Trading in Chaos

Trading in current market conditions is hard – there is no getting away from that fact. But how has your trading plan or style changed as a result?

As traders we continually need to tweak our trading plan to take advantage of current conditions. Currently we are facing small trends sometimes only days and periods of uncertainty.

Lets look at a couple of things that you should be doing in the current uncertain times;

  1. Keep stop losses further away, this will also force you to take smaller positions sizes to maintain your important risk management rules.
  2. If the market you are trading does continue to be profitable increasing your position can be viable – remember to use appropriate risk strategies.
  3. Be patient – wait for the trade to identify itself, to not try to pick every change of direction. If there is no trade today, there will be one shortly.
  4. Remove all lines from your charts and reapply  – this allows you to revisit the charts with a new perspective.
  5. Investigate different markets – if you normally trade shares or cfd’s, look at forex or commodities – remember to  control your risk and exposure.
  6. Always trade with the strongest trend.
  7. Be willing to accept smaller profits on your trades, gone are the days of weekly or monthly short term trades – short term trades are being currently measured in days or even hours.
  8. Lock in profit as your trade improves, this requires more attention but it is essential in current conditions.
  9. Draw a line in the sand – if you are suffering losses, identify a level in your account where you will stop and take a break – everything looks different after a week or so of inactivity, hopefully this will allow you to refocus and make smarter trading choices.

Happy Trading

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

Transition to Retirement

In recent weeks I have been training to keep my accreditation current, during this I stumbled upon a little gem that may suit your situation.

It deals with retirement and Self Managed Superannuation Funds (SMSF). Once you arrive at the “preservation age” (currently 55 years, if you were born before 1960) you have the ability to look at the “Transition to Retirement” options.

Now a number of rules apply here, so its best to see a financial advisor to get information pertaining to your specific situation, but let me outline some of the options.

Although the transition to retirement rules were originally introduced to provide for people over the  preservation age to move into part time work, they can also be used to allow those people to continue in full time work and start to take advantage from your hard earned superannuation.

So what are the benefits? From 55 years, you may start to take a pension from your SMSF between 2% and 10% per year of the balance – but before you say anything let me continue.

Tax on your SMSF occurs at 15% until you start a retirement income stream (pension), from then on it is tax free. Im sure most of you have heard of Salary Sacrifice – basically your  employer pays money into your SMSF to give you added tax benefits with a current limit of $50,000 (if you are under  50 its only $25,000 p.a.), this comes from pre-tax income so the benefits are greater .

So lets look at some numbers considering things like Salary Sacrifice in the equation.

In the above table “Sally” takes a $41,000 salary sacrifice to be added into super and deduct $33,000 pension from the SMSF. Using the above figures, Net income is the same but the super fund grows at $7,000 p.a. faster – not a bad trade off.