Sharing No. 2c

Sorry for being absent for so long. I was very caught up with my schedule for the past few weeks.

On the exit strategy, I had mentioned earlier that before we enter into a position, we should have already thought out how we will exit. Slightly more complicated here, because it involves quite a few dynamics. I apologize first in case I am not able to list them out in a systematic way.

How we will exit depend on a combination of:

(1) Whether we are in a bull or bear market,

(2) Our investment horizon – short or long-term, which will more or less determine what analysis we use (fundamental or technical), and

(3) How the market environment changes while we are in an open position.

Just to provide some perspectives, I shall give a few scenarios. For example, we are in a bull market, the targeted exit price we had set using either fundamental analysis, or technical analysis, is achieved easily. This is when we should set new exit points so as to let our profits run. The reverse is true for our losing stocks. We should be very discipline in cutting losses for stocks that go very wrong.

If we are in a bear market, we should not be greedy and should always lock in our profits whenever possible. Losing trades are also exited once our cut loss levels are hit.

On the investment horizon, long-term investors are often not bothered by the short-term market volatility. Both fundamental and technical analyses are applicable to help determine the exit points. For short-term traders, the exit strategy is more dependent on technical analysis and market events/sentiment.

The last point is especially relevant for short-term traders. If we are sure that the market is turning against us, it is better for us to exit as soon as possible in order to minimize losses or profits lost.

For clearer explanations on the entry and exit strategies, I will recommend this book: “The Little Book of Value Investing” by Christopher H. Browne".

For the trader’s psychology, I find it quite difficult for me to explain it well enough, because it is something that every trader has to experience himself/herself in order to understand the importance of having a strong mentality. It is an intrinsic value that oneself needs to acquire through experience. But reading up some books on it will help to a certain extent too. Just to share a bit on how mentally taxing it can be – imagine you try to trade a counter and end up getting stuck, then you observe a fight breaking out between the buyers and sellers with the price going nowhere, or worse still, the price starts to go against you. That’s when your emotions set in and you struggle to maintain your rationality. You do not know whether you should just cut the loss for fear that the price might recover later, or whether you should hold on the position or even average down on it. All kinds of thoughts will be running wild in your mind and stressing you up. You end up praying hard that things will turn out fine for you. For those who try to play contra without any holding power, the stress is much greater due to the time constraint involved.

If you have been trading these few days during the current market downturn, you should understand perfectly what I am trying to illustrate. That’s why the trader’s mental strength is so important. If you are interested to read up more on mastering the market psychology, I think these two books by Dr Alexander Elder will be useful: “Come into my trading room”, and “Trading for a living”.

Note: Kindly read my first post About Myself, on my disclaimer. Thank you.

Sharing No. 2b

Now to carry on my previous post. To have a profitable trade, we of course need to buy low and sell high. Therefore, other than putting in the hard work to monitor the market and the possible stocks to buy, we need to decide on the entry strategy, the exit strategy, and consider all the “what if” scenarios first. This is because things can happen very quickly after you enter a trade, plus you will more or less be emotionally entangled with the trade, leading to the inability to analyze the current situation logically. Any inability to think properly and act quickly during emergencies will result in grave consequences – losing trades.

So that’s why a very strong mentality and discipline is required throughout the trade. I cannot emphasize or elaborate more on this part. Those who have traded before and witnessed their prices stuck or dive will agree with me about the need to have strong mentality and discipline throughout the trades.

I had attended a seminar before, and vaguely remember the lecturer sharing a finding with us. He showed us the breakdown on the importance of the components to a trade. In exact, the entry strategy is only 20% of importance to the trade; the exit strategy takes up 30%, and the trader’s psychology reigns with 50%.

I shall talk about strategizing the entry first. It is quite simple. After all the hard work in reading up research/annual reports, monitoring the share price behavior (depending which kind of analysis you believe in – fundamental or technical. I will touch on this again next time), you decide on an ideal price to buy at. Quantity of shares is another thing to decide. This will be dependent on: (1) how many shares you want / can afford, and (2) your investment horizon to be long or short (linked to your exit strategy). If you are buying for the sake of keeping for long-term gains, then it is okay to buy a little. But if you are trying to trade an uptrend, you better enter in batches of at least 5 lots. That’s because we want to break-even/profit within the shortest possible time and exit the positions before the market turns against us.

You might be thinking why is this the most simple task after all the tedious preparation work? A good entry strategy does its part to help. But the truth is, there are times whereby our entry strategies went wrong, yet we can still work out to either minimize the losses, break-even, or even end up with some profits. Just that extra care and effort have to be put in to minimize any misjudgments again.

I shall leave the exit strategy and more about the trader’s psychology till the next session. I apologize for being slow and naggy.

Note: Kindly read my first post on my disclaimer. Thank you.

Sharing No. 2a

Let’s be realistic first. The stock market is a zero-sum game. For a person to make profits from the market, somebody else will lose. That’s why, it’s all about the law of the jungle once you step into the market. Yes, it's cruel. Only the toughest can survive. In order to do that, you need to be very disciplined in your trades, cultivate a good set of trading mentality, and have at least some capital to hold your stocks. As I blog longer, you will realize how important these highlighted attributes are already, because it is just not possible for me to cover so much in a single post. And I certainly do not want to be too long-winded. :p

Some people might not be able to imagine how scary the market can be because you are not at the frontline witnessing the bloodshed. Yes, do not underestimate what the stock market can do. It can give you riches; it can also destroy your life. When the credit crisis unleashed its full force on 23 October 2008, I began hearing stories of clients and remisiers alike going bankrupt and even contemplating suicides etc. Therefore, be warned.

It is also a fact that once you enter into a trade, you are already at a disadvantage. Why? The answers are: (1) You already made paper losses due to the commission charges etc that you pay to the brokerage house you are trading with, (2) you are a retail client meaning that you lose out in terms of speed, size and news/knowledge compared to the people such as insiders, remisiers, proprietary traders and institutions.

To elaborate, insiders and people close to such first-hand information can take action first before a particular stock can react to the news being released. Yes, it’s unfair and illegal. But the truth is, it is almost impossible to detect and round up all of these people. For the remisiers, proprietary traders and institutions, firstly they are faster as they have direct access to the trading systems, and secondly, they trade in huge quantities which mean lower admin costs and break-even points.

So, the odds against you as a retail trader are really big. Thus the need for such stringent attributes.

Ok, you think you fit the bill. But that doesn’t mean you are on the path to riches already. Because to embark on a successful trade, you need a good entry strategy, an even excellent exit strategy, and of course, a strong trading mentality. I shall leave this part till the next post as I’m too tired to think already.

Thank you.

Note: Kindly read my first post on my disclaimer. Thank you.

About Myself

First of all, I am just a small dealer sitting behind my trading screen in one of the dealing rooms in Singapore, helping and advising my clients to trade.

I learnt stock investing through the hard way during my early days while I was still serving NS. Then as a naïve investor, I thought share investing would be as easy as ABC after reading a few investing books, and started to dabble in shares with my pathetic savings. Anyone would be able to guess my outcome.

Nevertheless, my interest for the stock market continued to grow while I was in University, to the extent that I decided to join the dealing industry. That opened my eyes to the world of stocks, or rather Singapore stocks. I saw and learnt more things than I had ever imagined. Now, I thought it will be good for me to share my passion and knowledge with whoever is interested, because I had fumbled through the hard way myself, so I understand how challenging it truly is for a newbie to start from scratch alone.

I will start this blog slowly because (1) I’m very new to blogging and am still trying to figure many these things out, and (2) I’m a workaholic who works long hours monitoring the markets and doing research for my clients, so I hardly have any more free time. (Yes, the first truth to being a good investor is: hard work is essential.)

For the beginning, I guess I will start my posts with more of the basic stuff to do with stocks investing first. And I will only focus on the Singapore market as it is what I’m more adept with. Once the basics are done, I will follow up with some of the contents of my daily market updates to my clients. From there on, if there are more theories involved, I will throw them in.

Just to disclaim about my future postings: while discussing about the market or certain stocks, I may express my views. My views here should not be taken as recommendations because the issues to be discussed are time and sentiment sensitive, meaning that they are very likely to be outdated by the time you read them. Therefore, always contact your broker for the most updated financial news. Being kept updated will make a very big difference to your investing decisions and thus your performance. And secondly, my views might turn out to be wrong for all we know.

Side-track a bit, not sure how true it is. But I was once told that the dealers in the finance industry are more updated in the current affairs than the Prime Minister office, all thanks to the Bloomberg machine and Reuters.

Ok, stay tuned!