How Panic Often Blinds Opportunity

Last week's trading can only be described as a bloodbath with the Bears managing to open the floodgate and ransacking all the gains made in the last 3 weeks. What is evident over the last 2 months of trading is that volatility will most definitely be around a little while longer, creating chaos when least expected, spooking you when needed.

I thought I'd touch up on my previous blog detailing the emotional state of panic and how it affects our trading decisions. Its nowhere more evident than the trading action we saw last week as markets worldwide plunged in a hurried frenzy to exit at all costs to protect the little gains which have materialized from the previous rally we had.

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Panic evokes a heighten sense of urgency and as the year draws to a close traders become more vulnerable to slipping into these mind sets. As I had said in my car problematic experience, simple tasks such as finding my location were restrained while my instinctive thoughts flooded my mind and crowded my degree of rationale. 

I wanted to deal with that today with a very practical example. Going back to the grips of October madness, markets were able to bounce from the lows and surge their way back in a stellar run. One stock which showed such a bold effort was Richemont which fell out of favour with investors in July of this year and took a beating all the way down from it's highs to lows last seen in June 2013. 

Although the results which came out on 7th November were not what many would call fireworks, most saw them as better than what they had expected and rallied the price close to the all important R100 mark. At the same time the Top 40 was being met with some resistance as the Bulls ran out of steam and the Bears started licking their lips. What ensued was a start of a selloff which had all the substance but was abruptly halted by news out of China regarding possible stimulus. 

But once again the Top 40 was met with resistance and Bulls began to panic and sell off the market but here lies the divergence, Richemont continued its ascent and with much vigour. If you had your blinkers on you'd only see the distress overall yet miss a perfect trading opportunity on the contrary.

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This once again stresses the importance of managing your emotions which are a key priority throughout the trading process. Panic will always be present when there is a large contagion of volatility around. Traders who neglect their trading plan in adverse conditions get caught on the wrong foot and within an instant find themselves in a daunting decision making process. 

Its highlighted some important aspects in my own trading namely: 

• Be aware of the volatility which is influential of market conditions. Earlier in the year most traders were bored out of their minds sleeping at their screens with the lack of any movement now just a few months later there seems to be a heightened awareness to daily movements. Volatility not only affects the individual trader but all traders, something never to forget. 
• Although there is high volatility in the market and uncertainty lying around it doesn't mean that there aren't opportunities on offer in the market. A great example is Richemont which is still putting in hard work to get back to the top as others simply slump. 
• When you position yourself do so with a small size first and see the conviction of the follow through, once you get the confirmation you can begin to add to the existing position. Its imperative you do this because uncertainty can bite the socks off your stock at any given time. 

So in saying all that, as we approach the end of the year fast I would hope that most of you have started reflecting back on your performance and most importantly your progression and start building a plan for your trading journey in 2015. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Panic Mechanic

As December trading got off to a panic stricken start , nothing quite beats that sinking feeling watching the market fall through the floor knowing you're on the opposite end of it. The old trading adage goes "Bulls take the stairs , Bears jump out the window."

The weekend passed I experienced a similar situation while driving home from a friends house late in the evening. My car decided that 12am would be the most appropriate time to issue it's grievance about its own condition and subsequently broke down on the side of a highway.

It's in that immediate situation when the information most needed to help you dissipates as your logical reason is strangled . Panic takes over and irrational actions follow. I had managed to get hold of someone but found it strangely hard to explain my location which I had been very familiar with. I was cursing at the fact my car was broken rather than delivering the most important facts that would aid me to be helped.

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It struck me there and then that the only human mechanism working was my emotional responses. Fear flooded my mind and panic was beginning to set in but I knew I had to keep calm. I recalled methods I've used in trading when things get heated in the market. The worse thing to do is do something you're going to regret later so it would be imperative to think carefully about my options. 

The second I let go of the fact that I was stuck the information I needed the most came easy. I made sure I was mindful of everything. To give you an example I had been 350m away from an off ramp which there was a huge sign stating so. I hadn't seen it when I was panicking and it would've cost me more frustration. 

The market operates in similar circumstances. When we start to see the plunge we start to panic and that's the most critical stage. You're fear of losing profits you've accumulated over the last weeks or even the massive loss you'd have to absorb each time the market is sinking can be a very daunting thought.

These thoughts are a normal part of the human reaction process when faced with possible disastrous or even dangerous situations. Our instinct is to hone in on the situation and negate the environment around us. Fight or Flight. This can be detrimental when trading when information is most vital when making a decision.

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You need to be aware of this and take precautions to prevent yourself from obstructing your own trading success. Be mindful of what is happening, although your most immediate thought will probably be to sell up and run for the hills. Before you do make sure that when you're doing so it's because of technical or fundamental reasoning and not based purely on emotions. 

Having witnessed the deadly sell off yesterday 1 December 2014, as I am writing this article there has been a swing upwards from the low to the highs of 1500 points. If you were one of the frantic sellers at the lows you certainly won't be very pleased with your decision making skills today.

This emphasises the importance of information processing as an integral part in trading. When information becomes blurred we are more prone to irrational decision making. However if we are able to identify the symptoms of panic we are better equipped to deal with these situations as they occur and less likely to make mistakes. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Stop & Go: The Essential Reason to Use a Stop Loss

Much excitement was around yesterday when an announcement was made that Steinhoff was going to acquire an effective 92% stake in retail giant Pepkor for almost R63 Billion. The retailer which is owned in part by Brait private equity firm and Christo Wiese is a massive step in the right direction for Steinhoff some analysts are saying as it becomes more focused on the African consumer.

However when the deal was announced it was said that Steinhoff would only pay Wiese R57 per share of which he has 609 million shares. This spooked some investors  who thought the value to be more and what we saw was a massive selloff of over 20 % in the share price by mid afternoon.

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In trading I don't think there's a shortage of  literature relating to risk management principles with one of them being the adherence to using a stop loss. In my time trading I've come across many traders who have never used them and resulted in their accounts being blown. I thought it would be appropriate to highlight the exact point using the Brait price movement and unfold the emotional distress a trader can experience when positioned in the wrong direction.

If you had to fictitiously take a geared trade on Brait on Monday 24th November 2014 for an exposure of say R100 000, your margin would be R20 000. You went long because you had identified a bullish pattern which indicated buyers strength that would help lift the price. You decide that because the share doesn't trade frequently you leave the trade with no stop loss.

Fast forward to the 25th November and the news comes out which sends the price plummeting to lows last seen weeks ago.  By the end of the first hour of trade the price has dropped more than 20%. To put that into perspective, your R100 000 is now worth 20% less which would mean the margin you put up would just be enough to cover the loss. Chances are you'll be getting a call from your broker pretty soon asking you to put down further funds.    

You probably panicking and frantically search for an answer regretting your decision that you foolishly left out the stop loss. You start questioning your ability not only to trade but your financial liability you've now created thinking how difficult it's going to be explaining to your loved ones that you lost so much money in a matter of hours.

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In the back of your mind there's a little bit of optimism left coaxing you to hold on in case the bounce may materialize but then your urge to sell becomes more prominent as your position is depreciating at an even faster rate.

The fact of the matter is that there are endless amount of possibilities in financial markets and when we execute the trade we effectively take over responsibility for what happens next whether it be good or bad, in most cases we expect it to always be good.  However our inability to appreciate the negative outcomes clouds our judgement and places more priority on profits rather than securing the safety of our capital.

Markets have a convincing ability to allow us to form bad habits such as not placing a stop loss. You get by once and you think it always work. Unfortunately there will always be times when a trade works against you which is why its essential that any trade you take, the first step is to place a stop loss before anything else is done.  That way your losses are limited to a set amount and the emotions are left at the front door.

How to Deal with the Roller Coaster Ride

Recently I was asked by a person close what it felt like being in the middle of a volatility storm as the one we experienced last month. At first I wanted to describe it as exciting, something a thrill seeker would get a kick from but then I thought about newer traders who had yet to experience these kind of conditions and the emotional response which was awoken through all of this.

In saying this, I thought back to my first experience in these topsy turvy movements and how I had to face up to some of my most scariest trading fears.

When you're still new to the game you'll gather snippets from the pro's on how you see flashes of price movements before your eyes. They immediately bill it as a very unpleasant experience and in the back of your mind you begin to have second thoughts, hoping that these kind of situations don't surprise you anytime soon.

If you ever been on a roller coaster you'll know that anxious feeling you get when you queue in the line and start hearing what others in the queue are expecting. Psychologically you are building up the tension inside and try to rationalise what you're about to do but your fears won't back off.

You're getting closing to the front and your heart is racing,  your breathing is restricted and your face turns pale.Your friend turns and says to you "Hey man stop looking squeamish , it's just a roller coaster. Nothing to be scared about". But your anxieties won't go away. You manage to convince yourself that this is it. Time to take the plunge.

The attendant makes sure you're strapped in safely and goes through the whole line. He gives a signal to the controller and suddenly the coaster begins its ascent.

The distance between the coaster and the top of the line is getting shorter and shorter and you're panicking, legs dangling in midair and an eerie silence has taken over the general  mood. And then...

Boom the wind blasts your face with rapturous force increasing your anxiety. You tense up and your body feels paralyzed and...Wowwee up and under racing along the track with no limitations twisting and twirling approaching the next bend fast, ready for cork screw.

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Sssshhh you going around in a circle at such a fast pace you can't place your direction and that's when you finally let go and let the force of the coaster dictate the control of your body.

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The coaster begins to slow down and you start to feel your muscles relax and relief that it's all over until it comes to a halt.

What I've just explain is what someone who has a phobia of roller coasters , coasterphobia, would experience. This is exactly how it feels when you hit high degrees of volatility. The speed at which it happens is quite fast and violent and there's absolutely no control.

These conditions do blow into the markets every so often and it's imperative for you to know some basics steps to follow if you do encounter them.

Firstly don't try and trade on instinct, there are always temptations when moves such as these materialize. These conditions are quick and you're execution needs to be accurate. Best left to the traders who've had a few years worth of experience to fall back on.

Secondly, ensure that you're strapped up at all times. What I mean by this is your risk management rules. If you are feeling brave and capable enough to trade always make sure you have a stop loss as profitable trades can quickly turn into losses in a matter of minutes.

Thirdly, trade with less gearing, it's always difficult to call when such conditions are going to end so one way of entering a trade without standing the risk of getting stopped out all the time is to begin with a very small position. This way you're allowing your position breathing space and flexibility. Once you're certain the worse is over you can begin building your position to full capacity.

And lastly remember that the best thing to do when you don't see high probability setups is sit on your hands and wait for the chaos to subside. Once it has the best opportunities will present themselves.

The 4 Traits of a Successful Trader

I have to admit that I'm a huge soccer fan and over the years I've built a certain affinity to one team in particular. But today isn't about testing our loyalty to one team or who's currently leading the league. It's about highlighting the advantages of consistency in every area of our lives and how having the right mindset is essential in ensuring long term success.

Sir Alex Ferguson is one of football's most successful managers of all time. His records speak for themselves and the time he spent during his 26 and half years at Manchester United has been described as "the Impossible Dream". His built up a number of teams all of which have been able to exhibit a distinct progression in the game of football.

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However what strikes me the most is his performance record over the years. I was able to find them on a Man Utd fan site. According to the website Ferguson was in charge of the Red Devils for a total of 1500 games of which he only won 895. That would give him a win ratio of 59.67%.  In other words every time he assembled his team and marched them onto the pitch, he had a 60% chance of winning the game.  Under his reign his players scored 2769 goals for the team and only conceded 1365.

Here's a few things I think is most important about the stats

1. Although he won 60% of his matches he was able to accumulate a cabinet full of trophies. This speaks so closely to a trader as it does in football. A league isn't won in a single game but rather over a season of games cumulating in the most consistent team winning the cup. In trading we often feel disheartened by one loss but don't realize that it takes more than one trade coupled together with good discipline to build our accounts. 
2. Ferguson was known to manage his players well both personally and skillfully on the field. He knew each player's attributes and used them to their full potential. Trading is much the same in the sense that each indicator we use should be fully understood and accepting that they don't always workout isn't a train smash. Our jobs is to be consistent. 
3. The goal difference at the end of his career was a staggering +1404. For every goal conceded the team was able to score 2. When trading it's always imperative to be rewarded with more profits than losses so that you're able to be profitable. It's a simple equation that so few exercise. 
4. Finally time is the most underappreciated asset of a trader's career. Spending close to 27 years at the helm, Ferguson was able to capture the most prestigious titles in the world because his team was prepared when those moments of glory awaited them. The same goes for a trader. Time is your friend not the foe. Being able to survive the markets in times of drawdowns allows your system enough time to work when the conditions become right.   

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Drawing from the philosophies used by Sir Alex one can see how playing a game is a lot more than just winning. It's about being in control of your emotions and guarding your goals when tough times loom. The real reason people stay in a job that long is because they have a passion for the game, money comes secondary and when you are able to reach that point in your trading journey you'll be able to say that you've successfully mastered the skill of trading.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

How to Explain Volatility the Politically Correct Way

As the year end approaches I find myself thinking back to the lessons I've been able to learn from over the past year. If I had to point out one aspect of trading that stuck out the most to me it would have to be the volatility.

Starting from the complacency in the beginning of the year taking our market to all time highs right to the African Bank rights issue debacle which ultimately ended up in the share being suspended until further notice, one things for certain, volatility is the oxygen which ignites the combustible process and aids explosive action when used in excessive quantities. 

However in saying this nothing smacks more of volatility than the chaos which erupted in parliament last week Thursday as a disagreement between opposition parties and the Speaker of Parliament turned what was thought to be a normal day in parliament into a circus act. 

This spectacle of amusement not only liberated once disinterested viewers of parliament into a mob of reality television worshippers but showcased the true nature of these "Honourable Members" of society. 

I'm sure you're scratching your head wondering how this forms any parallels with trading markets. My answer is nothing can come quite close than this textbook example of how complacent volatility set itselfs in and how the opposing side finds the strength to create an uptick and degenerates the situation into pure chaos. 

Ever had the feeling when trading a stock it suddenly stops moving your way and just starts to oscillate between 2 points.  Quite a frustrating experience, something we've seen happening this week on our markets. We term this kind of movement as "falling asleep". This has also been a frequently occurring theme in parliament over the last 5 years as seen in the picture below.

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These kind of movements have be seen on stocks such as AVI or Mondi. They've reached a plateau after a massive run and the ruling trend setters start to lack the substance needed to take the value to greater heights. The opposing side finds just enough excuse to keep the ruling side at bay for a while, stalling prices when necessary.

A really great example which I wanted to share with you is Bidvest which has been "sleeping" for the past 7 months. Let's have a look at the chart

If you had only been watching this stock over the last 7 months chances are you would have got bored and probably thrown it aside waiting for the break out to the upside. If you the type of trader who trades ranges you had a few chances to make some decent money, but if you thought that this condition was going to hang around and continue to go to and fro you'd have been mistaken and got bumped around like an attack from a 3rd force.

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When volatility finally rears it's ugly head and begins messing around with all rationality the outcomes look disastrous. There is no distinct direction at which the price moves. Buyers and sellers started tussling amongst one another with violent swings from one extreme to the other leaving behind a destructive path of chaos. The uncertainty let loose causes many on the sidelines to watch idly by and seemingly chuckle at the poor souls going through this abrupt disorder. 

Take note that the above description was how traders would react. The chart show clearly that any trading signal generated would immediately be declared null and void and create mass confusion. There is a few times where the sellers threaten to disrupt the long standing uptrend and bring this share to its knees but the buyers eventually grab a hold of the situation and maintain order and if you've noticed, the last candle on the chart exhibits what will be the breakout everyone was looking for. Bidvest has traded much higher and has resulted in a lot more happy shareholders.

However a striking resemblance to the chart above, watch the video below to see exactly how politicians react to a similar situation in parliament. The similarities are quite remarkable.  

So folks whats the moral of the story. Quite simply when a market is running nowhere and tempers are running high, sometimes a little commotion can definitely get the ball rolling and keep those buyers or sellers on their feet and besides who doesn't enjoy the fun it brings with it.

Nothing Hurts More Than a Missed Opportunity

How often do you hear it? Whether it be around a dinner table, scouring through the internet or even a quick chat with your friend, the spectacular returns made on a trade of a life time. Of course you feel a bit envious, don't we all but today I wanted to fess up and tell you about the trade I never took and what it feels like knowing the potential gains I could've had.

Naspers has had a phenomenal run over the past 5 years with a significant stake in the tech giant Tencent helping the price amass what can only be described as a rally made in heaven. No resistance can keep the price down and in saying that at the beginning of October there came a chance when the market selloff offered a bite at the cherry.

It's not very often that you see a momentum play such as this in oversold territory so the chance was there for the taking, yet my inability to act came from a piece of data I thought to be worrying. The price had reached an all time high of R 1474.95 some time in August of this year and the pullback that we were experiencing suggested that the lows being registered were over 20% from those highs.

Thinking that the sheer drop could trigger a sell off on epic proportions I stayed cleared, content with just watching from the sidelines. But as the market began to bottom out I once again started to show interest. Having been burned by Nasper on a few occasions in the past ( coincidentally going short rather than stick with the trend, another confession I wanna fess up too) I had an inclination towards not taking the trade. I consider it to be pure fear, yet a little over a month later I find it to be pure stupidity.

Although hindsight can be a perfect science, the fact that I had allowed my emotional response to act rather than my trading plan was justified to call it stupidity. The rules when it comes to trading is to trade what you see. I clearly got lost in the emotional mix of it and missed out on an opportunity.

I'm sure I'm not the only trader to have done this and I know I won't be the last. Missing out on movements like these can really put a dent on your confidence to trade.  However I like to use a bit of reverse psychology on myself and pat myself on the back for seeing the potential move and being satisfied with my predictions working out. But you should be mindful that the occurrence of these situations don't take place too often because if they do you need to question your emotions in the participation of taking trade.

Finally remember that opportunities such as these don't happen to often but that they will always appear. Knowing that your longevity in the market is a goal you wish to obtain should be enough motivation to ensure that the next time they come around you won't miss the boat or rather in this case the freight train.

If you would like to contact me you can through my email atcadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

How the CadeTradeR Came To Be

 I've decided that today that I wanted to unravel the mysterious behind the name of this blog in the hope that it may explain why I decided on using the name and how I try to incorporate it in my articles.

As you will have noticed that when I do write I try bring the experiences of life and trading together so to highlighted the similarities between the two. If you take the time to observe the subtleness of it you'll be quite surprised how the two align. I've always believed that through our lives in between working, studying or even enjoyment there are life lessons to be learnt, valuable experience from which if we are mindful about create greater value to ourselves. 

However many times in our lives we are simply too busy to take note of what has happened and most often lose out on the opportunity to embrace the lesson stemmed out from the experience.

I believe we are shaped by our past experiences and our trading journey is not merely a process whereby we simply execute a trade and hope it works out. I believe that the first experiences of a trader's journey should be one of self discovery to find what personality traits we possess or lack and from that point shape our ultimate trading experience. Thus my goal when sharing my personal stories with fellow traders is to evoke their curiosity to search for the trading beliefs they truly believe in which will fundamentally lay down the foundation of their future career as a trader. 

I've always been asked, "Why CadeTradeR? " Quite simply because a cadet is a trainee military personnel with no experience at all. When introduced into the rigorous training routine they are broken down physically and mentally and then built on the principles of discipline. They are brought into a ranking system whereby positions are earned through experience, hard work and innate knowledge of the situation.

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I've found in my dealings with many traders, old and new, that there seems to be an instant affiliation to the rank of "Trader". But what is a trader exactly. Although we may have glamourous connotation we don't truly appreciate the time it takes to craft oneself into one. It is because of this exact point that I intended on writing down my own experiences as a cadet trader enlightening my readership with my findings of what it is to be a true definition of a Trader.

I wanted to created a concept in which new traders could identify themselves much easily with and at the same time not take away the expectations of a trader. Thus the merge of the two words to form a new definition of a new trader, the CadeTradeR.

The market can be a harsh reality for a person not skilled to foresee the danger which lies around the corner which is why I've left 3 letters in capital form. Each letter forms a trait which I believe is the backbone of most successfully traders and the same needed for CadeTradeR's to ensure their ultimate goal. They are;

• Consistent: The manner in which we trade needs to be consistent at all times taking into account risk management, the most important part of the trading process because without it our success will be diminished dramatically. 
• Tactical: Having a plan on hand and understanding the reasonings behind entry, exit or delay of a trade thus bringing a degree of measurement to our expectations. 
• Resilient:  The most important trait is resilience as a traders journey is full of highs and lows (no pun intended) and our abilities to deal with the realities of trading truly and honestly will speed up the process of understanding. 

Follow these 3 traits and you'll be equipped to escape the fallacies most commonly found throughout the Trading Community. 

A school teacher of mine once told me "Humility before Honour" which is none truer than in the markets. The market is a much greater force than one trader. We have no control of it, we serve the market in forms of liquidity and in turn the market rewards us based on our discipline. There's no need to act perilously, respect the market and it respects you.

I hope that this article has inspired you to come back and read my progression through the trials and tribulations in my own trading journey and maybe it creates much awareness to form a community of like minded traders to share our journey to a common goal.

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If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Strengthening Dollar, Weak Chinese Economy Hurting Resource Stock

Over the last few months as many have watched the Dollar grow stronger versus all major currency, global commodities have taken a hard hit as a result. The JSE Resources 20 index is no exception with much talk going on amongst various market commentators debating whether the Resources Boom we experienced pre-financial crisis might have come to an end.

In saying that we need to take account of the dip in economic growth we've seen coming out of China and the sustainability of that. Still there are large pockets of potential within China that remain untapped yet there seems to be a constant overshadowing of debt problems stemming from the massive drive in the growth rate. With the level of debt at these levels one does get the feeling that the Chinese consumer might be feeling the constraints and thus restrict spending. What's added further pressure to the commodities slump is mainland China's efforts to curb supply from abroad by opening inefficient operations within its own borders namely iron ore. 

 With that being said I wanted to focus on the resources sector in the South African context since our partnership with China is increasingly leaning towards a more dependent one.

The chart I want to focus on today is the JSE Resources 20 Index, which represents the 20 largest listed resource companies listed on the JSE. These companies range from diversified miners all the way to gold mining which has seen a tremendous downturn in prices from it's glory days.

The timeframe I'm using here is a Monthly over the last 10 years.  The first thing we want to identify major support and resistance. We can pinpoint those to 45 000 and 60 000 respectively. We  see that from 2010 the index has been range bound.  What strikes my interest is during the first half of 2013 the level of the index fell below the 45 000 mark as indicated by the circle.

It seems as if a fight ensued between the bulls and the bears which resulted in high levels of volatility with the bulls as eventual winners driving the index back to 60 000.  That would indicate some resistance on the part of the bulls to allow the level to go further than 45 000.

We are now approaching the all important support level of 45 000 once again and it will be interesting to see how the bulls will react. Two possibilities can happen. The first being the bulls being able to push the index up again thus reinforcing the range bound trading environment we have been experiencing or second, the bears gain sufficient strength to break deeply into bull territory so as to chase them off. If that were to happen we would likely see the index fall further to financial crisis levels of 30 000.

I see the second scenario as rather unlikely but in financial markets you can never write off any possibility. The way it stands right now I would be steering clear of resources stock for the moment to allow that possibilities to unfold themselves and once I have strong confirmation of the direction I'd begin to trade again.

Market Commentary: Bulls have their work cut out for them

What a week we've had last week on financial markets worldwide with tempered levels of volatility coming through creating the perfect storm. A few months ago I had written an article stating that the global markets had indeed become complacent with what price action was suggesting and that in order to find resolve we'd need to see an uptick in volatility.

At the time volatility was creeping to lows last seen many years ago. I want to revisit the chart that I had used 3 months ago to show the extent of what has unfolded and possibly try give some idea which direction we could be headed.

The chart below represents the JSE Top 40 over the last year on a Daily basis. I had said that the support level of 45500 was important and that if we saw a deep break to the downside we would see some sellers coming into the market. Observe that towards the end of September that break did occur and the follow up from the bears held that view.

From the level of 45500 the bears were able to secure a 4500 point drop or 9.9% demolition of any complacent bulls. Prior to the price dip my expectation was for the index to reach 44000. I've highlighted that level with two square boxes labelled 1 and 2. In box 1 you'll see that during May the level of 44000 was the trigger for the bulls to take the index higher which did happen. My thinking was that since this level was critical in helping the bulls take control of the upside we would see some protection of this level.

However we didn't see enough effort to hold the index at that level and subsequently the index came in for a hard landing. There's a few technicals that I think play a crucial role in the weeks ahead. Notice that when 44000 was broken there was a bounce. That bounce didn't materialize into a significant move and the 200 SMA (Blue Line) was touched but the index moved quickly away. Consequently there was a degree on confluence because the 44000 area was in the same region as the 200 SMA and they both failed.

The last few trading sessions suggests that the bounce could have some sustainability to it however the bulls are going to need to work hard to reclaim the sentiment and certainty before we begin to trend upwards again. I say this because the index is under the 200 SMA for the first time since June last year.  The 200 SMA is considered an important gauge by market participants in deciding whether the sentiment is bullish or bearish. With the index being under it presently it does shift the strength in the direction of the bears and gives the bulls the task of proving their worth.

We do see that the MACD lies deeply under the zero line which adds further evidence of bearish strength together with the fact that there is signs of bearish continuation divergence on the Stochastic. The bears/sellers will be waiting at the 44000 level because they know that the probabilities lie in their favour. In saying that the bulls are going to need to put in a really good performance for us to feel confident in the uptrend once again.

If you wish to contact me you can do so via my email cadetrader@gmail.com or if you'd like to stay up to date with market news, latest trends and interesting insight follow me on Twitter @CadeTradeR.

Departure of 2 Key Economic Figureheads Shows Lack of Confidence in Government

The second tenure of President Jacob Zuma has just begun and already South Africans are left wondering about the departure of two influential policymakers from their offices.  Pravin Gordhan was moved from his post of Finance Minister after elections had taken place with much speculation leading up to the elections on whether he was willing to stand for a second term and most recently Gill Marcus, South African Central Bank Governor has expressed her intentions not to renew her contract when it comes up for renewal in November this year.

 Pravin Gordhan exit comes as a grieve warning to current cabinet. Gordhan drove a hard line and came to office in economic times of vulnerability. He was able to steer government budget in the right direction and ensure stable government revenue with his previous work as SARS commissioner. However Gordhan’s integrity has come into question when he openly appealed to government officials to tighten their belts, an appeal which seems to have fallen on deaf ears within the ruling party where government departments is rife with overspending and tender irregularities. One needs only to look at the recent Nkandla scandal which has implicated President Zuma in upgrades to his private residence to the worth of over R200 million to see the extent of these uncontrolled actions of extravagant spending.

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This had to be the last straw for Gordhan who has somehow tried to save his own reputational damage by agreeing to work within another department in government.  He now heads up the Ministry of Cooperative Governance, a department which objectives are to ensure that officials abide properly by the rules set out and maintain a steady hand on their spending; something the previous minister was unable to do.

Gill Marcus has been an outspoken advocate of the dire economic situation which is currently playing itself out in South Africa.  The monetary world of economics has seen an abrupt stop to norms with prolonged periods of quantitative easing in the US. The mass amount of money created to halt the rot of the world financial system is dismal but Marcus has been able to adapt well to the new environment.

Given the problematic circumstances faced from externalities from the outside world, Marcus has on several occasions warned government of the dangerous precedent it is setting by not acting swiftly to economic disruptions such as the Marikana Massacre in 2011 and most recently the Platinum sector strike which lasted 5 months. In both cases labour has been unwilling to reasonably negotiate and sacrificed the wages of workers to secure higher wage demands at the cost of thousands of jobs and at the same time business has suffered a barrage of attack on its confidence levels in doing business in South Africa which has led to a ripple effect of mass closure of many businesses and job losses.

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While sitting idly by, the government has watched from the side lines as this economic tragedy has made a mockery of a sound and stable economic environment. As these events continued to rear their ugly heads Marcus has been forced to drop growth forecasts quarter after quarter leading to further downgrades from rating agencies and outcries from the same government officials who claim to have all citizens’ interest at heart while at the same time continue to lavishly spend on luxury houses and cars.  

One does seem to question the health of the economy knowing that both fiscal and monetary policies are essential to the functioning of any economy and the exodus of two of the most important persons within those policy frameworks is a major blow to confidence in the current government.  

The continual denial by top leadership within the ruling party of disruptions within the economy is tantamount to unclaimed responsibilities entrusted to them by the electorate. If these responsibilities are further ignored it may only lead to a worse situation than what we see and damage which can be irreversible.  Maybe it’s time for the ruling party to gaze into the mirror of possibilities and see the true reflection of what really is happening.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Listening to the Wise Man

The other day I was thinking back on my life and the philosophy by which I live by which has helped me achieve my goals thus far in my life.  Then my thoughts directed to my trading journey and what it has taken me to reach the level I have in the last few years.  We all have a story to tell, our own personal journey’s leading up to our greatest achievements. Our stories may be unique yet our beliefs to endure and succeed are shared.

There will be moments in your fledgling trading career where you will be left vulnerable to the emotions of doubt, hope, fear, greed and many more. It’s in times like these we search for that piece of inspiration or that thought of genius and even the grace of humility.

I’ve found refuge from listening to the stories of many professional traders only to realize that they too faced the same obstacles I am.  What makes them rank to the level of professional is the fact that they persevered through and made it to the top.  One trader in particular who captivates many traders in South Africa is Igor Marinkovic.   

Igor moved to South Africa in 2000 as an electronic engineer and began trading in 2003. He started in warrants and gradually made his way to futures for which he currently day trades ALSI futures.  Igor’s 11 year trading career has seen him become an authority on the ALSI and has earned him the name ALSI Trader.  The fact that he has been able to navigate his way through the market with very limited amount of experience is true testament of his ability as a trader.

Igor has built quite a large present within trading circles in South Africa and abroad which gives further evidence that people place a lot of value on what he has to say. One of Igor’s most recent projects is Trading Wisdom’s, a website which is dedicated to capturing thoughtful quotes from some of the world’s best trader’s.

When it comes to learning about trading it pays to learn from the best. Just as we follow the trends in trading we naturally gravitate towards successful traders who have their own shared experience to relate with others.  Quotes ranging from Jesse Livermore to Mark Douglas, they all remain relevant when it comes to trading.  They are principles which are universal and should be followed by all traders.  

But why should traders pay attention to wisdom’s? 

It’s our gateway to sanity, knowing that trading can be difficult at times is simply not enough motivation for us to be able to carry on pursuing it. Having assurance that the obstacles which we face were the same faced by so many others and overcome inspires us to become greater than what we’ve ever imagined.

Trading Wisdom’s is a collection of those few who have successfully managed to accomplish trading. Each quote deals with different aspects within the trading process and because they short, concise and easy to remember they affirm our belief that what seems impossible is always possible. The value added to our trading journey stems from the path they lead us onto to which keeps us following the same path throughout our journey irrespective of the level we hold.

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Thinking back to Igor’s journey makes it all real the possibilities anyone one of us can achieve if we are determined to succeed, passionate about what we doing and remain disciplined. The collection of quotes he has compiled shows just how passionate he is about trading, the extent of experience he has been able to draw upon and make his own trading success happen and the fact that he would want to share these wisdoms with others shows his commitment to educating those who wish to be taught in the ways of the wise man.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Having the Right Mind Set Isn’t as Straightforward as You Think

Recently I read through an article written by Bennett McDowell published on TradersLog.com which touched on a thought provoking topic, the different ways traders see the market and the way in which they respond to their mind set they have in place. McDowell explains that markets should be seen as a nonlinear entity comparable to space, time, reality and oneness, a non-systematic mechanism in which output is disproportional to its input, where natural order is the determining factor and logic doesn't apply.

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McDowell goes further on to say that most traders use linear thinking when participating in the market which could possibly explain why they have a difficult time interacting with the market over different periods of time.

 

Think about it for a while, it took me some time to wrap it around my mind. We all experience it in our trading; we dedicate a fair number of hours staring in front of screens sifting out opportunities from a universe of securities with endless possibilities. The process is laborious in times when no opportunities seem present and pleasant when they are bountiful.  Although we perceive both times in a different light, we attempt to apply the same consistency to each situation so that our results do not deviate from our expectant outcome.

Our mental prowess is tested to the maximum when we are suddenly confronted with chaotic transitional market conditions which no longer conform to our rigid trading strategies which were set in place with the previous condition. If we are unable to initiate our ability to become more malleable and adaptable to new conditions we are then faced with emotional responses, most notably fear and greed which have tremendous impact on our trading process.

Herein lies the contradictions, we as human have advanced to a point where we use the process of logic as a tool to assist us in understanding all facets of life, including trading.  However if we were to accept what McDowell was saying we would see that there is a clear conflict between the nonlinearity of the markets and the linearity of our trading mindset. But why do we apply logical process to markets which are nonlinear in nature?

We introduce logic to the process so that we are able to assess the probability of a trade working out. We apply different techniques such as technical analysis so that we create an edge which aids us to enhance our chances of profitability. However we need to be mindful that although our expectations on the market are fixed it doesn’t stop the market from exceeding or even coming close to our expectation.  Markets are nonlinear and although we use logical processes to predict their direction they can work in the opposite way which leads me to the second reason why we use logic.

The markets can be both rewarding and punishing when we ignore the rules we set out. How many times have you observed in your own trading a situation where your profit target was exceeded and you chose to greedily stay in the trade regardless of your rule to exit or the time the price gapped below your stop loss and you fearfully hoped the price would retrace to a more tolerable loss? 

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Logical process prevents our emotions from entering our minds.  We need to be aware of the nonlinearity of the markets as they can cause confusion. The markets can lead us on and mistakenly believe that if we were stopped out we have done something wrong and if we’ve profited more than expected that we've done something right.  This is not the case; it’s simply our edge working for or against us. Our edge may have 50%+ probability which gives us the advantage but we should not forget the other side of the probability which can lead to us being wrong. Our success as traders cannot be measured by our highest winning trade but by the manner in which we execute and follow the plan.  

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Back to Basics: What are the Best Principles for a Beginner to Know?

When I began my trading journey I remember feeling almost overwhelmed by the sheer volumes of information widely available on the internet but not being able to grasp where this information would prove to be vital further on.  All I was looking for was some basic do’s and don’ts when trading, a basic set of rules or goals I could work towards.

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 This week I stumbled upon an article written by Brian Lund titled; The 10 Commandments of Trading.  In his article Brian shares some important aspects traders should keep in mind when they start trading. Here’s Brian’s 10 Commandments: 

1. Know yourself
2. Educate yourself
3. Find a mentor
4. Develop a methodology 
5. Use the right tools
6. Turn off CNBC 
7. Remove your emotions
8. Cut your losses 
9. Trade less make more
10. Only trade liquidity 

What sticks out in this list that is absent from so many? They are basic principles which lay down the elementary foundation of a traders future and it’s the same principles which guard the hierarchy of professional traders.  Simple to recite, simple to remember.

There are a few aspects of the article I want to deal with that made sense to me when I read through it, something that stuck out when thinking about my first experiences as a trader.

How often do you hear emphasis being place on the individuality of the trader?  As rewarding as trading can be we need to bear in mind that taking responsibility for ourselves is critical in our growth as traders. In the list above the words yourself and your ring the right tune.  New traders often lack the confidence to confide in themselves to be able to trade that’s why it’s important to take ownership of your trading, it liberates your inner self and helps you find your path to successful trading. 

“Trade what you plan and plan what you trade” is one of the many trading axiom’s most commonly heard but here’s the dilemma; how does a trader plan for something his never participated in?  It does created a sense of indefinite goals.  That being said there should be one plan which remains priority no matter the circumstance, Risk Management.  Lund’s list mentions cutting your losses and knowing how much you’re willing to lose but does also state the need to develop a methodology. 

What this suggests is that you should understand your risks you are taking but in the same light accept that in the beginning your trading process is going to be rudimentary. You have to accept that in order for you to place the building blocks to your trading plan you have to be able to absorb losses you incur over that period of construction.  Ensuring your losses are kept to the minimum will increase your chances of building a solid trading methodology.

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Although Lund’s list is concise it’s simplistic; something which helps to achieve certainty in the goals we wish to reach.  By organising the stepping stones to our success we are able to focus on each aspect independently but at the same time know that the combined effort of each yields an overall goal we wish to achieve.  

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The primary goal we want to achieve with the 10 aspects is to expand on them further, allow ourselves to discover the trading process as a whole and be able to draw our own blueprint of how we see the market and its mechanisms. We are the architects of our own trading success, become creative with your mind but always remember the pillars of strength which make it robust and hold the structure in place for enduring times so that we may be resilient when most needed.  

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR 

Derivatives: Weapons of Mass Destruction or Absolute Necessities

When I was first introduced to the concept of derivatives a few years ago the idea excited me. I got to work immediately on finding out more about these financial creatures of wealth creation. It felt as if I was in speculators heaven. I could take a position on the market both ways and not have to tie up all my money doing it.  What could ever go wrong?

 Type in the words “derivative trading” and you'll be mesmerized at the amount of brokers offering to open an account for you. But one thing still evades me; do novice traders truly understand how derivatives work?  

To answer that question I’m going to share with you my first experience with derivatives. I was in my final year of varsity when I stumbled upon an investor’s newsletter advertising a “secret” very few knew about.  Still fresh in the game I was instantly interested and read on further. All I had to do was subscribe to a monthly service where a professional trader would send me a buy or a sell signal, what could be more difficult? But wait…there’s more. Not only was I going to receive monthly stock tips but I would receive a free guide, that’s right, a guide that if I spent reading for a few hours was going to solve all my financial problems.

Being the inquisitive person I am I had taken to search engines to see how true these claims were and clearly they weren't far from the truth.  I had broker after broker telling me how I could cash in on this new phenomenon. “Make $2000 from $500 in just 3 weeks” or “It’s so easy and painless, one click away from your financial freedom” and my personal favourite “I had never been involved in financial markets but today I’m earning a living from it”.

I thought I better try this out and see for myself and signed up for a free 14 day trial. My demo trading began within a few minutes of registration. Wow! Life was fast when it came to trading. Buying and selling at galactic speeds with some winning and others dead losers.  I had no idea what the contract specifications represented, all I knew is that large sums of money were going in and out at rapid pace. Something still puzzled me at the time, yes money was coming in but could this be sustainable?

My interest tapered down after my trial period had ended. I had seen a module in my varsity course which offered an introduction to derivatives. I immediately thought it would be a great idea to unpack the concepts and was almost certain that it would unlock the “secret” that had escaped me thus far.  This is when it hit me in the face like a ton of bricks.

Going through the work wasn't easy at all; it involved financial mathematics and complex equations.  It went into detail about the type of contracts you get, how they are used, who uses them mostly, why they were created, on which securities you can use them on and so on. It was recommended by the university to spend at least 120 notional hours on the module, I ended doing 200 hours.  But I can confidently say that those 200 hours were the best amount of time I have ever spent on really understanding how things work.

If I hadn't taken that module I would be none the wiser to the complexities involved in derivatives. It heightened my awareness to the possibilities derivatives held both positive and negative.  It also made me sit up and think about the people who don’t have any financial literacy or expertise; how lucky I was to have been afforded the opportunity to learn about these mechanisms which so few know about.

To answer the question I posed earlier on I would say no, I don't believe all traders fully understand how derivatives works which is why I have set out on raising awareness to as many traders as possible so that their fate does not end up the same as the fate of traders gone bust.  The reality of trading is that for a trader to ensure his long term success they need to fully understand every aspect of their trading process and that includes the tools and products they work with.

Derivatives are essential tools in trading. They effectively lower the barrier to entry into trading by borrowing exposure at a fraction of its full value which makes it a very attractive proposition to many.  Although the capital required has been lowered, we should not forget that the time and experience needed to succeed far outstrips any amount of money contributed to the trading journey.

The real risk with derivatives comes from the trader who is unaware of its potentially destructive ability to erode his account to zero in a short span of time.  The leverage which is offered is most often misunderstood which leaves the trader in an overexposed position and vulnerable to the turbulent market conditions often experienced.

 

This is why it is imperative that when you wish to start trading you equip your mind with enough knowledge and conceptual understanding of the nature of derivatives, paying particular attention to the leverage.  Accept that although your broker is able to provide you gearing of up to 20 times in some instances, it does not necessarily mean you need to fully subscribe your capital to it. It’s important to remember that derivatives will always be around, they have been for many years but your trading capital won’t if you don’t employ responsible risk management principles.

    

 Finally, no trade is worth the money if it makes you lie awake at night. Trading can be a very stressful task which is exacerbated when a trader tries to test his courage with a higher than usual position. It doesn't make you a better trader competing against the market, rather respect it and leave the bravado at the front door.  

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR 

What does Putin’s Conciliatory Tone on Crimea say about the State of the Russian Economy?

The great tragedy happening in Europe presently has to be the tensions between Russia and Ukraine following the annexation of Crimea by the Russian government.  Ukraine, a former Soviet state of the U.S.S.R has been plagued with civil unrest from rebel forces opposing the ruling government creating chaos on the street of Kiev.

Antagonist in Chief, Vladmir Putin has been assertive of his stance and until recently refused to compromise. This has resulted in the West, comprising of the United States and European Union imposing sanctions on his government, much of which has been brushed aside or countered with tit-for-tat measures against his opponents such as a ban on airlines in Russian airspace.

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However financial markets around the world reacted positively to the news coming out of Crimea late in the week where Putin and various lawmakers met to discuss continuing tensions. Putin’s comments were understood to be conciliatory in nature. Why the sudden about turn?

Unpacking key economic indicators can help us understand why Putin may have taken this stance. I would like to share with you some of the charts I thought could be useful in explaining this.

Since the sanctions imposed by the West is related to trade with Russia, I’d like to start off with trade indicators because any impacts that will be seen first will come from this part of the economy. 

Some interesting trends do emerge when we look at the chart of the Russian Ruble:

This is a chart of the US Dollar against the Russian Ruble for the last 2 years. Going back to the beginning of 2013 an uptrend has emerged which seems quite strong.  Emerging market currencies have been hit hard and Russia is no exception.  Although a weak currency does make Russian goods cheaper and does stimulate local manufacturing, it hasn't helped them over the last 3 months since they haven’t exported any goods to EU region as a result of the ban.  Russia’s biggest exported goods are oil and natural gas which make up roughly 60% of total exports. Most of these go to Europe.

We should note that the above chart does not represent the previous 3 months but rather 2 years, however what is does indicate to us is that there is a strong upward trend which can remain in place for as long as a solution can be found.

The next chart is Balance of Trade, but before I continue let me explain what is the balance of trade and why is it so important.

The balance of trade is the difference between exports and imports of goods and services and should not be confused with balance of payments; however it does form a large part of it.  When a country exports more than it imports we say there is a trade surplus and when it imports more than exports there is a trade deficit.

It’s a fallacy to think that it is good to always have a trade surplus and bad when you have a trade deficit. It is more dependent on the state of the economy which will ultimately decide if it’s good or bad.  Trade surplus are good when an economy is contracting, by exporting more than importing it helps stop an economy from declining and reverse upwards so it is able to once again grow.

Trade deficit works well when an economy has expanded rapidly and might be over exerting itself with a need to slow down. One way to do this is to tap into the surpluses made so as to slow down the expansionary process.  

The chart above shows the Russian balance of trade from 2000 till present.  Russia has been known to run trade surpluses due to their supply of oil and gas to European region. Over the last 6 years there has been a steady uptrend in the balance of trade. This would suggest that a Russian export has been expanding faster than its demand for imported goods and services.

But as said before a surplus is only useful when an economy has expanded rapidly and needs to cool down. Let’s see what the Russian economic growth looks like and compare the two. 

What we see is a very different picture to what we've seen on the balance of trade.  The Russian economy peaked in 2008 and has been in a steady downtrend since then.  Let’s use some data points to assess the correlation.

Notice the peak in the economy in 2008 in both the trade surplus and the GDP growth. Observe how the follow through happens almost immediately afterwards as Russian policymakers run down the surplus. Again when the economy builds momentum from the bottom of the Financial Crisis and reaches a high in 2010. The same procedure follows, both charts turn down and the same with 2012.

But look at the charts nicely and you’ll see the Russian economy flirted with recession in 2013 and has since turned negative in 2014. What can we conclude from these observations?

Although Russian has a trade surplus and if the government wanted to run it down the Russian economy is in a very poor conditions to do so.  However we know the government is not running it down, that’s being done by the EU and US with trade bans.

Russia is at a critical breaking point here, if the current situation were to be prolonged it has the ability to plough the Russian economy into the depths of recession, the worst since the fall of communism.  What does it mean for Putin’s political aspirations?

The people of Russia are beginning to get frustrated with the lack of traction in the economy.  Once the economy paths its way downwards jobs are lost and manufacturing is slowed down that can’t be good for consumer sentiment. 

Here’s another graph of Russian Inflation: 

Russian policymakers have been able to normalise inflation over the past 6 years but notice the band the inflation rate has been in since late 2012 early 2013. Sideway band suggesting everything is in check until recently where it popped above the upper band and has broken past the previous lower high. This could suggest that inflation in Russia could increase dramatically in the next few months which would make sense taking in consideration the weak Russian Ruble.

It’s clear from the above analysis that there is economic distress in the Russian economy both in the long and short term.  What Russian policymakers need to realize is that supporting or creating wars with other nations is not going to solve these problems and will only attract condemnation from the rest of the world.  

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR