Trading Secrets

Killer trading strategies to beat the markets and finally achieve the success you deserve

Louise Bedford

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118319260
• eBook ISBN: 9781118319239
• Edition: 3
• Topic: Business
• Subtopic: Finance
• Index: Business

A practical, informative, and accessible guide to getting started in trading

Louise Bedford has been coaching and mentoring traders for almost twenty years, and in Trading Secrets, Third Edition she's back to share what she's learned. Whether you're just starting out in the trading world, or you're an old hand looking for some new tricks, this book is for you. Packed with everything you need to get in on the action and consistently profit from the markets, Trading Secrets is your personal coach to becoming a trading mastermind.

Designed to educate, motivate, and guide you through the sometimes confusing world of trading, the book shows you how to set up a trading business and, most importantly, master your number one trading foe; yourself. Known for her witty and entertaining style, Bedford has demystified the world of share trading for thousands of investors and traders, and you're next.

• Brings together the processes, careful planning, and risk control techniques that Bedford has used throughout her own successful trading career
• Offers fascinating insights into everything from how to handle a windfall profit to why men and women trade differently
• Includes end-of-chapter review materials, essential for helping you master the material

Part I: Business secrets

Chapter 1: Stop trading, start thinking

In this chapter, you will learn that:

• Most traders dive into the markets before they even plan for success. If you’re ready to stop whingeing and start making money, don’t shirk the work.

• Fundamental analysis involves making evaluations regarding the future share price direction based on company balance sheets, profit/loss details and announcements.

• Technical analysis and charting take into consideration share price and volume action to establish whether share prices are likely to go up or down in the future.

• Good traders come from both schools of analysis. The key is to find a method that resonates with your way of thinking and to use strategies suitable to your level of trading development.

• Trading on tips and gossip will never lead to consistent results.

• It’s best to avoid applying leverage too early in your trading career. Learn how to trade effectively using shares first before you move into trading options, CFDs or futures.

If this is the first book about investing and trading that you’ve ever looked at, you may find the jargon involved in this field a little tricky to understand. The first part of this book is designed to get you into the swing of how traders approach the market, and to broaden your foundation of knowledge. You may find that you are unfamiliar with quite a few trading and financial terms, so give yourself some time to come to grips with all of the weird terminology. Instead of trying to single-handedly work out what certain words and phrases mean, and perhaps in the process missing the lessons that the chapter is trying to convey, turn to the glossary on page 301 before reading on. Unfortunately, there is no simple way to fill your mind with the necessary information unless you put in an effort to learn some of the jargon. You’ve got to start somewhere — all traders have at some stage felt exactly the way you are feeling.

I’ve been able to help a vast number of ordinary people trade all sorts of different instruments all around the world. I’m dedicated to helping individuals become successful traders, so that they can live life on their own terms. It’s within your power to make this your richest year ever. All you need is the correct training.

Once you grasp the basics, you’ll feel much more comfortable with the whole process. Successful trading involves applying basic principles over and over again. So let’s dive in!

Tug of war

In the investment field there is often a tug of war between those with a fundamental viewpoint and those with a technical perspective. Just what are these forms of analysis and how can they help you make a profit from the sharemarket?

Fundamental analysis

Fundamental analysis seeks to detect shares that have a probability of increasing or decreasing in value based on announcements, company balance sheets and profit/loss details. If you are used to reviewing figures, ratios and interpreting data, then this type of analysis may suit you.

Considered traditional, but tried and true, the big issue is whether fundamentals have a direct effect on the share price. Many times I’ve seen a company release a great profit result, and the share price turns down the next day. Even a surprisingly good track record does not necessarily ensure sharemarket success. It is perception that drives share price action. The emotions of the players in the market will ultimately create an uptrend or a downtrend. Positive announcements that are released to the press are often already factored into the share price, so even a strong profit result will not necessarily lead to a bullish reaction.

Technical analysis

The majority of brokers tend to be fundamentalists at heart, so they may discourage you from exploring the field of technical analysis. Luckily, you are in charge of your own financial future, so it is your responsibility to fully explore all avenues before making a decision. I encourage you to persist in the field of technical analysis and develop your skills in the sharemarket. Technical analysis has helped many traders increase their profitability and proficiency. It may provide a whole new career for you, or allow you to develop a valuable source of additional income. At a minimum, with a bit of study in this field, you’ll definitely be able to impress your friends at dinner parties with amazing terms such as ‘trendlines’, ‘Stochastic Indicators’ and ‘going short’!

Technical analysis is a method used by an increasing number of traders to determine the points at which they will enter and exit the market. Some misinformed investors feel that this method is somewhat akin to reading tea leaves or tarot cards because it involves a degree of subjective interpretation. However, even fundamental analysts differ in their interpretation and projections; so let me assure you that this is definitely an area worth investigating.

Technical analysis involves reviewing actual price and volume action on share price charts to reach conclusions about the likely future direction of the price. In general terms, I’m the type of girl who doesn’t care why a pair of shoes is on sale ... I am just in seventh heaven to see them at 50 per cent off! That’s why I focus on technical analysis and share charts. I have tried using fundamental analysis to trade but, for me, the true indication of market sentiment is gleaned from looking at charts, rather than analysing reams of ratios. The benefit of this method is that it crystallises the market sentiment by displaying information in a visual format. Many people think in pictures and so relate to the pattern recognition inherent in technical analysis. Rather than number-crunching figures, ratios and prices, technical analysis enables you to look at a chart that displays all the information you need to trade proficiently.

Technical analysts believe that everything known and unknown about the share is already factored into the share price. Often, by the time a media announcement is made, the share price has already displayed signs of reaction. It is this share price action that a technical analyst uses to detect buy and sell signals. Technical analysts often don’t know the reasons behind the share price increase, but they are willing to buy the share based on the charting patterns that it presents.

This type of analysis is a way that you can access an early source of inside information. If company insiders know a pertinent piece of information about the company, they are likely to act on it prior to releasing it to the public. Their actions will show up on the share chart as either buying or selling pressure. You don’t need to know why the share price is going up, you only need to observe that it is going up. The actual reason for the price increase is of little consequence — it should not make any difference to your ultimate purchase decision.

The majority of technical analysts tend to be trend followers. They wait for a share price to display a trend in a particular direction, prior to taking action. For trend followers, there are a few simple rules. The first rule is that if a share is trending up, buy it. The second rule is if it’s going down, sell it. Many people overcomplicate trading but, in essence, if you become adept at identifying the direction of a trend, you are well on your way to trading like a professional. Technical analysis is part art and part science. The more you use it, the better you will be able to interpret the signals.

Over time, people who trade against the trend will ultimately run out of money and self-destruct.

There are some traders who continually try to trade against the prevailing trend. Over time, people who trade against the trend will ultimately run out of money and self-destruct.

Some traders seem intent on getting in at the bottom of a trend, and out at the top of a trend. Your friends may be impressed if you tell them that you rode the entire trend, but in all likelihood, the pursuit of this ‘perfect trade’ will leave you penniless. This has more to do with ego than with any objective form of technical analysis. It is practically impossible to repeat this activity with a high degree of probability ad infinitum.

When I started trading, it really was a case of learning by my own mistakes and banging my head against a lot of brick walls. Not only was this horribly expensive and time consuming, but I felt terribly alone and scared for a lot of the time. I didn’t realise that it was really important to draw on the support of people who had already achieved what I was looking to achieve.

You see, successful technical traders have a defined set of rules to enter a trade, and to promptly exit from the market at the first sign of a downtrend, or to preserve their capital after the share has retraced in value. They maximise their profit potential through dedication to the principles of managing money and risk. Later chapters will explore these concepts.

Another method of analysis

The other type of analysis you could try is to read newspapers and listen to rumours, opinion and hearsay. Your neighbours, friends and favourite journalist may mean well, but it is unlikely that they will suffer any consequences if you act on the strength of their opinions. This popular, but exceptionally unproductive, technique is the way most people buy and sell shares. Headlines in newspapers directly feed our greed and fear. Unless you would like to create a small fortune — after starting with a large fortune — do not be tempted to take advice from these sources.

Amateurs react emotionally whereas professionals consider carefully the implications of their actions prior to responding.

Many journalists who are expecting an announcement from a company will write two stories — one bullish story and the other bearish. Depending on the market’s reaction to the news item, the journalist will run with the corresponding story that he or she has compiled to explain why the share price increased or decreased. This hardly sounds like you’re getting the inside scoop, does it? You’re receiving a jaded explanation of an event that has already occurred. Newspapers report on what has happened, not what is about to happen.

Personally, I never give tips and I never listen to tips. I have found trading on information received in the form of a ‘hot tip’ to be unpredictable and foolhardy. Amateurs react emotionally whereas professionals consider carefully the implications of their actions prior to responding. The next time someone rushes up to tell you about the latest ‘sure thing’ — even if that person happens to be your broker — take time to review a share chart to see whether the recommendation makes technical sense.

Fundamental analysis may help to provide an indication regarding which shares are likely to increase in value, but it will not provide a timing tool. Technical analysis will help to pinpoint when to enter and exit a trade, but it won’t provide any information regarding whether the company is financially sound. Many traders use a combination of both methods. You will need to make your own decision about how to engage the market.

This book will focus on technical analysis, as this is the method that I use to trade. I have tried using fundamental analysis to trade but for me the true indication of market sentiment is gleaned through looking at charts rather than analysing potentially subjective company reports. Charts show whether people are willing to put their money where their mouth is. Technical analysis puts you on the cutting edge and allows you to make money without becoming buried in a mountain of paperwork.

Strategy

Your analytical skills are your ammunition. Your skill in determining a share’s direction is something that can be put to use in any market around the world. Wherever the forces of supply and demand provide a market, you will be equipped with the correct tools to make money. If there is more demand for a share, the price will be driven upward. If there is a predominance of emotional sellers, the share price will drop like a stone. This concept holds true whether you are trading soybeans in Brazil or gold stocks in Australia.

After you have completed your analysis, work out the appropriate strategy to use in order to profit from your findings. You will need to decide which type of vehicle is appropriate to make money from your observations; that is, shares, derivatives (including options, warrants and CFDs) or futures. Each strategy needs to be firmly based on the findings of your analysis or you will be destined to lose money. Some markets will move more slowly, and thus are easier to trade, because you have more time to consider your actions. The returns to be expected from these markets are lower compared with those of more leveraged are...

Table of contents

• Cover
• Table of Contents
• Title Page
• Foreword
• Part I: Business secrets
• Part II: It takes all sorts
• Part III: Trading tools
• Part IV: Trade management secrets
• Part V: Recession-smashing strategies
• Part VI: Words of wisdom