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Range bound or an opportunity?

In the last 13 months the AXJO has been trading sideways, I’m sure not a surprise to anyone. Those trading this period have been consistently scratching their heads about future direction – even professional traders have had troubles.

Looking at the chart (right) we can see the extended range between the peaks and troughs of the last year spanning around 800 points – take a mid point to that around 4580 and notice that within a small range how many times the market has changed direction.

During the last year we have been bombarded with tiny wins and losses from not only on our shores but from around the world – most of which should have no bearing on our market but alas they have. When we overlay the DJI onto the AXJO (below) we can see that the US market is acting a little bit more stable than ours. I have also added additional 1/2 markers from the mid point to the extremities which have also acted as support/resistance points.

This direct comparison surprised me a little considering the constant bombardment of “how strong our economy is”, and “how unstable the US is”. On the other hand it also shows us that there may be better opportunities in Australia than in the USA.

From the chart right, we are seeing the 50 day moving average now start to cross the 200 day moving average, this has always been a good sign for trend traders, lets hope our index can break out of this tight range and forge some solid gains over the next few months.

Happy Trading

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Stages of Education

From my last post I received a comment (obviously from someone who disagreed with my opinion), but they declined to identify themselves, and I don’t think they actually understood my angle so i didn’t post it as a comment. The first paragraph is pasted below, I felt I need not post the flaming which followed.

“i love how someone who has made a living teaching people useless information they could learn visiting the asx site for 5 minutes takes a slag at advisers who put their balls on the line day in day out in an attempt to make their clients some money.”

(Just a note, I do much more advisory work than training – the lines often blur, but I have not delivered basic training for a number of years. And if you read the article I was supporting advisers)

This got me thinking about education, he/she is right – what is taught by SMC (my employer) is freely available from many sources. But so is 99% of the worlds information. So why do we need specialist educators?

In the days before mass media, information was harder to attain – though not impossible. Since the Internet  information is everywhere – google knows everything. The problem remains that any idiot (including me and the poster above) has the ability to put information online. Is this information true, accurate, impartial or an angle to sell viagra?

  • “Formal education will make you a living; self-education will make you a fortune.” — Jim Rohn

I have always been an advocate of free information, the more information you have at your disposal the more “informed” you can be with your assessment. This is pointed to people that are a) able to make a decision and b) happy to live with the consequences of their actions.

The problem with free information is that somebody has to pay for this resource, we all have to fund our lives, everything costs money – whether you pay this up front (as in fee for service) or from the back end (as in hidden charges) everything costs. Considering anything different is a little naive. Some would say that free information is essentially worthless.

  • “Education costs money, but then so does ignorance.” — Sir Claus Moser

With financial information costs can be extreme – both from up front charges or in self learning, learning from your own mistakes can be far more expensive than any up front fee. I consider myself self taught, but over the years I have attended many training sessions on various subjects, both formal and non formal courses. Some have been valuable, others a waste of time and money.

The courses that I believe to be wasteful, were probably to do with a) my ability to accept and use the information effectively at that time, b) my frame of mind to implement this information and perhaps c) my ability to relate to the person delivering the course and understand the concepts. The courses themselves are not to blame.

The courses I have gotten value from all have the basic fundamentals of  a) they have simple concepts b) they are advanced enough to challenge me but not too advanced to overwhelm and most importantly c) I have been in a mental position to accept the information.

There is a lot of information about trading or investing out there in the ether – you can just go grab it but before you do, you may also need to a) assess its validity to you and the current conditions to make sure its still valid b) have a method of testing prior to implementation to gauge the results and c) be able to justify the risk to reward.

My opinion is that everyone needs education on managing their finances, go read a book, do a course with someone reputable and accredited – but learn about this stuff.

Especially with information about trading, I feel that courses can only take you so far – after that your own observation and discipline will be the deciding fact. Trading is an individual thing, being able to make your own decisions based on proven set of guidelines will give you a great advantage, more still being able to evaluate and change your systems when they don’t perform is the real trick.

  • “Teachers open the door, but you must enter by yourself.” — Chinese Proverb

After the basic information (even on complex subjects) has been learnt, the only avenue for advancement is a) self evolution or b) mentoring. I think  successful people are always students that keep learning, adapting and evolving.

Happy Trading

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Averaging Down

Sooner or later we all end up with a losing position on a good quality share, we may feel that we can ride out the slump and wait for the market to regain its former glory. One technique we can use to assist is to average down our purchase price. With this strategy we would purchase another parcel of shares at a lower value effectively lowering the average purchase price of the entire holding.

Lets say we own a parcel of 1000 shares has been purchased shares for $10.00, and the position is worth less than the original purchase – Say $6.00 per share.  Lets assume that no risk management has been applied (because if it was, you wouldn’t be in this position).  Buying another 1000 shares at $6.00 would lower the complete average on the asset to $8.00.

So lets look at the right time and the wrong time to do this. The wrong time is when the market is falling, if you are averaging down into a falling market is very difficult to achieve a good result, because we don’t know how far the price will fall. If the price falls to $3.00 your decision to average down hasnt been a good one. The ramifications of getting this wrong may impact on your positions profitability, it may create an imbalance in your portfolio or in the worst cases give you greater exposure to a dying asset.

A more appropriate time to use this strategy would be to wait for the market to form a support base and bounce – at least in this way the market is moving in your favour again. Try to look at it like entering the position again — does it meet my normal entry criteria, if so its the right time – if not then wait until it does, or forget this strategy.

Ideally averaging down with the market bouncing off a support line and forming a bullish pattern is the time to average down, the stronger the move upwards the more likely you will have a successful trade.

In Short: Don’t Average Down into a falling market, go when the market is rising. Getting this right will give you the ability to lower your original entry price so you may trade out of the position with a profit.

Happy Trading

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Trading Channels

Markets will often move in repeating patterns or ranges, there are a number of different names for this but breaking away from the titles, our obligation as traders or investors is to make good choices in our investments.

As observers watching a market our best opportunities come when we identify repeatable conditions. Sometimes we see that the price action is moving between an upper range and a lower range, sometimes called a channel. As a trader this offers some nice trading options, the biggest being a repeatable opportunity trading into the active “leg”.

A couple of things to consider when analysing a channeling trade;

  1. Trade with the dominant channel direction – One of the most viable principles in trading is to follow the more dominant direction. This is because the dominant direction will be more profitable. Of course it is possible to trade against this direction, though more care should be taken as it would be considered a higher risk trade. When channels are flat in direction profitable trades may exist in both directions.
  2. Connect your peaks or troughs – This is to gain an understanding of when the market is reaching the extremities of the trading ranges. Normally the channel is identified by connecting either a couple of troughs or peaks. Duplicate the first line and move it to the other side, often this can be done before the 4th leg has started. (see top image). Once the second peak is in place further adjust the angles of your lines.
  3. Larger channels take longer to reach the extremities, but provide you with a bigger return, smaller channels are faster and more frequent.

  4. Plot a mid point – The mid point of the channel will often cause the price to pause, stutter, stall or even reverse. This is more important on larger channels, but as valid on smaller ones.

In very simplistic terms – Buy at the bottom, Sell at the top and stay out of the middle. Now that’s about as generic as I can be, your trading rules should be a little more thorough.

From a reality perspective we will never trade the complete width of the channel, you will loose a little on each side. So determining whether or not a channel trade is viable is an easy choice – how far is it (in $) from the channel lines? This is the potential profit on the trade. When you shave from both sides, is there enough room for you to get in and out and make a buck?

Channels can be some of the best opportunities we have as traders, so do 2 things. Firstly, watch your channel regularly, identify the movements and speed – be  ready for the next move. And second, tell me about it 🙂

Happy trading