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Top 3 Reasons Why You Should Start Investing in 2017

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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

3 Insanely Profitable Traders You Probably Never Heard Of – What Makes Them Different?

When people think trader, they think rogue trader Nick Leeson. 20 years ago, a single derivatives trader caused Barings bank to collapse, leading to many quickly labelling forex trading as an evil profession.

Here’s a photograph of that historic event when it happened:

1Source: The Guardian

As most people know, proper risk management would prevent failure on such a catastrophic scale. At the same time, it is unfortunate that some of the most famous traders in the world shot to fame as a result of one big trade that normally rocks the headlines. This results in some traders having the mentality that they just need that one big winner to retire comfortably.

Let’s take a look at two famous examples:

GEORGE SOROS – BREAKING THE BANK OF ENGLAND

Soros famously made $1 billion from shorting the British Pound. This was what made his name famous and he was named the man who “broke the Bank of England”,  apparently due to him shifting (or shorting) $10 billion dollars worth of currency.

ANDREW KRIEGER – TRADED BIGGER THAN THE NZD MONEY SUPPLY

Andrew became famous when he shorted the New Zealand Dollar of almost $1 billion in value,  which was more than the money supply in circulation in New Zealand during that year! Andrew ended up garnering $300 million in profits from this single transaction alone for his trading firm.

We know that these two traders had trading accounts that were unbelievably large. This is not the case for almost all of us. Therefore, we need to gain the skills and knowledge that can bring consistent, decent returns on an average trading account size. The key is to look for sustainability, and this is definitely learnable.

“Trading is not about getting a one-hit wonder. It’s a career decision, and requires as much commitment and passion as building a business.”

Below, I’ve picked out three excellent traders who I believe will change the way you think about trading.

How many of you can recognize these faces? 😀2Source: philanthrophyroundtable.org, tastytrade.com


EXPERT TRADER #1: TOM SOSNOFF

1Tom Sosnoff sharing option strategies on his daily financial show with his daughter
Source: Tastytrade

Tom Sosnoff started off as a political science graduate working in the Chicago Options Exchange as a market maker. An industry veteran, he quickly spotted the market opportunity in online option trading, and co-founded and created the famous Thinkorswim trading platform. He later sold it to TDAmeritrade for a handsome sum of more than US$600 million.

A maverick of sorts, he is currently most famous for his financial network TastyTrade, where he shares professional trading strategies relating to derivatives and covers topics that are extremely difficult, such as advanced option greeks, and also the very basic. He exhibits some traits that are very rare and valuable to a trader:

  • Substantial and deep trading expertise.

Sosnoff’s knowledge of his area of specialization is admirable indeed. If you are familiar with options, or consider yourself a veteran in the options arena, you might want to think twice after knowing how much expertise he has garnered.

If one wants to make it in the trading arena, one has to be absolutely familiar with the tools of his trade, and the lingo used by industry practitioners. Forex traders, for example, know the ebb and flow of orders throughout the day, such as the Asian/European/American session, and can detect upcoming volatility even before it strikes. For price action traders, the trader can become so proficient that he knows when to stay out of the market within a few seconds.

  • Sharp business acumen.

A trader is ultimately a shrewd businessman. His trades are merely expressions of his ability to spot opportunities for profit, and he quickly knows if he has made a wrong decision. When he is right, he presses his bets and makes the most out of it. Just as a professional poker player knows the odds of every single set of cards dealt to him, a trader knows the odds of every market situation presented to him.

“If you can play poker well, you can probably trade well. Every trader is a shrewd businessman at heart, placing bets where it matters, with reasonable, sound analysis.”

The trader is also absolutely clear of his strategy. Trading without a strategy is as good as flipping a coin, but with a clear plan for attack and defence, the trader is able to defend his account and successfully build his net worth in the long term.

  • Continuous growth.

In his daily financial shows, Sosnoff quips that he has learnt far more in his years explaining option trading concepts, than he learnt while being a professional trader and market-maker in the days of the exchange floor. His team continuously churns out data and statistics on the probability of different option strategies, ranging from basic ones like naked put selling, to exotic strategies like jade lizards and the like.

“Perhaps the reason why most traders fail is they fail to see themselves as entrepreneurs.”

The ability to continually analyse his strategies and develop his domain knowledge is the key to his continual success. Where many of his peers in the trading floor days have left the industry, unable to keep up with the fast-paced world of online trading, Sosnoff has soared way above and carved a niche for himself.


EXPERT TRADER #2: BRUCE KOVNER

3Bruce Kovner with his wife
Source: The Kovner Foundation

Kovner made his first trade on credit, borrowing money to execute a soybeans futures trade, where he made $23,000 on a borrowed sum of $3,000. He was interviewed in the famous book ‘Market Wizards’, and in 2003 he reportedly ran an $11 billion dollar hedge fund named Caxton Associates. He is a rather low-profile guy and shuns media attention.

“I have no bias toward any of the markets… I am just as happy a trader in a bear market as in a bull market, rates up or down, commodities up or down.”
– Billionaire hedge fund manager, Mr. Bruce Kovner

  • Develop a strategy that you are comfortable with.

Kovner’s hedge fund trades based on global macroeconomic conditions. In the hedge fund world, this is called macro-trading, and is a common way to manage a large portfolio. His unique approach to the markets has earned him 28% per annum over more than 20 years (every single year!). Just as he says in the quote above, he is comfortable trading any kind of market, in any kind of condition.

  • Really understand what causes markets to move.

Fundamentally, institutions and banks move money because of their view on global macroeconomic conditions, and they express this in the form of price action, demonstrating commitment through their buying and selling.

Although most small traders don’t have the luxury to express their view of the economy with hundreds of millions of dollars, it helps for us to understand where the world is heading toward, so that we can ride on the moves of the institutions.

For example, you may have heard of the famous saying “The trend is your friend.” Sure enough, as long as the trend is clear, it shows that institutions are piling into the particular financial product that you are trading. You don’t argue against a trend; you flow with what the majority of market players are doing. The context of the market is far more important than the trading signal; just because you see a bearish candlestick pattern does not mean it’s a wise trade to short the market – you have to see whether the surrounding price action supports your trade idea.


EXPERT TRADER #3: LEWIS J. BORSELLINO

4Borsellino trading in the pits as a young man.
Source: Tastytrade

Lewis Borsellino came out of a troubled past. As a young man, he had to live with the shocking murder of his father and having to deal with emotional blow while working at the Chicago Mercantile Exchange. He started off as a runner before becoming a formidable opponent in the S&P futures pit. At one point, he claims that he traded so large that market participants looked to him as a sign that the market was going to turn. Apparently, his trading volume accounted for as much as 10% of total trading occurring in the futures pit!

  • Get very, very good at what you do.

His confidence on the pit was astounding. He knew what he was doing, and traders around him could feel it. In those days, the expression and emotional state of the trader contributed to the mood around the arena. With electronic trading, this plays a less important role, but the market still expresses itself with price, and the despair and ecstasy of traders can be understood if you examine price very carefully.

He almost exclusively traded the Standard & Poor’s 500 pit during his 19-year career on the trading floor.

“I was very good at what I did.”
– Lewis Borsellino

Many people use multiple indicators, hoping to quickly find a system to get good as a trader. However, what works is to be very good at at most 1 or 2 indicators, or simply trade with no indicators, so that you can gain the most expertise and be familiar with what really matters.

In the proprietary trading world, some traders only use Level 2 quotes, trade ladders, without any charts! There are other traders that make portfolio allocations, while there are some that engage in high-frequency intra-day trading. It does not matter how you get there; once you have selected something, you need to get very good at what you do.

Now that we’ve covered the lives of these three traders, let’s take a closer look at trading as a possible career path.

TRADING AS A CAREER – WHAT DOES IT REALLY TAKE?

Many traders are frustrated with their trading results because they don’t change their behaviour. They make many, many trades, but fail to ask the right people and seek the right guidance, causing them to make the same mistakes over and over again. If you do what you always do, you will get what you always have been getting.

Lewis Borsellino left the trading floor and entered online trading. Initially, he backed a lot of floor traders financially and groomed them to become profitable, but as time went by, he saw the opportunity in backing both floor traders and online traders, and forced himself to re-learn trading with charts.

If you are still unprofitable in the trading arena, what are you willing to do to make things work out for you? Change your actions, and you will see change in your results!

Anthony Robbins says this really well:

3Source: Goalcast

Perhaps you are someone considering trading as a possible side income, or even as a career. It takes dedication (time!), expertise, patience, as well as some street smarts in order to become a professional trader.

“If you are considering making a career switch to trading, what are you willing to do to make it happen?”

 

RESEARCH SOURCES & REFERENCES

https://www.theguardian.com/business/from-the-archive-blog/2015/feb/24/nick-leeson-barings-bank-1995-20-archive
http://www.forbes.com/lists/2006/10/6OQE.html
http://archive.fortune.com/magazines/fortune/fortune_archive/2003/09/29/349918/index.htm
http://www.derivativesstrategy.com/magazine/archive/2000/0300qa.asp
http://www.investopedia.com/articles/forex/100515/these-are-most-famous-forex-traders-ever.asp

5 Practical Tips on How to Trade on the Go (With 15 Minutes a Day)

After trading and travelling to 48 countries across the world, I realised that it is actually not very difficult to trade on the go, since in most countries you can get wifi or buy a data plan, so as long you have your mobile phone, you can easily place trades as you move along.

2016-07-10 10.20.49

 

Here are some useful and practical tips I have picked up along the way:

1. MAKE SURE YOU HAVE A GOOD INTERNET CONNECTION

This is a no-brainer, as the last you want is to be left handing with no internet after entering some trades, and not being able to input your stoploss and targets. Don’t forget to take full advantage of Wifi hotspots at hotels and cafes, or even better, purchase a local SIM card and data plan.

If you have intermittent access to the internet, perhaps because of flights, then make sure you always have a stoploss in place for all your trades.

2. FOCUS ON A HANDFUL OF SETUPS AND PRODUCTS

Since you don’t want to spend too much time browsing the markets, it is a good idea to prepare a simple watchlist beforehand. For me, I usually focus on about 20+ forex/commodity pairs, so that I can scroll through all of them quickly in a few minutes with my mobile phone to look for any good trading opportunities.

And since I won’t be taking many trades, I can choose the best of the best trades, which means that I can focus only the very best setups that I see. When you see an AWESOME setup, it should jump out of the chart and right in your face, and you should feel the rush of adrenaline and excitement to take the trade. If you have to squint at the chart and think thrice about whether it is a good trade, then I would suggest you just let it go.

3. USE A LARGER TIMEFRAME TO PLACE YOUR TRADES

If you are on the move, then obviously you won’t have time to be staring at the charts all day, which means you should not be using smaller timeframe charts like the 5-minute or 15-minute charts. Actually, I won’t recommend using anything less than a 1-hour timeframe.

By using longer timeframes (1-hour, 4-hour, daily), it means that you only need to check the charts at very infrequent intervals, such as every hour, every 4 hours, or once a day. This way, you do not have to constantly worry or stress about your positions, because your stops will naturally be wider (and your positions smaller), so you do not have to worry about the smaller market fluctuations.

4. DO NOT SPEND MORE THAN 15 MINUTES A DAY

Since you do not have to constantly monitor the market, this means that you only have to periodically check and update your positions. You can easily do this by utilising the “wasted” pockets of time that you have throughout the day.

For example, when you are waiting for a bus/taxi/mrt/plane/train, or waiting for your ordered food to arrive, instead of playing some mindless mobile app game or reading random articles of facebook, why not open up your trading app and place some trades instead? This way, you can make some additional income with your spare pockets of time.

5. LEVERAGE ON A GOOD NETWORK OF TRADERS

Lastly, by leveraging on other good traders, I can learn from their trades and hone my skills as a trader.

I will be back in Singapore in about another week, and I look forward to seeing you all at my next “Trading Foundation Workshop”, where I can share more about my travel adventures and some of the trades I made while travelling.
Check availability: http://synapsetrading.com/trading-foundation-workshop/

See you soon! 😀

Simple Video Tutorial: How to Set Up & Use the MT4 Trading Platform

This is a simple demonstration on how you can use the MT4 platform to:

  • Add and view charts
  • Add trendlines, support/resistance, indicators
  • Customise charts layout and colours
  • Toggle between different timeframes and charts
  • Place trades using various methods, including the EP, TP, SL

In this video, I did a sample trade on my live account to show how easy it is to place trades, and this can actually be done very easily via my mobile phone as well.

If you are keen to see more real-life examples, I will be logging in to my live trading accounts to show my open positions, and also take some new trades if there are any good opportunities.
Register to meet Spencer live: http://synapsetrading.com/trading-foundation-workshop/

See you there! 😀

The Most Important Money Management Rule that Most Traders Forget – Why?

What is the one rule that all professional traders use, but many retail traders forget, or are simply unaware of?

_MG_9839

We all know that the goal of trading is to make money, and as long as you have an edge in the market, you will be profitable in the long-run.

So the next question is, how do you maximize your profitability without blowing up your account?

The answer lies in the 2% money management rule.

Let’s use a hypothetical example where you start betting with $10,000. In this scenario, you have hitrate (winning chance) of 60%, and you either win double of what you bet, or lose the whole sum of what you bet. How much would you bet each time?

If you bet the whole $10,000, you have a 60% chance of doubling your money, but you also have a 40% chance of losing everything. That is exciting for a gambler, but not ideal if you want to remain profitable in the long-run.

What if you split your $10,000 into 2 bets of $5000 each? Your probability of losing 2 bets in a row is only 16% (40%*40%), which means your chances of losing everything is much less. Sounds good? What if you take it one step further, and split your $10,000 into 10 bets of $1000 each? The odds of losing everything drops to just 0.01%.

In trading, the secret of money management is not to focus on making the most money, but rather to ensure that you do not lose your capital.

As Warren Buffet once said, the number one rule of his is to not lose money.

How does this apply to your trading?

According to the 2% rule, when we take a trade, we will only risk 2% of our capital on each trade, meaning for a $10,000 account, we will only be risking $200 per trade, and that is the maximum amount that we can lose for each trade. (Risk is calculated as the difference between the entry price and stoploss price, multiplied by the quantity traded.)

With this 2% money management rule, the only way to lose all your trading capital is to lose 50 times in a row, and the probability of that happening is less than 0.000000000000000001%.

We have most likely heard horror stories of traders blowing up their account, and that is happens when they break this rule. If you stick to this 2% money management rule, it is almost impossible for you to blow up your account, and you will see a marked improvement in your trading results.

And this is what separates the professionals from the average trader.
Which one are you today? 😀

 

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Join me for my next free 2-hour seminar where I will reveal all my trading secrets!
Check availability: https://www.eventbrite.sg/e/how-to-profit-from-the-stockforex-market-with-just-15-minutes-a-day-tickets-16884977422