emotions will influence trading decisions, compared to the more experienced trader.
Consequently, trading funds should always be viewed as money you can afford to lose. One of the keys to reducing emotions in the trading sphere is emotional independence between private wealth and your trading account.
Rule 3: Personal wealth and trading funds should be separate. Following on the previous rule, a trader should not be in a position whereby he or she “hopes” that their trade will be profitable. The successful trader must always be able to remove personal from trading emotion. When you find that you are “hoping” that a purchase will be favourable, usually it isn’t.
Rule 4: Preserve your trading capital. Without wishing to sound like a pessimist, there will be times when you will encounter losses even if you follow the above two rules. The answer is to ensure that each trade doesn’t influence the entire portfolio. this is achieved by having a diversified and balanced portfolio. these terms are explained in Chapter XXXX.
Rule 5: Don’t be a sheep. Successful traders are not influenced by current or fashionable trends. When everyone concentrates on long positions, they tend to be contrarian and go short. The theory is that, if 85% of buyers are bullish, then the market is overbought. Conversely, if less than 25% are bullish, the market is oversold. Only sheep follow. Successful traders use this theory to buy when everyone else is selling and vice versa.
RULES TO CONSIDER BEFORE YOU TRADE
Rule 6: Always review overall market news. The skilled trader does the following: he or she will assess local general and corporate news and then compare that to global news. Then look at sector indices and how these have reacted to such news items. Follow that up with specific assessment of shares and related news issues. These will act as an alarm, warning you of potential shifts in the market and, of course, specific shares.
Rule 7: Do you know what markets you want to trade? Start with the above rule to determine which sectors are interesting ones, i.e. which are in an upswing. Know what your trade limitation is and then buy within that limit.
Rule 8: Set trading boundaries. To complete the above rule with a rule: keep three to five times the money in your trading account than is needed for any acquisition. You may have to reduce your position to comply and also avoid trading decisions based on the amount of money in your account. There will be times when a “hot” tip will convince you to buy a share out of your limits – don’t. you will simply be risking your whole portfolio if you do.
