Trading Pal Blog

In this information age where all the facts are available the behaviour of a crowd should be rational. Well, economists deserve the lack of respect they are getting because they fail to grasp that crowds are impulsive. The more a trader trades the higher the danger of being over-confident.

People fall in love with the stocks they are holding. As a result they discount any negative information but seek any confirmation that they have done the right thing.

People buy high and sell low when they should be doing the opposite. Of course people will explain their behaviour by saying that if they bought a somewhat high price there is enough momentum to sell higher. This will work in a bubble situation and reinforce bad habits at the same time. You could call that the greater fool method where as long as you can find someone more crazy than you it will justify your action.

The motivators here of course are greed and fear. Greed of missing out on a good move while you have no idea how close to the top you really are. Fear of a paper loss turning into a debacle while at the same time savvy investors are buying the very stock you are getting rid of in a fire sale. Two years later, not only it regained your entry price but added 50% growth to that.

Applying good statistical concepts to a small sample is another trap. Just like the random flip of a coin will give an equal number of heads and tails, rises and falls in the market seem to follow evenly. But if you rush to apply this to a small timeframe you are being over-confident. There could be 10 heads in a row in a coin flip experiment and over 500 attempts it is irrelevant. Likewise the market has a fractal nature and there are rises and falls within larger rises and falls. Don't think the market will do you a favour by behaving as you want just because you have a vested interest which colours your perception of things.

People develop a pet formula out of random reinforcement. The mind is quick at working out a correlation between random events. If you made a profit out of two companies in Australia you are going to seek other Australian stocks and become an expert in down under issues. Little did you know that the fact your first two Australian wins were a fluke and it went downhill from there. There was no connection there. The company names might have started with letter B or the CEOs might both be over 6 feet in height!

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

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Just like you can't hurry up the growth of a plant or animal without side-effects, the return on investments is a function of time. The more work you put in, the more results. Nothing happens by chance. But what about those who win the lottery?

That would be the perfect example of a load of cash for next to no effort with instant results - the time gap between you buying the ticket and the publication of the draw. But how reliable is that? Some addicted gamblers have bought tickets all their life and are still betting on it for their retirement. It's amazing what you can get people to do with the right propaganda. Some obviously think they are not paying enough taxes.

Lottery is akin to gambling. The illusion of massive returns for no effort. Lotteries are very sound businesses for casinos and government coffers hence their existence. They produce absolutely no value for the economy but generate social problems which beset the poor and vulnerable. Lotteries would disappear into oblivion if it wasn't for the massive exposure they are getting. The stark truth is that many winners are broke within 5 years because they didn't have the mindset to use their gain wisely. Statistically there is as much chance of you winning the big draw as you being zapped by lightening.

The more hands on you are with your investment the more control you have and the more returns you will get. You need to train yourself to be the nosey type who can suss out opportunities. Do you know that some businesses do as much turnover in the two months leading to Christmas than during the rest of the year? There you have it. Hire a stall in a shopping mall and move merchandise with the help of family members.

By now you have noticed that it's all about doing the right thing at the right time, at the right place. The reason so many investments go awry is that people don't do their homework and trust blindly a manager to look after their money for them. The issue is why should you get a free ride on some investment while someone else is doing all the work and carrying all the risk? The stock market was supposed to be the trading exchange to connect all interested parties. Unfortunately is has become the den of robbers where sheep are being fleeced.

Now let's have a look at another law at work: The more you give, the more you receive. Once you find a worthy cause to mobilise your time and resources you will find yourself empowered to do more. Go and find a cause that really turns you on the inside and throw your weight behind it. It is a biblical law and it works for Christians and non Christians alike because God looks at the attitude of the heart.

If the stock market interests you check out http://TradingPal.net an automated trading system which you can use to compare against your own performance.

To find out more about Christian values check out http://witness4christ.net

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Buy yourself a safe and charge yourself $10 each time you open it to count what's inside. Seriously, can you really get around the correlation between risks and returns?

The concept that you can get your money to go out and work on its own is called investing. But maybe your money might feel abandoned and would like your company instead, rather than working with strangers.

We live in a mindset where few people are in business for themselves. The majority work their guts out to make some corporation rich and they demand high returns for the savings that cost them so much blood sweat and tears.

It wasn't always like that. Since we have moved from an agricultural age to an industrial age and then onto an information and now entertainment age we need to go back to the basics and see unshakable laws at work.

The safe investment with fewer risks is when you have a hands-on approach to investing. Why would you trust some glossy prospectus to park your money to work on dubious ethical ventures? This is a cop-out and you deserve to be fleeced for believing a falsehood.

It's your money. You need to take charge and be responsible for it. Maybe the root of the discomfort is that you do not have clearly defined goals - both short term and long term. Even taking a holiday could be a very productive investment if it opened your mind to find out what you really want to do with your life and set aside resources for you to get there.

Setting goals will force you to investigate issues that really resonate with you and will give a meaning to everything that you do. Your research will lead you to solve problems where you have to give out of your substance - both time and money. You and your money working together - what a beautiful partnership!

One of the obvious long term investments people will ever make is real-estate. But unless you are quite clear about what you want to achieve and who with, you will never know what sort of accommodation/business abode you really need and in which part of town.

What maybe a sound safe investment for some might be very risky for others who lack the connections and the industry background. Say you worked all your life in the mining industry. Picking speculative stocks of oil exploration companies might be a clincher for you because you know the background of most of the directors on the board and you trust their experience. Someone else might be fooled by some fake new venture just setup by a creative broker to "pump and dump" on the stockmarket.

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You wouldn't pull out a seed you just buried in a pot to see how the roots are doing. You keep watering it with tender loving care. Then the first stem and green leaf show up to confirm it is working. You should do the same when you put your money out to work.

There are many parallels to be drawn between investing and agriculture. The same principles apply to both.

Returns are a function of time
Regardless of the prevailing mood people still need to buy food, petrol for their car, clothes to wear, etc... Invest in those industries because there will always be a demand for these products.

Impatience is your downfall
How many times have you heard of someone pulling out of the market with a loss in a panic attack? Six months later the price of their stock finished 20% higher than their purchase price.

Risk is part of the equation
The knowledge of the future does not belong to us. But one thing we know. If you don't plant seeds there is no harvest. If you're not in the market there are no profits. In fact you could say that the only reason you ought to make a profit is for your ability to handle risk. By buying shares you provide liquidity into the market and allow businesses to raise capital.

Invest in an industry where you are knowledgeable
A farmer doesn't pick a crop at random but knows the intimate details of each plant he grows. Likewise you need to know the drivers behind a company. You need to have contacts with people who work there to corroborate whatever news or rumour is doing the rounds.

Do not confuse investing with speculating
In fact there is a fine line between speculating and gambling. It is manageable to pick a reliable trend over weeks and months but if you go hour by hour like a day trader you are in a fog.

Take responsibility for your investments
Do not hand over your life savings to some manager to do the work for you. That's the only way you will learn something out of the experience. The one who has built the expertise deserves the profit - not the bystander.

Go for companies that pay dividends
Capital growth is good but if the business is sound they should pass on some of the profits without you having to sell your shares. Check the track record on dividend payouts and compare companies with each other in that regard.

Cast your bread upon the waters, for after many days you will find it again.

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There are often times when a trading instrument doesn't display any clear trend - either up or down. That shouldn't prevent you from pulling a profit out of the market if you have the right strategy.

A market is either trending or ranging; usually showing a clear move upwards or downwards a third of the time. This means most often it is bouncing between two limits. This is a safe trading opportunity.

Nobody is smart enough to pick the tops and bottoms of the market so you should not try either. Using stop orders you can enter the market only if the stock (currency, commodity, whatever you are trading) displays the expected behaviour.

As soon as you are in the market you can trigger another stop pending order to protect your newly opened position. That way you are not glued all day to the screen. You may check 3 times a day the situation with a smartphone.

A third limit order is placed in the market to collect your profit near the outer range of the trading channel. Simple in theory.

In practice several things can go wrong. How close your stop order is from your entry point is a matter of how much risk you are prepared to tolerate before you call it quits. Funnily enough the more tight fisted you are the more you stand to lose because the market noise is sure to hit a stop order placed to close - only to resume the previous move moments later...

Too much greed is also a downfall. Many have seen a good profit escape their grasp because they were not content with what was on offer on the table and wanted more.

Better many small profitable trades than no gain at all. If brokers commissions are an issue for you then shop around and find a setup that's fair to you.

Most importantly you need to keep a log of your trades and figure out your trading averages. How many losses in a row did you encounter? How many gains did you have in succession?

Remember also that the markets do evolve over time. You might have been fortunate to identify a profitable trading pattern. The market does not owe you anything and is free to branch out into a completely new behaviour without warning.

If that happens don't be stubborn. Don't jeopardize your previous gains. Go and smell the roses and study other more profitable instruments to devise a new strategy.

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