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Friday, January 4, 2013

Why I prefer to trade Ordinary Stocks

Many people have asked me what I trade.  I have traded ordinary stocks, CFDs, index futures, forex futures, spot forex, and even commodity futures. I am vested in bonds, ETFs, and ordinary stocks.
What is my preferred instrument? Well, Spot Forex is sexy and cool.  Everyone seems to be trading it.  Index Futures is the most volatile, and the fastest, and it is here that I have my biggest gains and losses in a single day/hour/minute.
Although I see trade all of the above, my preferred instrument is actually the plain old ordinary stocks.  Compared to forex and equity indices, the "boring" stocks offers me the following advantages, which forex and indices do not have.
  1. It is possible to determine the fair value of each stock.  Most people call it intrinsic value.  From this value, I will know subjectively what my stock is worth.  It is very much more difficult to determine the value of a currency.
  2. It is possible to quantitatively determine the relative safety and growth potential of each stock.  To determine how safe is your stock, there are plenty of financial ratios to select from.  How do I quantitatively gauge the growth potential and safety of a currency?
  3. My preferred trading method is trend following.  It is much, much, and much easier to find trending stocks as there are thousands of stocks to choose from.  Compare the number of stocks in this world to the number of currencies.  Which currency pair is now trending on the daily chart?
  4. Human nature, emotions of greed, fear, hope, ignorance, are more evident in the stock market.  The stock market has plenty of investors.  These investors are mainly uni-directional, they buy only.  This makes the stock market to be mainly influenced by human nature, human opinions, and expectation of future profit potential.  With regards to forex, because they trade in pairs, human emotions in forex trading is bi-directional.  It is not clear at all which direction is there more greed, or fear.  (Forex and index traders like to use "risk on/off" to determine the sentiment of the market.)
The above 4 points are very much part of my considerations when I trade stocks.  With due respect to my fellow traders, I humbly think that these 4 "tools" gives me an edge over my competitors in the market.

In my humble opinion, the most important is point 4 - the human nature.  Gauging the sentiment of traders allows me to decide which strategy to use: to follow the trend, or to be a contrarian.  I believe that mastering the human nature element separates the minority of people who are successful, and the vast majority of unsuccessful traders.

2 comments:

  1. Hi Ian

    Thanks for sharing unreservedly your journey and what you do as a trader, your regular posts and insights make for interesting read

    I have also wanted to be a full-time trader, but never had the support nor the financial flexibility to pursue this option. So am still a rat doing my best to make end's meet.

    Anyway, maybe one day i will realise my dream, so please do continue to share and blog regularly. You have a regular fan in me. Cheers

    CO

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    Replies
    1. Hi CO,
      Thanks for your message and support.
      Like chess, trading can be tough to learn. But again like any game, with lots of hard work, and time, it can be learnt. Try not to focus on the financial returns, but treat it like a game that you like to play for the rest of your life, eg golf, badminton. And it is better to start now, 30 minutes a day, than to start later.
      If you do want some direction on where to start, do contact me, and I will be glad to share my thoughts with you.

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