John Jeffery

Gann was a great believer in applying natural law to the markets - as indeed was Elliott. So what can we learn from the natural world? How can this knowledge be used in a way to increase potential risk (thus rewards) or even to decrease potential risk? There are two ways; opposing and complementing market Beta.

The traditional way of learning about stocks which have a diametrically opposite ‘Beta' (the sensitivity of an instrument to broad market movements) is to consider two businesses. A textbook example (in a nutshell) is an umbrella shop and an ice cream store. When it rains, no-one buys ice creams, whilst the brolly store cashes in, but when that sun comes, the umbrella recession begins as the ice cream boom starts! You get the picture? Although this example is possibly flawed and purely theoretical, there are real-life opportunities to take advantage of stocks by considering their Beta, whether they are opposed or congruent.

Beta reflects the sensitivity of a stock's price to movements in the market as a whole. High technology stocks traditionally have high betas, whereas utilities (described as defensive stocks) have low beta. The high beta stocks are the ones that offer higher returns in positive market movements, but struggle most in adverse market conditions. A seasoned trader should be confident with stock selection based upon their own parameters and comfortable with going long or going short on any given stock. Traditional ‘pairs trading' involves selecting two stocks in the same industry (such as Coles and Woolworths) and going long one, whilst shorting the other. The idea being that you make profits on each position, but in the event of a market shock and a collapse in the consumer staple sector, your long is stopped out for a loss, but your short runs on to greater profit, you have effectively bought a natural hedge.

To extrapolate this idea a little bit further can involve some more portfolio theory. Most people are aware of the importance of diversification in their long and medium term investments, but few seem to have a similar approach in their trading. It can be argued that trading short term movements are not subject to the same restrictions as investments, but I believe that to maximise your returns whilst monitoring risk, it can be extremely useful to employ a derivative of the pairs trading idea. For example, should oil prices continue to rise over the northern hemisphere's winter, transport dependent companies may begin to suffer whilst oil producers increase their profit margins. Profitable long and short positions could be held, whilst you are insulating your trading against any market shocks, such as consumer confidence falls, natural disasters or even terror attacks. Of course, the success of this strategy will be based upon your analysis of oil. If you get that wrong, you are in for some losing trades!

Although this will not be for everyone (as account size and investment horizon etc. all differ between traders), for those with more of an eye on the longer term, scenarios may develop which make this form of diversification extremely beneficial. The large number of traders who are content to trade off weekly charts, for example, may find themselves with exposure lasting more than one month and revel in the opportunity to make more profits, whilst still minimising risk.

Stay Sharp,

John Jeffery

Darryl Nagel

In order to become a skilled trader, it is essential to gain trading experience. While paper trading has its place for gaining confidence with your trading plan, there is no substitute for actual trading with your money on the line.

How did you learn to drive a car? The only way is to actually experience driving a car. Sure we all made mistakes when first starting out. That is to be expected. That is how we learn. For me it is the same with becoming a skilled trader. The way to become skilled is to take many, many trades. The more trades you take, the more skilful you become.

CFDs can provide excellent trading experience, provided you are very disciplined. CFDs are a leveraged product as they are traded on margin, thus losses as well as profits are magnified. In the hands of the uneducated and undisciplined, CFDs can be a wealth hazard.

For traders who fully understand how CFDs work and are disciplined, I want to suggest that you use CFDs to simply gain more experience trading with your own money. Just as you paid a driving instructor to take you on a driving lesson, consider trading share CFDs for the trading experience. Why use share CFDs this way? The answer is that with share CFDs you can trade just 1 share CFD.

The starting point is to decide how much you wish to invest in your trading experience. Having established that I am willing to risk just $50 on a share CFD trade, I will calculate the number of share CFDs by using the following formula:

No. of share CFDs = $50 / risk per share CFD

To calculate the risk per share CFD, when I have a long trade, I deduct my stop loss from my entry point. As an example, if my entry point is $23.66 with my stop loss at $23.38, then my risk per share is $23.66 - $23.38 = $0.28.

The number of share CFDs I can purchase is $50 / $0.28 = 178.

The commission on the trade (both in and out) is approx. $20.00, with a finance cost of approx. $5.00 if I hold the position for 5 days.

Ensure that you provide your CFD provider with a stop loss when you give them your entry point. This is essential.

The total cost of the above trade is $75, ($50 + $20 + $5) assuming that it is not a profitable trade and I am able to close out my long position at my stop loss. You can obtain a guaranteed stop loss at additional cost from some CFD providers. I will expand on this concept in a future article.

You cannot get an injection of experience or take an experience pill. The only way to get trading experience is to take action and trade!

Good trading!

Darryl Nagel

Sinan Koray

Press the button, move on to the next trade.

Wouldn't that be nice? If only you had a mechanical trading system that worked all the time without any hiccups, exceptions, or losses. This is the dream of many traders and they search and search and search. They look at systems created by others, try them for a while, give up and move on to other systems. They use a few or several indicators to create this mechanical system. They fine-tune and curve-fit them to past data and come up with the perfect system. In their desire to believe in the existence of such a system, they tell everyone who will listen: “Just use this system and you will make tons of money, forever.”

Finding such a system is as hard as finding the Holy Grail. Why? Because markets are made up of people and people are not rational when it comes to trading. It is often said that the markets behave like a psychotic: alternating between euphoria and depression. These extreme feelings create buying and selling patterns which can be (and have been) analysed very successfully. The likes of W.D. Gann and R.N. Elliott have shown us that history repeats itself and we can predict and forecast the future with reasonable accuracy.

This is where the amateurs get confused and take the analysis to the extreme, expecting a bullet-proof mechanical system.

Successful traders bring in the wisdom of their discretion. They take their signals from their system and apply discretion to take the last step.

One of my teachers, David Bowden, has repeatedly stressed the importance of having hand-drawn charts. He believes that there is some organic learning that happens when one applies pen to paper and I wholeheartedly agree. This is one way of gaining the wisdom and experience, whilst building your discretion muscle.

The skill in using one's discretion can be improved with seminars, web sites, bulletins, books, workshops, practice, back testing and system testing. Ultimately you are going to make a decision, and the human factor will come in at some stage. You see, we only make emotional decisions and use logic to explain or justify them.

Believe, achieve.

Sinan Koray

A successful trading system takes into account the human factor as well as a mechanical system. This is why we need teachers even though computer-based training can deliver a degree of education. That is why Interactive Voice Recognition systems have to have ‘press 9 to speak to an operator' option. This is why we need pilots to fly the planes although we have auto-pilot doing most of the work. We need the human factor.

Press the button, apply your discretion, move on to the next trade!