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Comparing share trading to spread betting

What is the difference between share trading and spread betting? Well the short answer is it requires less money down re up front and secondly of all you can go either way ie you can go long or short. With a stockbroker you normally cant go short unless you are a big player.

Anyway I found an excellent piece on how to compare the two, the costs associated with them and what the leverage you get with a spread bet means to your bank balance, Comparing a share trade to spread betting. It also has a little tool to compare different share trades with spread bets. It also has a bit of an explanation as to how you can hedge shares with a spread bet which I had never really thought about before.

Posted in Commodity Trading, FTSE Terminology, FTSE trading, Market diary, Spread betting. Tagged with , , , , .

By Dow Man
April 30, 2009

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Making a trade

How do you actually make a trade? What thoughts go through your head, what items are on your mental checklist? The answer will, of course, be different for all of us. However what I’m gonna try to do here is create a model trade – a template if you will. This template is aimed at newbies who know the basics of spread betting – leverage, stop losses, going short etc… but need some way of stringing it all together. More experienced traders, please read and make comments at the bottom of the post. I have no monopoly on trading knowledge so come one, share some of yours.

I’m going to try to come up with a 9-step process (sounds like an AA plan or, even worse, a self-help programme)! I’ll try to cover all the basics and I’ll, errr…. try to do it in a blog that only takes a few minutes to read. Gulp!

Guiding Principles

Before I launch into this I’m going to set out a couple of principles that I think are critical for new traders.

  • Learn, Then Earn: Trading is not an easy way to make money – it takes some discipline and some knowledge. So some of the rules set out here aren’t necessarily set out to maximise your profits, but they are designed to get you up the learning curve as soon as possible
  • Emotions Are Your Biggest Enemy: When people start trading they often underestimate the effects of fear, greed and even boredom on their trading. Where a tool helps to reduce these, I don’t hesitate to recommend it.

Right, let’s dive in.

Step 1 - Choose A Timeframe

If you are just starting out your trading timeframe will probably be determined by your daily routine rather than anything else. If you can trade through the day then you might have a timeframe of a few hours: i.e. your ideal scenario will be to enter a trade and then exit it (for a healthy profit, of course) a few hours later. However if you are aiming to trade in the evenings only you might have a timescale of a few days – so your ideal trade will be closed (and your profits made) perhaps three days after opening it.

Either way, your timeframe will inform what you do in much of the rest of this process.

Step 2 – Choose A Market

Hah, tricky one this. paddypowertrader for instance, offers a bewildering variety of instruments: indices, currencies, commodities and literally thousands of shares.

If you are interested or have a feel for a particular market, I suggest you start there. For example if you have been investing in shares for years, go with that. Don’t let a flashy headline about oil or a friend’s comment about the US Dollar distract you. Build on what you already know. Do keep to the larger shares though – tighter spreads will make it easier to turn a profit.

If you don’t have any particular starting point then all I can do is offer some general advice, and invite others to comment below.

– Avoid markets that are (or can be) fairly thin in liquidity. Oil trading, for example, is dominated by a relatively small number of banks. Same might be true for any number of the smaller currency pairs.

– Avoid massively volatile markets (i.e. ones where the price jumps around like a hare on amphetamines). Volatility isn’t a bad thing but it does require good risk management, and that’s something that needs to be learnt.

So where do you start? If you really have no preference I’d suggest either indices or currencies. Both have tight spreads and both are sufficiently well-traded that it is hard for any one player or players to affect the price.

By the way you might find it interesting to know what most clients bet on. Indices are generally the most popular bets, followed by currencies. And if you want more detail keep an eye on the ‘open positions’ widget near the top right of our home page.

One final piece of advice before I leave this step. When starting out it is better to choose one instrument, learn about it and give it a proper go. Initially you need to find out the characteristics of that instrument – for example the DAX has far more manufacturing companies than most indices, while at the time of writing Ireland’s ISEQ20 ETF is heavily dominated by just one company, CRH. Later on you’ll get a feel for the more abstruse stuff, like what which pieces of news are more likely to affect its price and what times of day are the best to trade it.

Step 3 – Choose A Strategy

Most of the literature for new traders emphasises the need for a strategy, but maddeningly they rarely explain what a strategy is!

When talking about strategies, the first thing to consider is how to make your trading decisions. There are two main approaches to consider: those that are based on fundamental knowledge and those that are based on graphs.

Fundamental decision makers generally rely on having a good knowledge of what is going on in their market and making decisions based on whether they think an asset is under-priced or over-priced. If, as a fundamentals bod, you think something is under-priced (perhaps because the price has over-reacted to some bad news) then you buy (go long). The assumption is that others will soon realise what you know and the price will rise. Conversely if you think something is over-priced (perhaps it has over-reacted to some good news) then you sell (go short). Either way, if you are right you make money and if you are wrong you lose it.

Technical Analysis (TA) strategies rely on using and interpreting graphs. There are hundreds of Technical Analyses out there. If you want to read up on them we have some great blogs on the basics of charts, moving averages, Fibonacci levels and much more.

However an example of a simple TA strategy might be to find an instrument that is range-bound, i.e. having trouble breaking through it’s support and resistance levels. If the instrument approaches it’s support level then buy it and hold it until it has either returned to the middle of it’s range (when you sell and take your profit) or it breaks through the support (when you sell, take your loss and move on to the next trade).

Where will you sit on this scale? Trading is a voyage of self discovery …(cue mystical music).

Step 4 – Choosing A Direction

If you think a price is going to rise you ‘go long’ and if you think a price is going to fall you ‘go short’. Simple, no? And yet one of the most frequent mistakes we see are clients who have a ‘long bias’ – in other words they are more likely to go long irrelevant to whether the market is trending upwards or downwards.

Even a cursory glance at a FTSE chart for 2008 shows that short positions on UK shares were more likely to win than longs ones. Nevertheless throughout 2008 we saw a substantial number of our clients trying to trade the bounces – and many failed.

Maybe we, as humans, prefer to go long because by nature we are optimists. Maybe the media coverage of stocks is largely aimed at investors who can only go long, and that influences us. Whatever the reason, spread betting allows us to go long or short, and to be successful we need to be as ready to trade in one direction as the other.

Step 5 – Choosing Entry And Exit Points

Once you’ve chosen the instrument and the direction you want to trade it, the next item on the agenda is to choose the points you want to get in and out.

How you do this will be completely dependent on the approach you chose in step 3. For a fundamental approach there simply aren’t any hard and fast rules. Text book theory says that one should work out the theoretical value of a stock (based on concepts like discounting the value of the company’s future earnings). However that approach is much better suited to long-term investing than short-term trading. More likely a fundamental approach will see people make judgements about whether something is over-valued or under-valued, and then either use their gut feel or graphs to choose an entry point.

By comparison, a Technical Analysis approach might make the entry quite straightforward. For example, if you are using the range-bound strategy from above and you instrument is trading in a range of 100 points, your entry point may be when the price reaches within 10 points of the resistance level.

Step 6 – Exit Points

Once you are in a trade one of two things will happen: the price will move for you or it’ll move against you.

If the price moves for you there are any number of ways of deciding when to exit the trade and take your profits.

One of the oldest maxims in the trading world is to ‘cut your losses and let your profits run’. Which means that if the price is moving in your favour then you shouldn’t close the trade until the trend reverses. It’s one exit strategy but (and I know a lot of people will disagree with me) I don’t recommend it. Not for new traders anyway. Following that strategy requires you to make a decision during the trade, at a time when the trader’s enemies of fear and greed will be at their most potent.

Other alternatives include deciding on a profit target from the outset or using trailing stop losses. Both are easier on the old emotions!

Of course the price might move against you too. So, before you put on a trade, decide where you want to get out of the trade. And then, once the trade is on, move your stop loss to this level. Again there are no rules I know of regarding a fundamental approach to setting stop losses. Maybe that’s why many people use Support and Resistance or Moving Averages to help. Anyway there’s plenty more about stop losses here but to start with remember to keep things simple.

Step 7 - Decide On Your Bet Size

The size of your bet (i.e. the stake) bet and your stop loss level are the main things that determine the risk of the trade – and managing your risk is critical to being a good trader. The theory says you should decide on how much of your starting balance you are willing to risk. Once you’ve decided that, and if you know where your stop loss should be you can work out the bet size.

As an example let’s say you have €5000 in your account. You want to risk no more than 5% of that: €250. If your stop loss is 50 points away from where you’ll enter the bet, then your stake can be no more than €5 (as €5 x 50 points = €250).

Step 8 – Run The Bet

At this point you should know what market you want to bet on. You should also have a ‘strategy’ in that you know what direction to trade, where you will get in, what your profit target is and where your stop loss will be. Voila! You have a strategy.

Now comes the easy part … wait to see if your entry point is reached and, if it is, spring into action. Put on the trade and, once done, don’t forget to move your stop loss to where you want it. Oh, and be careful not to bend your rules. Better to let a few trades get away than to break your trading discipline – at least at first.

It also makes a lot of sense to test your strategy on a demo account before risking any of your own hard-earned dosh.

Step 9 – Assess, Learn And Finesse

Once the bet is closed you’ll know immediately whether it has worked or not. But to find out if your strategy is any good you’ll need to run it for a good few bets. If it’s not working you might look at changing things around.

That’s All Folks

And that’s it. I’ll end with one last piece of advice. Trading is hard work, but it can be rewarding both financially and in other ways. So enjoy it! If you lose that sense of enjoyment you’ll lose the most valuable part of trading.

Hopefully this article will be of some use to beginners and, if you are an experienced trader, please do add your comments below. Share some of your hard-earned know-how – you were a new kid once too!

Posted in Commodity Trading, FTSE Terminology, FTSE trading, Spread betting. Tagged with , , .

By admin
February 11, 2009

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Simply trade the FTSE

Growth in the UK last week, or rather the lack of it, was even weaker than expected. Traders ignored a dubious rise in retail sales and sold Sterling down to yet another new low. Equities are pushing ever closer to November’s lows.

Last Friday was a light day on the trading front; I had to see a man about a car so missed the early Dollar strength. When I got back I didn’t fancy selling Sterling at a multi-year low, and buying it would have been spitting into a very strong wind. The US session usually offers between 80 and 160 pips on a quiet day so I’m sitting back with my charts and watching to see which way the US folks go.

Earlier last week, late trading saw EURGBP crash through my tidy uptrend line, but by Friday normal service had resumed with a new recent high at £0.9472.

I closed out my FTSE short late yesterday purely because I didn’t fancy much exposure to the vagaries of overnight markets. It was the wrong move, but that’s OK; I’d locked in a profit and my short bets in Lloyds and HSBC are showing small gains this morning. My exposure isn’t much, but I still need to decide whether to close them out ahead of the usual weekend banking headline lottery.

I trade FTSE regularly, but I’m a simple bloke and recently most of my attention has been on the forex market (my missus will tell anyone that I can’t multi-task). I’ve been trading FTSE on the short side, but not with the determination, or size, that I used so successfully in the autumn.

But this chart makes it look so simple; when the index rises up to the downtrend line, sell it. Go and have a shot of caffeine then come back and book your profits! So, what’s the chart telling me now?

Two things:

1) I should look to sell any rally up to the 4050 area (although there’s room for a rally up to 4100 on today’s candle). Of course it’s only a chart, and charts do go wrong so I wouldn’t blindly sell there, but I would watch the test of the trend line and sell on a failure to hold above it.

2) So far FTSE has found support at the 3950-4000 area. A lot of the clever people are targeting a break of 3953 for full speed ahead to November’s lows. Oh, and something else worth watching out for is the weekly close on the S&P 500. The pre-open price is 811 so it should make for some interesting trading.

With GE’s results out the way there’s no data out from the US today.

Happy Trading

Posted in FTSE trading, Market diary, Spread betting. Tagged with , , .

By admin
February 10, 2009

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Spring cleaning the banks

In this blog, I’m going to look at another ‘way out’ for the Irish banking system. A “bad bank” scheme is where a bank splits off all of its non-performing assets / bad debts into a “bad bank”, which is then usually managed by the government. It was successfully introduced in Sweden in the early 1990’s and has been Switzerland are adopting this tactic in this crisis.

Sweden’s “Bad Bank” Scheme
Financial deregulation in the 1980’s fed a frenzy of real estate lending by Swedish banks. With no regulatory oversight they didn’t worry enough about whether the value of their collateral might evaporate in tougher times (sound familiar). No prizes for guessing what happened next. Yeh, property prices imploded and the bubble started bursting in 1991. By 1992, Sweden’s banking system was, for all intents and purposes, insolvent.

So what did the Swedish government do? Firstly they guaranteed all bank deposits and creditors of the nation’s 114 banks (again to us Irish this’ll sound familiar). But they went a lot further. They acted quickly and comprehensively: investing government funds and setting up “bad banks” to manage the banks non-performing assets i.e. bad debts. The state-owned “bad banks”, named Securum and Retriva, then restructured the non-performing assets before selling them back into the market when the time was right. The initial outlay was about 4% of GDP and, in return, the State received a 20% stake in the banks. Eventually markets stabilised and with the banks reorganised, by 1994, they were back in profit. The Swedish state then sold their 20% stake back to the market. The eventual cost was somewhere between 0% - 2% of GDP, as estimates vary widely. Even if nearer 2%, it was cheap as the economy was swiftly put on the road to recovery.

Swedish GDP Growth (1990 - 2007)

Switzerland Adopts The Scheme In This Crisis
A nice solution for the 1990’s, but is a Swedish “bad bank” scheme still viable in this crisis? The Swiss government thinks so and have set up a $60B “bad bank” for UBS. What’s happening is that UBS will take the losses on the first 10% ($6B) and then the government will be liable for any potential losses after that. UBS’s benefit is that they now know how much they are going to lose through write-downs. They can now move forward with their normal operations and start planning with more certainty for the future. The Swiss government benefits from a generous yearly payment and a 9.3% stake in the company.

Could It Work In Ireland?
So this “bad bank” scheme is being tried in the current banking crisis too. I think that it could be successfully applied to Ireland.

What would need to happen? Firstly all non-performing assets of the banks would need to be substantially written down; no more of the piecemeal writes-downs we have been seeing. This would reduce the government’s liability.

Once this is done, all the bad commercial and residential loans could be consolidated under the management of the Irish State. They can then appoint restructuring experts to do what is needed for the greater good of the economy. If the cost was 4% of GDP, that’d work out at around €6 billion. But this expenditure could certainly be justified in an once-in-a-lifetime crisis. Plus the government will also have their substantial stake in the banks, which they would sell-off (hopefully at a profit) in a few years time.

Effectively the banks would be passing on their worst loans to a debt collector. But this debt collector, the government, could afford to take more of a long term view to the loans. For example the government could restructure property developer’s debts in a way that gives more benefit to the economy as a whole. Their efforts could ensure a minimum amount of bankruptcies in 2009 and 2010. The mortgages of struggling families could be restructured so that a situation of mass repossessions (such as the one occurring in the US) doesn’t happen here. Essentially the government could do what is needed to ensure a recession doesn’t turn into a depression.

What Will The Government Do?
Right now the government is very reluctant to get further financially involved in helping the Irish banks. Their budget is strained as it is and likely to get worse; they don’t want to have to take on the debts of the banks too. But as the public banks have seen their share prices fall by an average of over 92% from their highs, the industry is dealing with a systemic failure. As Sweden’s Minister for Fiscal and Financial Affairs Bo Lundgren said in 1992 “you can’t rely on the private market sector or markets alone to solve systemic banking problems”. He’s right. The government needs to finally step in and take decisive action.

How Would Bank Share Prices React?
Any “bad bank” scheme would see a dilution of existing shareholders holdings as the government takes its stake. But significant government intervention is already priced into share prices. In my opinion, the stock market would react positively to a “bad bank” plan. There would be a short term rally in banking share prices as much of the uncertainty would be taken out of the equation. The ISEQ would probably also jump too as other Irish companies indirectly benefit. This belated government move could signal the bottom for the forward looking stock market.

Into the medium term, I think that a “bad bank” solution would result in the Irish banks being a good long bet. They would benefit from getting a lot of their toxic loans off their Balance Sheets. They would also effectively have closure to the open question of how much they are going to lose through write-downs. They would then be able to move forward with their normal operations and start planning with more certainty for the future. It is obviously a long road back to their share price highs of February 2007, but a general “bad bank” could mark the beginning of the end of the banking crisis in Ireland.

Posted in Banks, FTSE trading. Tagged with , , .

By admin
January 28, 2009

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Banks for everyone

Only three months ago, Gordon Brown boasted that he was the savior of the banks. Unfortunately it’s looking increasingly likely that he is going to have to have to repeat this ‘miracle’, this time through nationalisation. With the UK short selling ban now repealed, you can short the UK banks and make a lot of money if nationalisation does occur.

There is no official plan to take more UK banks into public ownership at the moment or set up a “bad bank” system. So why did the banks share prices fold this week? Well, an increasing amount of market analysts now believe that the UK is on a course of “creeping nationalisation”. Nationalisation would result in shareholders losing their collective shirt. As the stock market is a forward looking mechanism, it has to discount the banks share prices by the probability that they will be nationalised. Some have been discounted by more than others. Let’s have a look at them.

The Current State Of The UK Banks
Royal Bank of Scotland Share Price

Royal Bank of Scotland is undoubtedly top of the list for nationalisation. Following their warning that 2008 losses could stretch to £28bn and the government’s stake could reach 70%, their path to public ownership seems to be inevitable. It looks like a disastrous end to a company, now worth only £5bn, that paid £50bn in cash for ABN AMRO only 18 months ago. Lofty ambition or foolish hubris?

The Lloyds TSB shotgun acquisition of HBoS resulted in it picking up about £21bn of assets for about half that price. They also got substantial bailout funds to help make the new Lloyds Banking Group work. But the risk now seems to be outweighing the benefits. Lloyds is already 43% state owned and if they accept the UK government’s new offer, the taxpayer will become the majority shareholder. This is not a situation that management would want, but they will find it difficult to resist the new deal for very long. And if they can’t prove the viability of their independence in the coming months, the government will be just forced to step in anyway. The clock is ticking.

Barclays could easily be in the same state as RBS, but for the fact that their bid for ABM AMRO failed. This has helped them avoid the need for any bailout money so far. But the clock is ticking for them too. They decided to buy Lehman Brothers US operations for £1bn when they really couldn’t afford it. Their balance sheet is looking vulnerable with a lot of unknowns. And any time in this crisis when the unknowns have become known, share prices have dived. Barclays are in a position where they will have to take some sort of government funding. But there is increasing market speculation they are also heading towards nationalisation.

HSBC are going to survive (famous last words!). They actually have more deposits than loans in the UK which gives them the ability to absorb losses and write-downs, which have been plentiful. Their size, diversification and creditworthiness have seen them become the biggest bank in the world by market capitalisation.

Standard Chartered Share Price

Standard Chartered have also performed admirably throughout this crisis, mainly due to their focus on emerging markets, especially Asia. They continue to deliver strong results and positive future guidance, meaning they are a rare growth company in these times of rapid de-leveraging.

More Trouble For The Irish Banks

In Ireland, the same nationalisation questions are being asked. Allied Irish Bank and Bank of Ireland have seen their share prices plunge 58% and 57% respectively since the start of the week. They need more funding and can’t seem to entice private investors to give it to them. Finance Minister Brian Lenihan has said there are no proposals to nationalise either of them… but he was saying the same thing about Anglo Irish Bank.

The third remaining Irish public bank, Irish Life & Permanent, isn’t in as much danger of being nationalised (at the moment). They weren’t part of the government plan for recapitalisation as their funding needs are much lower than the other two. The Irish Life part of the business looks to be fine – if only they could get rid of the Permanent TSB side!

Possible Trades
The UK financial shorting ban has been revoked (for now anyway) so markets can return to some sort of efficiency. But which banks are worth shorting? If your view is that one of the above is going to be nationalised, then there is still a lot of value in going short. Barclays have a market capitalisation of about £5.5bn which means it has plenty of room to fall further. Also if your view is that the world economy is going to get significantly worse, there is potentially value in shorting Standard Chartered.

On the other hand, this huge sell off could be overkill. The respective governments do not want to have to resort to nationalising their whole banking systems. Everything else will be tried first. As a result there could great value out there. AIB and Bank of Ireland, with retail branches in every town in Ireland, are now valued at a mere €533mln and €356mln respectively. But if you see queues outside your local branch that would be a good signal to get rid of your long position… fast!

Another possible trade is a pairs trade, explained in the hyperlinked blog. Here you would go long on the bank that you think will outperform and short the bank you think will underperform. In this case, you don’t really have to make a call on the banking industry in general. You just have to pick the banks that will do the best and the worst, although that’s not an easy task itself.

Conclusion
The sell off this week has been caused by speculation rather that hard fact. The market has decided to shoot first (and shoot often) and ask questions later. This reaction to what can only be described as rumours has undoubtedly been over the top, but that’s what the market has been driven to after been caught unawares so many times in the past.

NationalisationFor me, I don’t think that Allied Irish Bank are in such grave danger, so I think there is good value to a short term long position on them.

Whatever happens; the person who gets it right will make a lot of money.

Posted in Banks, Spread betting. Tagged with , .

By admin
January 27, 2009

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The Obama effect

Once again UK officials managed to put the skids under Sterling. The Pound smashed the 7-year low against the Dollar and hit an all-time low against the Yen.

I’ve said before that, even if they deny it, it suits the UK’s men in charge to have a lower currency. The usual depreciation downside, higher inflation, isn’t the number one worry, but a lower exchange rate to help what’s left of its export sector would do nicely thank you.

And what better way to give a green light to the forex market than to combine a multi-billion giveaway with a request for the banks to say just how much mess they’re really in? So on the day that RBS hinted that it had lost more than any UK company in history, the Prime Minister admits that he hasn’t a clue just how bad things are!!! Interesting to note that 93% of the open positions on the paddypowertraders Home page are long GBPUSD. After a 600-pip drop from 5 0′clock yesterday, that could be a canny move.

On the trading front I’m still short of FTSE and Lloyds, but yesterday’s short bet on EURUSD was stopped out at $1.3156 (boy does that look a long way off now!).

This morning I added a £2 short bet on HSBC at 508.49. The price had been holding up well, relative to the other banks, and this morning provided a golden opportunity to short the opening rally. Doing the school walk meant that I missed the best prices, but I’m happy enough with the position.

But the real earner was another short bet in GBPUSD. I thought I’d missed the boat as the rate was already 200-pips lower by 7 o’clock, but once the break below $1.42 was confirmed I sold £5 at $1.4181. As usual I closed out part of the trade for an early profit, buying £3 at $1.4156, but resisted the urge to deal again until the break below $1.40. I reckoned that area might put up some resistance so bought back £1 at $1.3996 and trailed my stop down to $1.4021 where I was hit later on. But that’s OK; the trade put £400 plus in my back pocket, leaving me with just my short equity bets to manage this afternoon.

Hey! Check out the Lloyds price. Does some-one know something there? It’s just gone 38p bid. HSBC is holding up well at 496p-perhaps benefiting from switch activity. I’ve just closed out some of my Lloyds short at 40p and sold some more HSBC at 490p. And I’ve just closed out my FTSE short at 4115. There shouldn’t be as that’s far too predictable, but you can never tell with the Americans. If we get a decent rally I’ll be looking to put my short back on again.

Happy trading

Posted in FTSE trading, Market diary, Spread betting. Tagged with , , .

By admin
January 23, 2009

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Showing some restraint

Last week the Dow popped down for a close look at 8000 and decided not to bother. The screens were full of reasons for a savage bounce but, more importantly, will these levels hold?

Not a great week’s trading though; luckily a late-in-the-day forex trade bailed out some poor trading in FTSE. I made money by closing out a short bet on FTSE, then made the mistake of trying it again after blisteringly bad numbers from Citigroup and Merrills. But in a week of bad news, traders just couldn’t be bothered by these numbers; after all, the banks only need to pull the arm on the taxpayers’ fruit machine and money will come pouring out.

Needless to say the loss wiped out the overnight profit as I stopped out near the high of the day (doesn’t that just always seem to happen?).

Undeterred I went £2 short this afternoon at 4208 and I’ll probably run it over the weekend.

I’d been prepared to leave Sterling alone towards the end of the week. I missed the early move and didn’t fancy chasing it near $1.50. But as the price retreated back to the $1.49 area I reckoned there could be a trade on. I keep a record of the daily trading range for GBPUSD; it’s generally over 200-pips, but today’s action fell well short of that. The key was betting on the right direction-a bounce off $1.49, or a decent fall through it.

The first visit to $1.49 saw a worthy bounce, but this was short-lived and next time around I decided to have a go at it. Normally I’d wait for a confirmed break of the big figure before committing myself, but the price action was giving a strong hint at breaking through.

I sold a fiver at $1.4902, with a 40-pip stop. The plan worked and I closed out £3 at $1.4878 and $1.4862 (Friday afternoon is no time for heroics). I bought back £1 at $1.4803 and still have £1 running, protected by a stop at $1.4852. Nice one Charlie!

The charts looked tempting on Friday evening. I don’t like holding forex positions over the weekend, so I left that trade for Monday. The Euro’s had a good bounce from the same low as last Friday, but I still think it has to go easier, regardless of interest rate policy. Discipline, discipline; I shut my screens down early to avoid the temptation.

Hey! Here’s a good tip. If you need to distract yourself from the markets, but need a subsitute, sit down with the missus and watch Coronation Street. Now that has more ups and downs than the FTSE.

Have a good one.

Posted in FTSE trading, Market diary, Spread betting. Tagged with , , .

By admin
January 22, 2009

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Bailing out the banks

European banks took a good kicking this week; Her Royal Highness’s Bank of Scotland plunged over 50%, kept in good company by the newly formed Lloyds-HMG-HBOS, down 35%.

My morning began with a nasty reminder of the drawbacks of using stops overnight. On Friday, I decided to run my £2 FTSE short bet over the weekend. I left my trade in good shape; I was reasonably in the money with a stop loss at 4198 locking in a small profit.

Well, not exactly. Firstly, I tend to leave the desk a bit earlier on Fridays to get a headstart on the weekend, so I missed the mega sell-off that began just after the close. Secondly, the subsequent rally wasn’t quite enough to stop me out, but this morning’s optimistic open was. The early mark-up took me out at 4208, way above my stop, back to where I sold in the first place.

My more recent trades haven’t been too adventurous, what with the US being on holiday on Monday. In the early market I sold GBPUSD for a £50 profit and made a further £20 by shorting EURGBP. And talking of EURGBP, although I missed out on Friday’s equity collapse by leaving early, at least it prevented me from opening a short in EURGBP. Now that would have made my Monday morning tea taste that bit more bitter.

At the moment I’m running three short bets, opened this morning:

1) I’m short £1 FTSE (again) from 4195.
2) I’m £2 short of EURUSD from $1.3196. I sold £5, but closed out £3 at $1.3186 to ensure a gain. This one’s working quite nicely, but I’m giving the bet some slack with my stop way back at $1.3186.
3) Not done this for a while (and really should have done it last week when I first thought about it) but I sold £7 of Lloyds TSB HBOS (whatever) at 76.3p. I’ve since bought a scrap back at 64p, leaving me short of a fiver. I’m not sure about this one; at 68p it could be a screaming buy, but the price action seems to be following the pattern of Northern Crock, Bungle & Bodgit and RBS.

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The Eurozone still looks to be falling apart at the seams. Today, Spain lost her treasured AAA credit rating, following on from last week’s downgrading of Greece. And over the weekend an ex-official from the Irish central bank called for the Emerald Isle to threaten withdrawal from the EU unless it’s owners, France and Germany, bother to lend a helping hand. Whichever way you shake the tin, it doesn’t look good for the Euro.

This week sees CPI and GDP releases in the UK and a big step-up in US corporate earnings reports.

Happy Trading

PS. If you’re going through a tough time with your trading, try and get a look at Million Dollar Traders (Monday, BBC2) to see how bad it can get.

Posted in Market diary, Spread betting. Tagged with , , , .

By admin
January 21, 2009

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The payroll numbers

So the Payrolls numbers were better than expected, weren’t they? I’m not sure if traders knew what to think (me included) and last week’s action has had more to do with position squaring than fresh views.

The headline payroll release of 524,000 sacked workers was close to consensus, but in reality much better than feared by the market. But, but, but the payrolls numbers warrant further investigation. For example:
* Revisions to the two previous months add a further 145,000 to the jobless total, which is more than 1 million for the past two months alone.
* The unemployment rate came out at 7.2%, higher than the forecast 7%.
* Manufacturing lost 149,000 jobs this month compared to a forecast 100,000.

Irregardless, traders weren’t sure what to make of it all; an early rally in equities petered out as did a dollar sell-off. More recent trade has seen the Dollar strengthen, even against the now-mighty Sterling. And equities have slipped a bit.

My trading last week was as muddled as the market reaction and ended on a slightly sour note. I’d bought GBPUSD in a fiver at $1.5187 and made just short of £200 by the time I’d stopped out the following morning.

But after the US data I made peanuts on a long GBPUSD trade, lost £90 on a short GBPEUR trade (yep, how could I lose money on that?) and lost £36 on a short EURUSD trade (again, how could I lose money on that today?).

The reasons for my losses were the reasons why I shouldn’t have dealt in the first place. I was indecisive in jumpy, volatile markets. And because they were so jumpy I traded with tight stop losses, which were invariably hit just before the market went where I’d hoped for. I still need to suppress the instinct to get stuck in, when occasionally it makes more sense to watch from the touchline.

My EURUSD trade was frustrating, but thankfully only in a token £1. I decided to sell on the break below $1.35, at $1.3496, with a stop at 1.3532. But I was too early in my call; the price consolidated after the earlier 200-pip fall and just reached far enough to trigger my stop before crashing down to $1.3470. It wouldn’t have been a big profit, and it wasn’t a big loss, just professionally irritating.

The profit for that day ended up at a net £90, but over the week I made a decent shade over two grand; a better start to the year than Marks & Sparks.

Posted in Uncategorized.

By admin
January 14, 2009

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Best Trades of the Year

Following on the Dumbest Trades of 2008, I’m going to look at what would have been the best trades of 2008. Unfortunately I didn’t manage to back any of these trades myself, but I’m sure that plenty of you traders out there did, so congrats to you. For the rest of us, hopefully we might pick up some monster trades, like the ones below, in 2009.

The New Year isn’t a time for dwelling on the past so I’m only going to use companies that are still going on in my analysis. This rules out bankrupt companies (e.g. Lehman Brothers) and companies that have been acquired (e.g. Anheuser Busch). You can’t trade (and more importantly, profit) from these companies anymore so I’m going to leave them out.

Equities

In a normal year, the best trades are longs. This is because when you short, the maximum percentage move you can get is 100%, down to zero. But when you go long, the potential percentage gain is undefined. But then you have a year like 2008. Of the 797 analysed equities that are still going, not one of them added over 100% to its market cap in 2008.

So the best equity trades of 2008 are all shorts. In fact, 36 companies have lost more than 90% of their value in 2008 (and that’s not even including those that went bankrupt!) and no company that is still treading water has lost more than Anglo Irish Bank. The former all-star of the Irish Celtic Tiger is down a whopping 98.63% on the year, falling from a lofty €10.94 to a mere 15c. Leveraging up 20 times, your return on that trade would now be 1,973%, before the transaction costs.

Anglo Irish Bank's Share Performance in 2008

On the other side of the coin, the biggest equity gainer on the year is a rapidly expanding British oil company called Emerald Energy. They are up 68.50%. There are not too many equities that have a 2008 share price picture like the one below. Despite being the most successful company in 2008, you would have still been more profitable if you had closed your long in September and shorted them then.

Emerald Energy's Share Performance in 2008

In total, 35 equities advanced in 2008 versus 762 fallers, leaving an advancer/decliner ratio of a shameful 0.047. Thank the lord that spread bettors can short or else it would have likely been an awfully painful year!

Indices

As indices aren’t so exposed to any one sector, they must have performed better than the non-diversified individual equities? Indeed they did, but that doesn’t mean that any of them are up on the year. In fact the best performing index is the FTSE 100, which has “only” lost 34.70% in 2008.

So the best index trade for 2008 is again, unsurpisingly, a short… and again, it’s Irish. The ISEQ 20 has lost 66.30% of its value in 2008, a remarkably large amount for a seemingly diversified index of 20 stocks.

Commodities

Next, we move on to commodities and the unquestionable “Trade of the Year”: long oil into July and then short it for the rest of the year. I’ll use Brent Crude Oil as my example, but a similar trade in US Light Crude Oil would have paid off as spectacularly. Going €1 long on Brent at the start of January would have been worth €1.51 by the time of Brent’s high of $147.30 in July. Closing that long position and moving your €1.51 into a short Brent trade would now result in your initial €1 being worth €2.63. That’s a 163% return before we even start to take into account leverage.

Brent Crude Oil's Price Performance in 2008

FX
Moving to FX-land, 2008 saw some of its biggest moves since the 1970’s. With the chaos in the financial world, the unwinding of the Carry Trades and the collapse in commodity prices, some countries currencies took a severe hit. None more so than the South African Rand (ZAR). Before leverage and transaction costs, USD/ZAR climbed 37.70% in 2008 and EUR/ZAR rose a handy 33.16%. As FX is supposedly seen as less volatile than other markets, you could leverage your position to over 100 times with paddypowertrader. I’ll leave it down to you to work out how much you could have possibly made with a successful bet against the South African Rand.

Bounceback Stocks

In the US, there is a famous stock market phenomenon called the “S&P 500 Dog Effect”. This holds that stocks that have fallen strongly in the three years to the 30th of September bounce back strongly in the following 3 and 12 months. Unlike many published mechanical trades, this bounceback effect has been shown to still work well for FTSE 350 shares for 2003 – 2006.

From my list of 797 equities, below are the 10 worst performers in 2008. While it’s extremely high risk to go long on any of these near-bankrupt companies, it is certainly an interesting theory.

The 10 Worst Performing Equities in 2008

Conclusion
What this quick analysis shows is that 2008 has truly been a catastrophe for the financial markets. Not since the Great Depression have so many equities and indices lost so much value. Even early-08 bright lights like Brent Crude Oil are going to finish the year way down.

But remember that with spread betting, you can go short and make a lot of money off the anarchy.

Posted in Market diary, Spread betting. Tagged with , , .

By admin
January 8, 2009

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