Reminiscences Of A Trader

Monday, July 24, 2006

Has the STI bottomed out?

I think the STI has already bottomed out, at least in the short term and looks ready to retest 2450 in the coming days. As for the medium term outlook, i am no longer bearish since middle of last week and the STI may resume its medium term uptrend once it close above 2450 convincingly on a weekly basis. :-)

Monday, July 17, 2006

Global Voice

Based from the weekly chart above, Global Voice is currently trapped in a downtrend channel with lower highs/lows seen. Immediate support is at 0.125 followed by 0.105.

I used to trade this stock actively in the 2nd half of last year as the stock's price rose from a low of 0.05 to a high of 0.22 within a short period of 6 months. Unfortunately, there are some investors and punters alike caught buying at the high levels. For those with vested interests, keep an eye on the critical support level at 0.105.

Sunday, July 16, 2006

Dealing With Panic

Have you ever been caught off guard in the midst of a trade? In an instant, you may lose control of your emotions? It may not happen all the time, but it does happen. Consider the basic scenario. You may have thought you had a well-developed trading plan. You executed it, monitored the markets, and suddenly, it all went wrong. You became agitated. You could no longer think straight. You were caught off guard, and thrown into a state of anxiety and panic. When things don't go your way, it's easy to feel frustrated and disoriented. In a sense, there is little you can do but acknowledge that you have lost control, and that you better struggle to minimize the damage. Our brains are wired for primitive responses, and this faulty wiring can throw us off balance at times. Just like wild animals, when things don't go our way, our thinking gets cloudy, and we instinctively try to take physical action, such as fighting an opponent or running away. But when trading the markets, this is not an optimal strategy. What we need to do, and may have trouble doing in a panic state, is think clearly, rationally, and take appropriate action. In an extreme state of panic, though, you will not be able to think logically enough to think on your feet and make an astute midcourse correction. There are steps you can take, however, to deal with an unexpected, panic state with grace.

First, planning ahead, and working under the assumption that things go wrong, helps. Getting caught off guard is often the main precursor to a state of panic. If you are caught off guard, and start to panic, you will have difficulty gaining your composure and acting rationally. The best protection is to assume that adverse events may happen. Don't fool yourself into thinking you are immune from things going wrong. Bad things do happen to good traders. How do you prepare for adverse events? Don't trade with a vague trading plan. Consider all possible adverse events, and consider how the price may move in ways that you had not anticipated. Specify the signals that will tell you at what point you should logically abandon your plan. Outline the plan in as much detail as possible, when you will enter, when you will exit, and indicators you will look at to determine how well the markets are behaving according to plan. If you have a well-defined plan, you can react decisively even during a panic state. If a plan is well formulated, then it's easy to follow, even in times of extreme uncertainty and stress. By having a well-defined trading plan, you can follow it even when you are frustrated and agitated. And if you can follow your plan, you'll minimize the damage that a panic state can cause.

A second major precaution is risk management. If you risk money you can't afford to lose, the stakes will be too high and you'll know it. You'll feel on-edge, as if something bad is about to happen. If you manage risk, though, you'll know deep down that you are safe even when the market moves against you. You'll feel more at ease, and be able to instinctively think, "I'm protected. Just calm down, and follow the plan. I'll survive."

Trading can be stressful at times. An unexpected adverse event, or seemingly erratic market action, can throw you off balance. And once you are knocked off balance, it's hard to regain your composure. You won't know what to do. Don't wait to be caught off guard before taking action. When you are thrown off balance, you may not recover fast enough, but if you trade with a detailed trading plan that you can easily follow even in the midst of a state of panic, and if you have carefully managed risk, you will be able to gain some emotional control, and minimize the damage. Don't wait until it is too late. Take action before the markets catch you off guard.

Tuesday, July 11, 2006

Back In The Zone

Trading can be especially enjoyable when you are trading at your peak. There are times when everything just seems to click as you move effortlessly with the ebb and flow of the market. There are various names for this optimal state of mind, such as "trading in the zone" or "flowing with the markets." But whatever you call it, traders in this ideal mental state almost completely lose themselves in what they are doing. They are focused only on the ongoing process of the moment. They are not self-conscious, concerned with how well they are doing or worried about doing poorly. Their complete attention is focused on trading. Unfortunately, we are not always in this optimal state of mind. We get thrown off our game. We experience setbacks, and when we face disappointments, we lose our mental edge. When we are out of sync with the markets, it's useful to get back in the zone. The best way to regain your mental edge is to look at your assumptions about trading. Many times, we put too much pressure on ourselves, expecting miracles when we are merely humans.

It is all right to be naïve. Many times we believe we must have perfect knowledge and know exactly what will happen next. But few people have such a wealth of experience with the markets that they can anticipate every possible market move or adverse event. Always remember that you are human. You cannot know everything, and that is all right.

And because you are human, it is vital to remember that you are not perfect. It's useful to approach trading with the mindset, "I can make occasional mistakes. It's understandable." It's impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. Your trading idea may just not pan out, and there's little you can do about it besides taking proactive steps, such as managing risk and having clearly defined exit strategies to protect your long term financial interests. Holding yourself up to unrealistic standards is just going to make you feel frustrated, fearful, and unnecessarily uptight. By accepting your limitations, and trying to work around them, you'll feel more at ease, and ready to capitalize on a high probability setup when you come across it.

It's also vital to take losses in stride. You can lose money and allow yourself to not feel like a loser. It's hard to take losses, and when you encounter a string of losers, it's natural to feel shaken and uncertain. But the worst thing you can do is stay on the ground after you have taken a fall. It's useful to get back in the zone. You may decide to scale back and make a few small trades to try to regain your edge. Or you may decide to stand aside and merely study the markets in order to get a feel for how the markets are moving. Whatever you do, however, don't stand still. Keep moving, even if it is just thinking rather than acting. If you can keep your mind moving and trying to solve problems, you will regain your mental edge.

It's easy to get thrown off by setbacks and lose your mental edge, but there is a big difference between feeling permanently beaten and temporarily off your game. If you keep problem solving and try to take active steps to get back into the zone, you will get there, and feel like a winning trader once again.

source: Innerworth

Sunday, July 09, 2006

R.I.P, The Yen Carry Trade

by John Mauldin

Poor Ben. The real culprit is one Mr. Fukui, who is the Governor of the Bank of Japan. While central bankers everywhere are in a struggle to prove their manliness by being harder on inflation than their peers, Mr. Fukui has shown to be the clear cut champion. They have taken massive amounts of liquidity out of the Japanese system in the past few months.

George Soros, commenting recently, brought home the point: "I think we are in a situation where almost all the asset classes will be under pressure or are under pressure and the main reason for that is the reduction in liquidity. What people do not realize is that the Japanese Central Bank has withdrawn something over $200 billion worth of excess liquidity from Japanese banks. Now that money was not put to work in Japan because there was no room for it, a lot of that went abroad, went into emerging markets, there was a so-called carry trade and it is not that suddenly people are risk averse. It is really that liquidity has been drawn out of the market and that is affecting emerging markets."

$200 billion in a global economy may not sound like a lot. But remember this was money in fractional reserve banks. They could easily multiply it several times. Pretty soon we could be talking a trillion dollars. Much of it went into providing cheap liquidity to global hedge funds and aggressive investors and banks. Thus, as the leverage went away, these groups started liquidating their very profitable emerging market trades, their commodity trades, and so forth. Everything began to go down at once. Markets that had not been historically correlated all of a sudden went down in tandem to the drumbeats of margin clerks everywhere.

There have been three large run-ups in the Japanese monetary base in the last 30 years. Not so coincidentally, there were three large periods of asset inflations which accompanied them. When the Bank of Japan began to tighten, we had resulting deflation of those assets. As I quoted GaveKal last April:

"Looking at the past thirty-five years, we find that the Japanese monetary base has been allowed to double over short periods (i.e.: less than three years) three times. Each time, it led to massive bull markets (real estate, share prices, commodities, gold, etc...), followed, some time after the expansion of Japan's money supply was over, by a serious market downturn. Will this time prove any different? So far, it has."

That was at the end of April. At the end of June we can see that it has not been any different. World stock markets have dropped precipitously along with commodity prices.

For several years, speculators have been able to get very low interest rate money in a currency that was purposely being held down. It doesn't get any better than that. Low cost money encouraged speculation in every corner of the investment world. Not just stocks and commodities, but high yield and emerging market debt. The yen carry trade fueled the investment world.

Now Japan has said not only are we going to take massive amounts of money supply from the world, we are going to raise rates and allow the yen to rise. All that "free" money investors and businesses around the world borrowed is going away. It is going to become far less than free. By-by carry trade. Fukui indeed.

In our world, two actors can create money out of thin air: the central banks, and the commercial banks. Over the past year, the world's central banks have been busy draining liquidity from the system.

"While the central banks were busy taking money away, the commercial banks were happy to multiply whatever money they had at an ever faster pace. This is now changing; with the increase in volatility, commercial banks are pulling back. As Mark Twain once said, commercial banks lend you an umbrella, then take it away once it is raining."

"The divergence between the action of central banks and the action of commercial banks recently reached unprecedented levels. In the past (1997, 2000), once the commercial banks got a whiff of the message the central banks were attempting to convey, they changed their behavior rapidly, and uniformly. Will we now witness a sharp snapback as we did in 1997 and 2000?"

OK, remember they asked the question in April whether Japan taking liquidity off the table would be different this time? It wasn't. And my bet is that commercial banks will also start the process of taking liquidity off the table as well. Loan committees are going to tighten their requirements on all types of lending. Get used to it.

Between the central banks of the world almost universally tightening, commercial banks poised to tighten and the US housing market looking like it is going to slow as interest rates rise, it is very likely the US economy is going to slow down in the last half of the year. The question is, "How much?"

I do not think we will be in an actual recession by the end of the year. But a recession is not out of the question for 2007. If the Fed does not have to go too far (and 5.5% may be too far given the other conditions in the world), then we could see a slowdown on the order of what we saw in the mid-90's. We will have to watch the yield curve and other indicators.

In any event, whether it is slowdown or recession, I think investing in the broad stock market is particularly risky. If you are good at picking stocks and know the companies you are investing in, that is one thing. But most readers invest in mutual funds and broadly diversified stock portfolios. Bluntly, I think there is some real risk to the downside.

And if the US economy slows down, so will the housing market and so will the US consumer. That will be a drag on the world economy and world growth in consumption. If the world slows down too much, you could see oil drop back into the $50's or even $40s!