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Thursday, May 29, 2008

Handling Ups and Downs

When the markets are choppy and you are unsure of what to do next, trading can feel like riding an emotional rollercoaster. You can feel euphoric bliss after a win, but overwhelming disappointment after a loss. Experienced professional traders, however, stay calm and relaxed even after a series of losses. They don’t let the natural ups and downs of trading impact their emotions.

Why do traders feel ups and downs? Part of the problem is defensiveness. We all want to win, and oftentimes, we need to win. But success is never assured, so we see what we want to see when afraid, and usually feel joy and relief when we win, but feel disappointed and upset when we lose. But ideally, the winning trader stays rational and unemotional. Even a seasoned trader can fall prey to emotional ups and downs occasionally, however. As one professional trader put it, “It is easy to start doubting my approach and wonder about the validity of what I’m doing…During winning periods, it is easy to become overconfident, and that can lead to trouble. While overconfident, I feel a false sense of security. I’m tempted to take unnecessary risks, and I start to think that I don’t have to do any more research to find and figure out new ways to extract money from markets. It is easy to fall into a sense of complacency.”

The Problem

Some traders are especially prone to experiencing an emotional rollercoaster as a result of improper risk management. They may be prone to risking too much capital on a single trade, for example. And when they take big risks, they are likely to feel overly ecstatic when they win big, but especially beaten when large amounts of trading capital are wiped out after a big loss.

Mental Edge Strategies

How do seasoned traders control their emotions? Seasoned traders accept the fact that their trading performance may moves in cycles. Sometimes they are profitable and sometimes they are not. Accepting this fact of the trading life helps them control their emotions. In the words of one trader, “I realize that if I have a big winning period that I shouldn’t get overly excited because, most likely, I’ll have a flat or losing period just around the corner. That’s the way the market works. No style of trading makes money all the time. The odds are that after you have a big winning period, you’ll go through a period of losing money shortly thereafter. I try to make enough money to give myself a cushion to handle the losses when they come.”

Since your trading performance may move in cycles, it’s vital to manage your risk to account for the ups and downs. With proper risk management relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It’s easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. It should not be treated like recreational gambling. As a business professional, it’s essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze the market action and trade opportunities as they present themselves.

Trading can wreak havoc on your emotions unless you take precautions. Through proper risk management, though, you can control the extreme ups and downs that are inherent when you have your hard earned capital on the line. Winning traders, however, stay calm, objective, and rational. If you can trade in this optimal state of mind, you’ll increase your chances of achieving enduring financial success.

By Michael S. Shopshire, PhD. Mental Edge

Monday, May 26, 2008


Previous week was a bad week for the KLSE, it started the week on last Tuesday with a negative response to Tun Dr.Mahathir's exit from UMNO and continued with more corrections on the KLCI. The KLCI closed the week at 1274.78 near the weekly low, down 26 points w-o-w forming a bearish engulfing candle pattern on the weekly chart. This week, the KLCI is expected to continue testing its immediate support at 1271 and a critical support at 1264. If 1264 is breached, then CI may visit 1250, which is the 38.2% Fibonacci retracement level of the recent up wave.

A new record high of crude oil price of USD135 has put more inflationary pressure on the US economy, hence, the downward correction of the DJIA to close near the week low at 12,479.63 forming a bearish engulfing candle on the weekly chart.

For the KLCI, the continue high price of the crude oil may have positive effect on our plantation stocks, hence, may cushion off the downward pressure on the CI slightly. Plantation and oil and gas stocks such as Ioicorp, KLK, Swkplnt, Dialog, Kencana, Sapcres, Tgoff may continue to attract attentions of the investors.

Disclaimer: The above is not a recommendation to buy or sell, all suggestions mentioned are purely for academic study purposes for our trend trader club members only, and the author may have personal interest and position in some of the examples mentioned. Any losses incurred if you were to trade base on the study examples above is solely your own responsibility. Do consult your dealer before taking any action.

Tuesday, May 20, 2008

1300 - A strong resistance

Monday, 190508 our ex-PM Tun Dr. Mahathir threw a bomb, declaring his exit from UMNO. This of course will cause some panic in the market. On Tuesday, Bursa Malaysia opened with a small dip on the CI, and going sideways for the whole morning session. The CI started to plunge just before lunch break at 1215. The afternoon session saw the CI plunging further to 1285.20(-15 points) after opening bell of the second session, and a technical rebound actually lift the CI off low to close at 1287.43 (-13.43 points). Volume was slightly higher at 652 million shares.

Many asked, "what is the impact of Dr.Mahathir's decision to quit UMNO has on the share market?" I personally think not much, except for a some panic among the usually panicky retailers who will get panic over any issues. The big boys usually make used of this human weakness to slaughter the retailers. The market will go where it wants to go.

Technically speaking, the KLCI is really hitting a strong resistance at 1300 points. Last Friday's close at 1300.67 was a weak one, a last minute job, as the volume was low. If one were to study the chart of the DJIA and other markets that opened on Monday (we were closed for WESAK day holiday), the DJIA already formed a top reversal candle pattern on Monday and a double top chart pattern at 13133. So, the DJIA is expected to reverse for the short term, and it did. The rest of the regional markets were also down, so we were merely following, and Tun's action was only an excuse for the big boys to push down the market after a two weeks rise on the Bursa Malaysia. Chart wise, the KLCI is also forming a double top at 1302.

With the current development, the KLCI is expected to consolidate first for the short term, it may move within the range of 1250-1300. There are still some counters that are quietly moving up, one will need to put in some hard work to do your studies to find them.

To all my Buddhist friends, I wish U a belated Happy Wesak day, and may we all pray for the victims of the Sichuan and Myanmar disasters. Ami Tuo Fo.

Wednesday, May 14, 2008

Detached and Profitable

Why do you trade? Is it for the profits? Do you need to win? Many novice traders have difficulty achieving the ideal, objective and rational mindset. They may take trading losses, and subsequent drawdowns, personally. They see these setbacks as a hit to their ego, attaching personal significance and symbolic meaning to just an everyday fact of trading. Losses should be expected, and it's vital that you don't take them personally.

Certainty, it's natural for a person to feel upset and disappointed upon experiencing a severe drawdown. Financially, a great deal of money has been lost, and even if one were to return to profitability after a drawdown, from a purely mathematically standpoint, it will take some time to build one's trading capital back up. It's reasonable to feel a little disappointed, but it isn't useful to take it extremely personally, or let it impact your self-worth.

How does one control emotions and stay objective? It’s useful to remind yourself that many factors associated with profitability are not about you. A large part of trading profitably requires using a trading strategy that is capable of producing a profit. Sometimes it takes ingenuity to find such a strategy, but many times it is a serendipitous event. And there are those times when it's a matter of learning about a profitable approach from others. But in the end, it's just a matter of odds. It's just like rolling a die or flipping a coin (in some ways). One expects to make a profit over a large number of trades, but in the short term, even a winning strategy is bound to have a string of losers. That's just the nature of probability theory. A small number of flips is less than an infinite number, so it's quite likely to get a string of a 50 heads out of 50 tosses. So why make it so personal? Why put your ego on the line with each trade? Why gloat when you are lucky enough to have the odds work in your favor and sulk when the odds go against you?

When it comes to trading, you've got to unlearn what you've learned your whole life. It isn't all about you; it may just be the odds working against you. In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the folks who pay you, and you're a success. In the traditional work environment, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff. But with trading, the odds can still go against you, no matter how much work you put in. You need to consider that "success" can sometimes (but not completely) be a matter of odds. That's hard to accept for most people because it means that when you are a winning trader, to some extent, it may be a matter of the odds randomly working in your favor. That takes some of the glory out of it, doesn't it? But on the other hand, it helps you cope with a severe drawdown. If you are a skilled trader who really has mastered the markets, you can feel assured that, if you are trading at peak performance, the odds will soon move back in your favor, and you will again see consistent profits. Taking a detached, unemotional approach may take some of the glory out of trading, but on the other hand, it will help you stay unemotional, take precautions, such as careful risk management, and stay focused on the process of reading the markets, implementing winning trading strategies, and trading profitably.

The Problem

Many traders take setbacks personally and think it is a reflection of their self-worth. They put pressure on themselves to succeed and tend to choke under the psychological pressure. It’s vital to cultivate the proper, objective mental edge, however.

Mental Edge Strategies

First, use reliable strategies that have a high probability of success. Second, minimize risk so that you can more easily convince yourself to take it easy. (Don’t trade with scared money, and make sure that you can easily live with the worst case scenario.) Third, think in probabilities: Remind yourself that your strategy is reliable and that over a large number of trades, you will profit overall. Fourth, don’t put your self-esteem on the line with your money: Your net financial worth has no bearing on your self-worth. No matter what happens, you have value as a person.

There’s no need to let losses and setbacks interfere with your sense of well being. Stay detached, focused, and logical. The proper mental edge will increase your odds of financial success.

By Michael S. Shopshire, PhD, Mental Edge

Tuesday, May 13, 2008

Market turning positive

(Click to enlarge chart)
Despite the fact that the previous week was a down week for the DJIA, our KLCI walk a different way. The KLCI weekly chart formed a bullish harami candle, indicating hidden buying strength.

On Friday, the DJIA was down 121 points, but it did not really affect our market yesterday, the CI was down only for five minutes and it recovered very quickly into the positive territory and was going sideway most of the day, and a last five minutes work brought the CI to close at the highest level of the day. Volume traded remained low in the 500 million shares region. Most retailers are still having fear, and the big boys are slowly accumulating quality stock.
The strong plantation and steel sectors has help to move the CI up.
With these two sectors remain strong, it is expected that CI may move forward to re-test the 1300 resistance. If it can break and remain above the level, the next target will be the 1340 long term resistance.

As for the DJIA, it has been on a gradual uptrend since March 11, the short term is positive and the medium term MA has also turn upwards indicating the worst of the sub-prime issue is probably over. 12,760 is an important resistance turn support level.

Back to our local front, many of the lower liners are also beginning to turn active, indicating the big players has accumulated enough for the short term and is getting ready to push up for unloading, as long as one can read the big boys movement through the chart, we can benefit from their actions.

Some of the stocks to watch: Kencana, Sapcres, Lion, Huaan, Evergrn, Zelan, Masteel, Kinstel, Pmetal......

Disclaimer: The above is not a recommendation to buy or sell, all suggestions mentioned are purely for academic study purposes for our trend trader club members only, and the author may have personal interest and position in some of the examples mentioned. Any losses incurred if you were to trade base on the study examples above is solely your own responsibility. Do consult your dealer before taking any action.

Tuesday, May 6, 2008

Sideway trend

There's an old saying, "Comes May, sell your stocks and go for your holiday." Since entering 2nd May, Bursa has been in a profit taking and consolidation mood. As mentioned in previous post, the KLCI was expected to come down to close the gap at 1267, and it did.

Yesterday, the KLCI was basically in a sideway and yo-yo mode, strong support was seen at 1271 level, the low of Friday 2/5/08, and eventually the CI closed at 1274 forming a Doji. The appearance of a Doji after three consecutive down days marked the slow down of the selling pressure, and a possible reversal. Trend wise, the short term is still up and the medium term is sideway with an upward bias, the CI is expected to trade within a narrow range of 1260 to 1300 for the immediate term with an upside target of 1340 in the medium term. Overall volume traded for the last few session was low, at the region of about 500 million shares only, this clearly shows a lack of interests, however, there are some stocks that are quietly inching up. So, scan through the charts diligently and you may find stocks that offer good trading opportunities.

Some of the stocks to watch, AMMB, IGB, MRCB, Kencana, Sapcres, KPS, MAS.....

Disclaimer: The above is not a recommendation to buy or sell, all suggestions mentioned are purely for academic study purposes for our trend trader club members only, and the author may have personal interest and position in some of the examples mentioned. Any losses incurred if you were to trade base on the study examples above is solely your own responsibility. Do consult your dealer before taking any action.