A series of video tutorials to help you get started! (In collaboration with TradeHero & SGX)

Top 3 Reasons Why You Should Start Investing in 2017

copy-of-copy-of-not-allthose-who-wanderare-lost

Brexit, Trump, Italy, asset bubbles all over the world… you name it, there’s probably some financial market jitters that keeps most people out of the world of investments.

On the flipside, the financial world often quips about some investment that has made xx% over a certain period of time, trying to entice visitors with a glimpse of the profits possible for anyone. In the world of investing, it is easy to find spectacular returns on hindsight, and salesmen go through great lengths to market what has already happened.

As traders, we live in a constant state of uncertainty. Every trade we make has the possibility of going wrong, and this is taken into account when a decision is made. It is the knowledge of this that gives power to a trader; if he can understand the math behind his investment decision, he can have a positive expectation and a positive traders’ equation.

There are three main reasons why trading is even more attractive these days. Indeed, with advanced technology, there has never been a better time to step into the world of finance, and grab a golden egg while you still can.

GOLDEN EGG 1: TRADING GIVES A HIGHER INTEREST RATE THAN BANKS

fdThe best you can get on a fixed deposit is 0.35% a year in Singapore, as at December 2016.
Source: moneysmart.sg

While inflation is a constant enemy for our savings accounts, most people do not know what to do to combat inflation. The most common quick-fix is to work harder and earn more money. While that does feed us and our families for some time, the need to build a war chest for emergencies becomes more and more real.

 

How much can you make from trading? Institutional traders bring in a success rate anywhere from 30%-70%. Why is this so?

The greatest insight into the markets that can make you profitable is this: 90% of the time, the odds are 50-50, while 10% of the time, the odds swing 60-40 (slightly in your favor).

That’s right. While most of the time, markets are 50-50, it is those brief moments when the market gives some opportunity, and prices quickly move to take advantage of this opportunity. That means that if you were to buy or sell randomly, you already have a 50% chance of success!

Another insight to know is that a high success rate (hit-rate) brings a lower profit target, while a low success rate brings a higher profit target.

What do I mean by this? Institutions trade using a combination of low-probability and high-probability trades.

Example: 40% (low) success rate, win = +2%, lose = -1%.”

low

In this case, if you were to make 100 of such low-probability trades, you would make +80% on winning trades and -60% on losing trades, bringing a 20% return on capital.

Example 2: 75% (high) success rate, win = +0.5%, lose = -1%

high

In this case, if you made 100 high-probability trades, you made 37.5% on winning trades and -25% on losing trades, bringing +12.5% return on capital.

It is impossible for the market to give high-probability trades with a high profit potential. This would be quickly detected by institutional traders, who have mathematicians, PhD staff, and computer science experts who can quickly make adjustments and profit from it. With hundreds of millions of dollars at stake, these people would do all they can to bring profits for their firm.

 

That is why if anyone quips that they have a 80-90% success rate, they are probably having many small wins but a few gigantic losses. If you don’t believe me, try trading forex and planting random trades with low profit potential and high loss potential. The numbers indeed prove to be true!

That is also why it is important to understand the traders’ equation. With a reasonable success rate and an appropriate win-loss ratio (or risk-reward ratio, RRR), you would be profitable over the long-run.

I have had days where I ran 7-8 trading losses in a row, but because I trusted in the probabilities, the next 3-4 trades ended up profitable, as long as I stuck to my trade setups and didn’t let the emotions get the better of me.

GOLDEN EGG 2: TRADING DOES NOT REQUIRE LOTS OF CAPITAL

If you have $500 to invest: trade forex.

In the Forex market, you are entitled to ‘get a feel of the game’ by risking a few dollars per trade. By trading the smallest lot size (0.01 lots), you can learn to make a few dollars here, lose a few dollars there, and rack up trading experience and learn to trade ‘live’ without incurring hefty losses.

By learning to make many decisions and experiencing all the different conditions of the market, you would become seasoned enough to trade a bigger size, and fine-tune your own trading strategy.

Many traders discover they have certain characteristics about themselves that hinder success. In trading a ‘live’ account with a small sum of money, they are putting in some skin in the game, and getting used to the ups and downs of their account.

The best part about forex is that there are no commission charges. The broker makes money from the bid-ask spread, which is the difference between the buy/sell price, and most brokers charge reasonable spreads, allowing you to trade with almost negligible transaction cost.

If you have $3000 to invest: explore stock CFDs.

Stock CFDs have low commissions and can be bought in small quantities – a few thousand dollars can allow you to have a portfolio of 5-10 stock positions.

For people with less time and more money, stock CFDs can be a great way to learn to deal with commissions, spreads, fee structures, and the whims and fancies of the stock market.

The stock market is only open during working hours, unlike the forex market. Someone who is interested to take longer-term positions may be open to trading stock CFDs, risking small amounts of money, and yet racking up trading experience.

Some people quip that the forex market is more difficult to trade than the stock market. I beg to differ, because it is your circle of competence that determines your success, not the actual characteristics of the market.

If I were to ask you to drive a Formula 1 race car, you probably would kill yourself within the next few hours or so. However, if you were progressively taught how to drive the race car, it doesn’t become dangerous, and because of the progressive nature of your learning, the high speeds don’t come as a shock to you.

f1Driving this car is dangerous, only if you are not trained.
Source: wallscorner.com

Many people get shocked at the speed by which forex markets move during the Non-Farm Payroll Announcements and FOMC Interest Rate Announcements; prices can move 10-50 times faster than normal during those crazy periods! However, with practice, these sessions can become a profitable time for traders with experience and proper risk management.

If you have $10,000 to invest: trade everything.

People with more money have the luxury of trading a combination of stocks, forex, commodity, bonds, and index trades. These can be accessed through any decent forex broker, and you’ll be surprised to find that most forex brokers let you trade forex, oil, gold, the Dow Jones Index, the S&P, the bond markets, wheat, corn, natural gas, and more. These of course come with higher margin requirements, but exploring all the asset classes makes you a seasoned, well-rounded investor that can take any market condition.

Sideways in the forex market? Maybe there is a trending opportunity in the oil market. There’s always something to trade if you have the experience and know where to look.

However, in my opinion, the greatest investment is Golden Egg 3.

GOLDEN EGG 3: TRADING BOOKS ARE CHEAP AND EASY TO FIND

John Murphy: Technical Analysis of the Financial Markets. One of the great trading classics that builds a strong foundation.

John Murphy’s book on technical analysis reveals the fundamental nature of financial markets. Prices move in patterns and cycles, and understanding history helps you to cope with what is to come.

In my trading journey, I’ve read more than 200 books, and found only about 11 of them that are useful in my trading career. These books were either borrowed from the library, or bought only for $30-$50 a book, which is a very good price (since stock commissions can be $15-$25 already!).

Buying a few good trading books can completely change your destiny.

If you are starting out, why not invest in 3-5 good trading books, before getting your hands wet in the financial markets? These books would build a strong foundation, and you would start off with a better understanding of why things happen.

bookSome of the more famous online bookstores.
Source: Company websites

Amazon.com and bookdepository.com provide great options and they ship almost anywhere in the world. Personally, I found that bookdepository has the more exotic books, but it is a little pricey (yet still worth it since you can’t find the books easily!)

Second-hand books: Carousell if you live in Singapore! If you’re lucky you can find good books at a discounted price. Even though the books may be a little dusty and yellowed, it’s the content that you want to really absorb. You can always find what you want if you search hard enough!

TRADING & INVESTING EDUCATION IS WITHIN OUR GRASP

If you are still thinking about it, here’s why you should pick up investing education:

  • Historical chart data is free (we used to need to pay in the 1990s and 2000s)
  • Free resources are available
  • Books are cheap and easy to find
  • Starting cost is as low as $500
  • Cost of failure is low
  • Experience can be racked up with very little capital
  • There is a market for every type of investor

And most of all, it can bring higher returns in the long-run than placing your capital in the bank account. Sure, you might risk losing a couple of dollars at the start, but the cost of ignorance is a lot higher when compounded over the next 5, 10, or 20 years!

Wishing you all the best in your trading journey, and I do hope this article serves as a pump to start you on your quest for investment expertise!

Cheers!

 

RESEARCH SOURCES & REFERENCES

http://www.moneysmart.sg/fixed-deposit
http://www.lifehack.org/articles/money/15-best-online-bookstores-for-cheap-new-and-used-books.html

Credit Suisse Report: Is Your Net Worth Above the Average Singaporean?

123

Here’s an interesting article I came across during the weekend: according to a Credit Suisse report, the average wealth of Singaporeans is the highest in Asia.

In the report, it states that the average adult has US$276,885 (S$395,000) in wealth, which is 1.4% higher than last year.

“The Global Wealth Report ranked Singapore number 1 in Asia, and when compared to the major economies, Singapore is ranked number 7.”

 

averageSource: Today Online

 

 

This is great news and I’m quite humbled that our tiny nation has managed to achieve this. However, remember that there are two main sources of household assets:

#1: WEALTH FROM FINANCIAL ASSETS

“Financial assets — which include items such as currency, deposits and equities — accounted for more than half of the average wealth per adult in Singapore at US$180,414.”

Wealth from financial assets accounted for >50% of the wealth of a singaporean adult. That means an average Singaporean has $130,000 in cash, foreign currencies, deposits, stocks, and other liquid investments.

Of course, the figure is just an average. I went to Singstat to get a visual of these figures, and here’s what I found: while the growth rates of household assets and liabilities have slowed down dramatically since 2010, net worth continued to climb every single year alongside liabilities!

householdThe growth rate for assets and liabilities slowed down in the past 6 years.
Source: Singstat

I recommend that you click the image above to expand it. Take a look at the details: liabilities have never exceeded assets, but the growth rates have plummeted severely over the past 5 years. It seems that low growth rates in household net worth is going to be the norm.

The average Singaporean has about S$130,000 in financial assets. Cash, stocks, deposits, and foreign currencies included.

That’s a very good figure to have, because most Singaporeans will be able to tide through a 1-2 year period of retrenchment before having to look for sources of income.

What about the statistics on Non-financial assets?

#2: WEALTH FROM NON-FINANCIAL ASSETS

“Non-financial wealth, including assets such as housing, accounted for US$151,239.”

I wanted to find out if this was accurate, and dug deeper to get the data. I decided to do away with Credit Suisse’s claims and check out the figures reported by the statistics department:

householdMost of the wealth is still held in financial assets, rather than in homes.
Source: Singstat

This gives a more accurate figure in my opinion. The data until Q4 2015 reveals that approximately half of every Singaporean adult’s financial wealth came from residential property valuation. The average Singaporean’s wealth in residential property assets could be anywhere from 40-60% of his/her personal wealth.

A casual glance like this might lead you to conclude that Singaporeans are well-protected, wealthy, and financially-savvy.

It is no wonder that even though Singapore has a great number of millionaires as a percentage of population, much of the wealth is held in property. I managed to find statistics on the total assets of Singaporean households, and these are presented in the tables below.

Note: The figures below are in millions of dollars.

householdNot counting CPF & Residential Property, Singaporeans have a lot less liquid assets as a percentage of total assets.
Source: Data from Singstat, Chart generated using MS Excel

In essence, the Singapore as a whole without CPF and Residential Property can be almost 65% poorer on average! That means the true amount of liquid capital that our country commands is much lower than the net worth figures reported. Take note that the data is in millions of dollars and represent the whole nation.

SIDENOTE: DEBT

“The average debt was US$54,768, or 17 per cent of total assets, moderate for a high-wealth country, the report said.”

The average debt was “moderate” for a high-wealth country, and I wanted to understand what this meant. To my pleasant surprise I realized we could actually get the data for our CPF, life insurance, pension funds, shares, liabilities classified by category, and many other statistics from our very own statistics department of Singapore.

excelWith data, in hand, much magic can be performed.
Data Source: Singstat

After downloading their data in XLSX format, I saw that there were several categories for liabilities. They are:

  1. Mortgage loans – to financial institutions
  2. Mortgage loans – to Housing and Development Board (HDB)
  3. Personal loans – motor vehicle
  4. Personal loans – credit cards
  5. Personal loans – education loans, renovation loans, hire purchase loans, loans for investments etc.

After putting them in a pie chart, this is what it looks like:

pieMortgage loans in both categories take up 75% of liabilities Singaporeans have.
Source: Data from Singstat, Chart generated using MS Excel

It was interesting that much of household assets include residential property, while much of household liabilities also include residential property. It’s understandable that most of the loans would be made with financial institutions since HDB has a fixed loan rate, while the FI’s have variable ones (good news for us in a low interest rate environment).

It is remarkable that credit card loans amounted up to almost the same size as motor vehicle loans!

WHAT ABOUT YOU?

The average adult Singaporean has $130,000 of liquid assets, has 75% of liabilities in housing loans, 19% of liabilities in education/renovation/investment loans, and, unsurprisingly, derives most of his/her wealth from CPF and Residential Property.

What does your balance sheet look like? It’s important to review your own finances periodically and see how they have changed over the years.

Perhaps it’s time for a financial health check-up as we round up and conclude the year 2016. Hope you enjoyed plowing through the numbers like I did!

Cheers!

 

REFERENCES & RESEARCH SOURCES:

http://www.todayonline.com/business/singaporeans-average-wealth-increases-us277000-credit-suisse-report
http://www.singstat.gov.sg/statistics/browse-by-theme/household-sector-balance-sheet
http://www.singstat.gov.sg/statistics/visualising-data/storyboards/household-sector-balance-sheet
http://www.tablebuilder.singstat.gov.sg/publicfacing/createDataTable.action?refId=1952

Will Higher Interest Rates Eventually Lead to a Stock Market Crash?

asJanet Yellen’s actions come into the spotlight once again.
Source: slate.com

 

After a slew of unprecedented events (Trump, Brexit), what has been troubling the world financial markets in recent days? As the FOMC announcement approaches, market participants have all eyes fixed on the almost-certain rate-hike that is coming up on Thursday. You probably have started to see Yellen’s photograph in news articles across all major financial newspapers.

Traditional economics theory teaches us that when interest rates rise, they are deflationary; businesses find it harder to borrow and affects interest-sensitive investment, while home owners find it harder to pay their mortgages. It all seems reasonable on the surface, but what actually goes on behind it?

In an economic climate such as ours today, traditional predictions have fallen very flat. There are Fed officials and scholars (not lay-people) who still insist that QE has no impact on the real economy whatsoever. The average wage-labourer probably doesn’t feel much when interest rates change, nor will he care even if rates drop or rise significantly.

However, as traders, our portfolios are at stake and it will bode us well to study this properly. Several macroeconomic indicators have to be understood and analysed to understand what is likely to happen. I’ve broken it down into 4 components for easy reading. Let’s get going:

INDICATOR #1: Falling GDP?

The body of scholastic material addressing the link between interest rates and GDP is rather depressing. Stephen D. Williamson summarizes this rather aptly:

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity”-Stephen D. Williamson, St. Louis Fed Vice President

When the cost of borrowing rises, economic activity slows. That has been what the Fed was trying to do when it goes ahead and raises interest rates. They were used as a deflationary tool to keep the economy from expanding too rapidly. What have we seen? I came across this table while researching on this topic:

bank

What we see is that the average rate hike cycle takes 22 months, while a recession normally happens 41 months later. However, it has been 87 months since the last rate hike, eclipsing even the 85 months lag time since the 1994-1995 rate hike.
These are definitely unusual circumstances. While the economy has been chugging along for 7 years despite near-zero interest rates, I don’t see how a rate hike would dramatically change this, especially in the short-term (1-2 years from now). While the economy has been a big topic on Trump’s agenda during the election, the reality is that the economy is still reeling from the damage caused in 2008, and it could take far more than more investments to bring the world back to economic health.

 

INDICATOR #2: Lower Stock Prices?

The US stock market has been breaking new highs and with every new high, another analysts comes out and purports that ‘this is the top’.

 

econDire predictions by an economist.
Source: CNBC

However, before we all go into doom and gloom, let us remember that the bear markets of the last 50 years have had different causes, to be fair, there had to be some sort of trigger. It could be a political issue, such as the 1973-74 oil crisis, and the 1990 bear market caused by Iraq’s invasion of Kuwait. Furthermore, the Fed could be behind a market crash; in 1982, after raising interest rates relentlessly, the U.S market saw some severe bear moves in that period of time.

Sometimes bear markets happen because of bubbles; such as when the 2001 dot-com bubble and 911 terrorist attacks came about. In 2008, we saw a market crash as a result of a tanking housing market spurred by widespread institutional dishonesty.

Let us not be quick to jump to conclusions about a market crash coming. I’ll be watching the S&P and other indices closely over the next few months.

Interestingly, some quip that the “three steps and a stumble” rule would become a reality. It last happened in 2004, but we didn’t see a stock market crash until 4 years later.

“The ‘three steps and a stumble’ rule states that after three consecutive rate hikes (three steps), the stock market would begin to fall rapidly (stumble).”

I don’t quite buy into this idea. Over the past 30 years, there were only nine occasions where we saw 3 rate hikes in a row. Thrice in the 1970s, four times in the 1980s, and twice in the 1990s, and on average, only the 1970s saw a significant decline (approximately 10%) of the stock market in the next year or so.

chartChart of DJIA price changes after 3 rate hikes
Source: MarketWatch.com

More interestingly, the S&P500 looks like it’s ‘toppish’; the bull run seems rather unsustainable, but something seems to be sustaining this euphoria. On a technical basis, it has simply broken out of an expanding wedge on the daily chart.

sp
The S&P500 has broken out of an expanding wedge pattern. It looks rather unsustainable, but it is happening before our eyes.
Source: MetaTrader 4

We’ll have to watch closely how the S&P behaves near the resistance before deciding if it would continue the rally (which is very possible!).

 

INDICATOR #3: Volatile Bond Prices?

There are signs that the market has already adjusted to an interest rate hike. Check out what happened to the 30-yr Treasury Bonds over the past year or so:

30yr

The 30-yr Treasury Bonds have fallen 15% since its last high in July 2016.
Source: MetaTrader 4

The rude correction has shocked many bulls out of the market, and it seems we have entered bearish territory in the bond market. My opinion is that the rate hike has definitely contributed to this, but it seems that the rate hike is a mere response to the macroeconomic conditions of the world. On the technical side, we see a head and shoulders pattern that has broken down (as a result of election fever), and the downtrend has continued somewhat.

yieldsShort-term yields have risen almost as much as long-term yields.
Source: Bloomberg

If you’ve studied finance in university you would immediately recognize that the yield curve has flattened. Check out the table above; 3-month rates have risen as much as 30-year rates! This means 3-month yields have risen more than 100%, while 30-year yields rose about 10% or so. This is a typical response when the Fed tightens monetary policy.  A famous interpretation of the yield curve states that when yield curves get inverted (when short-term bonds yield more than long-term bonds), that’s when the stock market crashes like nobody’s business.

We are still very far off from an inverted yield curve, so a market crash is still some distance away. My guess is that the bond market, as a measure of fear, will be in a state of confusion as there are valid reasons for economic strength as well as economic panic. Volatility in yields is likely to be the norm in the year ahead.

INDICATOR #4: Commodity Prices

Although some pundits claim to be able to predict how interest rates will move commodities, I beg to differ. Oil, for example, is very much output driven (think OPEC), and recently we’ve been having output cuts among producers. As you can see in the image below, when I checked the newsmap yesterday, ‘Oil Surges as More Producers Join Output Cuts’ was the most-read news of the day.


A casual glance at the NewsMap reveals a heightened focus on oil production.
Source: Newsmap.jp

Generally speaking, if you look at the relationship between oil and real interest rates, we see very little correlation even over the very-long-term.

irIt’s hard to come to conclusions about how interest rates have affected commodity prices globally.
Source: cobank.com

More recently, we’ve seen commodity prices tank over the past 5 years despite interest rates remaining almost constant. I just did a simple google search on the price of DBC (the global commodity price ETF) and this is what happened in the past 5 years.

commm
A quick glance shows that commodity prices have fallen for 5 years.
Source: Google finance

To make an investment decision on commodities solely on interest rates isn’t wise. On a technical basis, commodities look like a good buy and I’ll be watching them closely to spot trading opportunities.

UP NEXT: THURSDAY’S RATE DECISION

If you aren’t already riding the bull market in stocks, it doesn’t make sense to enter now. Heroic bulls would want to enter now with a small profit target, and the world will be watching closely how the new year starts. Moreover, you won’t want to have too much exposure during the final FOMC meeting of 2016. Volatility on all other asset classes are expected, and I’ll be trading currencies, perhaps more regularly on an intra-day basis if I can’t find any good longer-term trends to ride on. All eyes will be on Thursday’s Rate Decision and the price action in the aftermath will be worth watching.

RESEARCH SOURCES & REFERENCES

http://www.cnbc.com/2015/09/15/when-the-fed-raises-rates-heres-what-happens.html
http://www.cnbc.com/2015/08/18/st-louis-fed-official-no-evidence-qe-boosted-economy.html
https://www.thestreet.com/story/13279476/1/what-happens-when-the-fed-hikes-interest-rates.html
http://www.slate.com/content/dam/slate/blogs/moneybox/2015/11/23/janet_yellen_responds_to_ralph_nader_s_sexist_letter/495620136-federal-reserve-chair-janet-yellen-testifies-before-the.jpg.CROP.promo-xlarge2.jpg
http://www.cnbc.com/2015/08/24/8-things-you-need-to-know-about-bear-markets.html
http://www.cnbc.com/2016/12/10/economist-harry-dent-says-dow-could-plunge-17000-points.html
http://www.marketwatch.com/story/edson-goulds-three-steps-and-a-tumble-rule
https://www.thebalance.com/inverted-yield-curve-3305856
http://www.cobank.com/Newsroom-Financials/~/media/Files/Searchable%20PDF%20Files/Newsroom%20Financials/Outlook/Outlook%202012/Outlook_10122.pdf

Goldman Sach’s Top 6 Trading Ideas for 2017 + 3 Trade Ideas of My Own!

As I was preparing for the year ahead, I came across this interesting read in the news. Goldman Sachs had just released their top trade recommendations for the year 2017 as a response to a Trump win in the recent U.S elections, amid economic and political uncertainty. These trade ideas were birthed by recent developments in the major economies of the world, and I couldn’t help but recall what Goldman said in 2015, about 2016 being a year of economic gloom. Already, the S&P 500 is hovering at 2,200, up 9.4% for the year 2016.

goldmanImage Source: Bloomberg

“Goldman Sachs’ top strategists predict that stocks will once again disappoint next year. Goldman predicts the S&P 500 will go nowhere in the coming year, ending 2016 at 2,100.” – Fortune.com (November 2015)

Analysts can be wrong, and to be fair, very few expected the S&P to hit all-time highs. As traders know, we don’t expect to be right all the time. There were a number of great opportunities for bears to take profits even in the uptrend market we’ve seen this year. With information from 29 Nov 2016, the S&P 500 was about 100 points above what Goldman predicted for the year, and the graphic (a weekly chart of the S&P 500 index) below gives a clearer picture of this.

goldman-predictionImage Source: MetaTrader 4

I often read opinions of the market not because I need them, but because as a trader it is essential that I keep up to date with what the institutions are thinking. In the latest recommendation, Goldman recommended the following: (quoting the titles directly from Bloomberg’s report)

  1. “U.S. Dollar the Winner From Developed Market Populism”
  2. “Bet on Trump Getting More Upset About China’s currency”
  3. “Keep Calm and Carry the Right Emerging Market Currencies”
  4. “Long Emerging Market Stocks with ‘Insulated Exposure to Growth’ “
  5. “The Reflation Trade Has Legs”
  6. “Long European Dividend Growth”

What in the world do these ideas mean? Just in case it sounds too confusing, I have translated them into simpler bite-sized titbits below.

confusedImage Source: freepik.com

HERE ARE THE SIX TRADE IDEAS:

Trade Idea #1: Short the EUR/USD pair and GBP/USD pair

currencyImage Source: CleanFinancial.com

Goldman expects the US Dollar to rise. As such, shorting currency pairs with ‘USD’ at the back would express this adequately. Trump’s economic policies are expected to be growth-inducing. Stuff like great quantities of fiscal stimulus, protectionism (both in terms of foreign products and foreign people, haha) to boost local growth and employment, and not to forget, rising interest rates; all these increase demand for the US Dollar.

Uncertainty in Britain (because of the details of the Brexit process) and “populism in Europe” (another Donald Trump situation in Europe?) should “weigh on the pound and the euro”. Essentially, they mean the currency of Britain and Europe should be less in demand as compared to the US Dollar.

Trade Idea #2: Go long on the USD/CNY pair

globalImage Source: Globalriskinsights.com

China’s current currency regime is a fixed yuan with respect to a basket of other currencies, therefore a strong US Dollar should push the Yuan higher. Kind of the same logic as idea No.1.


Trade Idea #3:
Go long on emerging market currencies, like MXN, NOK and others

Following the U.S. election, a number of the higher-yielding currencies experienced a mini-meltdown. Nothing new; they’re just recommending taking a reversal trade on oversold currencies.

mxnnokHuge run-ups in USDMXN and USDNOK show major selling in emerging market currencies.
Image Source: MetaTrader 4


Trade Idea #4:
 Buy emerging market equities that don’t benefit much from U.S and China’s growth

Quite a straight-forward idea; countries like Brazil and India will probably continue to grow despite America and China’s antics, and they should be seen as safer places to park money.


Trade Idea #5:
 Bet on rising inflation by buying 10-year U.S. TIPS

Growth in the U.S should lead to re-introduction of inflationary pressures. Along with bullish expectations for energy prices, Goldman expects 2017 to be a year of inflation.


Trade Idea #6: 
Bet on rising dividends by buying Euro Stoxx 50 2018 dividend futures

Yes, you can not only bet on inflation, but on dividends rising. The Eurex actually offers futures contracts for people who want to bet on dividends rising. I’ve heard of other strange futures contracts like cheese, freight, gold volatility index futures, crack spread futures, but this is interesting.

In 2011, Goldman Sachs expressed their prediction for 2012 as “Overall, though, a volatile market, with little overall change, what we describe as ‘fat and flat,’ would be our central view for the year as a whole, but with things getting worse before they get better…”

In 2012, Goldman Sachs predicted the end of the gold bull market and an improved economy (as well as a bullish stock market), and accurately so. Well done for them. (check out the bullish move in 2013 in the chart below)

spAnd so Goldman Sachs predicted the bull market of 2013.
Image Source: MetaTrader 4

From an outsider’s point of view, it seems that Goldman could just be very, very good at predicting things. However, a quick google search will reveal that they are also incorrect in their calls at times, and this should humble any aspiring trader.

In my opinion, the end of the gold market of 2013 was a result of simple price action analysis. Statistically speaking, or using probabilistic reasoning, a sideways market was a reasonable prediction.

In the image below of the gold weekly chart, we can clearly see the multiple trend line breaks that 2012 was characterized by, and the subsequent sideways-bearish move in 2013. We are still in a sideways market on a multi-year basis.

bullGold experienced a bearish move after multiple trendline breaks in 2012.
Chart Source: MetaTrader 4

With all this in mind, what then should we be looking out for in 2017? Although trading themes are being churned out by analysts year after year, using simple price action strategies, the average investor can identify a few potential trade strategies to take for the upcoming year.

THREE SIMPLE IDEAS OF MY OWN:

1. U.S. STOCKS – CONTINUE BUYING ON DIPS

As most traders know, when the market is trending strongly, ride the trend until it proves itself otherwise. This simple strategy is what I applied on the USDJPY right after the recent U.S election results. In the chart below, we see 12 distinct buying opportunities spread out over 14 days. By simply riding on a strong uptrend, it is actually not too hard to watch your profits snowball – provided you have the patience to hold your trades.

usdjpy12 buying opportunities spotted on the USDJPY 1-hour chart
Chart Source: MetaTrader 4

On the S&P500, a strong trending bull market means buying on any dips is a profitable strategy. It doesn’t take a lot of analysis to realize that this is a high probability trade. Of course, as with any other trade, stop losses will take me out of the market immediately if the trend quickly reverses.

“What about a Santa Claus Rally?”

Graphic shows average monthly change in Standard and Poor’sChart Source: Stock Trader’s Almanac 2010

The statistics for Nov to Feb rallies in past years is pretty positive. Starting from 1950 to 2009, the average November-January rally brings in 4.2% returns. It seems buying on any dip from now till about February next year would be a statistically sound trade.

 

2. FADING OVERLY DEVALUED CURRENCIES

For those who aren’t aware, fading simply means taking the trade in the opposite direction of the trend. This seems like a contradiction to my previous trade idea, but it isn’t; in the context of clearly trending markets, going with the trend is the reasonable thing to do, and the trend sometimes lasts for much longer than one would expect. However, when the move is very, very quick, huge, and climactic, it has to end quickly as well.

In order to see the speed of the collapse, you can obtain intra-day charts of the USDCHF on that fateful day.

chfThe famous Swiss Franc crash and rebound of 2015.
Chart Source: MetaTrader 4

Returning to the devalued emerging market currencies, it is reasonable to assume that huge moves will come to an end, and a reversal trade (with a clear signal!) would make for a profitable bet.

 

3. PRUDENT ENTRIES IN OIL AND GOLD (WAIT!)

On the commodities front, the markets seem more sideways than trending. In such a case, it is prudent to look to trade near the extremes for a reasonable risk-reward ratio. Here’s the crude oil daily chart, and I’ve drawn two simple lines to aid in visual analysis:

crudeIn the case of crude oil, buying near the channel line makes sense.
Chart Source: MetaTrader 4

It’s hard to say where the crude oil could go. Although Goldman predicts it would pick up modestly, I’d rather wait for a strong bullish setup before making an entry. It’s perfectly fine if you are not comfortable entering the market; wait for clarity. It always comes.

For Gold, I had to zoom out a lot more on the charts to make sense of what was happening. Sure, it’s seen a huge dip recently (as a result of the U.S election), but I’ll wait for more confirmation before deciding what to do.

goldGold price chart from Sep 2013 to Nov 2016
Chart Source: MetaTrader 4

By the time the news reports a huge move in commodities, it’s too late. It’s much more logical to look at the charts yourself, and decide on an entry before the move happens; that’s the only way you can profit from the market.

WHAT ABOUT THE SINGAPORE STOCK MARKET?

The STI has been sideways for a couple of months now. This makes for very difficult trading, as the market changes direction many times within the month. I recommend staying clear of trading it until a clear trend develops.

stiChart Source: Tradingeconomics.com

For dollar-cost-averaging investors, this year would have been a very frustrating one indeed.

Using a simple excel sheet, I calculated what returns the investor would obtain if he had bought in any of the first six months this year, and held it to the current price (in November): (all prices used are closing prices for each month)

returnsBuyers of the Straits Times Index from March 2016 onwards would have seen measly returns.
Source: Yahoo finance (calculations done by author)

If you had bought the STI at the end of January, good for you; you would be up 11% on your investment. If you had bought at end February, you would be up 8.6% on your investment. However, the market situation isn’t good news for those who bought in the subsequent months, as shown in the diagram above. For those of you who need candlestick charts, here you go:

stiThe STI has been in a tight sideways market since July 2016; others may say it started in April 2016.
Chart Source: ChartNexus

WHERE DO WE GO FROM HERE?

I’ve shown that the Singapore market has been a tough one to trade in recent months, while opportunities were plentiful in the forex markets. Also, commodities have not asserted themselves in either direction yet, and the effect of a Trump presidency is still weighing heavily investors’ minds.

With that said, as I’ve always asserted, trading decisions are made using simple price action principles and must make logical sense. Goldman Sachs could be correct or wrong, and I could be right or wrong; what matters in the end is that the winning trades make more than the losing trades.

As Soros famously quips:

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros

 

RESEARCH SOURCES & REFERENCES

https://www.bloomberg.com/news/articles/2016-11-18/here-are-goldman-sachs-top-trade-ideas-for-2017
http://www.zerohedge.com/news/2016-11-17/goldman-reveals-its-top-trade-recommendations-2017
fortune.com/2015/11/25/goldman-sachs-stock-market-predictions-2016/
http://www.cleanfinancial.com/financial_images/trading/eur_usd_spread_betting_250x250.png
https://www.theguardian.com/business/2011/dec/22/goldman-sachs-forecast-for-2012
http://www.businessinsider.com/goldmans-2013-forecast-2012-12?IR=T&r=US&IR=T
http://www.investopedia.com/news/goldman-sachs-how-trade-first-year-trump-gs/

How Will Brexit Affect the Various Markets?

Last week, there was much turmoil and excitement in the market. Fortunes were made and lost. And many markets spiked strongly, hitting record new highs or lows.

The pound has crashed more than 12%.

1

 

Gold rose more than 5% in a day:

xa

 

And Oil has started to tip under the 20-EMA (daily chart):

oil

 

The ASOS site crashed as too many shoppers started to buy on the cheap pound.a

Fox news network wrongly reports that the UK has left the United Nations:

fox_news_brexit.jpg_1611819713

 

It seems that almost anything that deals in pounds or derives revenues from the UK is at risk of being dumped. For example, Comfortdelgro runs bus and taxi services in the UK, deriving more than 20% of its operating profit there.

The STI has rolled over on the daily chart, and is convincingly under the 20-EMA.
sti

But on the multi-year chart, if we zoom out a lot we see it has quite a bit of room to move down before it can be considered a bargain buy. I’ve talked about it in my previous workshops, when I showcase my 30-year forecasting chart for long-term investors.

stii

 

There’s a lot of talk about the Brexit being a financial snowball that will end in financial mayhem. There are also people on the internet talking about a huge correction in real estate prices in Singapore:

asd

Overall, I’m glad I stayed out of the Brexit and closed all my positions prior to the Brexit (last wednesday!). Having announced it on my private “live” chat to my program graduates, I sat back and calmly watched the world burn. Just kidding! 😀

fb

What’s clear to me is that although the charts look a little ugly at the moment, the STI is still not undervalued.

For example, China Aviation still remains sky high, after having taken profit on a 5.83 R/R trade (meaning I made 5.8 times of what I risked for the trade):

Here’s the screengrab of when I took the trade,

chinaaa

 

And where it ended up last Friday. Looks like a really nice bounce setup but that’s for another time.

china

 

For now, since most charts are kind of messy and prices and in the middle of the spike range, I will be focusing more in intraday scalping trades to have consistent income even during such volatile times.

This is a defensive play, so instead of going for big wins, I am going for many small wins instead. Good luck!

 

Sources:
http://www.telesurtv.net/english/analysis/Trump-and-4-Other-Crazy-Things-That-Happened-over-Brexit-20160624-0026.html
http://sbr.com.sg/residential-property/in-focus/here%E2%80%99s-why-brexit-bad-news-singapore-property