Trading the Easy Way

Well, at long last some decent snow has fallen in the Pyrenees - but it's blowing a gale today so there's no temptation to rush through WICS and get out on the pistes - overall, this must have been the worst season ever in this area and a lot of money has been lost (or not made) - but that's just one of the risks of working in the tourist business I guess. I'm just glad to be a 'consumer' here rather than a 'provider'.

What about the markets then? They certainly bounced back up as suggested, after they had gone slightly lower, also as suggested. (Notice how Williams happily takes credit for correct predictions and simply ignores his incorrect ones. One of you - thanks David! - emailed me a very apposite quote during the week: something along the lines of "Age and treachery will always overcome youth and skill......"

Whither next for the Dow and the FTSE? Divergent, I suspect. The Dow (and the S&P of course - I just tend to quote the Dow because it's a 'psychological leader', as is the FTSE 100 in Europe) is likely to 'rack around' a little in the area of 12340, which was a support area back in December. It's probable that now 12340 or thereabouts will become resistance - and if that is broken then it's more than likely that we'll see a strong push onwards and upwards towards new highs - the bulls will be firmly back in control. As far as the FTSE is concerned (and the other European 'majors' like the DAX and the CAC) I think we'll see a bit of a retrace of the recent recovery - indeed we may even see a drop back in the FTSE 100 to below 6000 over the next couple of weeks. Those of you who have access to the WICS video updates will be able to follow the above remarks later today.

On other aspects of the 'bigger picture' it was interesting to note during the week that Ernst & Young (a major accountancy/consultancy practice) voiced their 'considerable concern' that a lot of big private equity deals will probably end in bankruptcy over the next couple of years - I mentioned Sainsbury's in WICS of February 11th and that's a good example. If a big private equity firm gets its hands on Sainsbury's then yes, existing shareholders will likely make a profit when they sell their holdings, but the firm itself will then be saddled with massive debt - and as recession really starts to bite and interest rates rise, the business will end up on the rocks and nobody (other than the fat cats who set the deal up) will benefit in the long term. Did someone mention Madame Tussauds and dummies? (Another recent private equity deal) Please don't ask me for a detailed technical explanation because it's rather complex but no doubt time will prove Ernst & Young to be bang on the money.

It was also interesting to note that just as Lloyds TSB closes its Indian call centre (mentioned last weekend), so Barclaycard closes a UK call centre and opens one in India. What goes around, comes around - but 'customer service' is surely a bit of a misnomer. The banking industry certainly seems to take the line that customers are basically just a necessary evil - in much the same way as politicians view voters, I imagine.

And Aston Martin seems to be heading back into UK ownership - good luck to them - another private equity deal at the wrong time. Maybe the new owners will manage to get away from charging megabucks for a Ford Mondeo interior? I'm not holding my breath, but I wish them well for all that.

Moving along, the price action of the past couple of weeks has certainly set the cat among the pigeons for some of you and you're hurting from losing stopouts. I'm afraid that kind of thing goes with the territory - a harsh but true remark, and we just need to put losers behind us and move on. I received an email from one of you the other day regarding 'psychological issues' and I thought perhaps it might be worth reproducing here, along with my comments.

"Ian, I have what I suppose is a psychological problem – I don’t know if it’s one you can help with. It’s not over-trading, it’s under-trading. The more share charts I look at, the more I find look at each one and think, "oh hum, I don’t know what this thing’s going to do", and my brain glazes over."

IW replied: "For a while, stick to the most basic TTEW analysis criteria & ignore the 'more complex' like triangles, channels, etc. Is there support/resistance? What do the DMAs look like? What's the state of the trend? And base decisions on that analysis only - ie revisit the manual."

"Or, I make a note, say, to order a sell below a particular point, but to look at it for a few days first - and lo and behold it goes up, so I just think how right I was not to do anything. "

IW: "Not necessarily - it might go up then return to 'your' area, reinforcing support in the process".

"Overall result: I remain cautious, and only trade on patterns that I feel look solid".

IW: "That's not a failing! It's a lot healthier in the long run for your bank balance, than overtrading".

"The result of this is that I have (or had - magically I have fewer now) only a handful of positions open. 4 or 5 were slowly and painstakingly building up profit, and it only takes a couple of losers, plus the recent shenanigans, to wipe all the profit out. (If you are prompted to say, you guess most of my trades were buy trades, you'd be right. Most, but fortunately not all.) What’s the best cure?"

IW: " 1) take a complete trading break. Spend at least a week looking at nothing other than the management of your open positions. If you end up with none open, so much the better. Then try to stay away from your screen for a few days more.

2) when you return, do your usual analysis & if you order anything, put on as little as your SB co will permit.

3) Build up again slowly with no thought to profits nor losses. This is going to be a good time to act like that because I smell overall 'sideways/choppy' for a few weeks to come".

"Rather than have a long watch-list of 100 shares or more, and flick through them all quickly, is it better to have a smaller watch-list and take more time studying each share and getting to know it?"

IW: "You could usefully whittle 100 down to 50, but in saying that, a quick look through 100 a week isn't onerous - but NOT during your trading break if you take one. 'None' should be the number on your list then".

"Or what? (I’d almost come to the point of saying to myself, right sunshine, you are now going to sit down and find 12 more trades and jolly well enter them. It then occurred to me that entering a chunk all at the same time might be a bad idea, and that it would be better to feed into the market gradually – say 2 a week. Yes? No?)"

IW: "Yes and no. 'Yes' if there are 12 valid orders to place. 'No' because there won't be. You would be diluting your criteria and taking trades for the sake of doing it - the exact opposite of my suggestions above".

"It seems an awful lot easier and faster to lose money than to make it. I am tempted to dedicate a demo account to trying to lose money, and see if I fail in my task and make a profit instead....... or to see if this helps uncover any further principles........ Have you ever tried this???"

IW: "Never. It's called the headless chicken syndrome. You will be best served (in my view) by the 'trading break' I mentioned earlier, and the 'light trading' on your return. Emotion is clouding your ability to analyse. The good news is that everyone suffers from it, myself included - and my reaction is ALWAYS to do as I've suggested above".

You may have noted I mentioned 'sideways/choppy' in my replies above - share prices are likely to do that for a wee while after any fairly substantial price 'correction' and patience is going to be needed even more than usually. And that reminds me of a quote from the excellent book, 'Reminiscences of a Stock Operator' by Edwin Lefevre: "There's the plain fool who does the wrong thing at all times everywhere, but there's the Wall Street fool who thinks he must trade all the time...." You know I have touched more than once, upon the absolute necessity for patience in this business - and these words were written in 1923 - so 'taking time out' is hardly a new concept! (Now those of you who are trading Forex will know that I have no plan whatever to mix comments about that in with this WICS material, but I feel it's necessary to point out right now that NOWHERE in trading is patience needed more than in the world of Forex, which seems to attract the least patient - and thus least likely to succeed - traders on the planet!) I promise not to mention Forex again though.

Moving on to charts, we'll first take a look at Serco, where after a nice 'classic' triangle breakout, the overall market drop knocked it back - but it has recently shown a very interesting recovery. Then we'll see if Provident Financial might be in for a bit of a rise - you know I don't pay much heed overall to so - called 'fundamentals' but it would be fair to suggest that such companies profit considerably from the misfortune of others, and with banks beginning to turn the screws on consumers - by making credit harder to obtain - these 'doorstep lenders' are likely to do well over the next five to ten years before the next profligate phase begins.

That should be plenty for this weekend, so best wishes till next time. (It's likely that WICS will be online next weekend some time around 10pm on Sunday evening 18th March - I'm going to be otherwise occupied all day Saturday.)

Ian.

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'

Page Top

Page Top