My long-awaited reappearance

In a flash, nearly five months have come and gone since I reluctantly threw in the towel on my trading experiment. Although my "towel" was drenched with the sweat of failure and despair on that day in May, I was nonetheless glad to have put myself through a hardening experience at this point in my career and life. And I can't deny it was an exhilirating ride while it lasted.

Scanning through my old posts makes me cringe at the time, devotion and bravado I put into the exercise. Still, looking at the market's hiccups since then and the frustrating stagnation of my last remaining shareholding, BHP, I can proudly say my decision to go on hiatus was a wise one. In my absence thousands of people lost money (not just Telstra investors) including a friend who is searching for his first pot of gold. Unbeknownst to me he had whacked $20000 on tiny telco Engin (ENG) and another anonymous small-cap. Only recently did I peruse through some charts and came to the realisation he was turning a house deposit into a piggy bank full of coins. The crazy bugger isn't fussed though, which I admit is a good lesson to us all on positive thinking and self-affirmation. I wonder how many other early-twenties guys are like us?!

My dad has seen his Telstra retrenchment payout dwindle to less than two thirds of its original value after rigidly insisting on placing 100% into an online savings account. Refusing to look for another stable full-time job doesn't help but the sharemarket's poor performance has given him the last laugh. The managed fund (Perpetual) I recommended at the time fell by roughly 20% in the last three months.

At the other end of the scale, my more conservative friend joined the resources party by splashing a whopping $300 on a junior uranium explorer. He's earnt about $25 so far - yet another example of the tortoise outpacing the hare!

Anyway, after singing off on this blog I shifted my attention to the new business venture being started up by a friend and I. If you think day-trading is hard, try your hand at being a company director! And I'm not talking about some cushy role in a multinational organisation where the hardest task of the day is adding up your earnings on a calculator or debating over which Krispy Kreme doughnut is tastier out of blueberry and Powdered Strawberry. No, I'm talking about trying to be a web developer, designer, marketer, receptionist and strategist all in one.

The business (Noodle Networks) has little to do with trading or the sharemarket, which is why I lost touch with basically all financial news. We will be offering consulting services to small Victorian businesses with a primary focus on providing SMS capability. There is quite a market for this at the moment, and having an IT consulting background it is not overly difficult to achieve. With an SMS "invitations" (Noodle Invitations) site for the general public about to be launched in conjuction with the consulting business, you can see why I've fallen off the radar for quite some time!

So what brings me back? I recently received my dividend in the mail from BHP - a measly $33! Does anybody feel embarrassed when presenting the teller with a cheque of less than $50 ? After that I opened up my old trading software and looked back at all the old resistance lines I had drawn all over the charts. Taking a long term view there are some charts in there that are showing some quite enticing patterns. The biggest disappointment was seeing what has become of the Rinker (RIN) price. I earmarked it as a strong short when it hit a peak, but didn't have the cojones to stick with it.

So although I'm back now and happy to watch the odd chart and dabble with a trade or two, I probably won't have the time to post regularly. For now I need to put on my marketing hat and start doing the hard yards....find new clients!

Mercatorius Expletio - Stopped out

Day 31,32,33 - The week of the crash
Total Account Value: $3540
Available Equity: $3292
Positions Remaining Open: 2

I've never been one for game shows. Not only do they offer some of the driest television moments you will ever behold, they also incubate simpleton culture in their simpleton viewers' minds. And would any expert disagree that the illusion of free money and prizes is unhealthy?

I just finished watching an episode of "Deal Or No Deal" that made me feel sick to the stomach. A friendly looking yet doltish mother of six was vying for a 1/26 chance of taking home $200,000. Half way through, the cards were falling nicely and the "bank" was offering a generous $40,000 guaranteed if she decided to walk away. But no...it seems there was a reason behind her daredevil confidence.

"We own a holiday house in Point Lonsdale (affluent Victorian beachside community) that has passed down through two generations," she said in so many words. "At some stage it was mortgaged and now we need to find $400,000 to keep it." God knows what the funds were needed for, but if I was the ancestor who built the house with my own sweat and blood I would be turning in my grave. The charismatic host oohed and aahed and gave her a "shoulder to lean on" but I bet he was thinking the same thing I was - another Cashed Up Bogan (CUB) that the popular media has been talking about recently. Think David and Victoria Beckham, Russell Crowe, Shane Warne and on the not so famous side, jacuzzi-buying goldminers. This former CUB had gone bust though, and she was (quite literally) risking the house on a pure, televised gamble. Reverse Darwinism taking over - survival of the dumbest.

I'll spare you the torture but she left the studio $5 richer. A booby prize for the boob who fancies faith over reason. It was a very timely reminder that most people in the world have little practical intelligence when it comes to risk mitigation and money management. Alarmingly though, consumers like these actually keep the economy ticking over. Watching the public humiliation of the CUB left me vindicated in my decision to stop myself out of trading altogether.

Yes, I've been away for a few days, not because I've been brooding over my losses but because I've been lacking the right words for this diary entry. Wednesday of last week was average but unspectacular as my account balance fell slightly yet again. However I erred fatally in placing complete trust in my charts - the individual daily, weekly and monthly charts of different (non-resources) stocks. Unfortunately, more longer-term buy opportunities were noticed. So through the carnage that occured on Thursday not even my loose stop losses and minor position sizes could save me from a sad demise.

My running account balance collapsed through my maximum loss limit of $4000 to $3400 before making back $100 due to the survivors (HSP and ABC). Gaps appeared on just about every chart no matter what the circumstances, and most rose slightly after that. If anyone made a killing on Thursday they must have combined fiendishly good future with a disregard for the "rules". (Shorting most big resource stocks would have been risky). My biggest annoyance was that in the most recent two weeks I had earmarked many stocks as strongly bearish but shorted them unsuccessfully. Now they have responded - ILU, AXA, MBL (ouch), BIL, RIN, WPL (ouch), ASX - you've seen me talk about them all. The obvious lesson here is to keep stop losses loose but is that safe in an underlying bull market?

So that's the way it is. And even though I wince to admit that my experiment ended in monetary loss I'm not ashamed to say that I failed. Give or take, I have learned more in the last two months than I could have learnt in two years of reading. A good friend reminded me on the weekend that if I started this last year I would be rich. While hearing this buoys my spirits I will not place all the blame squarely on the market. Shit happens and you must expect the unexpected. Still, the market has been wacky lately and is no environment for a beginner.

When the kinks are ironed out and everyone re-mounts the bull I will resume (only on a lesser, less active scale). However, while the followers who follow fables of guaranteed riches will erase from their memories all events further than one week past, I will remember how it felt to crash land. I'll remember how it felt to admit to others that I wasn't good enough, and that I had no choice but to succumb without an opportunity to resurrect the situation. But most of all I'll remember how good it felt to brush away the dust and keep walking, only slightly bruised but nowhere near broken.

So bad, it's embarrassing

Day 30 - Tuesday
Total Account Value: $4315
Available Equity: $3345
Positions Opened: 3
Positions Closed: 5

Ouch, that really hurt. Don't laugh at me people...

The market fell again for the third consecutive day and although some of my positions were holding up, big collapses in NCM and ARQ are largely responsible for that horrible looking account balance. Newcrest Mining, which broke out from a triangle pattern on the 8th of May, had been performing quite well despite all the chaos surrounding it. Yesterday it closed a small downward gap and despite my nervousness on resources stocks, I had picked this based on long-term charts was confident it would see it through. As such my stop loss remained very loose to allow for volatility. Today it plunged 6.4% right through the 20-day SMA and the few days of handy gains turned into maximum loss.

Arc Energy was a similar story - after 3 trades on this stock I have lost a total of $276. The price really doesn't seem to pay much attention to support and resistance. Iluka Resources (ILU), which I had shorted, bucked the trend and began to rise through my stop loss. Once again winners turning into losers. Luckily PMN held out and RIN exhibited further weakness.

The paradox I faced today was watching strong movements happen everywhere but being unable to find many safe entry points. The problem with transitioning from a short-term trading style to an "enter and hold" one is it must be built up slowly. Many stocks have been hovering around long-term support and resistance and are indecisive about when the move will be made. BSL, CSR, ABC, IAG, AWC - the list goes on and on. I really shouldn't be going long until the bearishness has passed and it would be foolish to go short when they seem to be closing in on a reversal. It seems the only lucrative shorting options at the moment are BHP, RIO, OXR, ZFX, FMG etc. but that is way too speculative for me. Without patience I will only continue to bleed.

The promising fact is that I have noted down a list of stocks that appear close to reversals when I couldn't find any at yesterday's close. Something's gotta give.

The red sea

Day 29 - Monday
Total Account Value: $4806
Available Equity: $3107
Positions Opened: 2
Positions Closed: 4

Wow! What a sight to behold today. It was the biggest single-day fall since last October as resources stocks took a king hit. My decision to avoid some of the larger players in the industry was vindicated. I wonder how all the "Johnnie-come-latelies" with undiversified portfolios felt when they left the office for morning tea today. Only the coolest, most experienced minds would have been able to shake off chaotic events such as Zinifex's (ZFX) 8% collapse. I had been raving about this stock just one week ago - I guess it just goes to show how controlled by external events much of the Australian stock market is.

Just about everything fell today with the exception of Leighton Holdings (LEI), which notified the public of an expected 20% proft increase. Not even DCA Health (DVC) could recover from a monumental drop of 19% yesterday. This serves as a valuable reminder not to enter a position simply due to a large fall or gain. You should actually wait for it to start returning to normality. Also, DVC proves that trading solely on "market sensitive" news is folly. On May 11th, a press release announced "DCA Plans Further Aged Care Growth." Second only to resources stocks, the media's other pet subject is the positive outlook for the health industry due to the ageing population. Looks like the market was having none of it.

As for me, I was unable to part the red sea, but my losses were generally contained. BNB was stopped out after a massive opening drop. Keeping looser stop losses has its benefits but on a day like today you end up losing much more than is necessary. This is one stock to keep an eye on however. Promina struggled early and just pipped my stop loss before rising back up a few cents. The annoying aspect was that this price was quite a bit below significant long-term support. Sometimes the pressure is just too great. On a day like today, the stocks that finish strongly (while still down) are the cream of the crop. PMN rallied and the buyers arose from the ruins to re-establish old support. I re-entered at $5.79.

It was my shorts in RIN and BIL that saved my bacon however. ILU also continues to fall and my target of $7 is looking more and more achievable.

Now what's the bet RIO and BHP rise by more than $1 tomorrow?

Week 6 Summary

Profit/Loss to Date (closed positions) - $1548 loss

This week
Positions closed - 17; Positions currently open - 8
Winners - 7; Losers - 10; Win/loss ratio - 41%
Biggest Loss - $177; Biggest win - $423

In what was a very stressful week my trading success and confidence levels fluctuated wildly. I also came to the realisation that my current system (or lack thereof) is not the most efficient way to make money. The shorter the time frame the more effort is required to ensure that wins don't turn into losses. More discipline is required to keep from overtrading, which although it allows me to spread my risk it encourages poor decision-making (which includes closing positions too early due to paranoia or to free up equity - both extremely bad habits). Also, I'm sure that many hardcore traders out there would disagree, but a touch of luck is a great help when opening gaps and market indecisiveness are involved. If no luck was involved, foolproof get-rich-quick systems would have been developed long ago.

It's heartening to see that although the number of positions closed has halved compared to Week 5, the win-loss ratio is beginning to look respectable. Six weeks sure does feel like a LONG time in the trading world.

If a tree falls in the forest...

Day 28 - Friday
Total Account Value: $5187
Available Equity: $2791
Positions Opened: 2
Positions Closed: 0

I didn't even log on to my trading platform until 11am today. That's how confident I am that my "big picture" strategy will work in the long run. There's no need to panic when daily losses occur - it's much worse when trades are taken with the daily flow and not closed out before the day's end. Today the market opened down and stayed down, but my stocks were holding up quite decently. Following a gain of $600, a loss of less than $100 is not bad at all.

Stop losses are one aspect I feel I've improved on. Both BNB and PDN would surely have been stopped out if I stuck to my original pattern of trailing a tight sell order after a day of large gains. I kept reminding myself of Timbercorp (TIM) - the fish that got away last week. Despite technicals indicating strong bullishness I grew paranoid as it followed a successful day with mediocrity. I was happy to exit the position with a gain (such was the overwhelming quantity of losses I'd suffered) at $3.43. The stock now sits at $3.79, which would have boosted my profit to an amazing $621! Trees were falling in the forest and I didn't hear.

I shouldn't be dwelling on mistakes but occurences like this are handy to reflect upon when faced with similar circumstances. Cut your losses early and let your winners run. It's been said many a time before and I'll say it again.

Iluka Resources (ILU) continued to fall with conviction so I pyramidded what was a tiny position to boost the holding to around $7500. In no way does this break the bank but you may have noticed that my conservative half is starting to win the battle over my inner brash adventurousness. The charts point toward heavy support at $7.00 even so I will monitor this closely over the next few trading days.

Bank of Queensland (BOQ) appeared ready to bounce off support at $15.00 but I wanted to wait and see what would happen throughout the day. It fell through to $14.85 but the order book looks very thin so I let the opportunity slip by. It will be interesting to see whether the $15 mark has now become solid resistance or not. The other interesting two are Arc Energy (ARQ) and Bluescope Steel (BSL) which both appear to be hovering around major support and resistance zones. Soon uncertainty will give way to confident movement and I will be ready to pounce. This method is much better than pre-empting the market - I may feel like a hero if the cards fall my way, but if they don't I'm no more than an idiot.

Pendulum of fortunes

Day 27 - Thursday
Total Account Value: $5263
Available Equity: $3377
Positions Opened: 2
Positions Closed: 3

Well there ya go! For the fourth day in a row my account balance has changed by more than $600 a day. Does this mean I'm an inconsistent trader or is it just an example of sharemarket volatility?

There is little to report today as I didn't actively trade as much as I have in the past. Most of the past couple of days has been dedicated to scanning monthly and weekly charts, paying particular attention to moving averages and plain old lines of resistance and support. If a stock's chart displayed scrappy looking, inconsistent movement I removed it from my watchlist. One of these was what had become my trading nemesis - Lend Lease Corp. (LLC). I think this stock a nightmare for both traders and investors.

Some charts showed really nice looking trends and pullbacks, and some of these were very close to the current price of the stock. In a spreadsheet I have written notes beside all my stocks documenting the overall trend (bullish if above 40 day EMA, bearish if below) and short term trend (possible temporary reversal toward support/resistance). The actual values of major support and resistance prices have also been recorded. I plan to take longer term positions when bullish stocks recover from short term reversals and take shorter term positions on trending stocks that change position against the prevailing trend. As such I will avoid some resources stocks such as BHP and Oxiana. Even though these may be profitable, recent gains have gone exponential. With such uncertainty currently surrounding the market I would prefer to wait out these on the sidelines.

Newcrest Mining (NCM) and Promina (PMN) are two stocks that are resuming bullishness. Check out the weekly chart of PMN on a 2-3 year time frame and you'll see why I was keen to go long. It has just broken major resistance and the market depth chart agrees - a strong looking barrier has built up around the $5.80 mark. BNB continues to accelerate and I will stay long with a "loosish" stop (than usual for me) until it adds roughly another dollar.

I barely looked at the daily charts while trading was in progress, but there were some tempting entry signs which I refused to take. If I'm disciplined about trading from the forest (rather than the trees), my crippled trading account will surely recover.