Weekly for SaturdayJuly 11th, 2015. Based on Thursday’s Close
CONTENTS EXTRACT FROM THE FULL NEWSLETTER
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ANNUAL CASE STUDY PORTFOLIO REVIEW July 2014 – June 2015 – 100.39% RETURN
By Daryl Guppy
The high levels of volatility in the Australian market make any position – long or short – dangerous because stops must be placed such a long distance away. Time in the market is the primary risk and will remain so until consolidation develops on well defined support levels. We treat this as a gamblers market because intelligent stops cannot be applied.
We made more use of FX markets in the past year because they reduce the time risk and provide a better reward.
CHINA MARKET COLLAPSE
The Shanghai Index has retreated dramatically and is moving toward the longer term consolidation area between 3000 and 3400. Despite the China market crash, our banked profits are 165.37%. The sell-off has been faster and more severe than expected. These falls are exacerbated by some structural features of the Shanghai market.
There are four features which increase the volatility of the Shanghai market and increase the severity and momentum of trends – both uptrend and downtrend.
1)The first feature is the application of limit up and limit down conditions. In big market moves stocks can be locked limit down just a few minutes after the opening of trade. The result is pent-up demand. When the market opens the next day frustrated sellers flood the market with lower prices desperate to get out. The inability to exit the market feeds panic.
2)The second feature is the ban on short selling. A very limited number of stocks are available for short selling. The vast majority cannot be short sold. This means that the only way to make money is form the long side – buy low and sell high. Profits only come from rising prices so it makes sense to sell and sell quickly when the market begins to fall. It makes sense to sell and sell even more desperately when losses start to mount. This increases the volatility of the market and the speed of market falls.
3)The third feature is the limited trading hours in the Shanghai market. Demand is confined to these four hours in total. When trading time is limited it easy for desperation to set in. It propels bull markets but it also propels falling markets. Longer trading hours remove the need to act quickly and emotionally.
4)The fourth feature is the suspension of thousands of stocks from trading. Nothing is guaranteed to induce panic selling more quickly. Investors fear that they will be locked out of the market so they rush to sell at any price. It becomes the same psychology as a run on the banks.
These four features all combine to distort the smooth operation of supply and demand – of buyer and seller demand. The result is very fast uptrends and very fast downtrends.
Of course these discussions beg the question. The main focus now is on when the fall will stop, and when is it time to come back into the market. From a technical perspective we look for consolidation between 3000 and 3400.
JUNE OANDA FX TRADE RESULTS
Exceptional volatility makes it difficult to trade. If we are forced to move to shorter term time frames then our preference is to look at FX trading because this gives a larger return for the shorter time frame.Three times a week we provide trading resource notes for Oanda based on applying the ANTS trading approach. Here is the summary results for March - June.
PROGRESSIVE MARCH – JUNE ANTSYSS TRADE OPPORTUNITY RESULTS
- 50 trades were introduced since March 1.
- 35 trades triggered entry signals.
- 85.71% of entered trades were exited at a profit.
- 51.43% of entered trades were exited above trade plan target levels.
- 20% of entered trades were exited at trade plan target levels.
- 14.29% of entered trades were exited on stop below profit target levels
- 14.29% of entered trades were exited at a loss
Once a trade entry signal is triggered the trade is exited at a profit. Exit above target profit plus are trades were the target was achieved but there was no exit signal delivered so traders could keep the trade open.
Exit profit on stop are trades that did not reach the trade plan target. These are trades that were exited on a protect profit stop using the ANTS ATR trailing stop. Exits kept the trade in profit. Access to the ANTS system is now available on the Oanda market place. Access is free if 5 trades are completed each month.
ANNUAL CASE STUDY PORTFOLIO REVIEW July 2014 – June 2015 – 100.39% RETURN
By Daryl Guppy
Market conditions and results can be summed up with two sets of figures. It took 85 days with VAH* to generate a 19% return. It took 63 days with REC* to generate a 15.8% return. In contrast it took 1 day to generate a 206% return with a trade in GBPAUD*. It also took one day to generate a 262% return in GBPCAD*. These are all personal trades.
When time in a volatile market is the primary market risk then 85 days and 63 days exposure adds significantly to risk for a relatively modest return.
FX markets have been our focus this year with 41% of the total trades made in FX or using the ANTSSYS method with oil, gold and indexes. Only 6.8% of trades were made with CFDs. However, although the time risk component is reduced, there is an increase in the capital risk component. This is managed with much tighter stops, and with reduced capital allocation to this asset class. Each FX trade is capped at a maximum of $5000. Each stock trade is capped at a maximum of $20,000. Capping FX trades at $5000 is an effective means of managing capital risk.
This year 68% of trades in the case study portfolio are personal trades. They are marked with a *.
Despite the good rise in the equity market in the first 6 months of the financial year there is also a high level of volatility. Solid trends collapse quickly. Opportunities in the mid cap and speculative end of the market are more difficult to find because the liquidity in the market has reduced and shifted to the upper end of the market which is dominated by Exchange Traded Fund and high frequency trading.
We used the ANTSYSS trading analysis and application methods for FX trading. These are available to ESignal and Oanda clients.
This year the case study portfolio included 20 personal trades or 68% of all trades. The best result came from a personal FX trade with GBPCAD*, with a 262% return on capital. The strong market volatility called for the application of short term derivative trading tactics in the second half of the year. The number of trades taken was a little above average at 29, and the success rate of the trades returned to average as tight stop loss conditions were applied. The year had a 79.31 % success rate and included 68% of personal short term trades that were included as case study examples.
The new market conditions require closer attention to managing volatility. It also means using leverage to get the best results so there is an increased number of FX trades.
The purpose of the newsletter is to model for readers the methods used by professional traders in all market conditions. Our eighteen year average returns of 95.04% for the case study portfolio are testimony to the effectiveness of this approach. We make about around 26 trades per year in the case study portfolio and this average has remained unchanged for more than a decade. This year was 29 trades. It’s the primary advantage of private traders. We trade only when the opportunities are at their best. Our objective is to teach readers the methods of success so readers can apply these techniques with confidence to help boost their trading returns.
12 MONTH ANNUAL REVIEW RESULTS
This year the case study portfolio included 20 personal trades or 68% of all trades.*
We made 29 trades for the year, a little more than the eighteen year average of 26 trades. The success rate is 79.31% which is a result of entering when momentum is strong rather than taking higher levels of risk on breakout trades. This means that around 8 out of 10 trading choices develop into profitable trades. This is slightly higher than the 70% average we aim for.
However, it is not the win/loss ratio that leads to success. The real basis of success lies in the way that unsuccessful trades are handled. We rode losses very tightly over this period, with most losses being under 2% of total trading capital. The largest loss was $2046 or 2.04 % of total trading capital. This was in a CFD trade. Generally losses were around $1500 or 1.5% of trading capital. This is slightly larger than previous years and reflects the difference in the risk profile of FX trades. This caution and tight risk management is reflected in the consistent dollar value of the loss in losing trades.
Total return for the period was 100.39% on capital. This is a realized profit of $100,390. This means we started out with $100,000 and added $100,390 during the year. Most equity trades were around $20,000. Generally all CFD and warrant trades were kept to around $10,000 as this is a means of managing risk. All FX trades were kept at $5,000. NOTE Dates show the date of the newsletter that includes the trade.
Are these still exceptional returns? This year the FX trade results boosted returned to a higher than expected level, but in general we do not think the underlying results are exceptional. The * note at the end of this section explains this further. The eighteen year results show a consistent level of return that is substantially better than the performance of the broad market index. On an eighteen year basis, we can realistically aim for around a 75% return or more on capital or better from the market. Our eighteen year average is 95.32% and it is achieved by careful and disciplined risk management. It is not achieved by ‘hot tips’ or by pretending that we can select stocks more successfully than others. The single most important lesson that traders can learn from these portfolio results is that success rests on the trader’s ability to cut losses quickly. Even if the stop loss exit subsequently turns out to be incorrect this does not destroy good trading results.
This report sheet includes all of the case study trades discussed during the last hyear. We do not hide losing trades, or poor performers. We do no conveniently forget to include some trades in the hope that readers will have forgotten about them. These results are achievable. They can be duplicated. You might not achieve the same level of return, but the case study trades show what is possible. They are also a powerful reason for not accepting poor trading results.
MEASURING RETURNS
We measure our returns by money in the bank. It is an old fashioned measure that gives the trader a realistic idea of just how well he is doing. We avoid false measures of success. There are four false measures.
- Counting open profits
Open profits are calculated by taking the last traded price and turning this into a portfolio value. This can make us all instant millionaires – on paper. Readers will know how some sample trades have been very profitable, but have later been closed at a smaller profit because the exit conditions are not triggered until much later.
- Annualized returns
This is the industry standard and we believe it is misleading. The sample trade might return 48% in just one month of trading. An annualised figure takes this realised return – the return that was actually banked – and calculates what it would have been for the twelve months. This translates into a whopping annualised return of 576%. This is an ‘in your dreams’ return because the trade will not be at the same price in twelve months as it was when we made the exit.
- Pretending losses don’t count
We have been disturbed by the trend with some market commentators who pretend that losses do not count. This approach ranges from the comment that in 10 years time, the September 11 drop will show as a minor blip to some writers who include many stock tips, but only track those that work out.
We believe these approaches are misleading. Failed trades have a significant impact on trading results. We get much better returns if we exclude the three losing trades. We also exclude honesty if we do this.
- Accept poor performance because of difficult market conditions
Trading is about making the best possible use of your capital. Our capital grows by completing profitable trades and cutting losses quickly. In the case studies, we demonstrate the difference that this approach makes to trading results. We are not prepared to accept that highly trained and well paid professionals cannot do better than the broad market when a consistent application of risk management shows that better results are achievable. Losing 5% when the market falls 7% is not a measure of success. We use a true hedge fund approach, using zero as the absolute benchmark, and using positive returns from the market as a starting point against which we measure our performance.
Trading is about making our trading capital work hard. If you are able to average a 10% return on each trade, then trading capital begins to build solidly. When you maintain that steady 10% return on $50,000, then $100,000, then $150,000 and so on, then your trading success is well established. Consistent returns enhanced by money management are the objective of trading.
As a final note, please remember that some of these trading examples are designed to fail because we want to show the adverse consequences of particular trading strategies. There are many trading styles and many trading indicators. Not all of them work in Australian markets, and not all of them work in all market conditions. It is more instructive to show how they fail to work than it is to show only successful strategies. Understanding why strategies fail is an important step in building successful strategies.
These case study portfolio results do resemble real world results. The newsletter is designed to be a useful tool to help you identify trading techniques that work and to use money management approaches that enhance your trading returns. The case study portfolio is used as a handy running reference for these examples and shows what is possible with good trading discipline and risk management.
The same level of sample portfolio results can be achieved by readers if they develop the discipline to act consistently on stop loss conditions. This is perhaps the most important single message in the newsletter. Trading is about money management, not about prediction. Success comes from discipline, not from a set of fancy or expensive indicators. Exceptional success comes from the confident application of the correct trading technique at the appropriate time supported by clear stop loss conditions designed to protect capital. It is not always easy, but if done properly, it is very profitable.
*With some reluctance we included more personal trades in the case study portfolio in the last 12 months partly to answer some of the uninformed emails we get from trial readers that tell us the case study examples are manipulated. It’s ironic that these allegations are made in relation to some of the personal trades included in the case studies. Reluctant, because we do not want to leave ourselves open to the charge that we have a conflict of interest with our readers. Also, the case study portfolio is designed as an example of strategy approaches and is not intended to be investment or trading advice.
TRADE GALLERY- EXTRACT
These are screen shots of every case study trade discussed from January 2015 to June 2015 showing entry and exit points. NOTE. The trade dates on the spreadsheet refer to the date of the newsletter in which these trades appeared.
FSA*
GBP/AUD*
VAH*
ILU*
EURCAD*
EURCAD*
GBPCAD* Oanda screen
NEWSLETTER AUSTRALIAN MARKETOUTLOOK July 9: DOWN SLOPING TRADING CHANNEL CONTINUES
By Daryl Guppy
The XJO activity is best understood within the context of the trading channel. Support near 5380 is weak and nothing to get excited about.
The current rally towards resistance near 5640 is simply part of the downtrend behaviour.
The key additions are the parallel trend lines that create a down sloping trading channel. This suggests resistance near 5640 and support near 5380. A breakout above this trading channel is required to establish a genuine new uptrend.
Traders need to see compression developing in the long term GMMA before it’s safe to start thinking long term long side trades in this market.