Traders' Delusions

Sharemarket Warning for Inexperienced Investors and Traders

Posted in Australian Markets | Traders' Delusions, Submitted by Trading Critic on Sun, 2009-07-26 23:01.
Sharemarket Warning for Inexperienced Investors and Traders

The sharemarket is not a place for inexperienced investors and would-be share traders. This is a warning for mum and dad investors as well as stock traders who are dreaming of a quick buck. Before you step into the markets, you must ask yourself why do you want to trade the stockmarket?. You do not want to be gambling your money away by trading. You also need to be realistic about your expected returns. This blog Trading Critic is in itself a cautionary tale of the financial industry surrounding the markets: share trading, stockmarkets and forex trading. There are many things that can go wrong for the retail trader. That said, many things can go right too. What is important is that you are aware of the pitfalls and dangers of trading and investing in the stockmarket before you actually execute any orders.

What can happen to unsuspecting inexperienced sharemarket investors and traders? The positive outcome would be you receiving a positive cashflow from the dividends and a healthy capital growth rate for as long as you hold the stock. On the otherhand the negative outcome is totally the opposite (obviously), while you can't receive negative dividends, you would probably experience a negative capital growth with the fall of the share price. Hold on – isn’t this all OBVIOUS?! Why are you wasting my time? No I’m not. Another pitfall YOU MUST WATCH OUT FOR, a warning you must heed is to read and understand the fine print of a stock before you execute the order.

Sharemarket Warning: Read the Fine Print

You have been warned: read the fine print. Take in point: the case of BrisConnections which has been in the news lately. You know the company which Nicholas Bolton of Australian Style Investments made some money by buying up a substantial stake ($47,000 with $97 million worth of liability) and then selling the voting rights to Leighton Holdings. The actual BrisConnections share which could have been bought freely like any other stock on the Australian Stock Exchange had some fine print attached to it (you had to either just "know" because you read the financial news or have read their Product Disclosure Statement (PDS)). The fine print was that the stock was structured with some attached debt. Similar to T3 in that you were expected to pay an instalment by a certain date. Now there are at present 135 former unit holders of BrisConnections whose companies are at risk of being wound up or individual shareholders facing bankruptcy because they could not make the extra payments they were obligated to on their units. Here is a doctor who was affected by this:

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Greedy and Gullible: Make $5692 in 7 days

Posted in Traders' Delusions, Submitted by Trading Critic on Tue, 2007-06-19 23:06.
Advertising to the Greedy and Gullible: Make $5692 in 7 days

Are you greedy and gullible? I hope not. But if you are reading this post, you must either be in the business of making money or just in the search for making an easier buck. Flip open the classifieds section of your local newspaper and you'll find plenty of programs promising easy money. Make $5692 in 7 days selling health supplements, cosmetics, jewelry, lingerie or clothes. The advert claims the money is easy. "Fire your boss!" They claim. Of course, these types of advertisements come in all shapes and forms, some extremely tacky and are obviously targeting the very desperate to advertisements that target the "smart players" or the white collars with something that may seem very easy to do but in reality it is rare to succeed. I am not going to point fingers at companies, but they are out there. Some are MLM companies and others are involved in share trading or options. I've seen companies try to entice people to buy their products purely on the basis of gullibility and greed. Other products companies try to promote on this same pretence are resume products, software and other informational "learn to do it yourself and sell your service" type courses.

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Share Trading is Gambling

Posted in Traders' Delusions, Submitted by Trading Critic on Thu, 2007-05-10 23:11.
Share Trading can be Considered as Gambling

Share Trading is gambling. There. I said it. The worldwide stockmarkets are one big glorified casino. Or is it? It depends on how you see it: your perspective. I've defined what gambling was and concluded that trading WAS NOT trading in this article at MyShareTrading.com. But I revisited the idea after discussion and reflection about the topic with a few colleagues and I eventually turned my perspective to conclude that trading WAS INDEED gambling in "Gambling Revisited". To keep the argument simple, everything in life involves risk. Driving a car is risky. Having a job is risky. Setting up your own business is risky. Living is risky. And so Investing is risky. Owning a house is risky. Trading is also risky. And so anything to do with risk, playing the odds for a "positive" result, is a gamble.

Personally, I associate share trading with gambling because it is so similar to a visit to a casino. Professional casino gamblers usually have some sort of gambling system they follow. And in turn, professional share traders (or stock traders) also have a system or a trading plan which they follow. Both want returns. Both ventures aren't creating anything useful except a positive reward if the odds go your way. Investment isn't usually associated with as much risk as it is usually longer term compared to share trading. Investment can include property, longer term stock investing or putting money into a business venture. Why aren't they associated with as much risk as short term share trading? Because the results can be researched more thoroughly, and because of the long term nature of the investment, actions can be taken to fix or improve returns. But in my mind, it is still a gamble - just in the longer term. You make your own mind up.

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Stupid Trading Mistakes

Posted in Traders' Delusions, Submitted by Trading Critic on Tue, 2007-02-27 07:41.
We all do it. We're only human. Stupid trading mistakes. That's right, trading mistakes that are plain stupid.

We all do it. We're only human. Stupid trading mistakes. That's right, trading mistakes that are plain stupid. Remember that Japanese broker who put in the wrong figures and ended up losing the firm millions of dollars? For amateur traders, or should I say, retail traders any mistake of that magnitude translated in our home office would almost certainly mean financial ruin.

Yes, you have a trading goal. Yes you have a trading plan - and in that plan you have a money management plan, a trade entry plan and a trade exit plan. And surely if you execute that system to the dot you would be certainly in profit? I'm not talking about erroneous trading systems here. I'm talking about the minor human mistakes that traders can make in between making the decision to enter and executing the order and the time when you have decided to exit and execution of that exit strategy.

Yes, I'm talking about the typos and pressing the wrong buttons when you surely intended to press the other button. It happens. Minor mistakes can be costly. So besides your other plans, you should also have a systemised approach in checking and cross checking your orders when you do execute them. One such simple system could be to type in the number, or if possible set a default in your system. Check if your trading system tells you to go long i.e. BUY, or to go short, i.e. SELL and then press the relevant button. Double check your order ticket, then double check your executed orders as well as your account balance to make sure everything has been processed correctly. And here's one final tip: don't trade under the influence of any substance and don't trade wen you have just woken up two minutes beforehand.

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David Tweed

Posted in Traders' Delusions, Submitted by Trading Critic on Sat, 2006-12-30 21:01.
David Tweed, the notorious share raider has again made an approach to shareholders to purchase their shareholdings

David Tweed, the notorious share raider has again made an approach to shareholders to purchase their shareholdings at a discounted price. David Tweed had recently approached AWB shareholders back in November 2006, hoping to convince shareholders to let go of their stock at $1.50 when the ongoing market rate was around $2.71. This time, David Tweed has sent out a letter to Commonwealth Bank (CBA) shareholders in a bid to buy their shares at $35 per share. CBA shares were trading at around $48.75 when the offer was made - some 28 percent discount to the actual market price.

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About Price to Earnings (P/E) Ratio

Posted in FAQ | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-11-22 02:40.
The Price to Earnings (P/E) Ratio is the most commonly used valuation metric used by investors

The Price to Earnings (P/E) Ratio is the most commonly used valuation metric used by investors to help determine is individual stocks are reasonably priced. It is a simple ratio to calculate but can be confusing to interpret. The ratio can be useful in some cases yet useless in others. The ratio was popularized by Benjamin Graham - author of "The Intelligent Investor" (a must read for all serious investors). Graham used this financial ratio as a quick way to determine if the company stock was trading on an investment or speculative basis.

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Religion, Politics and Trading

Posted in Traders' Delusions, Submitted by Trading Critic on Sat, 2006-11-04 05:30.
What do Religion, Politics and Trading have in common? Find out a secret about trading the markets successfully

Religion, politics and trading. At first glance they don't seem to have anything in common. However, there is something that ties these seemingly different topics together. We'll delve into that later. What you will find out in this article (the professional trader's secret) is important for your own professional trading health and safety. You may think your trading is FINE but if you don't use this secret tactic in your trading, you are bound to be a loser. Save yourself that distress and keep reading!

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Shares that Double and Halve

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-10-18 09:27.
There are stocks on the Australian Sharemarket that readily double or halve in value the short term

There are stocks on the Australian Sharemarket that readily double or halve in value the short term. Better yet, there are traded financial instruments that are linked to the volatility of the larger valued stocks which also are highly volatile. The former are simply vanilla stocks. The latter example relates to derivatives, namely warrants and Exchange Traded Options (ETO's).

There are stocks that increase their value exponentially on the exchange markets in the short term. It is not only restricted to the Australian Stock Exchange (ASX) but this effect translates to exchanges around the world. What you are looking for are the stocks that are plainly labelled as "penny dreadfuls" or "penny stocks". One of the main characteristics of these stocks is that they are cheap, usually under a dollar or even a few cents a share. They are highly speculative and they don't have much trading volume if at all. The ASX is famous for these types of shares especially in the resources arena, as they let any speculator to invest their money hoping to hit the big jackpot. When a miner or an exploration company finds more to dig, that's when you'll find their stock to escalate. If the news that the property they own or their exploration hasn't reaped any rewards find their stock slide into the doldrums. This type of stock price movement isn't restricted to resource stocks, other stocks like pharmaceuticals or even retail have their share prices jump on the back of news of any success.

Derivatives. Be warned, derivatives are risky. Risky because they require a little more know-how and experience to be used effectively. Risky because they are a double edged sword. – profits are exponential: losses are exponential. Warrants and ETO's are both traded on the ASX. The catch is that warrants is basically a synthesised market created by the market makers – the major stockbroking companies that choose to participate. With ETO's what contracts you can write or trade is limited by the trading volume.

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T3 Telstra Deja Vu

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-10-09 07:43.
Faustina  'Fuzzy' Agoiley seeing Deja Vu in the T3 Telstra (TLS) Float

Here's the main reason why I don't read tabloid newspapers: they give useless mish mash information that does no one any good. One case in point was a short piece about the upcoming Telstra (T3) (TLS) float in the one-page "Business" section of the The Saturday Daily Telegraph. It took a quote from the Channel Ten "Video Hits First" show host: Faustina "Fuzzy" Agoiley (The woman that reminds me of a golliwog because of her hair). The "news" piece reported that she had been one of the 1.6 million shareholders that had bought into T2 at $7.40 a share. Asked about whether she would invest more of her money into Telstra in the T3 float she sensed a case of déjà vu stating that: "I wouldn't invest into [T3] because I'm still burnt from T2 and I'm still looking for a long term gain from that so I wouldn't see why people would want to invest more money into those sorts of shares."

Now what good is that reporting that crap in the newspaper? As a trader it makes no sense at all. As an investor the reasoning in that statement isn't logical. Okay, she has the right to claim she has been burnt from the Telstra (TLS) share price halving in value and hence wouldn't invest in T3. If she stopped there, I would be empathic to her case. I have a problem with the two last points: the long term gain and the point about not investing in "those sorts of shares."

If I was really an investor and I was really in for the long term I would see the upcoming float as an opportunity to buy into more Telstra (TLS) shares. I would see it as a discount. As an investor, if you had no belief in the shares, you would have let go of those shares a long time ago. As a trader, if you were to buy into this cheaper price with a bullish view and you are still holding your T2 shares then you are effectively lowering your break even price.

Finally, what does she mean by "those sorts of shares"? Shares that you put money into and which halve in price? I didn't know there was such a classification.

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The Price of Holding a Position

Posted in Traders' Delusions, Submitted by Trading Critic on Fri, 2006-09-22 00:10.
When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic

When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic. If you trade with options and similarly with warrants, there is time decay to consider. With CFD's as well as forex contracts, the price of holding a position is much simpler than dealing with delta's that define decay with derivative instruments such as options.

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