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Monday, September 22, 2008

Technical rebound

The world market rebounded strongly on Friday, thanks to the concerted effort by the six central banks and the U.S. government on the bailing out of AIG, the largest insurer, and the market responded strongly. However, that may not be the end of the U.S. financial crisis yet, as how many more big trouble case are there is still to be uncovered. For the DJIA, It is just a technical rebound for the time being, and back to its sideway consolidation zone of 11,000 - 11,800. It need to be able to break above the 12,000 mark before any meaningful trend change and bull run can take place.
As for the KLCI, the index has tested its downside targets and rebounded from the lower trend channel support strongly, forming a long lower shadow doji star reversal pattern. This reversal pattern was confirm on Friday by a bullish candlestick. The bullishness may continue, however, the overhead resistance will be seen at the 1038, 1050 and the 1070 levels.

Technically, this is just a technical rebound which could be shortlive, and maybe view as a good opportunity to get out. The down trend of the KLCI has not change until the CI can work its way to break above 1100 level.

As it was mentioned before, there are always opportunities during a crisis. Those who have followed the market closely and understood the market signals of smart-money accumulation would have made some quick profit on many counters.

Anyway, trade carefully with your stop loss always in place, you'll be alright. In trading, it is not how much one can make per trade, it is how consistent and how long you can last in the game that counts.

Thursday, September 18, 2008

On track

One month ago on 20th Aug'08 I posted the chart (on the left) and the possible target of KLCI, and I mentioned that "Based on the chart pattern formation and the projection, a likely bottom may be around the 1014 to 990 level, which is actually not that far away now. A major panic that cause by the success of the Anwar's 916 plan can easily push the index down by few tens of points." Today, on the 17092008, Anwar's plan has not materialized, however, KLCI already move on track to its target level.

KLCI closed at 1002.99 dragged down by banking and plantation stocks. It is now on the verge of breaking the 1000 mark, a major psychological support level. Based on the trend channel projection and the horizontal support level, the KLCI may continue to head towards the downside target of 980, 970 and 950.



The DJIA is really looking bad with all the trouble going on in its financial sector, it broke the important psychological support of 11,000 and even pierced right through the 10,800 support level to close at 10609. Based on the same projection technique, the downside target of DJIA will be at the level of 10180 and 9740.

Wednesday, September 10, 2008

Back to the beginning

Took a break from writing to observe the market. Situations have not change very much. Since my last posting, KLCI has not moved anywhere, it was trapped between the recent low of 1064 and the high of 1100.50 registered on 29 Aug '08 on budget announcement. It losses steam very fast, as mentioned before that was just a technical rebound. Foreign fund continue to sell down on blue chip shares has dragged down the KLCI, we are just at the edge of retesting the 1064 low, if this is breached, which is likely to happen, will see another round of selling that would bring the CI down to 1048 level. The government is trying hard to prevent Anwar's 916 plan from happening, but would that stopped the CI from sliding down? The fear factor is dominating the market, many are just selling to stand sideline. Volume has remained very-very low in the 300 million shares region, showing a lack of interest from the retailers, however, the smart-money or the big-boys are happily collecting from the fearful sellers.

The charts of all other major bourses show that the market has come back to where it begun. The chart of DJIA and S&P500 of the U.S market shows that they are in a sideway market, one day up and one day down. For the time being the DJIA support at the 11,000 is crucial, and the ultimate support will be 10,698. If the is breach, the whole world will have another knee-jerk, and DJIA will go back to where it begun, the is the 10,000 level.















































Wednesday, August 20, 2008

Taking a breather

(Click to enlarge image)
Since the last posting, the KLCI has plunged further by another 50 points to a low of 1064.58, led by heavy weights such as SIME, IOICorp, Commerz, Maybank, KNM, etc. This shows that the foreign funds are dumping the local stocks in view of the uncertainties lingering the local scene. As mentioned before, the KLCI came down to test the critical psychological support at 1100, no defense were seen there and the next level of support at 1189 were also broken easily. This shows that the foreign fund just want to cash out and local fund was just happy enough to let share price come down to collect at low level.

The falls of KLCI eased off slightly at the 1065 level, and the KLCI rebounded slightly today in line with other bourses in the region. Daily volume traded over the last few days was miserable at about 300 plus million shares a day.

Market was filled with gloom and doom. The listing of Perwaja today was at a wrong timing, where the share was opened at 2.80, -0.10 below the IPO price, the share was sold down to a low of 2.34 before closing at 2.48, -0.42.

The question on everybody's mind is where is the bottom? Seriously, the bottom is not found yet. Based on the chart pattern formation and the projection, a likely bottom may be around the 1014 to 990 level, which is actually not that far away now. A major panic that cause by the success of the Anwar's 916 plan can easily push the index down by few tens of points. What to do then? Get ready your ammunitions, as great opportunities are always found during a crisis, do your homework well so that you know what to catch.

At the mean time the KLCI may have some rebound, however, any rebound is going to be short live, as players will sell into strength to cash out. This is not the time to buy for long term yet as the bottom is not seen yet, one can only trade very short term for technical rebound provided you can read the market well, and catch the rebound right on dot. Otherwise stay sideline.





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.

Wednesday, August 13, 2008

Continued weakness

Since the last update a week ago, nothing very exciting happen, except for the Beijing Olympic Games 2008 which open on Friday 080808. Somehow the Chinese loves the figure "8".

Bursa Malaysia is experiencing continued weakness with the KLCI sliding down to close at 1118.78 yesterday on very thin volume of 292 million shares traded. Plantation stocks continued to weigh down on CI with IOICorp closing below 5.00 at 4.82. The CI has come to close at a very crucial support level now, as this was a strong support level previously. A break of this support may see the CI sliding further to test the critical psychological support of 1100. The low volume indicates that the buying interest is very weak, hence, the market may continue its current trend.

Our government has formed a national economic committee to strategize on measures to boost the economy, and hopefully the coming budget can help to inject some life into the market.

Wednesday, August 6, 2008

Continue Down Trend

The KLSE saw another round of sell down on the plantation stocks yesterday, with IOICorp -0.50, SIME -0.30, KLK -0.80, PPB -0.25 dragging down the CI to close at 1128.86, -19.82. The falls of the plantation stocks was anticipated in light of the falling commodity prices with crude oil down to an intraday low of USD118. This has cause the recent short term uptrend or rather technical rebound to end its uptrend at 1164.

As mentioned in last week's posting, the 1160 level of the KLCI is an important level to hold, if this fail, more downside will be anticipated. As of yesterday's price action, the CI has made a 50% retracement of its recent run up, the critical support is at the 62% level of 1117 which happen to be the strong support area of the previous down trend. If this level is violated, full downside is expected, and of course the 1100 critical psychological support is of utmost important. There after we are talking about downside targets of 1090, 1050, 1030 and even 980. Numerous factors can bring down the CI, somehow.

Technically, we can see that 1164 was actually a strong resistance area with the down trend line blocking the way and the long term MA are still pressing the price downward. However, if one do pay attention to individual stocks, one would have found that there are stocks that are not falling in tandem with the market, bucking the down trend. Perhaps these are the opportunities during a crisis. The dump money is selling now, and the smart money is accumulating. Try to spot signs of accumulation. For the retailers, money and risk management is most important at this kind of uncertain time.

Thursday, July 31, 2008

Mental Rehearsal Helps You Cope

These days there is no sure thing when trading the markets. You may have a good chance of winning, but the next unseen catastrophe may be around the next corner. Who knows what will happen next? Well, if you are the typical trader without the right connections or insider information, it’s almost impossible to know with exacting certainty what the Fed will do, what institutions will do, or how the media will report it. After a few years of seeing new highs, we are now seeing the Dow trending downward each week. Whether you are a short term trader betting on the daily or weekly trend or a long term investor worried about what will happen next year, it may be difficult to execute a trade when the time comes. You may feel calm during the planning stages, but when it comes time to put your plan into action, you may get nervous and flustered to the point that you can’t pull the trigger.

If you freeze at critical moments of trading, it’s understandable, especially during uncertain times like these. You can intellectually understand what to do, but when it comes time to execute the trade, you can't do it. It is much like knowing how to make a golf swing in the abstract, but being unable to do it while playing an actual round of golf. When the psychological or financial stakes are high, you may choke, and all the preparation that went into your plan may be of little benefit if you cannot put your plan into action at the right moment. You don't have to let anxiety and uneasiness get the better of you, though. You can use the technique of mental rehearsal to cope with emotions that may thwart your ability to trade effortlessly.

The Problem

When your money is on the line and you are not sure if you will lose precious capital, it may be hard to execute when you need to. A sudden fear reaction may catch you off guard and may seem mysterious. When caught off guard, the uncertainty of the markets can impact your ability to trade calmly and rationally. When you anticipate your potential fears, however, their potency will be greatly diminished.

Mental Edge Strategies

One of the best ways to cope with unexpected anxiety-provoking events is to use mental rehearsal. Mental rehearsal consists of pretending a series of events is unfolding occurring while in a safe, quiet place. It's much like making a videotape of a set of market events and replaying it in your head. For example, you can imagine having to make a profit during times of extreme uncertainty and feeling that you are not sure of what will happen in the long run. If you are the kind of person who would find making a trade while afraid of what will happen to your stake, you can try to practice making the trade effortlessly through your imagination. By replaying the events in your head at your own speed and under your own terms, you can learn to control your fear response. When you first replay the mental “movie” in your head, you may feel anxiety and apprehension. Your breathing may be heavy and difficult. When this happens, you can "pause" the "video" and practice relaxation exercises. Take deep breaths and relax your muscles. By replacing anxiety with feelings of peace and relaxation, previously stress-inducing events will lose their potency. Through practice, you will soon be able to replay the movie without stopping and without feeling any sense of anxiety or uneasiness. Eventually, you will be able to face actual stressful events during the trading day with a calm and relaxed response. You can imagine yourself trading under the most chaotic conditions with ease. You can imagine entering and exiting a trade calmly and effortlessly. By mentally rehearsing the event, you can face incidents that would be difficult to address during actual trading conditions. Rather than facing them in reality, and repeatedly experiencing stressful, paralyzing emotions, you can practice coping with approximations of the event until you can trade decisively and effortlessly. Don't let stressful emotions adversely impact your trading. Cope with them through mental rehearsal and neutralize them. Soon, you'll be trading effortlessly with the proper mental edge.


By Michael S. Shopshire, PhD. Mental Edge

Tuesday, July 29, 2008

Technical rebound and a deciding moment

The KLSE saw some active buying yesterday with the CI surged up 12.34 points to 1154.09 and volume rose to 785 million shares. This volume coupled with many active 3rd liners counters rising indicated that the retail players jump in actively after a 2 months down trend since 20th May from the 1302 level. However, one need to exercise caution when trading under the present scenarios. I would say that the market is at present only experiencing a technical rebound after an almost continuous fall for 2 months under all kind of negative factors, be it economically or politically.

Technically one can see from the chart that the CI was deeply oversold and fall beyond the lower LR channel, a pull back or rebound is expected. As mentioned previously, CI has to go above the 1160 level in order to stay within the long term uptrend channel. At the moment, the overhead resistance is at 1157 which was the low registered on 10 Mac 08. The downtrend line and the 30 days MA are also pointing at the same level which make the 1160 level difficult to cross at the moment. The CI may pull back a little before it gathers enough strength to break the resistance at 1160. A small inverted head and shoulder was formed, and the CI break through the neckline yesterday, this indicates that if CI is able to break through the 1160 level, it may have a chance to test the 1200 level indicated by the brown dotted line. This is a deciding moment in which if CI can't hold well and head south again (with more surprises surfacing), then we may even see it going to the 1080 level.

Hopefully the coming budget 2009 can inject some life into the market which it badly needed. Do keep track on this blog for trading opportunities.

Thursday, July 24, 2008

The Silver Lining

During the past few months it’s been difficult to look on the bright side. Whether it has been rising oil prices, housing woes or the banking crisis, it’s easy to fall prey to a pessimistic attitude. If you aren’t careful, you may start to think it’s impossible to overcome the many obstacles in your way. But there is always a bright side. For the past two days, for example, oil prices are down and things don’t look so bleak. These events illustrate that setbacks are often temporary and with enough creativity they can be overcome. It’s always better to look on the bright side than fall prey to pessimism.

Winning traders trade using a scientific approach. They don’t become overly emotionally and pessimistic when they hear bad news. Rather, they just press on. They develop hypotheses, devise sound trading plans, and test out their theories by executing a trade and seeing what happens. A very systematic, objective approach is taken. Sometimes a hypothesis is supported, and a method is confirmed to produce a profit under specific market conditions, but at other times, a theory is not supported. Revisions are then required. It's vital to determine what went wrong, and what went right, and make any necessary changes.

When things aren't going right, it is useful to look on the bright side: Remember that things could be worse. When you lose $10,000 on a sure thing, for example, you might as well think, "At least I didn't lose $20,000." It works to think positively. A study by Dr. Chris Davis, a professor of psychology at Carleton University, and his colleagues illustrates the usefulness of looking on the bright side. Participants were asked to imagine they had just experienced a major setback. Some of the participants were instructed to look on the bright side in that they were asked to consider the fact that matters could have been a lot worse. Other participants were asked to consider how the situation could have been much better. The mood of the participants was measured and compared. Research findings clearly favored looking on the bright side of things. People who focused on how matters could have turned out much worse felt happier after a major setback than people who focused on how events could have been more favorable. So if you want to be happy after you encounter a setback, look on the bright side.

The Problem

When facing setback after setback, it’s easy to fall prey to a pessimistic outlook. When pessimism sets in it is difficult to trade with the proper mental edge. Opportunities are blurred by a negative outlook.

Mental Edge Strategies

How you look at a setback strongly influences how you recover from it. If you view a setback as a dreaded event, and imbue it with strong personal significance, you'll feel so emotionally overwhelmed that you will be tempted to engage in avoidance and denial. Rather than taking decisive action, you will waste precious psychological resources denying the reality of the situation. It's better to take setbacks in stride, find solutions, and move forward. Don't mull over what went wrong. Instead, figure out what you can do next to improve your strategies and methods and take home huge profits.

There is always a bright side. You just have to find it. As long as you have trading capital to trade, you can look for opportunities to profit. Similarly, even if you don’t have sufficient trading capital right now, you can build up your capital, continue to observe the markets and develop your understanding of the market action. Rather than feel stuck and ready to give up completely, there is always a bright side.

Looking at the bright side keeps your spirits up, and you need to keep your spirits up in order to feel buoyant enough to search for creative solutions to problems. When carefully analyzing how a trading plan went awry, for example, it's easy to start beating yourself up for not having a trading plan that was foolproof. But if you mull over the possibilities too much and start thinking, "Why did things turn out so wrong?" then you will feel disappointed. It's vital that you stay focused on taking active steps to solve problems, and that’s why keeping your spirits up by looking for the bright side is so important. Rather than react to setbacks with emotion, it’s vital to think like a scientist. Pretend you are merely solving a mundane problem, like finding the solution to a basic math problem. Figure out what you can do next. Don't question your abilities. Self-doubt is a complete waste of time and energy. Look on the bright side for a moment, and optimistically search for ways to pick yourself up off the ground. By looking on the bright side rather than falling prey to a pessimistic outlook, you will trade with the proper mental edge.


By Michael S. Shopshire, PhD. Mental Edge

Wednesday, July 23, 2008

Technical Rebound

Last few days have been very much like a roller-coaster ride in the KLSE. The CI first found a support around 1120 and rebounded to 1153, the there comes more surprising news and pressed the CI down. Last Friday, the CI took a further beating when the foreign funds sell down major plantation stocks like SIME, IOICorp, KLK etc. The way KLK falls was really scarry, down by Rm2.60 to a low of 12.60 from 15.20 in 2 days before recovering slightly to 13.70 yesterday. This tells us that during a bear trend, no matter how fundamentally strong is the stock, it will still come down under market force. So, never fight the force, flow along with it, that is what trend trading is all about.

Yesterday, the CI rebounded slightly to closed at 1109.57, just slightly above the critical psychological support of 1100. It is very important for the CI to stay above this level, otherwise the downside level mentioned in last post will come true. The immediate overhead resistant is at 1120, for the short term down trend to reverse, the CI must be able to go above 1160 level. However, under current economic situation worldwide, with the high oil price and the many political sendiwara taking place in our country, the CI is lightly to consolidate within a range of 1090 to 1120 to build a base before any uptrend rally can take place.

As the market is deeply oversold, where the CI actually falls continuous for almost two months nows, it might be an opportunity for the medium term player to pickup some quality stocks. There are also some stocks that refuse to come down with the CI and even buck the down trend, these can be a very short term trading opportunity. Whatever, you like to do, placing a stop loss is very, very important to help preserve your capital, as you might be wrong again.

Wednesday, July 16, 2008

Bleak outlook

The regional market including KLSE plummeted yesterday following the Dow's fall on Monday, a result of the continuing financial crisis in the US. This round it involves the two mortgage giants Fannie Mae and Freddie Mac. Locally, the political uncertainty is a little settle with the PM's announcement of his handover plan.

Technically, the CI is not looking good. It has gone into a bear trend. Fibonacci retracement of the recent up wave points to a extended target of 1116 (127.2 % extension) which is where we are very close to right now, the down move may only complete at the 161.8% extension which point to 1066 if the 1100 psychological support is broken. A 200% extension will bring the CI down to 1007 level (green line). Base on the major head and shoulder pattern neckline breakdown, the medium term target is 990 (brown line). Based on the linear regression channel, in order for the CI to still stay within its long term uptrend, it must find its way to stay at least above the 1160 mark.

That is just the broad picture of the CI's future outlook base on technical studies, which looks bleak. However, one must remember that not all companies are affected by the current financial trouble of US, there are still sectors and counters that may buck the down trend, this will need one to do some serious homework to find them.

Wednesday, July 9, 2008

Roller-coaster ride

The bearish sentiments still prevail in the market. KLSE yesterday opened with a slight dip due to overnight Dow's small loss. It then rebounded on speculative buying especially on Gamuda and KPS, CI bounded to the intra-day high of 1136, and profit taking sets in. In the afternoon session, CI took a dip due to heavy selling on plantation heavy weights like SIME, KLK and IOICorp, many that posted gain the morning session turn red. KLCI finished the day at 1121.25, near the low of 1120.31. Volume increased to 450 million shares traded, with market breadth at 258 gainers to 344 losers. The increase in market volume indicates selling by the foreign fund especially on blue chips.

The Support now at 1120 is critical, if this is broken, we may see the CI plunging towards 1102. The other leading indicator is the CI future, FKLI for July has already gone done to the low of 1083 and closed at 1090, running at 31 points discount to the cash market.

The market will turn irrational, when major support like 1100 is broken, this will draw another round of irrational selling. However, as it always is, at the selling climax, it is always the market bottom. Hold your belt tight for the roller-coaster ride and get ready your bucket for the quality stocks at deep discount.

Thursday, July 3, 2008

Bearish sentiments, bearish trend

Since the last posting, the market has been through many changes. Oil price keep making new highs which lead to greater worries on inflation, locally political uncertainties has worsen the situation which lead investors into selling.

Yesterday the KLCI has came down to test the 1157 level which was the low registered on 10Mac08, the CI saw no defense at the level and went straight to test the psychological support at 1150 and registered a new low at 1149, late bargain hunting help to bring the CI to close at 1153. The question now is how low will the CI goes? Technically speaking, the KLCI has entered a bear trend, it will continue to go lower to test the support at 1141, 1130 and 1105. The best strategy now is to hold cash.

Market goes through different phases just like the the four seasons, we are perhaps going into the winter now, this is perhaps the time to hibernate, but as a trained investor, we should be diligently doing our homework while others are hibernating as opportunities are always found in a crisis. Look at the relative strength of the counter relative to CI, look at signs of substantial shareholder's accumulation can perhaps give ones a clue as to where the opportunities are.

Wednesday, June 18, 2008

Consolidation

The market turned very quiet the last few days, volume dropped to an average of just over 300 million shares. The KLCI is hovering around 1230 level, as mentioned is previous post the market sentiment is still bearish, and is entering into a consolidation phase with a downward bias. The high oil price plus political uncertainty is the current main concern of the market. CI may still move between
1215 to 1240 with a southward inclination. If 1215 is again breach, CI may again visit the 1190 territory.

Despite the gloomy atmosphere, there are some stocks that are against the general market trend, Takaful is one of them. However, one need to be more cautious trading under the current environment.


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, June 10, 2008

Bearish sentiment

The market sentiment was bearish since entering June. The announcement of price hike in petrol on 040608 has caused a big fear in the market, and resulted in a sell down on last Thursday. The dumb money (panic sellers) was really irrational and push the CI all the way down to 1214, however, the smart money came in quietly to buy and manage to bring the CI up to close at 1223.56 (Thursday 050608). On Friday, the CI turned very bullish, moved by TENAGA,which saw the largest single day gain of Rm1.70, and closed the gap at 1248.57. On Monday, 090608, the CI again suffered another round of bashing due to DJIA closing down 394 points last Friday. However, the candlestick of CI actually shows an up day despite the fact that CI was down 17.59 points. This indicates that the big boys (smart money) was actually accumulating the blue chips at this level. Similar candlestick formations are seen in many of the blue chip counters.

The market sentiment is generally bearish, the moving averages of very short, short, medium and long term are all pointing south indicating down trend. Since CI had already broken all the key short term support at 1250, 1241 and 1233, the immediate support at 1215 is critical. If this is not defended, we may see CI revisiting 1180. For the immediate term, we expect CI to move in a narrow range of 1215 - 1250.

However, one don't need to be overly bearish, there are still counters such as KPS, Kencana and a few others that are moving in divergence to the down trend, if you do your home work, you'll be able to find them.


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, June 3, 2008

CI heading south

On Monday, 020608 the CI was for most of the day holding around 1266 to 1268 point, but a last minute sell down push the CI down to close at 1262.49 (-13.61, -1.07%). Volume was very thin at 390 million shares. This indicates weakness and lack of participations in the market. As mentioned in previous post, the CI may slides further south to test the support at 1250, 1242 and 1233. The immediate 60 MA support is at 1255.

Last few days the market focus has been on those Property and Construction companies that have exposure in Vietnam, e.g . Gamuda, SPSetia, BJLand. Taking Gamuda as an example, from the lodgment to Bursa on changes of substantial shareholders, one can see that in actual fact the substantial shareholders has been selling their shares since 20May08, the big boys were doing it quietly at that period, however, the close on last Thursday which break the important psychological support at 3.00 was an indication of the selling down by the big boys. Hence, it is important to track the movements of the big boys. As there is no indication of bottom yet, Gamuda may move further down to test the downside target of 2.10. Don't try to buy low, any up move now is just a technical rebound, a chance for those who still hold the shares to sell. One will have to wait for a trend change before considering buying Gamuda.


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.

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

Corrections

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.

Wednesday, April 30, 2008

Got Inspiration?

Many seasoned, profitable traders truly enjoy trading; they have a passion for understanding and mastering the markets. As one trader put it, "I find the game itself interesting. I enjoy watching how stocks react to news. It's always amazing to me how you can see small movements snowball into large herd mentality sorts of movements. A minor piece of news starts some selling, and then all of a sudden, there's more selling and more selling, and then there's a huge avalanche of selling. And it all started with just a minor piece of news...I find that very interesting." Another seasoned trader said, "I like the freedom trading gives you, the ability to earn a living while not having to have employees, the mental challenge, and the constantly changing environment." There are many reasons to pursue trading, and money is usually not the only reason. At the same time, even a thrilling activity like trading can become commonplace, and when you're in a slump, you can feel like giving up. At times like these, it is vital to find the inspiration you need to overcome obstacles and win.

In systematic studies, researchers have repeatedly discovered that peak performers have a true passion for what they do. Whether it's art, sports, or business, the folks at the top are not primarily motivated by fame, glory, respect, or status. They are driven by the inherent rewards of the creative endeavor itself. But even the most exciting job can become boring at times. Think of the hobbies, activities, and things that you once found exciting but no longer find interesting. It may be a sports car that you couldn't wait to drive but now view as a daily driver, or a favorite, expensive designer outfit that today you see as commonplace as a pair of jeans you bought on sale at Wal-Mart. Unfortunately, the initial shine seems to wear off.
What can you do when you lose your inspiration? It’s vital to rekindle your passion for the game. You may, for example, watch an exciting moving about trading, such as "Wall Street." If only we had so much wealth that we could change the course of a company, and profit it from it? Wow, it's fun just to be a small part of that, right? Or what about the commodities brokers in "Trading Places" who tried to corner the frozen concentrated orange juice market? These are romantic images that can inspire you. That said, if you are like most traders, you no longer see these romantic images as accurate. They may have motivated you when you first started trading the markets, but now that you've had some experience with trading, the tough realities of trading the markets may far outweigh the glorious images of amassing great quantities of wealth. But it's fun to take a break occasionally and daydream. It doesn't hurt as long as you can separate fantasy from reality.

Trading is a tough business. If you lose your passion for trading, all it means is that you are human. If you get bored, it's vital to remind yourself of the advantages of trading: You work for yourself (unless you are an institutional trader). You can work at your own pace, and feel that you have freedom. Remember what it was like to work a 9-to-5 job? Perhaps you don't. Well, that's an idea. "Absence makes the heart grow fonder." Maybe you could arrange to visit a friend for a day at a regular 9-to-5 job. It's not forever. It's just a way to rebuild your passion. Sometimes we forget why we trade. Again, like a thrilling sports car, we start to see the thrilling job of trading as mundane. Drive a compact car for a week and you'll see how great your sports car drives. Work at a regular 9-to-5 job for a few weeks, and you will find your passion for trading quickly. It may sound extreme, but it works. Maybe even after the first day, you'll think, "Oh, now I remember why I became a trader."

It's hard to trade successfully day in and day out. Some traders never lose their passion for the markets, but many forget just how exciting the markets can be. If you lose your passion, don't sit around sulking about how boring life can be. Go out and see how the other-half lives. You'll remember why trading is a great profession. And you will trade with renewed vigor and regain your mental edge.

By Michael S. Shopshire, PhD Mental Edge

Tuesday, April 29, 2008

Chart following Vs Rumours following

(Click to enlarge chart)
Two weeks ago, a friend came to see me in the office to discuss about "share" matters. I told him that some counters offer good trading opportunities, but he mentioned that he was told to sell everything before Parliament starts, so he would not buy anything. I did not insist, but I told him that trading is about following market trend, not about listening to unfounded rumours or comments. Of course he didn't buy those counters that I mentioned (he would now say aiyah! missed la! as usual). A week later, another guy (somebody high in position in my office) also mentioned that he was told to sell everything before Parliament starts, I laugh again. Today, the Parliament started, I didn't see our market disappearing or plunging to a new low, instead, many counters are doing well, and I have been locking in handsome profits. This is not to boast, but just to tell a fact that, following the chart is always wiser than listening to all kinds of advices from those commentators in the street (everyone has a mouth, they can say anything they like).


The market was very slow and quiet today (Monday, 280408). KLCI was up 7.23 points, in which a last minute effort push the CI up by 3 points. Volume was very thin at 486 million shares traded. This shows the market lacks participations from the majority. Maybe the market is waiting to see any surprises after the Parliament starts. On the weekly chart, our market has actually ran up for three weeks since 7th Apr, and has touched the short term target of 1300, and maybe it is time to take a breather. The 60 days MA is posting some resistance to the CI, however, the short term 30 days MA has started to point northeast indicating short term up trend. The very short term 5 days MA is giving some support to the CI. If the CI is able to break through the 1300 psychological resistance, then it may test the next target area at 1340. On the other hand, if the market continue to stay weak, the CI may come down to close the gap at 1267.

Some of the stocks to watch are: Parkson, Puncak, Kinstel, Zelan, Kencana, Sapcres, Sunway and...


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.

Thursday, April 24, 2008

Profit Taking - Buying opportunity

As mentioned in the Wednesday's post, the KLCI tested the 1300 psychological resistance today, and after that the market went into a strong profit taking mood. Some went panic seeing the green color screen suddenly turned red, one or two called up and ask, "What's happening?" I just reply it's normal profit taking after three to four days of rise, and they feel a sense of relief. Trading is indeed stressful, and need full concentration. The market is full of opportunity now, but the opportunities belongs to those with a good command of trading knowledge and skills with a calm and clear mindset.

The following articles is good reading...

Stressed Out and Vulnerable

Ian wrote in and asked, “Over the past four months I have had a pretty rough time. I have had many medical issues...I don't get much sleep and I am constantly feeling run down. My symptoms have affected my life to such an extent that my long term girlfriend left me. I have gone bankrupt and folded the business I loved running. However, I do love to trade and when I devote myself to it, I can achieve consistent results. So my question is when all is falling apart, is it wise to tackle the markets?”

Thanks for sharing your circumstances with us. Many traders are under extreme amounts of stress these days and can relate to your predicament. For example, many traders have real estate investments in addition to their investments in the financial markets that may not be doing well. Also, many traders may feel stress from losses in the markets or from the generally unstable market conditions we have seen over the past few months. They may be hiding these feelings from their friends and family, and this may produce added stress. Stress levels may be higher than they have been in recent years.

Although generalizations may not apply to everyone, people in extremely stressful circumstances may want to avoid trading in earnest. A primary assumption I have made in my columns is that stress interferes with a trader's ability to maintain a proper mental edge. Here’s why: Trading requires risk, and tolerating risk is inherently stressful. Although people differ in terms of their ability to tolerate stress and to tolerate risk, humans have a limited amount of psychological energy when it comes to coping with stress and risk. It's hard enough to control impulses and emotions under ideal conditions, but when a trader is under a great deal of stress, trading becomes especially difficult.

You may be under a great deal of stress. To put it in perspective, consider your score on the Social Readjustment Rating Scale created by Thomas Holmes and Richard Rahe. Each life stressor has a stress score on the scale that can be summed to arrive at your total level of stress. In your case, your total stress score is moderate at slightly above 200.

  • Marital separation = 65
  • Personal injury or illness =53
  • Business readjustment = 39
  • Change in financial state = 38
  • Change in sleeping habits = 16

You may be under stress, but not everyone handles stressful events in the same way. Some people are “stress resilient” in that they can take stressful events in stride. But it is difficult to handle stressful events easily.

Some people cope with stress by engaging in creative endeavors they love and trading surely falls under that category. So if you love trading, focusing on the markets may help you cope with stress. That said, you must be extremely careful. If you merely paper trade or study the markets for interest, you may be able to relieve stress. But there is a “sunk cost” in studying the markets and not trading. There’s a natural tendency to think, “Why am I studying the markets and not making a profit?” That’s when you might be in trouble. You may make risky trades while in a vulnerable, stressful state of mind, which may lead to losses and further increase your levels of stress. In the final analysis, it is better to stay away from the markets until you fully recover from the major life events that have happened in your life.

Many traders underestimate the influence of stress. Stress is not only a psychological reaction, but also a biological response. When you are stressed, your body reacts instinctively. You are agitated, on edge, and ready to lash out. Your attention is restricted. Your mind is closed and inflexible. The stress response has a specific biological, adaptive function: Your energy is channeled into making the simple response of fighting an opponent or running away to flee to safety. Not only is your energy channeled, but your perceptions are limited. Trading requires a more complicated skill set, though, and when you feel stressed out, you are bound to make a trading error. For example, you can have a very complete trading plan, where every aspect is spelled out clearly, and you may have a wealth of experience executing such plans, but when you are stressed out, even the simplest task can be difficult to complete. You may not see an obvious signal to take action. And even when you see the signal, you can make a small mistake when you're stressed. Again, when under extreme stress you are agitated and your psychological perceptions and intuition are restricted and closed off. You miss little things and have a tendency to respond quickly without thinking. While trading, we often do things automatically, without thinking, but stress can cause us to act so quickly that we miss something. We may forget to place an order according to plan or we may misread a signal and close out a position too early.

Don't underestimate the impact stress can have on your ability to trade with the proper mental edge. It is useful to practice stress prevention. Try to minimize the impact of stressors as much as possible. Stressful emotions can build up, and if not released occasionally, one can be overloaded by stress. You can't completely remove stress from the trading environment, but you can prevent the stressful aspects of trading from making you feel overly anxious and fearful by developing a stress management plan and following it. Some useful ways to manage stress include (a) avoiding caffeine, (b) exercising regularly, (c) minimizing daily hassles, and (d) seeking out social support. Caffeine helps many people wake up in the morning, but it may often elevate your nervous system to the point of making you hyper-alert to the slightest form of stress. Trading is stressful enough; it's not useful to pre-elevate your nervous system and feel a heightened sense of anxiety. Tension can also be reduced with regular exercise. Tension builds up during the trading day, and a regular exercise program ensures that pent-up frustration and tension are released, and do not build up to influence subsequent trading decisions unexpectedly. It's also important to reduce stressors in your environment. Daily hassles, such as time pressure, traffic congestion, or feeling over-extended can build up psychological tension and loiter in the back of your mind. Try to minimize these hassles and relieve the pent-up tension. But however you cope with daily hassles, don't ignore them; don't try to pretend they aren't important enough to deal with immediately. They can accrue and cause you great strain in the long run. Seeking out supportive friends can also be useful when managing stress. Friends can provide you with a sounding board, an alternative perspective, or even creative solutions to your problems that may have eluded you.

Trading requires an optimal mindset. When you are upset, tired, and emotionally distracted, you will have trouble following your trading plan. It's vital to return to a calm, focused mindset, a mindset where you are attentive and alert, and can trade like a winner. Don’t underestimate the impact of stress. Trading is very stressful. When you have stressors to mange outside the trading realm, you may be especially prone to making trading errors, taking unnecessary risks, and possibly increasing your dept. There’s plenty of time to trade the markets across your life. It’s better to patiently stand aside for the moment, wait for your “traumas” and feelings of stress to dissipate, and when you are rested, relaxed, and relatively stress-free, you can resume your trading endeavors with the proper mental edge.

By Michael S. Shopsire, PhD. Mental Edge

Wednesday, April 23, 2008

The gap is closed

On Monday, the KLCI gap up open at 1278.25, right above the resistance at 1277.69 and hit the intraday high 1288.14 due to the spilled over effect of DJIA's gain of 228 points on last Friday's close. CI was trading downward the whole of Monday due to profit taking activities. Yesterday, the CI started the day with a bit of panic selling as usual because DJIA was down 24 points on Monday's close, however, the CI was gradually trading upward and turn positive at about 4.15 pm. Volume has gradually pick up, in the region of around 600 million shares. This shows the majority public has not regain confidence yet, and the smart-money has been actively accumulating. As Monday was a gap up open, CI may correct downward the re-test the resistance which now turned support at 1268 before it pick up steam to challenge the 1300 points.

The short term trend of CI has gradually turn positive as the 30 days MA has already starts to hook up. The 60 days MA which represents medium term trend is starting to go sideway and so is the 120 days longer term MA. So, the short term is up and the medium to longer term perspective is sideway with a trading range of 1250 - 1300.

On March 17, I mentioned opportunity in disguised, some were doubtful and some were opportunistic. Those opportunistic fellows who called me got on to the boat of Kencana, Sapcres, KPS, Zelan, Huaan, Hubline etc. However, there are also those who say they missed the boat, but the fact is when the boat was there, they didn't recognized it or don't believe that it is a boat, probably due to their lack of knowledge or lack of confidence. So, better revise what you have learned before. Do pay attention to those educational articles that I post here.


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.

Thursday, April 17, 2008

Trading with a Gambling Mindset

Trading should not be approached with the mindset of a recreational or a pathological gambler. Trading lore is replete with tales of traders who took big risks and paid a huge price for it. Professional trading as well as professional gambling is about risk management. One trade or a series of trades should not wipe out most of your account balance, yet many traders find themselves in dire straits. Do you trade like a pathological gambler?

The Diagnostic and Statistical Manual of Mental Disorders, published by the American Psychiatric Association, contains a pathological gambling diagnostic category. Just like alcohol use, gambling is not necessarily a “psychiatric disorder,” but when a pattern of behavior develops that causes emotional distress, interpersonal conflict, or work difficulties, a common everyday behavior like alcohol use or recreational gambling can turn into a psychological problem that may require treatment. Pathological gambling is a lot like alcohol or drug dependence in that the person cannot stop and the behavior causes impairment. For example, a pathological gambler can’t stop thinking about gambling experiences, requires larger or more frequent wagers to get the same rush, feels irritable when trying to stop, uses gambling to cope with negative moods, is consumed with recouping losses through gambling, tries to hide gambling behaviors, cannot stop gambling, and may engage in illegal acts to continue gambling. Does any of this sound familiar?

Unfortunately, many traders have made bad decisions trading and have paid the price. They may not have had a “gambling problem” in the strict clinical sense, but face a great deal of emotional turmoil as a result of their past trading. Many traders may hide their financial difficulties from family and friends, while other traders may find themselves in such as deep financial hole that they cannot climb out of.
It may be interesting to consider the extent to which you approach trading in the same way a pathological gambler approaches gambling. I adapted the South Oaks Gambling Screen to pertain to trading. It’s important to note that if you get a high score on this quiz, you may not have a psychological problem with trading, but it may suggest that your approach to trading is similar to a problem gambler and that you might want to change your approach to trading.

Answer True or False

1. It seems like I’m constantly trying to win back losses.
2. I frequently claim I’ve been making profits when, in fact, I have lost.
3. I sometimes feel as if I’m risking too much money on trades that I can’t afford to lose.
4. I risk more money on a trade or series of trades than my account size warrants.
5. I have felt guilty about the way I trade, as if I’m risking too much money on bad trades.
6. I want to control my risk (or frequent losses) but I can’t.
7. I’ve frequently tried to hide my losses from my family or friends.
8. I have had arguments about my trading losses with loved ones.
9. I have borrowed money from people to feed my account and not paid them back.
10. I have lost money trading that I can’t afford to lose (such as household money or credit cards).

If you received a score of 3 or above, you may have a problem with your trading. You may not be a “pathological gambler,” but it is worth seeking professional help to confirm that you don’t have a problem. Perhaps it is the nature of trading that those outside the profession do not understand the risk involved, but if trading impacts your emotions in a negative way or leads to problems with family and friends, it will impact your ability to trade with the proper mental edge and succeed. To trade at your best, it’s vital to manage risk, trade with money you can afford to lose if necessary, and trade high probability setups.

By Michael S.Shopshire, PhD, Mental Edge

Tuesday, April 15, 2008

Dull market.

The market was really dull yesterday. Regional markets was down due to the poor performance of DJIA on Friday, and KLCI was down 13.36 points to close at 1233.43, volume traded was only 355 million shares, one of the lowest volume day in recent months. This indicates a lack of interest. External factors and internal political uncertainties will continue to affect the performance of the KLCI. CI may continue to go sideway within the range of 1200 - 1265, if 1215 is broken CI may go further down to test 1200.

In a dull market like this, perhaps this is the best time to do more reading to enrich ourself. Below is a good article by Michael S. Shopshire, PhD, of Mental Edge.

The Obsessive Compulsive Trader

Careful analysis of all possible alternatives and all possible consequences of one's decisions is the hallmark of good decision-making. Amateur traders approach their decisions like recreational gamblers, but professional traders make a careful analysis of their options and act decisively. It's important to avoid impulsive decisions. It's vital to have a clearly defined trading plan, and to manage risk so that a single trade or series of trades will not have the potential to completely wipe out your trading account. It's also imperative when making a trading plan to define up front the signs and signals that indicate your trading plan has gone awry. It's useful to conduct a thorough analysis before making a decision, but some traders have difficulty making prudent decisions. Rather than act decisively, they become completely paralyzed by it.

At the outset, it's vital to point out that not all traders suffer from psychological ailments. When it comes to hesitation, for example, some traders have good reasons for waiting. Experience may have shown that it was worth waiting before making a trade, or novice traders may be risking too much capital on a trade and be legitimately afraid of digging themselves into a deep financial hole. That said, other traders act like they have obsessive-compulsive personality disorder. In other words, they hesitate too long and the reasons for their hesitation reflect personality characteristics.

Traders with a pathological variant of what traders usually refer to as analysis-paralysis are afflicted with an insatiable need to seek out certainty and security. For these individuals, uncertainty represents insecurity. It's not merely that they have a pessimistic outlook, although they have one. They equate money with psychological security; losing money represents not only a loss of financial security, but also a loss of basic emotional security and well being. How does such an affliction develop? For many it is rooted in early childhood. Parents often impose rules for their children to follow and punish them when the rules are broken. Young children are on the lookout for what rules to follow so as to avoid punishment and the unpleasant feelings associated with it. As adults, we make our own rules and decide to follow them or not; we no longer act as children searching for the "right" rules to follow in order to avoid punishment. People with extreme analysis paralysis, in contrast, tend to search for the "right rules." They continuously search for rules to follow, and when no clear rules exist, they simply make them up. It's as if their parents have followed them into adulthood. They are always there next to them nagging and threatening punishment when the "right" rules are not identified and followed unconditionally. For traders with a pathological variant of analysis-paralysis, this past childhood conflict manifests itself as searching for the "right" indicator or the "right" trade setup. And even when they see it, they have a strong need to want everything to be perfect. Because if they don't, they are certain that some form of unspecified punishment will follow.

Do you have an extreme form of analysis-paralysis? If you do have a pathological form of analysis paralysis, it may be difficult to overcome, but it is not impossible. The main thing is to take realistic action. If have a dire need to be perfect, you may want to minimize risk so that you can convince yourself that you can handle the worst-case scenario. Taking big risks will drive you to obsess about possible “disasters.”

Don’t be such a perfectionist. It’s not as bad to make mistakes as you think it is. "The harder you strive for perfectionism, the worse your disappointment will become," according to Dr. David Burns. Perfectionism has more disadvantages than advantages. Trading is a profession where you must take risks and explore new market opportunities. If you continuously strive for perfectionism, you'll never feel satisfied. You'll always think, "I could have done better."

Based on theories of Dr. Albert Ellis, a more adaptive approach is to realize that 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. For your long term enduring success, it is vital that you learn to ease up. You don't have to be perfect. You are bound to make mistakes occasionally. Dr. Burns suggests that lowering your personal standards may be helpful. Rather than strive for high levels of performance, feel what it is like to be average. For example, instead of searching for the ideal setup, you may want to just find a profitable setup. You may not make as much profit, but you will feel more relaxed. If you compare what it feels like to strive for high standards, moderate standards, and low standards, you may find that merely going for moderate standards makes you feel better. You may also find that you put on more trades, and achieve greater levels of profitability. You may also want to change your self-talk. In her book, Overcoming the 7 Deadly Sins of Trading, Ruth Barrons Roosevelt lists some supportive beliefs that may help you control your need for extreme perfectionism: "I do my best and my best is enough. Trading is an imperfect art and science. The future is unknowable, so I don't have to accurately predict it. I can forgive myself and still improve."

Don’t let an extreme form of analysis paralysis get the better of you: Ease up. Remember, you don't have to be perfect. You are bound to make mistakes occasionally, and that’s all right. No one is perfect. A mistake does not mean that you should be punished, it just means that you are human.

Friday, April 11, 2008

Don't Gamble: Trade Like a Professional

I grew up in a small town outside of Las Vegas. One summer a group of teachers decided to get jobs in one of the casinos during their summer vacation. For fun, they pooled their resources to see what would happen if they continuously played a single slot machine until it hit the jackpot. They lost about a fourth of their money. This story shows what we all know: Casinos don't let recreational gamblers break even. The free drinks, the entertainment, and hotel rooms have the sole purpose of getting recreational gamblers into the casinos to gamble, and lose. Casinos make sure the odds are in their favor. All they have to do is wait, let people gamble, and watch their coffers overflow with profits. Recreational gambling can be fun as long as you limit your losses and know when to quit. That said, if you don't manage risks, trade with a reliable trading strategy, and trade your plan, trading can be seen as every bit as reckless as recreational gambling.
Perhaps one can argue that any form of financial risk is a gamble, but surely some risks are more of a gamble than others, and some people approach trading with the mindset of a recreational gambler whereas seasoned, winning traders view trading as a profession.
To the general public, gambling has many negative connotations. When professional gambling is mentioned, most people immediately think of compulsive gamblers who seek out high levels of unpredictable risk and impulsively lose their paychecks, and money that is crucial to their basic survival. But gambling is not necessarily "bad" or "evil." Indeed, professional gamblers make a good living by taking the right kind of risk. It's all a matter of cultivating the right mindset. It is vital to make a clear distinction among compulsive, amateur traders and professional traders. Trading should not be approached as a form of recreation. Amateur gamblers, or social gamblers, are interested solely in enjoyment and entertainment. Smart recreational gamblers budget a fixed amount of money for gambling entertainment and spend it as they would for a movie, concert, sporting event or some other fun activity. Part of the fun of social gambling is getting a thrill, and the hope of finding Lady Luck on one's side and winning a big jackpot.
Traders who put on trades to get a rush and a feeling of euphoria act like compulsive gamblers. Impulsive traders have absolutely no discipline. Obviously, trading is no place for the trader with a need for shear excitement and risk. But many novice traders, unfortunately, make the mistake of applying the amateur, social gambling mindset to trading. They view trading as entertainment. If you've got money to burn, there's no harm in taking this attitude toward trading, but most of us want to make profits. And a social gambling mindset can quickly wipe out your trading account. If you are serious about trading professionally, changing this mindset is vital. You may find trading enjoyable, but the main objective of professional trading is making profits. Not only does that mean building winning trading skills, but careful risk management, discipline, emotion control, and executing trading strategies in a peak performance mental state.
Do you trade like a professional? It is vital to examine your risk-to-reward ratio before making a trade. It's also essential to trade with money you can afford to lose, and to limit the amount of risk you take on each trade. Make sure you can survive a drawdown, and avoid wasting your precious capital on low probability setups. Don't put on trades just to get a rush of excitement. Make sure you have a detailed trading plan and trade the plan. Be careful. Seek out high probability trade setups, and stand aside until you find a setup where you can win. In gambler's parlance, "you've got to know when to fold 'em." It's impossible to make money without risking it, but there is a huge difference between reasonable risk and recklessness. Winning traders know the difference and don't take unnecessary chances.

By Michael S. Shopshire, Ph.D; Mental Edge

Wednesday, April 9, 2008

Trade Like a Professional: Manage Risk

What’s the difference between reckless gambling and professional trading? For many, the answer is risk management. Many traders view risk management as critical to long-term success. Consider what a couple seasoned traders have told me about risk management when I’ve interviewed them. Mark said, "You can have a crummy trading strategy, but if you have good money management, you can make money. If you have poor money management, it doesn't matter how good the trading strategy is. You're going to lose in the end." Similarly, Chris observes, "You must have a survivability element so that if you literally wished to select stocks by throwing darts at a board, you would continue to survive market to market."

Risk management is viewed by many as important, but what's the best way to manage risk? Some traders use very specific rules for managing risk, such as risking a small percentage of capital on each trade. Other traders don't seem to have any specific rules, but may look at past performance as a key. (What is the volatility? What was the previous day's low?)

As important as risk management is, not all successful traders always manage risk. Some successful traders put on big positions when they believe they see a chance to make a huge, substantial win. When they believe they are right, they just take a chance. Doing so may lead to big losses when they are wrong, but they do it when they need to.

Is taking big risks a good idea? When it comes to trading, there is no one "right" way to trade. All you can do is consider the advantages and disadvantages of each approach and decide which approach you want to take. Whether you want to take big risks may depend on your experience and trading skills. If you are a novice trader, you have not yet learned how to use a set of methods that will reliably ensure that you will make back losses. In this case, it may not be a good idea to take big risks. For novice traders, it is often vital that they control their risk (for example, risking a small percentage on each trade) so that they could survive long enough to gain mastery as a trader. One reason trading coaches preach the virtues of careful risk management is that a common mistake among novice traders is wanting to "get rich quick" and putting on big trades to make big wins. The methods and skills of a novice trader, however, do not warrant taking such huge risks. What often happens is that they lose all of their capital on a few big trades and need to rebuild their capital before trading again. Rather than gaining mastery as a trader, they fruitlessly go through cycles of risking a lot, losing it all, quitting trading to rebuild capital, and so on. These novice traders never give themselves a realistic chance of learning how to trade consistently. In contrast, the novice traders who manage their risk can trade longer, and hopefully learn how to trade consistently before their capital runs out.

Once a trader becomes seasoned, he or she may want to "reach the next level" and make a lot more profit. Seasoned traders often reach an asymptote, at which point a self-imposed cap limits their profits. It's hard to break through this barrier, and no one really seems to know why. Very experienced traders who want to make greater profits need to start bending or breaking the rules a little to see if they can make greater profits and break through the barrier. This is risky, but some seasoned traders are willing to take the risk in order to make huge yearly profits. That said, they also can afford to take more risks. As seasoned traders, they have the methods and experience to take risks, but a novice trader does not. So even though there is no right or wrong way to trade, if you are new to the trading field, risk management has the advantage of allowing you to "survive the learning curve" until you find the once-in-a-lifetime opportunities to make you wealthy beyond your wildest dreams.

By Michael S.Shopshire, Ph.D, Mental Edge