How did you get into trading?
I have a background in finance and stockbroking.
It was apparent many people lost money because they refused to sell at a loss, even when the market was against them.
It was also apparent the market was hard to read purely on the basis of fundamentals; especially a volatile market, like the one we are in now.
In my own trading and broking, myself and a colleague became intrigued by technical analysis. We realised we could anticipate market movements that our fundamentalist colleagues were missing, to the detriment of their clients.
I read extensively, and gradually developed my own charting trading system.
Technical analysis satisfies my objectives: it removes emotion, it telegraphs what the market is actually doing rather than what others say it is doing, and it makes risk management easy.
What were some of the mistakes you made when you started out?
I started trading futures and stubbornly overrode my stops when the market didn’t go the way I had predicted. It was an expensive exercise and reinforced the reality that the market doesn’t care what you think; it just is.
This motivated me to refine my risk management. Indeed, it is a core component of my trading system.
Do you just trade shares?
Depending on the market, I trade shares, futures and options – at present I am trading only shares.
This is because of lifestyle reasons. I enjoy living on and sailing my boat and spending time with my family. With my share-trading system, I only need to monitor the market when it’s open. My only requirements are off-the-shelf software and an internet connection.
By contrast, trading futures and options requires constant monitoring of the market. This is because with the leverage involved, only a small move in the market can make a huge difference to your profits and losses.
I also enjoy teaching my methods and hearing of my students’ successes in the market. Given the dangers of leverage, I am only comfortable teaching share trading. There is plenty of money to be made that way and I have seen too many inexperienced investors badly burnt by leveraging.
What’s core to a trader’s success?
It’s easy to buy, selling’s the thing.
Many of my students are confused about when to sell. They don’t know when to get off the tiger. They keep giving back profit. They also don’t know how to manage their risk.
You need to calculate your price targets (ie. your profit exit points) and exact initial and trailing stops, based on the individual shares chart patterns.
Next, you need to be clear about what you can afford to lose, based on the difference between your purchase price and your initial stop. This will determine how many shares of a particular company you can buy. If your stop is too far away from your purchase price, your risk is probably too great.
Don’t leverage unless you’ve been trading successfully in both bull and bear markets for at least several years. Then think again. If you do leverage, don’t answer a margin call with anything but a sell order.
Don’t get married to a particular stock. Be objective. Once out, you can always buy in again if the buy set-up reoccurs.
Have fun. If you are stressed to the eyeballs, you are taking too much risk. The aim is to make money, not have a heart attack. If you are ill, or distracted, don’t trade.
Be adaptable. Whilst having a system and sticking to it, always seek to refine and adapt it to the current market.
I have been using technical analysis for 20 years. I am constantly experimenting with new patterns and refining my risk management strategy. Different markets (ie stages of a market), produce different patterns. The trick is to identify and use them.
For example, instantaneous computer trading as used by the large investors, such as institutions and fund managers, appears to have modified traditional patterns and caused new patterns to appear.
Revisit your mistakes. If a trade goes against me, I want to know why. Rather than being emotional, I go back and study the relevant chart to understand why the stock performed in a way I didn’t expect. I have learnt more by my mistakes than my successes.
Expect to be wrong some of the time, particularly in the early and later stages of a trend. Probably 50% of my trades are losing trades. That’s to be expected. I keep my losses modest by exercising my stops and maximise my profits by letting my winners run.
Don’t be afraid to cut your losses and get out of a falling market. It is far easier to muster the confidence to get back into a rising market when you have a clean slate, than when you are burdened by losses.
Any sectors you prefer?
No. If a chart is right, being the buy set-up, with the correct balance of risk and reward, I buy the stock.
It is not unusual for me to be in shares where I have no idea of what the company actually does.
Having said that, I have noticed over the past six months that most of my trades are in the resources, energy and medical sectors.
However, one component must always be watched. That is the All Ords. It is critical to know what the overall market is doing. I always start my trading decisions by considering what the market is doing.
What’s coming up for the markets?
I believe the day of reckoning is still ahead. The problems that led to the 2007 Australian market fall and the global issues that precipitated that are still out there.
That doesn’t mean you don’t trade, rather you exercise caution, only take trades that stack up in terms of risk and reward and always act on your stops. There is still good trading to be had, as the past six months have shown.
Interestingly, during the Great Depression, the US and our market in particular, had huge gains. To me, this is further evidence that basing your trading on fundamentals and what the “economy” is doing is not the way to go.
Charting gives the tools to identify what is actually happening in the market and to follow what the money in the market is doing. With my method, the market will tell you when it is turning.
I have a lot of people ask me how I called the top of the market in 2007. It was simple. I was stopped out of trades and no new trades presented themselves.
If the market is not going in the direction I wish to trade, I am quite comfortable staying on the sidelines until the trend returns. Sometimes I am only in the market 3-4 months a year, for a return of 25% plus for the year.
Do you find writing a column is helpful in the way having a trading diary can be?
Yes. With my column I am publicly trading my personal portfolio. I don’t think there is anyone else actually doing that. It puts new meaning to having skin in the game. I’ve been doing it for 10 years and refining my ideas in the public gaze. It creates a marvelous discipline.