Market Psychology 1 st Stage Things are getting better 2 nd Stage Improvement Is actually underway 3 rd Stage Things will get better forever 2 nd Stage Things are deteriorating 1 st Stage Things would not always be rosy 3 rd Stage Things can only get worse
Support & Resistance Resistance Support Resistance Support Resistance Support & Resistance levels highlight possible “turning points” Support Resistance Support
Support & Resistance The more times a share price has touched these areas, the more valid these levels are & the more important they become. The longer these support & resistance levels have been in play, the better the outcome when the share price finally breaks out.
Support & Resistance - Bull Resistance Support Resistance/ Support Support Support Resistance
Support & Resistance - Bear Resistance/ Support Support Support Support Resistance/ Support Resistance Resistance
Trend Lines Support Trend Line Resistance Trend Line Support Trend Line Resistance Trend Line As long as the price stays above/ below the Support or Resistance lines, the trend is either bullish or bearish
Trend Lines - Bull Support Trend Line Resistance Trend Line Support Resistance Resistance Support Trend Line
Trend Lines - Bear Support Trend Line Resistance Trend Line
Entry Points Once prices are set to close above a resistance level, a trader will establish a bullish position. When prices are set to close below a support level, a trader will take on a bearish position.
Exit Points How long am I planning on being in this trade? (Depends on what type of trader you are: Position, Swing or Day Trader) How much risk am I willing to take? –Setting near-term profit targets that execute at opportune times to maximize profits. –Here are some common execution points: Retracement levels. Trend line breaks (Support & Resistance). Any other technical points. –Developing solid stop-loss points that immediately get rid of holdings that do not perform. –Creating exit strategies based on technical factors affecting the short-term.
Exit Points Where do I want to get out? –Many people become irrationally attached to their holdings & hold these equities when the underlying fundamentals of the trade have changed –Traders sometimes worry & sell their holdings even when there has been no change in underlying fundamentals. Both of these situations can lead to losses & missed profit opportunities. –Set a point at which you will sell takes the emotion out of trading. –The exit point itself should be set at a critical price level, i.e. technical points e.g. Retracement levels
Rectangle Formation 24 to 30 = 6
Ascending Triangles TP
Descending Triangles TP
Pennants 27 to 33 = = 37
Breakout Trading: The Steps 1.Identify the candidate 2.Wait for the breakout 3.Set a reasonable price objective 4.Allow the share to retest 5.Know when your trade has failed 6.Exit at your price target (TP) 7.Be patient
Breakout Trading: The Steps Resistance Support 118 to 137 = = 156
Breakout Trading: The Steps Resistance Support Resistance / Support
Breakout Trading: The Steps Resistance / Support Support Resistance
Double Tops & Bottoms Double Bottom Triple Top
Double Tops & Bottoms Double Bottom Double Top Triple Top
Head & Shoulders
Head & Shoulders Target Price
Head & Shoulders LS Head RS Neckline Head & Shoulders Target Price
Inverse Head & Shoulders 8.5 to 10.0 = = 11.5 TP
Inverse Head & Shoulders LS Neckline Head RS Target Price
Inverse Head & Shoulders LS Neckline RS Head
LS Head RS Neckline LS Head RS Neckline Target Price
Breakout Trading: Conclusion Breakout trading welcomes volatility. The volatility experienced after a breakout is likely to generate emotion because prices are moving quickly & in a volatile fashion. Using the steps & information covered will help you define a trading plan that, when executed properly, can offer great returns & manageable risk.
“A good (trading) plan today is better than a perfect (trading) plan tomorrow” General George S. Patton The Trading Plan
“Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multi-millionaire” Jack D Schwager The Trading Plan
1.Know Yourself, Know Your Purpose 2.Trading Goals 3.Markets, Instruments & Timeframes 4.Tools of the Trade 5.Before the Market Opens … 6.Risk & Money Management 7.Exit Strategy 8.Trade Strategies, Setups & Entries 9.After the market closes … 10.Discipline 11.Golden Trading Rules … The Trading Plan
Who needs a Trading Plan? Unless you are consistently profitable trader over a sufficient length of time to encompass a number of different market conditions – then YOU need a trading plan! If you have achieved this: – Refresher course –Open your eyes to new aspects of trading that can improve your profitability Consistently profitableConsistently profitable
What will the Trading Plan Do? Makes the act of trading simpler Limits your opportunity to make bad trades It will prevent psychological issues Act like a roadmap / Personal GPS –Either something in the plan is not working –You are not adhering to the trading plan Take away much of the decision making –Emotional & irrational decisions Enable you to trade outside comfort zone –Prevent letting losses run & cutting profits short Instill a large measure of discipline
1.Know Yourself, Know Your Purpose Understand your psyche & sentiment Decide what you want to achieve, ask why & how trading is going to provide it? Why do you want to be a trader? What sort of trader are you? What are your strengths & weaknesses? Are you in the right frame of mind to trade? What are your income targets?
2.Trading Goals Setting goals are essential –Beacon to work towards –Track progress –Motivation required Define goals in terms of your development as a proficient trader –Annual Trading Goals –Monthly Trading Goals –Weekly Trading Goals –Daily Trading Goals
3.Markets, Instruments & Timeframes Decide which markets will you trade? Which instruments will you trade? –Basket of shares / whole market? –SSFs / CFDs – Top 40 / Mid Caps? –Currency Futures – Currency pairs? Which timeframes will you trade? –Day Trader – Minutes & Hours? –Swing Trader – Days & Weeks? –Position Trader – Months & Years?
4.Tools of the Trade What financial vehicle will you use to trade? –Equities, Warrants, CFDs & SSFs? What broker & trading platform will you use? What Live Prices are you going to use? Which charting software will you use?
5.Before the Market Opens … What is your daily pre-market routine? –Have you analysed yesterday’s trades? –Do you have any positions open? What are the general market conditions? –What will you do today – hour by hour? Which instruments are on your watch list?
6.Risk Management General Risk Management What is your attitude towards risk? What is the overall market risk? What is the sector risk? What is the broker & hardware risk? What is the strategy risk? Specific Risk Management What is the probability of a successful trade? What is the Risk- Reward ratio? What is your risk per trade? Where will you place your stop loss order? When will stop trading?
6.Money Management General Money Management Large draw downs & profits What will you do? Which money management approaches will you utilise? Specific Money Management Will you lock in profits? How will you determine your position size?
7.Exit Strategy Losing trades –Will you exit before your stop is hit? – Which signals will see you exit early? Winning trades –Which signals will see you exit completely? –Which signals will see you close half? –Which signals will see you close the remainder?
8.Trade Strategies, Setups & Entries Which strategies will you trade? What are your trade setups? How will you find your setups? Which signals will trigger your entry?
9.After the market closes … Have you recorded today’s trades? Did you execute your trades according to your trading plan? Have you completed your trading journal?
10.Discipline Back test or forward test? What are your promises to yourself? –What questions do you ask after a winning trade? –What questions do you ask after a losing trade? What steps do you take to learn more about trading?
11.Golden Trading Rules Protect & preserve capital! Always set a stop loss, always! Cut your losses short – Let your profits run! Trade what you see – Not what you think! Never chase your losses, ever! Never average down, ever! Keep excellent records! Maintain discipline! Keep it simple! Plan the Trade – Trade the Plan!
The 3 M’s
“ “While a trading plan cannot predict the future, it can lay down how you react to the possible outcomes. This is why a trading plan is essential. It is a list of strategic responses to events beyond your control. You control the only thing you can control – YOURSELF!” Alpesh B. Patel [Author of the book “Trading Online”] The 3 M’s - Mindset
Attitude - How you react Self Confidence - Belief in yourself Objectivity - Increase impartiality Patience - Watching & waiting Discipline - Stick to your plan
"The longer I live the more convinced I become that life is 10% what happens to us and 90% how we respond to it.” …Charles Swindoll The 3 M’s - Mindset
“Successful trading requires us to be aware of our emotions. It often requires us to go against our natural inclinations or emotional responses in order to see profits.” The 3 M’s - Mindset
Greed The 3 M’s – Mindset Greed Fear Caution Moderation Fear
Make Money Investor Trader Technical Analysis WEN Charting Position Trading Day Trading SSF Equities CFD Trading Swing Trading
CFD Product Description Go ‘Long’ & ‘Short’ with CFD’s on Top 100 JSE listed shares Margin deposit requirements 15% Top 40 shares / 17.5% on next 60 shares Variation margin required for adverse share price movement. Brokerage = 0.4% per transaction Breakeven = 0.92% (VAT included) Zero UST Financing at competitive rates: Current borrowing rate 6.50% (± Prime – 2%) Minimum Exposure per trade of R (R4 500 margin) Derivative - A contract whose value depends on (or derives from) the value of an underlying share e.g. share – ANG, BIL, SOL
Top 100 Shares: CFD Margin List reset after each Quarterly futures Close out 15% Top % Next 60
Important notes on CFD Long & Short Positions Pay interest at SAFEX + 2 % p.a. (± Prime -2%) The holder will receive a synthetic dividend –Dividend is not earned tax free as a CFD is a derivative contract –In the case of a Long CFD, a holder of a long contract will be paid an amount equal to the dividend by issuer. –This is seen as an income and is subject to tax You pay a script lending fee of 1.5% p.a. (Min R456) Receive interest at SAFEX -2 % p.a. The holder is liable for the dividend –Dividend is not earned tax free as a CFD is a derivative contract –In the case of a short CFD, a holder of a short contract will have to pay the dividend to the issuer
Pro’s & Con’s of CFD Trading Advantages Low trading costsLow trading costs No expiry dateNo expiry date Hedge your current portfolioHedge your current portfolio All the benefitsAll the benefits Disadvantages Gearing & RiskGearing & Risk No voting rightsNo voting rights
Comparison with traditional shares CFDTraditional Equity No physical equity holding Do not pay UST No voting rights Earn synthetic dividends Physically hold equity Pay UST of 0.25% Voting rights Earn real dividends Leveraged trading Settle only collateral (15% %) plus top-up if required Gearing provided at cheap rates (Safex +2% or roughly Prime -2%) Not leveraged Must settle full exposure amount Expensive to borrow against shares Settlement Period Settled T+1 Settlement Period Settled T+5 Taxation Considered a Trader Added to personal income (Trading Instrument) Taxation Capital Gains Tax (CGT) (Investment Instrument) Easy to short Suitable for both hedging & trading opportunities Typically long only
What are SSFs? A standardised contract. Of a standard quantity (100) of a specific underlying listed share Requires a fixed margin deposit to open a position (around 15% of the total value). Expiring on a predetermined future date: Third Thursday of every March, June, September & December. Gives the owner the right to close the contract at a price agreed when entering the contract, including all relevant dividends & interest. SSFs are listed on the South African Futures Exchange (SAFEX), a subsidiary of the JSE. SSF contracts equate to100 shares of the underlying instrument. SSFs are created at the close of trading. All unmatched SSF orders expire at the end of the trading day. All partially matched orders will be cancelled at the end of the day.
Comparable to Equities INVESTOR A (Share Trader) INVESTOR B (SSFs Trader) Confident that Sasol shares will increase. She has R which she can invest. Sasol’s share price is R350, therefore she buys 100 shares. 3 months later the price has increased by 10% so she sells her shares to make a R3 500 profit. Her return on her investment is 10%. The initial margin set by the broker is R6 000 which is paid by the buyer. Sasol’s share price is R350, therefore she buys 1 contract. After 3 months the price has increased by 10% & the investor closes out his position & sells out of the Sasol SSF contract. His profit is R3 500 but his return on his investment is 58%.
Comparison between SSFs &CFDs Single Stock FutureContracts for Difference Regulated by JSE/FSB Exchanged traded product Expiry Date= Rollover costs Set principle amount Interest agreed upfront Wholesale interest rates Best execution Free markets Transparent Guaranteed by SAFCOM No dividend paid/received Fungible financial instrument Can take physical delivery Unregulated Trades OTC No Expiry Date Principle amount could change daily Interest fluctuates daily Retail interest rates No best execution obligation Captive markets Opaque Not guaranteed by SAFCOM Manufactured dividends Never physical delivered
SSF Margin Initial margin per contract Top 40 – Central Next 60 – Traditional
(Central) SSF Order Book Top 40 Shares ALSI & ALMI Copper, Gold, Platinum & Silver WTI Crude Oil
(Central) SSF Order Book Margin = R Exposure = R Cost R25 per contract 100 points move = R1000
(Central) SSF Order Book Future Price = Spot Price X 1 + (IR x t)
Relative Strength Indicator Under-perform Data 1 = Anglo Data 2 = Top 40 Index Market Perform Out-performUnder-perform
Relative Strength Indicator Data 1 = Anglo Data 2 = BHP Billiton Under-perform Outperform
Technical Check List What is the direction of the JSE Overall Index? What is the direction of the Sector Index? What are the weekly/ monthly sector /share charts showing? Are the primary, secondary & minor trends up, down or sideways? What are the important support & resistance levels? Where are the important trend lines & channels? Where are the 33%, 50% & 66% retracement levels? Are there any price gaps, and what type are they? Are there any major reversal patterns visible? Are there any continuation patterns visible? What are the price objectives from these patterns? Which way are the moving averages pointing? Are the oscillators overbought or oversold? Are there any divergences apparent on the oscillators?
Make Quick Decisions BUY HOLD WATCH SELL
Make Quick Decisions Watch
Creating a Watch List of Winners Fundamentals = PSG Online website Technicals = Wen Charting*
"The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing." Marty Schwartz The 3 M’s - Money Management
"Do not focus on making money; focus on protecting what you have.” …Paul Tudor Jones The 3 M’s - Money Management
Capital allocation (Position sizing) For each trade, how much of our capital do we commit? –Trade with 50% of total capital ( Earn interest & Variation Margin) –Position Size - Number of Contracts/ Shares Setting stop losses For each trade, where do we place our stops? –Initial Technical Stop (Support & Resistance) The 3 M’s - Money Management
Money Management Money Management Position Size & Margin (Harmony) You decide to buy Harmony Gold at R80.10 You set a 3% stop loss (R80.10 x 3% = R2.40 ) –R80.10 – R2.40 = R77.70 You are willing to risk 2% of your capital = R2000. Take R2000 & divide it by the R2.40 per share that you are risking Your position size = you can buy shares –(R2000 / R2.40). The SSF initial margin required is R –833 shares = 8 contracts = R x 8 = R –Exposure = 8 x 100 x R80.10 = R
Money Management Money Management Position Size & Margin (Anglo) Assume you have a R CFD trading account You decide to buy Anglo’s at R You set a 3% stop loss at R –R x 3% = R10.17 (R – R10.17) You are willing to risk 2% of your capital if the trade goes wrong = R2000. Take R2000 and divide it by the R10.17 per share that you are risking. That gives your position size. –In this example, you can buy shares (R2000 / R10.17). –Margin = 197 x R = R x 15% = R –For SSFs, the initial margin will be R5700 x 2 contracts = R11 400
CFD Order Book Buy 100 Anglo R Exposure = R % Margin = R Anglo shares = R % Brokerage = R % VAT = R18.99 Total = R R R x 6.5% = R /365 = R6.04
Risk Management The Stop-Loss Strategy The spot that represents maximum loss that you will take on a trade. Original trade idea was incorrect. The market tells you when it reaches the stop loss point. Cut your losses & move on.
Risk Management Risk Management Technical Stop-Loss Strategy The stop-loss comes from the chart. It is the first thing one needs to know about any particular trade. Can decide how many contracts to trade so as not to exceed the maximum loss per trade he has determined in the trading plan. First step to following your stop. –Have a contract size you can live with.
Placed at a logical point on the chart –Breaking of a support or resistance level –Breaking of a trend line Highly recommended because the chart “tells” you where to place the stop. Risk Management Risk Management Technical Stop-Loss Strategy
Step 1: Setup Price (Trigger) Select “Below” for Longs Enter Technical Price Select Price Watch
Setup the Stop Order (Bullet) Select “Close” Enter Quantity Enter Worse-case scenario price Select Stop Order Click Submit Price Watch & Stop Order button
Summary: Trading Step 1: Financial objectives Step 2: Watch List of potential winners Step 3: Mindset Step 4: Method of Trading Step 5: Money & Risk Management
“Many know, few do” Justin Cohen Justin Cohen
Conclusion Have you learnt how to “Make Money?”Have you learnt how to “Make Money?” Feedback FormsFeedback Forms Link to MarketWorx presentationsLink to MarketWorx presentations –Will be available soon! Open a Trading Account with PSG OnlineOpen a Trading Account with PSG Online –Online Trading Course –Equity & SSF Simulator –Research Tools DataShare p/mDataShare p/m –Software is FREE! Good Luck & Happy Trading!Good Luck & Happy Trading!