Looking back.........and ahead in 2013

Looking back this past few years, I have gone through several stages in development as a trader.
I remember that when I first started, I viewed it as a pure mechanical pursuit.  I thought that if I can only find the correct parameters for the MACD, or the correct length of a moving average, success would be mine.  I searched through thousands of charts, attended both paid and free courses, hoping to find an ideal system that can consistently beat the markets.  I was then an easy prey to "gurus" selling "systems" through trading courses that can help me to make money.

After a while, I realized that psychological factors such as optimism, doubt, greed, fear, hope, and fear of pulling the trigger are much more important than any technical indicator.  The next step was to learning to control risk via money management, and position sizing.  After that, I started to learn what is it that moves the prices of charts.

Right now, I am aiming to convert from a serious amateur into a professional trader.  I think that the most important trait of a successful trader is.........a very high level of discipline.  I think I do have some basic discipline, but I plan to increase it much further.  My focus for this coming year is to be disciplined.

Fusion of TA and FA

When I first started trading, I started by only looking at price charts and price patterns.  This is called technical analysis (TA).  As I began to trade more, I began to study of what moves these charts.  This study is called fundamental analysis (FA).

Most people ask me: Why take the time to look at fundamentals?  Why should fundamentals matter if a trade is done off a short term interval such as a 5 min chart?

I agree that it is definitely possible to make money using pure technicals. However, by combining TA and FA, I increase the chance of a higher probability trade.  By separating the fundamentals from technicals, the analysis of the financial markets is distorted.  Financial markets is by nature both fundamental and technical, which is reflected by the increased globalization of the world's economy.

The challenge for everyone is to find the "right" combination of tools that can assist you to find high probability trades.  The first step to this challenge is to understand what drives the stock, commodity, forex, and bond markets.  Understand the factors that drives the shifts in the sentiments of the buyers and sellers.  The second step is to derive trading rules that takes advantage the price reactions.

Ultimately, for me, the "best strategy" is the one that is well researched  and carefully supported by fundamental analysis, with well-timed proper entry and exits as determined by technical analysis.

Most important rule of FA

In yesterday's front page of the Straits Times, the headlines read :

"Q4 growth likely to shrink: Economists

Technical recession looms with Nov's lower than expected factory output"

In today's headlines of the Money section of the Straits Times, it read :

"3.6% growth for the global economy next year

Goldman Sachs' forecast higher than market consensus of 3.5% expansion"

How should one react to the above news?  Good or bad news will prevail?  What is the sentiment of the traders in reaction to the above news?

For me, the most important rule of FA (fundamental analysis) is that the stock market is 6 months ahead of the economy.   Whatever news I read in the papers, its the old news, it is 6 months late.  The financial market has already factored in the news in its price.

I will not trade based on news.  But I will gauge the sentiment of the players, as it is news drive the sentiment of the market players.  Lastly, I will then decide on one of the 3 strategies:

1. Be a contrarian
2. Follow the market direction
3. Stay out

Singapore Stocks makes 1 year high

Singapore stocks surged to a new 1 year high today.

There are always alternate views to the stocks making new high:

• Contrarians like to take profit when stocks makes new high.  If there are enough people selling, stocks are likely to come down.
• Most momentum traders like to ride the strong trend by trading breakouts.  Breakouts are quite profitable when they do happen.

For a long, long, long while, I struggled with this issue, should I always trade breakouts, or always take the contrarian trade?  This really bothered for some time.  I was taking momentum trades one day, and on another day I will be trading reversals.  I would be reading books by Richard Dennis who mades his millions trading breakouts, and on the same day attend a local seminar by Jeffrey Tie who trades against breakouts all the time.  I was really confused.

Today, I can say that I am both a contrarian, as well as a trend follower. And I am confortable with it. Sometimes, I ride with the trend, while sometimes, I buy when stocks are beaten down.  You know what, I cannot really explain why it does not bother me anymore.  I think it has something to do with the time or time frame.  There is a time to be contrarian, and there is a time to ride the trend.  

Sometimes, I can be contrarian  in the short term, and riding the long term trend, all at the same time.  At other times, I can contrarian in the long term, and riding the short term trend, again at the same time.  A bit complicated isn't it?

For the STI, I am now bullish in the long term, and contrarian in the short term.  Whenever STI retraces, I will buy bullish stocks making new highs.  I am expecting the STI to test the previous highs made in end 2010 (about 3300).  I have no plans to short the STI......yet.

Hold winning positions, take small losses

I would be telling a lie if I told you I am not worried that stocks are going to tank in the coming days ahead.

After last friday's drop (see above), in practically every market in the world, the feelings of greed, fear, hope, ego are playing in my mind.  Should I just take my profits and get out while I can?

As I am telling you this, I am also reminding myself that :

• I must not think of the money to be gained or lost
• I must be willing to cut my losses, and be disciplined to stick to my trade plan
• I must not seek to be proven right in my trading decisions. No ego please.  My foremost concern is to execute with precision according to my planned strategy. 

Most traders hold their losing positions and take small profits.  I must seek to adopt the opposite approach, which is to hold winning positions and take small losses.

Charts that I like

The following are some qualities of the charts that I like to trade.  There are based on technicals and not fundamentals :

• Charts that start from the bottom left to the top right.
• Charts with clear uptrend
• Stocks that are making new highs
• Stocks that has broken out, or about to breakout

These charts look like that :

  I will then put these stocks through a fundamental filter.  Hence, I will not buy stocks like Low Keng Huat, Del Monte.
Trading stocks making new high is not without risk.  These stocks are way over bought, and attract shortists.  It is very important to have stops in place.
I expect only 50% winning trades.  However, I also expect these winning trades to be at least 3 times more profitable than the losses.  That in essence is the heart of trading.  Low Risk with High Reward.

How chess influenced my trading decisions

Most of my friends do not know that I was once quite a reasonable international chess player.  After representing Singapore in the Olympiad, in Yugolavia, 1990 (Chess games, Low Pe Yeow ); I played my last tournament in the Nationals in 1991.  At 21 years old, I "retired' from Chess.
About 4 weeks ago, after more than 20 years of "seclusion", I returned to tournament play, playing in Toa Payoh West Open.  I was seeded 7th, and eventually also finished 7th place.

From age 13 to 21, playing chess was my life.  In this short period of about 8 years, I probably clocked in more than 10,000 hours in chess.  This makes me quite an expert in Chess, according to Malcolm Gladwell in the book, Outliers.  Playing chess "professionally" has helped me with my trading.  My trading system that I created is based on my Chess style.  Let me explain by giving a few examples:

• I very much prefer to play games with longer time control. => It is not surprising that I prefer to trade using longer time frame.  I definitely prefer not to scalp.
• I prefer to play a solid defensive game based on classical principles, and attack only when opportunities presents itself. => I prefer to use classical FA to search for solid stocks, and to use traditional TA to time the entry and exits
• I am willing wait for opponent to make mistakes rather than attack all the time => I prefer to stay out of the market and only enter when opportunity arises.
• I like to press for a win, even at the cost of losing the game => I prefer a system that allows winning trades to run, even at the cost of retracement (prefer trend following system without trailing stops)

The point that I am trying to make is that your trading system must suit your personality, style, and psychology.  Only then, can you discover your personal trading system within yourself.

Today's update of my stocks

Below is an update of the Singapore Stocks that I bought 2 to 3 weeks ago.  I am still holding them.

1. Super Group. Entry $3.26.  Stop $2.97.  Current $3.23  Change -0.6%
2. Bukit Sembawang. Entry $5.91.  Stop $5.32.  Current $6.85  Change +15.9%
3. Guoccoland.  Entry $2.42.  Stop $2.19.  Current $2.4  Change -0.8%
4. Semb Corp.  Entry $5.14.  Stop $4.66.  Current $5.21  Change +1.3%
5. Tat Hong.  Entry $1.38.  Stop $1.26.  Current  $1.375  Change -0.1%
6. Kepland.  Entry $3.60.  Stop $3.24.  Current $3.98  Change +10.6%
7. Ezion.  Entry $1.445.  Stop $1.3.  Current  $1.505  Change +3.8%
8. OCBC.  Entry $9.41.  Stop $8.47.  Current  9.78  Change +3.9%
9. Ho Bee.  Entry $1.73.  Stop $1.56.  Current 1.895  Change +9.5%
10. Far East Orchard.  Entry $1.90  Stop $1.71  Current  $2.07  Change +8.9%
11. Wing Tai.  Entry $1.80.  Stop $1.62.  Current  $1.825  Change +4.1%

This basket is skewed towards property sector.  It is definitely outperforming the STI over the past 3 weeks.

Update of Stocks

Below is an update of the Singapore Stocks that I bought 2 to 3 weeks ago.  I am still holding them.

1. Super Group. Entry $3.26.  Stop $2.97.  Current $3.04  Change -6.7%
2. Bukit Sembawang. Entry $5.91.  Stop $5.32.  Current $6.85  Change +15.9%
3. Guoccoland.  Entry $2.42.  Stop $2.19.  Current $2.4  Change -0.8%
4. Semb Corp.  Entry $5.14.  Stop $4.66.  Current $5.16  Change +0.4%
5. Tat Hong.  Entry $1.38.  Stop $1.26.  Current  $1.39  Change +0.7%
6. Kepland.  Entry $3.60.  Stop $3.24.  Current $3.97  Change +10.3%
7. Ezion.  Entry $1.445.  Stop $1.3.  Current  $1.50  Change +3.8%
8. OCBC.  Entry $9.41.  Stop $8.47.  Current  9.78  Change +3.9%
9. Ho Bee.  Entry $1.73.  Stop $1.56.  Current 1.80  Change +4%
10. Far East Orchard.  Entry $1.90  Stop $1.71  Current  $1.965  Change +3.4%
11. Wing Tai.  Entry $1.80.  Stop $1.62.  Current  $1.825  Change +1.4%
12. IS S&P500 10US$.  Entry $141.05.  Stop $126.9.  Did not buy

Watch out for SuperGroup as it is nearing my stop. That is the only stock that is underperforming over the past weeks.  Bukit Sembawang is doing pretty well, up almost 16%.

Of the 11 stocks that I bought, I have Bukit Sembawang and Kepland that is doing well, and SuperGroup that is bleeding.  All the rest is doing moderately well.  This is one of the main reasons why I choose to trade a basket of stocks, you never know which stock is going to move.

Trading a basket of stocks, plus high probability market timing entries and exits, with prudentl risk management are the cornerstones of my trading system.

S&P500 Price Action

The daily chart of S&P500 has bearish price action.  It is a combination of a shooting star and evening star.  If you have not already shorted last night, you may short now at about 1419.  But close at 1403 (Fibo retracement level) to have higher chances of success.
These candlestick formations have a relatively high chances of success - about 60 to 90%, depending on how far you choose the target profit to be.
I did not show any other indicators on the above chart.  Note that there is clear bearish divergence on the daily RSI, Stochastics, and Williams.  Accuracy is also rather high at 70%, if you are conservative and take profit at the 34 day SMA (not shown).
For me, my bias for trading US stocks is still on the long side.  Any pullback is an opportunity to enter to ride the next wave.

Great Goals require Great Sacrifices

Great goals require great sacrifices.  In trading, and in practically everything in life, if you want success, you need to live a focused life.  You need to ask yourself :3 questions

1. What will it cost?
2. What am i willing to give?
3. Is it worth it?

Do not begin working towards your goals until you have counted the cost.  Only 20% of traders succeed. Trading is tough when you are part of the 80%.  Trading is easy when you are the 20%.

As Christmas is around the corner, please allow me to view things from another perspective:

The greatest use of your life is to invest in something that will last, perhaps even outlast your life.  Jesus said, "What good is it for a man to gain the whole world, yet forfeit his soul?" (Mark 8:36).  Do not begin working towards your goals until you have counted the cost.

Back to stocks.  The basket of 10 stocks that I longed 2 weeks ago is now up 2.62%.  I am not one to count my chickens before they are hatched.  Its still early days as I expect something closer to 30% gain. Watch out for my blog as I give an update in the next few days.

Guocoland

I bought some GuocoLand shares about 2 weeks ago.  Got this news yesterday.  Crossing my fingers.

Billionaire Quek Makes HK$8.3 Billion Bid to Buy Out Guoco Group 2012-12-12 02:32:48.405 GMT

/*HK-listed Guoco Group owns 65.24% of Singapore's GuocoLand */

By Klaus Wille
    Dec. 12 (Bloomberg) -- A group led by Malaysian billionaire Quek Leng Chan offered HK$8.3 billion ($1.1 billion) to take Guoco Group Ltd. private. Shares of the Hong Kong-listed developer surged.
    The group is offering HK$88 a share, 25 percent more than Guoco’s closing price before the stock was suspended from trading on Dec. 4, according to a statement filed today by Guoco Group to the Hong Kong stock exchange.
    The proposal would give Quek, who is chairman of Guoco Group, more control of Guoco’s 15 percent stake in Bank of East Asia Ltd., Hong Kong’s biggest family-run bank, worth about HK$9.5 billion. Guoco shares had fallen 2.4 percent this year before today, trailing a 21 percent gain in the benchmark Hang
Seng Index.
    Guoco rose as much as 29 percent, heading for the biggest increase since April 2001, in early Hong Kong trading.
    Today’s offer was made by a subsidiary of Hong Leong, which is 49.3 percent owned by Quek.

Is trading difficult? It is as easy as 1-2-3!

I have often been asked how do I trade.  Here are the tools or that I currently use:

1) Technical Analysis (TA).  I use classical TA methods such as chart patterns, trend lines, support and resistance lines, and momentum and divergence indicators such as RSI, MACD, Stochastics.  These are applied to both indices as well as stocks.
2) Fundamental Analysis (FA).  Stock valuation, EPS growth, dividend safety, and company debt are my cornerstones of company analysis.  Combining TA and FA together gives me the edge over my competitors
3) Economic Analysis.   I read economic reports rather than come up with my own derivations.  However, know that the key to interpret economic reports is to know that these reports are about 6 months late.  The stock market is about 6 months ahead of the economy.  After reading any economic report, project the conclusion to 6 months in future to check if the conclusion still stands.
4) Strict Money Management.  Mechanical cut loss and profit taking strategy with conservative risk management.  This is key to consistency in results.
5) Fund management using Relative Strength. I use a proprietary relative strength indicator to sort the thousands of stocks in existence.  My belief is that trading a basket of specially chosen stocks give me an edge compared with trading an index or single stocks.
6) Event Driven trades.  These are opportunistic trades taking advantage of company events and world events.


Wow, what a mouthful!  Actually, here what you really you need to know is this:
The essence of making money in the market is buying low and selling high.  There are 3 steps:
1) When to trade/invest
2) What to trade/invest
3) When to get out
It is as easy as 1-2-3.
This is my trading plan.

Market Direction

The above was yesterday's headlines.  When you see such a headlines in the national newspapers, the market will likely come down that day.  Most intra-day traders will short the futures and close at the end of the day.

I am a contrarian - most of the time.  But I am not a contrarian for the sake of being a contrarian.  My personal views - based on technical and fundamental analysis - is that the mid term direction (monthly) that I trade, is still UP.  This applies to both in Singapore and US stock markets. UP direction do not apply to Commodities and Forex as there is currently divergence in the markets.

Withdraw all your money from GFT now.

The Holy Grail

I am a late bloomer in financial investment.  In 2009, I bought my first stock, at the age 39.  I have traded and invested:

• Singapore Stocks (Both Pennies as well as Blue-chips)
• Index Futures (SIMSCI, Dow Jones, Taiwan, Nikkei, etc)
• Spot Forex and Forex Futures (EUR, AUD, CHF, etc)
• Commodity Futures (GOLD, CRUDE)
• ETFs, Mutual Funds
• Corporate Bonds

I have traded 10 seconds time frame charts and all the way to weekly charts.

I have used used possible all kinds of money management rules.

I have used just about every trading strategy and trick that has existed, except arbitrage.

• Buy and Hold using Fundamentals
• Value Investing
• Market Neutral
• Seasonal
• Asset Allocation
• Event Driven
• Trend Following vs Counter Trend
• Enter on breakout vs enter on pullback
• Technical Analysis
• Position Trade
• Swing Trading
• Scalping using momentum

And of course using hundreds of quantitative indicators, hoping to predict the market movement

Here is my conclusion, and this is the hardest to achieve:

Step 1: Find the method(s) and weapon(s) that suits your personality, character, psychology, strengths, weaknesses.

Step 2: All the above must morphed into ONE.  In chinese martial arts term : Sword and Body merge

Until you find it, consistency is very difficult to achieve.  Fortunately for me, I think I have found the holy grail.  It was in me all the time.  I just had to find search within me while paying tuition fees to the market.

When others are Fearful, be Greedy

Most of you will know that I am currently quite heavily vested in stocks.  Do I think I will make money?  I really do not know.  In fact, I think that I have a higher chance of losing money.  That is called FEAR.

Couple of people (retail traders) that I spoke to was surprised that I recently longed.  Their immediate direction was : "What about the euro crisis and the fiscal cliff?"  My confidant reply is that I have my stops in place.

This weekend, I attended a sharing session of fellow traders, some experienced, some newbies.  Most of them seem to think that the market should be moving down.  Newbies want to short.  Experienced traders dare not long.  Their reasoning is that there are strong resistances in many market indices.

When others are FEARFUL, be GREEDY, says the legendary Buffet.

I was feeling fearful in the last couple of weeks as I tentatively entered the market.  Now, I am GREEDY.

Market Timing

I shall now explain why I am bullish about the market.  The above is the arithmetic average price of 750 stocks in Singapore.  As of 30 Nov 2012, there is a signal to go long.  This is a trend following trade signal.  Meaning that if there is a trend, I shall make money.  But if there is no trend, I will be whip-sawed, and thus lose money.
So far this year, this trade signal has been very profitable.  Of course there is no such thing as a sure win.  Trading is risky and not suitable for everyone.
People ask me why I am buying so many stocks, instead of putting all my money in a couple.  The answer is diversification.  I will never know which stock is going to move strongly, hence I spread the risk over about 10 stocks.  I am trading based on market risk.  When the market is moving up, almost anyone stock a person buys will make money.  When the market is moving down, even the best stocks will come down.  This trade signal is based upon the probability that the market will be taking on more risk and moving upwards.

Queuing to buy over the week

At the same time, I am queuing to buy the following stocks:

1. OCBC.  Entry $9.41.  Stop $8.47.  Target $14.12
2. Ho Bee.  Entry $1.63.  Stop $1.47.  Target $2.45
3. Far East Orchard.  Entry $1.83.  Target $2.73
4. Wing Tai.  Entry $1.745.  Stop $1.57.  Stop $2.62
5. IS S&P500 10US$.  Entry $141.05.  Stop $126.9.  Target $211.6

Live Trades

I am putting in this blog my "live" trades.  These are not intra-day trades nor are they short term trades.  The expected time period for holding is about 3 months.  Stop loss and profit targets are also given.  They are based on 10% loss and 50% gain.  However, it is more likely that profit taking will be based on my signal, whereby all positions will be closed out at the same time, regardless of profit or loss.

1. Super Group. Entry $3.30.  Stop $2.97.  Target $4.95
2. Bukit Sembawang. Entry $5.91.  Stop $5.32.  Target $8.86
3. Guoccoland.  Entry $2.42.  Stop $2.19.  Target $3.65
4. Semb Corp.  Entry $5.14.  Stop $4.66.  Target $7.77
5. Tat Hong.  Entry $1.38.  Stop $1.26.  Target $2.10
6. Kepland.  Entry $3.6.  Stop $3.24.  Target $5.40
7. Ezion.  Entry $1.445.  Stop $1.3.  Target $2.17

Please note that trading is risky and may incur losses.