Trading the Easy Way

Hello again - and I'm pleased to report that the snow is at long last falling here in decent quantities - although nowhere near enough to bring things to a 'standstill' as I understand recently occurred in dear old Blighty. ('Dear' as in 'expensive' that is - I gather things are not getting any cheaper there - High Street prices have seemingly risen now for the last seven months in a row.) And I see that the UK's 'trade gap' - the percentage difference between the value of exports and imports - is now the largest since records began to be kept in 1697. No, that's not a mistake - '1697' is the correct date! Deeper and deeper into the red for UK Plc. Maybe when they start removing turkeys from supermarket shelves, they ought to consider taking similar action at Westminster....

Moving on to markets, I note the third profits warning from HSBC has been taken a tad more seriously than the previous two - not that they're likely to end up skint for a while yet. The trouble is within HSBC's US home loan subsidiary, where defaults are soaring as Middle America wakes up to the unpleasant reality of the property crash, which is now in full swing of course. Nonetheless, HSBC's chief executive continues blithely to assert that overall, it's still a 'dream portfolio'. In HIS dreams perhaps...but even if his head rolls over the whole business, it's unlikely he'll suffer a penurious retirement - don't I just love banks!

Overall, both US and European markets are still pretty much in the phase I mentioned last weekend: "Fear of missing out". However, in Mr Dylans' inimitable words, "It's not dark yet, but it's gittin' there" - and dusk is fast approaching for investors in the stock markets of the world - again as touched upon last weekend. Just ensure you're aware though, that there are still plenty of viable 'up' trades available to those of us who have not the slightest emotional attachment to a particular market direction. Yes, when the inevitable major trend change arrives, 'selling' opportunities will probably greatly outnumber 'buying' ones, but there will always be buying opportunities too. As mentioned somewhere in a previous WICS, when markets overall become the playground of the bears, there tends initially to be a bit of a 'flight to quality' (where investors decide to dump 'risky' stocks and move their money into the so - called 'Blue Chips' such as the likes of the FTSE100) - and that effect can certainly provide some interesting chart formations to the upside. The other factor in terms of potential 'up' trades, is that there will always be Merger & Acquisition activity - indeed it's highly likely as this year progresses, that we'll see quite a lot of that kind of thing happening as the financial world fights like crazy to maintain last year's immodest bonus levels - and hang their victims' shareholders. You only need to look at Sainsbury's at the moment, for a classic example of what I'm talking about. And below you'll be able to see something possibly brewing on the chart of our old and very tired friend, Alba.......

The other thing I want to mention this weekend (in response to an email) is the matter of Director Dealings. My correspondent felt that he ought to open a 'buy' trade on Renishaw on the basis that a director had bought just short of £1m worth of its shares a couple of days after a pretty substantial fall in their price. My reply was basically that you need to consider ALL aspects of such matters. First and foremost of course is the 'look' of the chart, irrespective of what directors might be doing. If the chart shows nothing that grabs you, move on, but if it suggests that 'something' might indeed be brewing, investigate further. In other words, unless the chart looks of interest I wouldn't even know what the directors are up to because I wouldn't waste my time looking. Next, IF I had spotted the transaction in question, I would have asked myself "Is it significant?" The answer in CASH terms of course would be "Yes - £987,000 isn't pocket change unless your name is properly spelt using the Cyrillic alphabet." HOWEVER, is it significant in the greater scheme of things - ie, might it lead to a price surge because the director in question 'knows something' he or she wishes to benefit from? Hmmm, that's not quite so straightforward. In order to consider that question, we also need to consider the status of the director. In the case in question, he's the Deputy Chairman. Frankly, I haven't bothered to check for Renishaw, but almost certainly that's a 'name only' type of position - something to confer some kind of 'importance' upon the individual in question - and maybe to assist with the overall image of the firm. He's a non - executive for sure, and his appreciation of the intricacies of running the company is unlikely to be that keen. (No libel intended - it's simply the way these things work - trust me.) Because of that, together with the current lack of anything of 'upside' significance on the chart, his purchase (for me) suggests 'nothing' at best, and 'more bad news to come' at worst. Why? Well, he bought a load of shares two days after a pretty big gap down in the price. Neither the chief executive nor the financial director seem to have done likewise. Might the latter two not know more about the true state of the company than a deputy chairman whose time commitment to the firm might be a couple of days a month at the most? Might not the DC have been 'persuaded' it was a 'great buying opportunity'? OR (and this happens quite a lot overall) might he have been persuaded to dip into his pocket on the basis that "Things are bad, Reggie (purely hypothetical name/scenario of course) - really bad. Our share price is going to tumble unless we take strong action now. As Finance Director, I'm a bit strapped at the moment - school fees and upkeep of the country pile don't you know - but you have deep pockets. As DC, you need to set an example....blah blah." And good old Reggie does what he perceives to be his duty, thus supporting the share price, possibly for long enough to let others bail out, after which.....well, I'm sure you get my drift. Obviously, I have no idea at all if the foregoing scenario applies to Renishaw, and only time will tell, but these are the kind of questions you need to be asking yourself. (And although I said the chart told me nothing in terms of a potential 'up' trade, what about a potential 'down' trade....?)

Anyway, that's more or less your lot for this weekend, but to wind matters up for today, I want to reiterate one of my comments above - about the need to "ask yourself questions" in this game. That doesn't just apply to the examination of Director Dealings - it applies everywhere in your trading life. I had an interesting email during the week from one of you and with his permission (thanks David) I'm reproducing it below, with my answers thereto. If you're a newcomer to these ramblings, you'll note that I save my verbosity for WICS. My replies to emails are succinct to the point of impolite, but you'll get used to it. My heart is in the right place, honest! (Locked securely away just like my wallet, according to the prospective beneficiaries of the Williams estate.) Here's the email and my reply (the bold type):

From: Ian Williams

To: David

1. JJB. As everyone will (no doubt) have been telling you today, the price dipped when the founder got rid of a whole lot of his shares.

My question is: no doubt you will have seen founders doing this many times in the past. In your experience, does it tend to depress the share price only temporarily, or to give the price a more permanent set back? Depends entirely on the reason. He just raised £50m for something & that could mean nothing adverse – or it could be bad news. The chart will tell us.

2. Live entries -v- placing orders.

It dawned on me the other day that I’ve got too much in the habit of making live entries only – with the result that I’ve missed a number of potential trades. I must think more about placing orders. So, can I ask for a bit of guidance:

- of the entries you make, what percentage (roughly) are made live, and what percentage are done by orders you place?>>>>95% or higher orders

- assuming you like to have 12 open trades running at any one time, how many pending orders will you allow yourself:>>>> depends on no. open. If say 8 open, I look at maybe another 6 – 8 orders & that will likely = 12 filled in due course. If 12 open, maybe 4 orders. Not an exact science & I lose no sleep over it.

- around 12, on the basis that they might all get filled at once and if you have too many you’ll be using up too much of your bank

- substantially more than 12, on the basis that some won’t get fulfilled, and if you get 12 trades open you can then cancel the outstanding orders?

3. The psychology of trading in high-price shares.

The other day I opened a buy trade in Aquarius Platinum. It had got above its high and I reckoned it was pushing on up.

I bought at £1297.>>>dodgy! 1301 better by far. If I’d used either the 25 or 45 DMA, the Stop Loss would have been at 1123 – a 174 point gap, which I thought rather a lot. (The spread-bet company resolved this by automatically setting a tighter SL, which I decided to leave in place>> also dodgy. If you ‘know’ where it should be, closer = probable stopout.). The intraday movement was also sizeable, e.g 70 points.

After I opened the trade I have to confess I started feeling a bit apprehensive about it - even though the size of my bet was quite modest –

i) because the high price meant there was a long way down (it’s like a cliff: it’s scarier looking off the top of a high cliff than a low one);

ii) because a day or two later the share dipped;

iii) because – especially when it dipped - I wasn’t altogether happy about the SL being so tight. I was tempted to move the SL further out, but told myself it is one thing never to do>>> but you had it too tight to begin with, which = ‘don’t take the trade’..

So, after it recovered, I gave in to the temptation to take a small early profit at 1323. I felt quite relieved I had. >>> best thing to have done. I made a deal that I wouldn’t kick myself if the share continued going on up (which it has now done, after a bit of a triangle).

I guess that it’s always easier, psychologically, to stick with a trade once it’s got solidly into profit. But I just thought I’d ask you:-

What would you do with a high priced share, and a big gap down to the DMA? Would you

(a) set a tight stop loss, based not on moving averages but on some other criterion?

(b) or look at a shorter time-frame than a day, and use moving averages based on, say, hourly movement, to set the stop loss?

(c) - disregard the high price

- look at the price solely in percentage terms

- look at the pattern made by the share and the DMAs, and set the SL by the DMA, just as if it were a low-medium priced share;

– but bet only a small amount per point?

It’s not going to surprise me if you say "you know the answer, you’ve already given it in (c)" !! >>> you took the words out of my mouth. - but it would be helpful to hear a word from on high.

Now the main reason for having reproduced the above email is contained in David's final two paragraphs, where first he sets out three potential answers to his question about higher priced shares, and then he answers (correctly) his own question in (c) above. It's that kind of constant self - questioning that works so well in the trading environment, and I strongly recommend that we all get into that habit! I talk to myself all the time - but the guys in the white coats don't have my address, thank goodness.

Anyway, I need to go out now and teach some manners to the snowboarding fraternity, so that's plenty for this weekend, and we'll talk again next time. All the best till then,

Ian.

PS - due to a very large number of requests, I have asked my webmaster to add a (subscribers only) forum meantime to the WICS archive page. The URL is www.trading-the-easy-way.com/forum and your WICS user name and password will allow you entry. Once in the site, you'll need to hit the 'register' key and set up a user ID and password for yourself. Please be very aware that the facility is for YOU to use as you wish, subject to all the obvious protocols in terms of 'normal politeness' etc. I do NOT intend visiting it myself very often and will probably do so only if someone highlights a post that could be deemed offensive in some way - in which case the culprit will be instantly and irrevocably banned if I too consider that offence has been created. This will not become a 'public' forum - the trading world is full of them and is by no means the better for that fact - the objective here is 'exclusivity' for my subscribers and a chance for you guys hopefully to be able to help each other. The only bit of very serious trading advice that I would give you regarding the use of forums, is that NEVER should you be tempted to 'trade by committee' nor should you ever unquestioningly accept someone else's opinion - not even mine. Only YOURS matters! Anyway, this is just experimental for now and we'll see how it goes. If it turns out to do more harm than good, it will disappear - simple as that - but hopefully it will enable some constructive discussion to move your trading skills forward.

TTEW

'IMPORTANT NOTICE: These WICS charts are for EDUCATIONAL PURPOSES ONLY. They represent only MY understanding of what is happening in the market for any particular share, stock, commodity or index. In NO circumstances should they be construed as recommendations to trade. If I choose to trade what I see, that is MY decision. YOU must, in turn, come to YOUR OWN conclusions about what action, if any, YOU might choose to take'.

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