My Trades – September and October 2011

Hello and welcome to the second month end report from Trading Simply.

Honestly, it hard been a hard couple of months. Both on the markets and in general. Which is why I am combining both September and October into one post. I have had many commitments away from the stock market and The Trading Simply Blog and I am finding found it increasingly difficult to keep both going.

I love both trading the UK stock market and blogging about it and I could not ever see a time when I would give them up. I suppose in the case of trading the stock market I would have to give up if I lost all my money.

But I’m not planning to do that! Using stops placed in sensible locations on all of my trades prevents this from happening to a huge extent which is one of the reasons why I never trade without them.

Key developments in September and October

The most important thing I did in October at least was to stop trading altogether. The second most important thing I did was to leave my second job. If I did not do that I would have had to give up trading the stock market and blogging. Moreover, the second job was preventing me from playing rugby and having fun. The lack of a good work life balance finally caught up with me. It served me well to work seven days a week for two years, but now I can really focus on my main job – which I love – as well as trading the UK stock market.

The Trading Simply Trading Plan

Since I stopped trading in October, I have had the opportunity to re-evaluate three key areas of my trading, namely:

1. The trading plan itself in relation to why I stopped trading
2. Am I using too many/not enough tools in my analysis of the stock markets?
3. Have the markets themselves changed in any so that I need to adapt my style?

Action #1

Well I can tell you, after going through my trades and comparing them against my trading plan I found that I had deviated slightly from my rules only to the extent that I was placing far too much emphasis on fundamental analysis. For example, I allowed the recent circus that has been EU politicians trying to figure a way out of the Euro mess to predict the future direction of individual markets as well as the global economy. I would then place tentative trades based on what I thought the future direction of markets would be looking for chart patterns to validate my way of thinking. This was nonsense. Nobody can predict the future and chart patterns are chart patterns, irrespective of whether me or a Nobel prize winning economist thinks that the future direction of markets will be x, y or z.

As you would expect, I have stripped out the weighting of the macro economic picture from the Trading Plan and rely solely on chart patterns. Any macro economic analysis on the blog is done purely as an intellectual exercise. There will be more emphasis on technical analysis for the blog in future.

Action #2

One thing I noticed was the simple moving averages that I had placed onto my charts. I really did not use them. They were a distraction so I removed all of them from my charts: 25, 50 and 200 day moving averages. It is said that institutions pay attention to the 200 day moving average but I am not an institution and so why use it. A better way to know what institutions are up to is volume. With all of today’s technological advancements, institutions are simply unable to hide the fact that they are either buying or selling large amounts of shares. The way to detect this is to look for what I call volume ‘spikes’. Take a look at the following chart:

Glaxo’s chart exhibits a number of volume spikes. The most notable for me is the one in March 2011; it’s the highest volume spike on the chart and coincided with a change in price that lasted for two months. The 200 day moving average would not have helped here because the price turned up and moved quickly and the 200 day moving average would have taken so long to turn up that I would have missed the move (which I did). Perhaps shorter term moving averages would have helped but the amount of whipsawing they produce is too much for me to stomach.

In the end, I have cleaner looking charts with absolutely no indicators relying strictly on price and price patterns.

Action #3

The final piece of the jigsaw is an extremely important one: the best shares to trade if you use only price action and technical analysis are the most liquid ones. What this means is that price patterns such as triangles, flags, bowls as well as support and resistance levels work best on the shares that are traded the most often. I found this out by doing an extensive study of price pattern behaviour between LSE shares and NASDAQ and NYSE shares. I looked at both highly traded shares and shares that show thin amounts of volume.

I found that the shares that are traded the most on these exchanges are the ones that are more likely to exhibit price action that produce chart patterns. I’m not sure why this is, all I know is that it happens and it happens enough for me to trade them with sensible risk management in place.

I don’t think that markets have changed per se, but I think that I needed to change the way I traded to better represent the way my psychology can handle an endeavour that will test it to the limits, probably sometime in the not too distant future. After all, if the markets did it to me once, there is no reason why they will not do it again.

My Trades

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Results

September

• Trading Simply -1.17%
• FTSE 100 -4.93%

October

• Trading Simply -0.16%
• FTSE 100 + 8.11%

When the Trading Simply portfolio is compared to the FTSE 100 the figures do not look that bad. Indeed the FTSE lost more value that the Trading Simply portfolio. But that is not the point.

Throughout September and October, the world was still in the grip of an economic crises. The politicians have so far not agreed to anything concrete that would really tackle the issues facing the world economy either. This has lead the financial markets to maintain their rather choppy price action at low levels of valuation.

From a technical analyses point of view, the patterns have simply not materialised but look as though they could as I write.

Learning Outcomes For August

• Ignore macroeconomic data and news
• Indicators do not add value to stock market analysis
• The stock market will test both my patience and psychology to extreme points at unexpected moments in the economic cycle

Thank you for tuning in 🙂

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Any trades listed above are closed trades as I do not make public open positions.

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