S a xM
SPREADBETTING the e-magazine created especially for active spreadbetters and CFd traders
Myth or Fact?
INTERVIEWS “MR FTSE” MARK AUSTIN
wHy do you SpREadbEt? GAMBLER OR TRADER?
LESSonS FRoM HiStoRy MAJOR STOCK MARKET CRASHES OF THE LAST 100 YEARS
RESEaRCH in Motion updatE BULLS BACK IN TOWN?
n io it Ed
issue 11 - december 2012
Feature Contributors MAGAZINE
SPREADBETTING Robbie burns aka the naked trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
dominic picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Zak Mir Zak Mir is one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded www.Zaks-TA.com, the first pure TA website, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of 101 Charts For Trading Success.
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Editorial List Editor Richard Jennings Sub editor Simon Carter Design www.coyotecreative.co.uk Copywriter Sebastian Greenfield Editorial contributors Tony Loton Phil Seaton Thierry Laduguie Filipe R Costa Chris Chiilngworth
Disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice.
Foreword As I write, playing the markets feels like being in a washing machine on full spin. These last few weeks of November have been, without a doubt, the hardest trading environment that I have endured since the terrible summer months of 2011. The “fiscal cliff” and social unrest are being wheeled out by the media pundits as the reason behind the sharp shakeout. Whatever, it seems that there are some top-heavy positions that are being unwound in the equity markets at present and for those caught in the mix it ain’t been fun! Of course, the beauty of spread betting and CFD trading is that you can simply press the short button and take advantage of a downdraft. Snag is, it is of course not easy to tell what the short-term trend is, and when you do feel confident of pressing the button, you can bet your last coppers that the proverbial “sod” and “law” will assert themselves! A must read this month is the update from our novice spread better — Chris Chillingworth who is learning the ropes in the markets and bravely baring his experiences for all our readers. At the other end of the experience spectrum is a cracking interview with Mark Austin — widely recognised as THE FTSE trading guru. Be sure to take a look at the piece which was covered as an interview by Zak Mir. In keeping with the festive theme, we take a look at the so-called “Santa Rally” to find out if it is a myth or actually grounded in fact and we come up with some rather surprising results. For those readers looking for some “hand holding “in their spread betting, then the Managed Spread Betting Services piece is also likely to prove of interest. Hell, after being in the markets for over 15 years, even I could do with my hand holding now and again (in both senses!) — all recite The Beatles — “I wanna hold your hand..!” We’ll be producing the New Year edition of the magazine towards the very end of December and which will be packed with some great trading ideas for 2013. So, as we draw the curtain down on 2012, I would like to thank all our readers for your continued patronage of this magazine throughout this year. It’s been hard work, but worth it, and we are going to kick-off our shoes and enjoy the festive period now! Season’s Greetings to you all.
The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
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Santa Rally Is there any basis to this seasonal expectation?
14 Why do you spreadbet? Gambler or Trader?
Managed Spread Betting services
Zak Mir’s Top Pick for December
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We take a look at a unique new service designed to assist spread betters with their trading.
Zak focuses in on the Brent Crude oil contract this month.
City Index Trading Academy A unique experiment attempting to train eight novices to trade and with a prize of £100,000 at the end.
Spreadbet Beginner’s diary Our novice ‘Robbie Burns’ Chris Chillingworth updates us with his journey into the world of spread betting during this last month!
How to deal with a losing streak Tony Loton author of Better Spread Betting gives us some guidance on how to deal with an inevitable losing streak.
Traits of successful spreadbetters
Capital Spreads Angus Campbell relays the traits of their successful clients.
Simon Carter offers a selection of Xmas technology products for profitable traders this year.
Dominic Picarda’s Technical Take Dominic takes a look at some long:short trade ideas amongst the UK blue chips this month.
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Stock Market Crashes of the last 100 years
Ski Feature Special focus on Lech, Austria
Lessons from history
An update on our Conviction Buy call on the Blackberry maker.
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Zak Mir interviews Zak interviews “Mr FTSE” Mark Austin.
Best of breed UK based tech companies Contrarian UK takes a look at some of the UK’s foremost technology companies - ARM, Imagination Technologies & CSR.
Robbie Burn’s ‘Movember’ Diary Robbie regales us with his trading activity this last month.
Richard Donchian profile Phil Seaton’s LS Trader runs his slide rule over legendary trader Richard Donchian’s trend following record.
Currency Corner MonexEurope assesses what is behind the recent lack of volatility in the FX markets.
Mid Cap Corner
Thierry Laduguie explains his most profitable technical analysis combinations.
Focus on broker ICAP - are the shares now a Buy?
A little known strategy that limits your downside yet maximises your upside.
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Looking back at the
stock market crashes
of the last 100 years In a special two part piece that will conclude next month we look back at the major stock market crashes of the past 100 years. Since the creation of the Wall Street Stock Exchange, at the beginning of the 20th century, there have been countless stock market crashes that have ruined the fortunes of many in just a matter of days, hours, or even minutes. Crashes are the result of panic selling associated with poor underlying economic conditions. Although the exact triggers vary widely from crash to crash, most of the time a crash follows speculative stock market bubbles, periods under which people drive share prices up to lofty levels seemingly in thrall to never ending prices and where valuations get pushed way beyond fundamentals. To quote Alan Greenspan: “periods of irrational exuberance”.
A stock market crash differs from a bear market due to its associated accelerated panic selling leading to abrupt and often dramatic price declines in short spaces of time. In what may surprise many, a crash need not necessarily lead to a bear market. Of course, the Wall Street Crash of 1929 lead to a prolonged bear market that took until 1935 to shake off. In contrast, the crash of 1987 was shrugged off in a couple of years and in fact set the scene for the long bull market of the 1990’s. In this edition of our magazine we will take a look at the Panic of 1901, the Panic of 1907, the Wall Street Crash of 1929 and the Black Monday of 1987. In the next SBM edition we will continue with the little known Friday the 13th mini-crash of 1989, the October 27, 1929 mini-crash, the 9/11 aftermath crash of 2001, the 2008 Great Financial Crisis crash, and finally the 2010 flash crash.
“Crashes are the result of panic selling associated with poor underlying economic conditions. ”
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Stock Market crashes of the last 100 years
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Panic of 1901 The Panic of 1901 originated from a fight to control the U.S. railroads between E.H. Harriman and James J. Hill. Harriman was in control of Union Pacific while Hill was in control of Northern Pacific Railway. To dominate the rail roads of Chicago, Burlington and Quincy, Harriman tried to gain control of Northern Pacific Railway by quietly buying up its shares. Just when he almost achieved his goal, Hill learned of Harriman’s activities and contacted J.P. Morgan who ordered his men to buy every share that they could get their hands on. As a result, Northern Pacific shares rose exponentially and the short sellers faced ruin, having to buy to cover at much inflated prices. In the end, neither Hill nor Harriman were able to accomplish their respective goals and eventually they decided to form a trust — Northern Securities — a company that was prosecuted and convicted under antitrust laws, and finally dissolved in 1904. As a direct consequence of the fight between these two stubborn men, many fortunes of lesser men were ruined in the panic that ensued in the stock market in the wake of the prosecution.
Panic of 1907 (also known as the 1907 Banker’s Panic) In October 1907, a financial crisis occurred as a consequence of a failed attempt to corner the market of United Copper Company. The failed attempt led to a major failure in the banking system, a run on banks and almost a collapse of the whole banking system (sound familiar?!). The crisis has a name — the Otto Heinze Crisis — a man whose failed attempt to push a single stock price higher almost left the country’s banking system facing bankruptcy. In what was arguably the era of Mr J.P. Morgan — a name that still bestrides global markets today — this venerable banker’s actions allowed the market to avoid meltdown. Otto Heinze implemented a scheme to drive the price of United Copper Corporation artificially higher. He planned to buy shares and put the short sellers in a situation where they had no other chance to cover their losses other than repurchasing shares at a much higher price (such events seem entirely legal today as the hedge funds who shorted Volkswagen shares in recent years found to their cost!).
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Stock Market crashes of the last 100 years
Heinze’s plan was almost farcically flawed, however, as he lacked one major lynchpin to the plan: he didn’t have the necessary funds to do it! Still, undeterred by this small issue, Heinze decided to go ahead with his plan. He overestimated how much of the company his own family controlled and although he succeeded in part in driving the price up, the short sellers were able to get the necessary shares from other sources instead of the Heinze family and so the corner operation failed. As a result of the failure, the price of United Copper shares dropped substantially and Heinze was in a difficult situation unable to pay his debts. Banks lending money to the scheme suffered runs which spread to other banks and trusts. The third largest trust of New York City — Knickerbocker, capitulated, as people withdrew money from almost every bank and trust. J.P. Morgan’s intervention was crucial. He lent money to banks and convinced other influential people to do the same in an attempt to restore confidence. The effort was magnanimous and he was able to put an end to the liquidity crisis in November 1907. United Copper Company was, however, ruined and never recovered.
“the stock market plunged 50% from its peak one year earlier. ” The panic occurred during a recession and the negative effects were substantial. Production dropped 11%, the stock market plunged 50% from its peak one year earlier, the unemployment rate rose from 3% to 8% and imports dropped 26% — all because of one man’s greed (again, ring any bells Mr Fred Goodwin?!). Fortunately, positivity came from the crisis. In the aftermath it became obvious something should be done to avoid future runs on the banking system. A commission was created and from its recommendations the Federal Reserve System was borne later in 1913.
The Great Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as Great Crash or simply Stock Market Crash of 1929, is the Grand-daddy of them all. Quite simply the biggest and most far reaching shakeout in stock market history.
In 1987, the stock market experienced a larger drop in a single day but the 1929 crash was much more profound and marked the beginning of an economic downturn that was the worst in American history — The Great Depression. Right throughout the 20’s, markets had been rising for nine consecutive years. The U.S. economy was emanating confidence as its power and influence was rising on the global stage. Many Americans invested in the stock market with more and more getting sucked in as prices seemed to spiral perpetually higher. People borrowed money and brokers were happy to allow buying on margin (an early precursor to CFD trading and spread betting perhaps?). In the days preceding October 24, 1929, share prices suddenly became unstable however. With the P/E ratio on the S&P index sitting above 30, a bubble was already well and truly formed. At the time, however, many attributed the price swings to the prospects for passage of the Smoot-Hawley Tariff Act, an awful piece of law that imposed raising U.S. import tariffs to record levels. The exact reason that led to the sudden decline in shares on October 24 is not known, but panic hit the market and it was driven down 11% just after the open. Several influential bankers called an emergency meeting and decided to buy shares in blue chip companies in an attempt to encourage investors to do the same and so restore trust in the marketplace. It was a success and the market recovered during the session to close just a little under water. Unfortunately, the press hit the eyes and ears of many during the weekend (recall this was a time of no computers and internet!) and on Monday October 28th, investors tried to sell their shares, many held on margin, en masse.
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Panic spread and the market lost 13% in what was the second largest daily loss ever at the time. The following day another loss of 12% was registered. Even though the market managed to recover 12% the following day, the damage had already been done. Confidence was shot to bits and many margined players were flushed out. A downtrend of three years was just getting started. Stock market values dropped an incredible 90% during the ensuing 3 years through to 1932 in what was the worst depression ever . In just four years, the economy saw unemployment rise from 3% to 25%, international trade halved and many people were ruined. Although many say the crash and the depression that followed were not cause-effect, the truth is there is a strong relation. The plunge in the stock market hit confidence in the whole nation and led to the bankruptcy of several banks.
Businesses couldnâ€™t get funds from banks and unemployment rose (ever more parallels with the events of recent times eh?). Consumption was severely hit and a process of economic torpor and contraction was put in motion that was only mitigated when President Hoover started the great American rebuilding program. Even though it is not clear what led to the crash and the subsequent crisis, there are certain factors that were key. First of all, a lesson to learn on valuation never buy overvalued shares with the crowd. High P/E ratios illustrated that a bubble had formed and that sooner or later a crash would occur. Second, the Smoot-Hawley Tariff Act was quite simply ruinous. J.P. Morgan, a key man in the prior crashes, almost begged President Hoover to veto the act as he knew it would be disastrous. He was right. The Act played its role in the crash as many countries retaliated against the crazy import tariffs. In 1933, U.S. international trade was an astonishing 50% lower than where it was at the start of 1929. Third, the fallout from the banks de-leveraging only served to accelerate the problem. A system to diminish the effects deriving from liquidity problems should have been in place, but it wasnâ€™t. Amazingly, it took 25 years until 1954 for the Dow to recover its pre-1929 crisis level.
CHART - THE WALL STREET CRASH OF 1929
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Stock Market crashes of the last 100 years
Black Monday of 1987 The crash occurred on October 19, 1987 becoming later known as Black Monday. It was the worst single-day drop the Dow ever experienced and to this day still stands, losing 508 points which translates into a tub thumping 22.61% drop. Prior to this single-day loss, there was a warning shot across the bows to investors as the Dow had lost 10% over the prior three sessions. It took almost two years for the index to fully recover. But, if we contrast this with the twenty five years it took to recover from the 1929 crash, it was nothing. In fact, although being the worst single-day loss, the 1987 crash was relatively mild in terms of its aftermath problems. This time there was no J.P. Morgan to save the banks, but the Federal Reserve System was already in place and doing its job to avoid the spread of problems to the whole economy through slashing interest rates. Its actions were very effective and a painful and prolonged bear market and economic contraction was averted
â€œIt was the worst single-day drop the Dow ever experienced and to this day still stands, losing 508 points which translates into a tub thumping 22.61% drop.â€?
CHART - BLACK MONDAY 1987
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Many explanations were advanced in an attempt to explain the catalyst for the sudden break in confidence and to this day, people still debate it. Before the crash happened the Dow rose 65% in the two years that preceded it and the market had just experienced a five year bull period rising 189% since August 1982 as Treasury Bond yields fell dramatically and a “cult of equity” was again getting started. We can see now, however, that the usual ingredients were again in place — investor exuberance, lofty valuations and a prolonged bull run that had manifested complacency amongst the investing populous. Some people think that computer trading exacerbated the decline. In 1987 computers were developing fast and were being used to automate trading. Some reports say that when the markets started falling, the computers introduced sell orders on every down tick they saw as a direct consequence of what was called “portfolio insurance” and that this amplified the drop. Still, this wasn’t the catalyst. The crash started first in Hong Kong as the market opened Sunday night (UK time) and then spread to Europe and finally to the U.S. in a crescendo right around the globe. Just ahead of the crash, US legislation was introduced that eliminated the deductibility of interest debt related to corporate takeovers.
Again, many have postulated that this was the trigger, but the simple reality is participants were over extended and over exposed and that all that was needed was for a few participants to hit the sell button for the entire pack of dominos to fall. Interestingly however, the stocks that led the decline in the US were those that were the most affected by the legislation. The final reason pointed out as the cause of the 1987 crash is related to the US’ international trade deficit. A large deficit was announced on October 14 which led the Treasury Secretary to suggest the U.S. dollar may need to fall to bring the current account back into equilibrium. His statement raised fears that foreign investors could pull capital out of dollar-denominated assets, causing a rise in interest rates and a fall in asset prices. All these reasons may have had their part in the crash, but the presence of an overvalued market is always a key determinant. A P/E ratio at the time of 20 was a warning signal. In writing this piece it caused us to look at any comparable with the present environment. Happily, we find compelling global valuations, particularly in selected Europe, the UK and Japan. All display the same characteristics of investors that are underweight and fatigued with equities and where a largely side-ways market has been experienced over the last 12 years. In short, if history is any guide, the current environment is not one that historically crashes have emanated from.
“In short, if history is any guide, the current environment is not one that historically crashes have emanated from.”
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Santa rally myth OR fact? As the year draws to a close and we enter the final straight, many punters are no doubt hoping for the traditional year-end rally or “Santa Rally” as it is affectionately known. We thought it would be interesting to look at the actual data to see whether this expectation is well founded or, indeed, whether it is yet another market myth that doesn’t stand up to statistical analysis like the “sell in May and go away” mantra that only has a 50:50 chance of coming true. We collected data from the last 25 years regarding the FTSE 100, S&P 500 and the Nikkei 225 indices. Of course, past data is not any assurance of future performance but, still, one can possibly gain a trading edge by looking back at the data for high probability events.
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Santa Rally - Myth or Fact?
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Each year is, of course, different from the last with the economic context varying substantially and geo-political factors being at play. This year, for example, as I write, it is the so called “fiscal cliff” and the “Will they, won’t they avoid it?” question that is driving up bond prices while hanging over the equity markets like the Sword of Damocles. If the fractious US political parties — Democrats and Republicans — can put the American people and arguably the global economy ahead of partisan posturing, then the equity markets are likely to experience a sharp rally indeed, possibly to new highs for the year. Should the US go head over heels over the fiscal cliff in the New Year, however, then of course all bets are off, and so this is an example of how individual year’s December returns are affected by specific catalysts. The key question, however, is — can we glean any useful guidance from the historic returns table? The data table below is pretty compelling, I’m sure you’ll agree, certainly in relation to the UK & US stock markets.
December has been very profitable over the last 25 years — a period that is now bifurcated by the tail end of the 90’s phenomenal stock bull run and also the successive three bear markets experienced from the turn of the millennium. Arguably, this is a good historic period dataset to analyse, that reflects a mixture of market environments. What is even more interesting is that when the preceding month of November was a down month, then the probability of a positive December is even higher for the FTSE and incrementally so if the year in question was a positive year. At the time of writing, the FTSE is modestly down for the month of November, yet is up modestly for the year to date. The odds of a strong finish to the year for 2012 look to be on our side. One other interesting fact we unearthed too is that the most probable positive days throughout the entire trading year are the 2 days preceding the Xmas break and the trading days between Xmas and New Year. Lesson? Hold off on the Xmas festivities and leftover mince pies and take advantage of what is patently a sellers’ vacuum on those days, particularly if you are looking to offload positions.
DECEMBER STATISTICS FTSE 100
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Donâ€™t miss out!
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Managed Spread Betting services What are they? For many years spread betting sat on the edges of accepted investment practices and pretty much all the individual spread bet firms were restricted from giving advice due largely to a particular FSA directive known as KYC (know your customer), and also because of a perceived conflict of interest between their own trading â€œbookâ€? and that of the client.
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Managed Spread Betting Services - What are they?
In recent years, however, a small number of firms have obtained the authorisation required to give “advice” within the spread betting arena, reasoning that as CFD (Contracts for Differences) were acceptable to the FSA from an advisory perspective, then spread betting, which essentially only differs in its tax treatment (being tax free relative to CFD that are tax assessable), should similarly be treated the same. I’m guessing that as a reader of this magazine that you are either (a) looking for some trading ideas and/ or (b) perhaps for a degree of guidance in your own trading? As we are at pains to relay every month, being seasoned and experienced traders ourselves, we realise that making money in the markets is hard; if it were easy, then every man and his dog would be doing it. Consequently, if you are a novice spread better/trader or indeed a more experienced one, this new breed of firm that provides, at a base level, a sounding board for your own ideas or of course their own trade suggestions, is something that you may be interested in exploring further.
“we realise that making money in the markets is hard, if it were easy then every man and his dog would be doing it.” One such firm that has been successfully advising its clients in the CFD arena for several years, winning various investment awards along the way, is JN Financial. Their commission rates on both their CFD and spread betting products are every bit as competitive as trading in a direct capacity with a spread bet firm. They have, however, just launched what we think is an interesting proposition to the market place and this is a unique spread betting advisory service. We think it is a compelling proposition as: (a) when trading via them, they do not act as “principal” to the transaction, i.e. they do not have what may be a vested interest in your trade being a losing bet and (b) they do, in fact, actually have an active desire for your account to be long lived and successful as they only receive remuneration when you trade — if you blow your account up then it is no good to them!
So just how can a managed spread bet account be useful to you? Let’s say that you have an idea on a particular stock and (wisely!) don’t want to rely on the increasingly inane drivel that is posted on the bulletin boards by stale bulls and ‘voyeurs’ (those sad beings that seem to take delight in the capital destruction of others); with such a service you can bounce the idea off your account manager and maybe gain a different perspective on a situation. I know from personal experience as a fund manager that discussing an investment idea with an analyst, for example, allowed me to take on-board different considerations that I hadn’t previously considered.
I asked Nathan Eisenberg, JN Financials Managing Director, how he thinks the new spread betting advisory service could be useful to spread bettors both old and new: “As an established and successful advisory CFD company we realised that this was missing from the spread betting arena and that it was a natural extension of our services that could prove similarly useful to spread betters, whatever their level of expertise. We get to know our clients and many do use us as an impartial sounding board — something that is very important in these markets. Many have also ended up becoming friends of the traders.” Secondly, for retail investors in the spread betting sphere, it is increasingly difficult to obtain worthwhile and thorough research, certainly on UK stocks, as the institutions that produce quality in-depth research guard its distribution closely. One exception is Edison Investment Research and that we recommend all readers take a look at, given the sheer scope of their research coverage. Although they do stop short of giving buy and sell recommendations, the valuation and accounting work is second to none. In JN Financial’s case, they do offer their own stock recommendations, and so you can be sure that thorough analysis has been carried out.
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Another extremely important point, coming on the heels of the shocking situations at Worldspreads this year and before that Man Financials — both of whom collapsed taking client monies with them, is that you should ensure that your spread betting advisor is fully authorised by the FSA and so you are covered by the FSCS up to £50,000. We wouldn’t suggest to our readers that they deal with any unauthorised firm for this very reason. JN Financial are FSA regulated and so there is absolutely no difference whatsoever with regards to the client money protection that you would enjoy dealing directly with them or a spread bet firm. Perhaps the other major benefit of trading with an advisory firm is that as a necessity of their regulated status, they must carry out a “fact find” on their clients in understanding the client’s particular trading profile. This includes key elements including your risk parameters, return expectations etc, etc. We all know that in the thick of the markets, with your own money on the line, discipline can fall by the wayside. If you have an account manager, however, that is aware of your risk parameters, then he becomes your de facto risk manager and can act as the all important “brake” when your trading is careering out of control. Also, when carrying out the fact find they will look at appropriate leverage levels for your account and so ensure that you don’t “over trade” (commit more capital from your account to positions than is appropriate from a risk perspective). Diversification of positions, hedging, guaranteed stops implementation and generally being your “eyes and ears” in the markets are compelling attributes of these firms. Trading, whether via CFD’s, spread betting or any other mechanism is known as the “lonely game”; basically it is you and your capital against the markets. Survival not just of the fittest, but of the most disciplined, the most prepared and the most informed. At Spreadbet Magazine we believe that a service that (a) costs you no more in spread commissions, (b) provides a sounding board for your own trades, (c) offers all the protections that come with FSA authorisation and (d) is tuned to your own personal trading parameters and risk profile is a welcome addition to the industry. We have no hesitation in recommending JN Financial’s new service in hopefully improving your spread betting returns.
“Survival not just of the fittest, but of the most disciplined, the most prepared and the most informed..”
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When going into battle in the markets, it pays to have good back-up...
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RISK WARNING SPREAD BETS, CFDS & FX ARE LEVERAGED PRODUCTS & CAN RESULT IN LOSSES THAT EXCEED YOUR INITIAL DEPOSIT. JN FINANCIAL IS AUTHORISED AND REGULATED IN THE UK BY THE FINANCIAL SERVICES AUTHORITY. December 2012 442252 | www.financial-spread-betting.com | 23 REGISTRATION NUMBER
Zak Mir’s Top Pick FOR DECEMBER BRENTCRUDE
It has been a really difficult November to my mind, in fact it was rather as one might have expected October to have been — fear driven. Looking back at equity markets in the immediate aftermath of the Presidential Election result, we are reminded of just how insidious they have been. It seems that the market was rather too relaxed regarding the prospect of the US Fiscal Cliff. But then, as soon as President Obama was re-elected, they behaved as if they were scrambling to come to terms with the prospect for the first time!
Of course, until we know how things are going to pan out regarding The Cliff, all this leaves the last month of 2012 very much up for grabs in terms of whether we should go with the usual year-end rally scenario, or something altogether more sinister. In other words, we are faced with quite a conundrum and you would probably expect me to plump for a safe prospect, say some FTSE 250 stock that does not go with the overall market trend.
Indeed, the gravity of the situation, as far as I was concerned, was underlined by a spread bettor who contacted me regarding his long positions in the S&P and Apple (AAPL). Both of these he entered in October on the basis that the ongoing uptrend in both markets was his friend. Unfortunately, he found out that both markets not only delivered a retracement, but seem determined to make sure that anyone attempting to ride out such a pullback will not be able to do so without suffering some serious financial damage. Of course, with the run-up to the Fiscal Cliff and all the attendant negotiations, even with the best will in the world, it is very difficult to suggest on a strategic course. Ever the optimist, I have gone for the scenario whereby either there is a “fudge” deal which prevents any further serious retracement for the stock market, along the lines of what we have seen in Europe, or, a deal well ahead of time say by the end of November / first week of December which allows for a return to normality for the U.S. and equities. Here’s hoping!
However, after delivering a hat-trick with three wins on my first three monthly calls so far for Spreadbet Magazine, I would really like to offer some real charting magic for Christmas. Therefore, I have gone for one of the most difficult markets around: Brent Crude. Clearly, I would not be sticking my neck out if I was not completely satisfied with the technical setup here as the backbone to the buy argument.
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Zak Mir’s top pick for December
“However, after delivering a hat-trick with three wins on my first three monthly calls so far for Spreadbet Magazine...” Recommendation Summary The sound of rockets firing into Israel and a general escalation of what is a no win conflict in my opinion, for either side, is my starting gun for a buy bet in Brent Crude on a fundamental basis. While we have a new double dip recession for the Eurozone, a continuation of the Greece bailout mess, and even Spain a possible fresh contender for this process, few would back Brent as a buy where the demand side of the equation is concerned. However, I believe that the Middle East is about to become seriously unstable over the winter and therefore supply disruption fears are likely to outweigh all the bearish news just at a seasonally strong point for oil prices too. Indeed, even before the geopolitical explosions of the recent past, it did appear that economic concerns had already been factored into the Crude Oil price, as we have had several years now to factor this in.
Looking at the technical picture, what can be seen on the daily chart is the way that for the beginning of November there was an initial bear trap dive below $105, and below the former September $106.49 floor. The implication of this is that not only do we have a clear cut technical buy signal here, but one that resolves the mystery of the conflicting fundamentals — hence why charting can be so useful in times of doubt. The target for me is as high as a rising July price channel towards $125, and as soon as the end of January.
CHART - BRENT CRUDE
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Recent Significant News
12 November: U.S. oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s biggest fuel consumer almost self-reliant and putting it on track to become a net exporter, the International Energy Agency stated recently. The U.S. in H1 2012 83% was self sufficient, by 2020 it should be the world’s largest crude oil producer, and by 2030 a net exporter.
Although I have probably written literally millions of words on Technical Analysis and the markets since the start of the century, a topic I have rarely discussed is why I use technical analysis? One of the key answers is to solve fundamental riddles such as that of Brent Crude at the moment.
13 November: The International Energy Agency cut its forecast for oil demand during the last quarter of this year and said the state of the global economy will limit consumption expansion in 2013. It reduced its forecast for global oil demand in the final three months of 2012 by nearly 300,000 barrels a day to 90.1 million barrels a day as a result of economic weakness in Europe and the fallout from Hurricane Sandy in the U.S. 15 November: Brent Crude steadied above $109 a barrel as violence in the Gaza Strip sparked worries about supply disruption and offset concerns that a slowing global economy could hit demand with Eurozone GDP falling 0.1 per cent in third quarter. Hamas fired dozens of rockets into southern Israel, and Israel launched numerous air strikes across the Gaza Strip as the military showdown lurched closer to all-out war. 16 November: The U.S. Energy Department’s weekly inventory release showed that crude stockpiles increased, as production climbed to its highest level in 18 years. At the same time supplies of gasoline were down for the first time in five weeks, as domestic consumption jumped 7.2% to 8.91
November saw mega news on oil including the U.S. beating Saudi Arabia on production, a double dip recession for the Eurozone and the highest stockpiles for crude in 18 years in the U.S. These three headlines are all bearish for the price of this commodity. But, set against them is one big bull factor, conflict in the Middle East, and in the case of Israel and the Palestinians two cultures (yes, I call them cultures not religions) who seem to require war in order to survive — Ancient Rome, I recall, had the same problem... I digress! With such an “eternal” bull factor you have enough to trump the aforementioned bears described above. Throw in Iran and a little Syria / Turkey and in the near term there is enough to underpin this market, at least over the next month. This is my view even going into the Fiscal Cliff even if traders go for the U.S. dollar as a safe haven. Quite simply, until the U.S. really does become the world’s biggest oil producer by some way due to the forthcoming deluge of shale reserves, a situation reminiscent of the Spindletop Texas revolution seen in the oil industry in 1901 when mud was used in the drilling process for the first time, oil price remains in a secular uptrend to me.
26 | www.financial-spread-betting.com | December 2012
UK100 | WALL ST | DAX | NASDAQ | S&P | CAC | GOLD | BRENT CRUDE | COPPER | EUR:USD | GBP:USD | USD:JPY | EUR:GBP | APPLE | RBS | VODAFONE | GOOGLE
“And that dress she was wearing was as tight as a Capital Spread.”
Spread Betting | CFDs
The tightness of our spreads is legendary. Spread betting carries a high level of risk to your capital and can result in losses that exceed your initial deposit. Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. December 2012 | www.financial-spread-betting.com
Take a better position | 27
Is it possible for anyone to learn to successfully trade the markets? City Index intends to prove that with the right support they can, in a new competition: City Index Trading Academy. Eight aspiring traders. A ÂŁ100,000 prize.
28 | www.financial-spread-betting.com | December 2012
City Index Trading Academy
“tHERE HaS nEvER bEEn a MoRE ExCiting tiME to tRy to MaKE MonEy FRoM tRading. ” Over the course of six weeks, experts at spread betting firm City Index propose to demonstrate that with the right education and facilities, anyone can learn to trade the financial markets. There has never been a more exciting time to try to make money from trading. New opportunities can be found in every region and indices. A new competition, City Index Trading Academy, features eight competitors from a wide range of backgrounds and with little-to-no experience of speculating the financial markets. City Index experts, and Trading Academy Mentors, Ashraf Laidi and James Chen, intend to turn them into star traders in under two months. Each week the competition will get tougher and the stakes will literally become higher as the contestants are forced to demonstrate their flexibility, confronting live trading challenges in different markets. Using City Index platforms for mobile and iPad, or more traditional desktop dealing, the competitors are able to trade on some of the industry’s most powerful platforms wherever and whenever they want to. Those who find themselves in the bottom three of the profit-and-loss table at the end of each week will be held to account by the Trading Academy Mentors who, in a boardroom showdown, make the final decision on the individual to be eliminated from the competition. In the final week of the contest, the remaining traders will battle each other and the markets for the £100,000 cash prize.
In an innovative first, the City Index Trading Academy contest is being broadcast online in an interactive environment, which allows the audience to trade along with contestants. The series has been syndicated on YouTube and across the internet with the first episode being viewed almost 200,000 times within 10 days. From a former marine to the managing director of a waste disposal company; from a humanist celebrant to a former super-yacht captain; the central theme of the competition is that whatever the contestant’s background, through the education provided by City Index over the six weeks of competition, they will learn the ability to successfully trade the market; a skill which will stay with them for the rest of their lives. It is the role of the Trading Academy Mentors to provide the contestants with the tips and techniques they need to trade effectively. In Ashraf Laidi and James Chen, they have two of the most experienced and well regarded experts in the world. Ashraf Laidi, who describes his training method as being swift, thorough and unforgiving, has served as a strategist in the retail and institutional broking industry for over a decade. His reputable insight on currencies and commodities has won him several number one rankings with FXWeek and Reuters. As Chief Global Strategist at City Index, Ashraf is well positioned to provide the Trading Academy candidates with the ingredients they need to successfully speculate on the markets.
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Meanwhile, James Chen, the Chief Technical Strategist at City Index, has a wealth of experience as a currency trader, having been involved in the industry from the inception of the retail foreign exchange market. He is widely considered as one of the most highly respected technical analysts in the retail trading industry and provides the competitors with a more methodical and structured approach to training. But what are the most important tactics for Trading Academy competitors to implement to beat off the competition and return a healthy profit? Well, according to the mentors, the key components include: trading with the prevailing trend momentum, establishing a detailed strategy for entering and exiting trades, maintaining discipline and, perhaps most importantly, to have the hunger and desire to never stop learning. However, as the contestants at the City Index Trading Academy have quickly learnt, there is no holy grail, failsafe system for trading the markets, but the right trading strategy and sticking to a plan can give them an edge. The challenge for the contestants is to maintain their discipline and put the theories they have been taught into practice.
Through the excitement generated by the Trading Academy, City Index hopes to reach other aspiring traders and demonstrate that they too can learn how to trade these volatile markets in person, by attending specialist classroom seminars or events, held at City Indexâ€™s offices, or remotely, by watching online webinars on City Indexâ€™s website from the comfort of their own homes. Ultimately, trading is both art and science. The route faced by the contestants over the six weeks of competition is not a straight path, but rather a narrow road which has bumps, curves and hurdles along the way. The journey is undoubtedly challenging, but equally it can also be exciting and rewarding. As the competition comes to a climax, the City Index Trading Academy finalists will need to remember everything they have been taught over the six weeks and have the discipline to apply it under extreme pressure. However, all Trading Academy competitors will be able to take home the skills and tactics needed to trade the markets and continue to feel the unique sensation of making a winning trade. The series can be viewed at the following address: http://www.cityindex.co.uk/trading-academy
The problems often faced by novice traders, such as those competing in Trading Academy, is coping with the combination of information overload and overcoming the pull of emotions. This is further complicated if you consider that the famous adage of buying low and selling high is not the full story when it comes to trading.
30 | www.financial-spread-betting.com | December 2012
City Index Chief Global Strategist
City Index Chief Technical Strategist
Visit cityindex.co.uk/trading-academy Show your support #TradingAcademy Spread bets, CFDs & FX are leveraged products & can result in losses exceeding your initial deposit December 2012
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a tuRbuLEnt MontH by CHRiS CHiLLingwoRtH
“HowEvER, tHERE waS aLwayS tHat niggLing FEELing in tHE baCK oF My Mind waiting FoR it to aLL go wRong. tHEn CaME novEMbER.”
32 | www.financial-spread-betting.com | December 2012
A turbulent month
In my first 18 months spreadbetting the financial markets, I’ve felt the highs of invincible confidence and the lows of confused despair — probably like many of you out there too? October was a great month for me; seeing my return on my investment (ROI) grow from about 18% up to highs of 40% at times. I have a few stocks in the US General Retail sector such as $DLTR, $ROST, $TJX and $MJN that I had been shorting. All of these fell considerably and this contributed to the 40% I was experiencing. I expect many novice traders who experience such testing times did the same as me — I started forecasting what 60% was going to look like, 80%, 100% even... You know what I’m talking about. Let’s face it, if I could hit 40% in just a few months, then surely 80% per year was on the cards? I won’t deny I started dreaming of the riches. That’s honestly how I felt. However, there was always that niggling feeling in the back of my mind waiting for it to all go wrong. Then came November. As I write this, we are mid-way through the month so there is still time to go, but it has not been a kind start to my portfolio and, from looking at comments on various bulletin boards, to a lot of other people’s too. A fair amount of my pull-back was due to my own mistakes in trading. More annoyingly, mistakes I have made before. When a large number of my stocks, at one point every single one of my stocks, started moving heavily in the wrong direction, I felt what can only be described as pure panic. Too hung up on wanting to keep my ROI above 30%, I started to do stupid things. I started opening day trades on the DAX in a desperate bid to make back the losses my system had incurred that day. I did in fact make a large sum of money on my first day trade. In hindsight, however, it would have been better for me to have lost, and I probably would have walked away with a small loss. Instead, I started thinking this was the future. Maybe I should be day trading now! After a few days I ended up losing everything I had made; and then some. It wasn’t working...
Failing to really learn my lesson, I started doing something similar with the Forex pairs and again made money from the git go. I opened more and more Forex trades, all day trades... I think you know what’s coming next. Yup, I ended up losing more than I won! It has been a pretty woeful couple of weeks for me. And what’s more, I knew I had let myself get suckered in despite several months of not making any mistakes with my system. I was looking at myself and thinking, “You idiot”. I liken it to trying to shake off a drug or drink habit (neither of which I have personally ever suffered, mind you, but I think there are similarities). I can go months without making any errors and then something happens which causes me to relapse and start doing stupid things. I am now sitting at 20% ROI. Still a respectable result, but made worse by the fact I had poured some of it down the drain worrying about my ROI score. If I had stuck to the system, my ROI would be higher today. However, I’m not one to wallow in self pity. I’ve closed any trades that had nothing to do with my original system, taken account of where the rest of my trades are, opened a couple of new ones that do fit my rules and I’m back on the horse, so to speak, determined to learn from this episode. It’s a small step back in what is a much bigger journey and a good opportunity to learn. Heading towards December, my goal isn’t to reach 25%, 30% or even get back to the 40% return I have previously seen. My goal is very simple — to stick to my rules and not make any mistakes for the remaining few weeks of 2012. If I do that, the ROI will take care of itself. I hope!
“It’s a small step back in what is a much bigger journey and a good opportunity to learn.”
You can follow my journey on my blog where I post all my trades, warts and all, winners and losers at www.spreadbetbeginner.co.uk and you can follow me on Twitter @traderchilli
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How to deal with a losing streak When the editor asked me to write something on the subject of “How to deal with a losing streak”, I joked that I had no experience to draw on regarding draw-downs... because I had never suffered one. Then he pre-empted the By Tony Loton first point I make in this article by “wishing” that I had in fact suffered a losing streak somewhere along the line, because one was sure to come along sooner or later... So yes, that’s the first point I want to make.
34 | www.financial-spread-betting.com | December 2012
How How to to deal deal with with aa losing losing streak streak
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iS it LuCK oR iS it SKiLL? Arguably the worst spread bettors in the long run are the ones who do really well from the very beginning. It’s much more likely that this is due to “beginner’s luck” in a bull market (for long traders) rather than genuine skill during adverse conditions. As soon as your beginner’s luck runs out and the bull market deserts you, so you will likely lose all your profits plus the money you staked in the first place! tip: if you staked £10,000 and turned it into £100,000 in your first month of trading, withdraw £90,000 of it to a safe haven (or even buy a yacht) and start spread betting again with a £10,000 trading deposit. Counter intuitively, initial losses may be the making of a trader. We learn more from our mistakes than from our successes, and the best lesson we can learn is humility. But don’t read too much into this, as it’s reminiscent of the first-time business owners who think they’re doing all the right things — despite losing thousands of pounds — because they’ve heard that “many ultimately successful businesses made huge losses in their first couple of years”. It’s perfectly true, but many more new businesses made big losses and never came back from the brink, so initial losses are no guarantor of eventual success.
dRaw-downS FoR day tRadERS Day traders aim to bank a profit (and hopefully not a loss) every single day. Ideally they don’t suffer draw-downs, because this would be a sign that their trading strategy simply isn’t working. But anyone can suffer an extended run of bad luck—such as throwing five “tails” in a row when tossing a coin.
If it’s a biased coin, you simply can’t win, just like you can’t win if your trading strategy is biased towards the negative—in which case you should pack up and go home. If you’re convinced that it’s a fair coin — or biased in your favour, which is even better — then it’s only a matter of time until it comes up trumps (or rather, “heads”). The problem is, you don’t know when, which is why it’s vitally important that you take note of the following tip. tip: you must “stay in the game” long enough to realise your trading edge, if you have one. The way to stay in the game is to practice prudent position sizing, sound money management and judicious use of stop orders. In other words: don’t bet the farm, or even 1/10th of it on each coin flip. Something like 1% should be the order of the day.
dRaw-downS FoR poSition tRadERS At the other end of the trading spectrum is my preferred longer-term position trading approach that has something in common with traditional value investing. Position traders might not expect their positions to move immediately into profit, and these traders may incur initial losses while they establish their portfolios of undervalued — and possible still falling — stocks. A position trader’s equity curve might initially look like this: Do you see how this demonstration position trading spread bet “portfolio” depreciated by almost 50% before starting to recover?
36 | www.financial-spread-betting.com | December 2012
How How to to deal deal with with aa losing losing streak streak
In this scenario, the position trader hopes that the initial draw-down will be repaid many times over, however, in the long run by an eventual multi-bagging leveraged profit. I’ve personally seen spread bet portfolios fall by 50% like this, and then rise by a factor of 30! Providing you trade within your means, you may be comfortable taking a 50% draw-down en route to a several thousand percent profit. Tip: Assess your draw-down against the realistic upside potential, and don’t draw down by a massive 90% if you’re pursuing a modest 10% profit. In relation to the tip just given, consider that a 90% drawdown requires a 900% recovery merely to break even. Unlike traditional investing, with leveraged spread betting this might just be possible, providing you...
Or do you have some concrete proof that your faith will be rewarded? In other words: is your “belief” based on your trust in the high priests of trading, or based on your own personal epiphany? I was lucky enough at one point to experience a 3000% return-on-investment within six months, which is equivalent to making £300,000 from every £10,000 of trading capital deployed. Since I’ve experienced first-hand that such a multi-bagging outsize return is perfectly possible, I’m happy enough — though not deliriously so — to stick with my preferred strategy in the face of the kind of draw-downs shown in my earlier graph. But only because I’ve seen it with my own eyes! Tip: Only “keep the faith” indefinitely if you have actually seen the light yourself. Trading is not a matter of life and death... it’s more important than that!
Keep the Faith When you encounter a losing streak and your draw-downs are mounting, you can do one of two things: switch to a different strategy, or keep the faith. It’s hard to know which is best. Really hard! You may be suffering because your strategy isn’t working, or because it simply isn’t working “yet”. If you decide to “keep the faith” and hang on in there with your current strategy, are you doing so merely because your favourite trading author (allegedly) runs this strategy... or perhaps because your favourite investment web site promises that you can never go wrong as long as you “buy and hold” (through thick and thin) for the long term?
Stop Digging! When you’re losing money and drawing down your trading funds, there is a temptation to “bet bigger” in order to get “even” with the market and recoup your losses even quicker. This kind of Martingale strategy is doomed to failure unless you have infinitely deep pockets that allow you to stay solvent longer than the market can stay irrational. Most successful traders will agree that it’s much better to reduce your bet sizes when you’re losing. So this leads me to my... Final Tip: When you’re in a hole, stop digging!
About the Author Tony Loton has authored the books “Stop Orders” published by Harriman House and “Position Trading” published by LOTONtech, and he runs the spread betting web site at www.betterspreadbetting.com
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RIMM UPDATE Blackberry 10 launch imminent, will it carry the stock price higher? We first covered RIMM in our inaugural January issue in which we looked at 10 contrarian plays for 2012. RIMM was tipped to be a potential takeover target and although there have been sporadic bouts of takeover speculation at various stages, as yet no acquirer has actually made a move although Samsung’s name has been in the frame on numerous occasions. The shares were originally tipped at $13 and we doubled down in the early $7s just ahead of their 2Q results and bringing our average down to a shade over $10. With CEO Thorsten Heinz surprising to the upside with the 3Q results at September end in which he unveiled rising subscriber numbers in emerging markets in particular where RIMM remains extremely popular and also a stable cash balance of $2.3bn due to tight working capital management; the shares have responded with upside momentum in recent weeks, in fact reaching a high of just over $9 in early November.
Scepticism about the company’s future prospects remains embedded in the analyst community, but with RIMM showing signs of stabilisation and preservation of their strongholds in the emerging markets of Nigeria, India and South Africa, should Blackberry 10 actually prove to be a hit with the West’s consumers, the discount to book value ($18) could narrow dramatically. With 80 million subscribers, Research in Motion still remains a solid player in the industry and veteran investor Prem Watsa, described by many as the Canadian Warren Buffet, has been a big buyer of the stock during the summer months and now holds just under 42m at the last regulatory filing, just over 10% of the company — not an insignificant bet.
38 | www.financial-spread-betting.com | December 2012
Research In Motion Update
“should Blackberry 10 actually prove to be a hit with the West’s consumers, the discount to book value ($18) could narrow dramatically” The continued poor sentiment surrounding the company in the face of improving financials, a potential positive catalyst on the horizon with Blackberry 10’s launch likely early in the New Year and, at the time of writing, with nearly 20% of the company’s stock sold short, then the set-up for a sharp squeeze higher or simply a re-rating looks encouraging.
Indeed, at Q3 2012, Google clearly stood at the forefront of the smart phone industry, shipping more than 130 million units and enjoying a global market share of 75 percent. Apple came second with a market share of 15 percent and RIMM claimed the third position by achieving a market share of just above 4 percent.
Background to their downfall RIMM revolutionized the mobile industry when it created a so-called “power-emailer” in the early 2000s. Corporate executives and white-collar professionals the world over fell over themselves to own a Blackberry, not least because of the security of its email system. Indeed, so addictive was the ability to email at will, anytime anywhere, that the devices became nicknamed “Crackberries”. Barack Obama’s public lauding of his Blackberry device just after his success in the 2008 Presidential election proved to be pretty much the high point for RIMM with its stock price peaking at just shy of $150 around then. It has been one-way traffic since that point down to a low of just over $6 in Sep of this year. Many analysts level the blame for RIMM’s downfall squarely at the doorstep of former joint CEO’s Jim Balsillie and Mike Lazardis who completely missed the threat of the Apple iPhones and Android Operating System created by Google. As the stock price continued to fall away during 2011, much to the chagrin of one activist investor — Jaguar Financial, that built a large position in the stock with a likely average of the mid $20’s (ouch) — the two founders of the company eventually fell on their swords in January of this year, resigning and making way for the new CEO Thorsten Heinz. Shortly after his departure, however, Balsillie actually ploughed $50m of his own money into the stock when the shares were trading in the mid teens and so illustrating his confidence in the future of the company. The stock currently trades at around half the price of Balsillie’s last purchase. It is unarguable that RIMM failed to adjust to the transformation of the mobile industry during the last three years. From nowhere, Apple completely usurped the one-time leader of the smart phone market, initiating a mobile “app” revolution and, of course, Google introduced the groundbreaking Android platform that has been adopted as the de facto non-Apple industry standard by the mobile phone industry.
The marriage of Nokia and Microsoft in the cellular space is also now into its stride with the launch of the Windows Phone 8 devices this summer. Some analysts are now suggesting that RIMM may, in fact, lose its 3rd place in the industry, and it has to be said that the new Lumia smart phones are actually rather good, being received well by both industry participants and consumers alike. Additionally, the early launch of WP8 handsets has provided Microsoft with a significant first-to-market advantage too. In short, a lot rests on a smooth and successful launch of Blackberry 10 in 2013. Blackberry 10 is already being lab-tested with 50 carriers. This testing period typically lasts 60-90 days so the phone could be out in late January. If it is received well, this could be one of the drivers that could lead to a short squeeze.
The good news In a market that is ruled by Google and Apple, RIMM exceeded analysts’ expectations with its Q3 2013 results. The figures themselves were not the key issue to me, rather it was the fact that for the first time in many quarters they actually positively surprised.
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It tells me that the primary analyst community, and that is North American predominantly, is hamstrung, as is so often the case with “group-think” mentality; a group-think mentality that is still very negative on the RIMM and is unprepared to even acknowledge any glimmers of light. This spells opportunity to those lone dissenters and contrarians assuming that the fundamentals of the company give you a cushion of comfort. The company ended the second quarter of fiscal 2013 with more cash and higher revenue than expected. For the six months ending September 2012, net cash produced from operating activities revealed a 17% positive change compared to last year. RIMM reported revenue of $2.9 billion. Even though revenue figures showed a significant drop on a year-over-year basis, still the total revenue exceeded analysts’ median estimate of $2.48 billion by quite a wide margin. Also, RIMM shipped approximately 7.4 million smart phones while analysts predicted about 6.9 million. Are we seeing a common theme here? The negativity surrounding the stock looks to us to have reached excessive proportions, and like with profit warnings that generally come in threes, surprises to the upside generally get followed by more surprises. RIMM also recently won an important U.S. security certification which will allow the Blackberry 10 to be used by government agencies. This is the first time the company device has been certified prior to its launch. A decisive factor in the company’s future performance is the QNX component of the new Blackberry 10 — a highly regarded operating system that management hopes will provide a successful turnaround for the company and that was acquired in 2010.
The software runs the security, info-tainment and hands-free system in General Motors cars and also runs routers and switches on Cisco’s networking systems. BB10 embeds the best features from QNX’s operating system and provides a reliable shift away from “monolithic” designs. The new operating system is in the final stage of testing before its launch in Q1 2013. The improved operating system is expected to deliver an optimum user experience by combining high quality security parameters and usage innovations which include simultaneously working profile applications. Something of particular interest from a valuation perspective is that the company is also considering licensing its new operating system seeking for additional cash flows.
Summary During the last three months, the stock has performed nicely by returning more than 10 percent as the chart below illustrates, and we expect this upward trend to continue, especially in anticipation of the release of the new handsets. RIMM’s valuation metrics suggest a compelling value opportunity to us, even more so than when we made the stock a Conviction Buy at the beginning of the New Year. The shares trade over 50% below book value and from a balance sheet perspective have a healthy quick and current ratio of 1.7 and 2.2 times; and being completely debt free, in fact sitting with current cash reserves of over $2.4bn — over 50% of the current market capitalisation. Additionally, the company has committed to purchasing $1.2bn of its stock back — a very powerful tail wind to any short covering that also occurs.
40 | www.financial-spread-betting.com | December 2012
Research In Motion Update
Technical outlook As we can see in the chart below, the stock has found a degree of resistance in the $8.30-$8.45 zone. At the time of writing, it is attempting to clear this decisively. These gains are usually shed immediately or a few days later. It is, in our opinion, in the process of a putting in a bottom, although the worst may be priced-in as it is trading significantly off its September 25th lows of $6.25.
The stock is still in a volatile phase and needs to hold above $7.90 on a weekly basis to confirm that the worst is behind it. A weekly close below this level could, however, result in a test of the lows. Conversely, a weekly close above $9.50 would be a very bullish development and indicate that the stock was ready to trade as high as $12.00 before pulling back.
CHART - RIMM
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tRaitS oF SuCCESSFuL tRadERS by anguS CaMpbELL oF CapitaL SpREadS
When hosting our seminars, I regularly get asked “how do I make money trading the markets?” Spread betting is just one way you can gain access to thousands of global markets from one account, one of the main benefits being that any Capital Gains are completely tax free (although this is a UK law that depends on individual circumstances and is subject to change). Attendees to our regularly held seminars and webinars come not necessarily to hear why they should use spread betting or how to trade online, but they want to be told the winning formula that’ll make them a millionaire in the shortest space of time possible. Unfortunately, in answer to the original question, Capital Spreads is an execution only broker so we cannot offer advice, however, we can educate new or experienced investors by informing them about what strategies are popular and, most importantly, where clients continually make the most errors.
“onE oF tHE MoSt CoMMon MiStaKES tHat pEopLE MaKE, in paRtiCuLaR bEginnERS, iS tHat tHEy HavE unREaLiStiC ExpECtationS bELiEving tHat aLL tHEy HavE to do iS pLaCE a FEw £10 bEtS and tHEy’LL SpEnd tHE RESt oF tHEiR LivES tRading via a Laptop FRoM a bEaCH-in-tHE-Sun.”
One of the most common mistakes that people make, in particular beginners, is that they have unrealistic expectations believing that all they have to do is place a few £10 bets and they’ll spend the rest of their lives trading via a laptop from a beach-in-the-sun. So, the first thing to appreciate is that trading is tough, you’re not going to become an expert overnight and those who do master it are generally in the minority. In fact, the failure rate tends to be much higher the shorter your time horizon. Most people who start spread betting fall straight into the trap of choosing the shortest possible time frame in which to make hoped-for big money, and they generally choose the most unpredictable markets to trade. It’s no wonder so many first time traders fail so quickly when they jump in at the deep end only to realise shortly afterwards that they don’t know how to swim. Not long ago, I met someone who said it took them about five years to learn the hard way before becoming a profitable trader. They started by making most of the common errors beginners suffer from and then spent lots of money on various courses before losing more money until eventually after years of practice they found a technique that worked. The key was finding a suitable risk management strategy which helped to control the emotional side of trading.
As the title to this article suggests, making money via any form of investing is not easy — otherwise everyone would do it.
42 | www.financial-spread-betting.com | December 2012
Traits of successful traders
Controlling one’s emotions is a very important part of any type of trading or investing and so once you’ve cracked this, then a lot of the other things fall into place because decision making can become so much more rational. Fact is, however, that some personality types just aren’t suited to trading as not everybody can be a professional football player.
Some traders allow losses to build as the market moves further and further against them, in the hope that the market will turn and the trade will eventually come back into profit. This is a strategy that losing clients employ as it is unfortunately human nature not to want to incur a loss. Even those in the know are often still guilty of doing it on occasion.
Often it can help by going back to basics and going over those first steps taken when starting out, for example, ensure that you are trading a market that suits you. It can take people a long time to realise that they may actually be trading a market that doesn’t suit their risk management style, it’s too volatile or they simply don’t understand it.
“This tends to be one of the most common mistakes and the main contributing factor to the good old 80/20 rule (80% of retail clients who trade on margin lose money).”
One thing is for certain though — a profitable trader isn’t one who is prone to running their losses. This tends to be one of the most common mistakes and the main contributing factor to the good old 80/20 rule (80% of retail clients who trade on margin lose money).
To become a profitable trader takes hard work and effort. The path is long, the path is undulating, but for the few who make it, the journey is well worth it.
While LCG attempts to ensure that the information herein is accurate at the date the information was produced, however, LCG does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice. Spread betting and CFD trading carries a high level of risk to your capital and you can lose more than your initial deposit. Capital Spreads is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority.
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UK100 | WALL ST | DAX | NASDAQ | S&P | CAC | GOLD | BRENT CRUDE | COPPER | EUR:USD | GBP:USD | USD:JPY | EUR:GBP | APPLE | RBS | VODAFONE | GOOGLE
“Yup, I held on as tight as a Capital Spread.”
Spread Betting | CFDs
The tightness of our spreads is legendary. Spread betting carries a high level of risk to your capital and can result in losses that exceed your initial deposit. Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial44 Services Authority and a member of the London Stock Exchange.| December 2012 | www.financial-spread-betting.com
Take a better position
Go On….Treat Yourself This Christmas By Simon Carter Ahhh Christmas! Believe it or not, the ‘Season to be Jolly’ is with us again and so are the relentless advertisements telling you what you simply must buy for your loved ones. But you’ve been a good boy this year. You’ve made sure that you’ve stayed away from Santa’s Naughty List (just!). And so surely you deserve to treat yourself to a little bit of Yuletide joy.
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Nokia Lumia 920 Price: £419 The Queen must struggle each year to come up with new angles to fill her six minutes of Christmas afternoon fame and though this year she’s likely to dwell on the Jubilee and the Olympics, maybe her message to the nation should be a simple one: there’s more to life than Apple and Samsung. Radical as though that message would be, Her Majesty would have a point. And nowhere is that point more nakedly addressed than with the exciting Nokia Lumia 920. Though the incredible HTC One X certainly has a claim to being ‘best of the rest’ the fact that it runs Android gives it the profile of a poor man’s Galaxy. The Lumia is built on Windows 8 and this alone means that it is one the of the world’s most exciting smartphones going into 2013. The tile based operating system makes Apple’s iOS and even Google’s Android look dated and the customisation options seem endless. The phone itself delivers on all fronts. Good looking, easy and fast to use, gorgeous display and some clever native apps give the Lumia decent credentials. The current lack of Windows apps is a bit of a bummer, as is the battery life, but find this phone in your stocking and you’ll be happy ‘til next Christmas.
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Treat yourself this Christmas
MacBook Pro with Retina Display Price: £1499 There is nothing that is not incredible about Apple’s flagship laptop, the MacBook Pro. Though the Californian giants have been the victims of some understandable criticism in 2012 for unimaginative upgrades to their mobile devices, computing remains the one thing that they are undeniably the best at. Although only an option, you should certainly indulge in the Retina Display model that crams four million pixels into the 13 inch device and five million pixels in the 15 inch version. Inside, there are few moving parts as the whole thing is built on flash memory making the Pro super-slim and super-light. As well as this, the MacBook is super-fast, powered by the astonishing Intel i5 and churns out beautiful graphics by way of the NVIDIA GeForce. The build quality is, as you would expect from Apple, superb. Push aside minor grumbles about the lack of optical drive and you have yourself the ultimate in mobile computing. Additional extras such as faster processors and extra storage space are available, but with the cheapest accessories coming in at £25, you’re unlikely to find them in your cracker this year.
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Sonos Play:3 Digital Music System Price: £259 What is the true meaning of Christmas? Family? Religion? Only Fools and Horses? Or is it a sleek and sexy music player that can deliver gorgeous sound to any room in the house? That must be it! The Sonos model of music delivery is based on the idea that you should be able to listen to what you want, when you want it. With the Play:3, the smallest and best looking of the range, you can stream your music collection wirelessly from any of up to 16 connected PCs; from over 100,000 preloaded internet radio stations; from popular music services such as Amazon Music and Napster and you can even dock your phone or mp3 player. What’s more, the Sonos range all come with a complimentary app instantly turning your smartphone or tablet into a remote control and, here’s the most exciting feature, buy more Sonos devices and you can sync them up so they all play the same song at the same time in whatever room you feel like putting them in. Of course, a hi-fi system lives and dies on its sound quality and this is where the Play:3 really impresses. Three speakers, powered by three digital amplifiers deliver sound powered by two dedicated mid-range drivers with an additional tweeter for accurate high frequency response. Your Christmas Greatest Hits album will have never sounded so good.
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Treat yourself this Christmas
Panasonic HC-V700 Camcorder Price: £79.99 With it being Christmas, you’re going to want to capture those precious moments for eternity. Though your smartphone, your tablet and probably even your laptop can capture video, you can’t beat a dedicated camcorder. The market is stuffed like the metaphorical turkey with camcorders of varying levels of quality, but for the perfect balance between build, picture and price, you will struggle to beat Panasonic’s HC-V700. True, Panasonic do have better camcorders than this — in their ‘Expert’ range — but for what you get, the extra money really isn’t worth it. As is ubiquitous in today’s market you can expect Full HD recording, and the new AVCHD 2.0 records at 50 progressive frames per second, but a cool added extra is the ability to record in 3D. The image quality is superb, even when zoomed in thanks to a 26x digital zoom (don’t let the words ‘digital zoom’ put you off, Panasonic allow you to zoom with pixels to spare) and the image stabilisation means that the picture will stay steady even if you are laughing until you cry as you record. All in all, this is a fabulous camcorder which will beautifully record your Christmas memories in 2012 and for years to come.
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Dominic Picarda’s Technical Take Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Long/Short opportunities Is the world economy about to sag into an even deeper malaise? Or are we on the verge of some sort of a recovery? This is an absolutely vital question for tactical traders like me. The outlook for growth is perhaps the single most important force driving many stocks’ performance. When prospects are improving, economically-sensitive or “cyclical” shares are more likely to beat the market. And when black clouds gather on the horizon, defensives are best poised to deliver the goods. To determine whether a share is cyclical or defensive, I look at its historic performance compared to the economic cycle. I then aim to position myself in defensives when they are cheap and the economy is about to slow, and in cyclicals when they are lowly priced and better GDP growth in prospect. To help track the overall trends, I run indices of UK cyclical and defensive industries. The cyclical index includes sectors like mining, media and basic materials, while the defensive index is comprised of sectors like tobacco, pharmaceuticals, and supermarkets.
“To determine whether a share is cyclical or defensive, I look at its historic performance compared to the economic cycle.”
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Dominic Picardaâ€™s Technical Take
uK cyclicals & defensives: valuation At the moment, UK defensives are slightly cheap overall compared to cyclicals, while I believe the global economy to be in the midst of a mid-cycle slowdown. Rather than heavily favouring either category right now, I therefore would seek longs and shorts among the most promising and most vulnerable stocks from each group respectively.
CHART - UK CYCLICALS & DEFENSIVES
Â December 2012
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diageo - Short opportunity It’s not just Diageo’s household name spirits that come with a premium price-tag. Its share price commands a top-whack valuation. The maker of Johnnie Walker Black Label Scotch and Cîroc vodka offers a dividend yield of just 2.4 per cent, its lowest level since the early 1990s. In the past, similarly low yields have been followed by Diageo’s share price suffering losses of more than 20 per cent.
CHART - DIAGEO
On the monthly chart, Diageo is seriously overbought, with an RSI reading of 87 per cent. While the uptrend could continue for now, I reckon a major top will then follow, leading to a big hangover for shareholders. Once the price drops below its 55-day exponential moving average (EMA), I would then aim to short rallies failing around the 13-day EMA.
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Dominic Picarda’s Technical Take
national grid - Long opportunity Electricity’s defensive characteristics are among the most powerful around. The sector has a very solid record of withstanding economic downturns and stock-market turmoil. A particularly attractive feature of National Grid right now is its robust dividend yield of almost 6%. Compared to its valuation over time, this tells me that the stock is not expensive and probably therefore has further room to rally.
CHART - NATIONAL GRID
A strong and steady uptrend is in evidence on National Grid’s chart. Despite its impressive gains over the last couple of years — during which time the price has gained by as much as 50 per cent — it is not overbought on its weekly or monthly charts. Along with valuation, this favours an ongoing uptrend, in my view. An attack on the all-time highs at 768p is probably in store. A good strategy in recent times has been to wait for the price to dip through its 21-day EMA and then to go long as it rallies back above there.
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Carnival - Long opportunity Should the US sink into a recession next year, Carnival’s share price would likely follow the American economy beneath the waves. However, that is not what I am expecting to happen. I believe that America’s squabbling politicians will reach an agreement to prevent disastrous rises in taxes and cuts to spending, and that the US recovery will therefore continue. This should be helpful to the world’s largest operator of cruise ships, a classic cyclical business.
CHART - CARNIVAL
Carnival’s stock price has been sailing determinedly higher for much of 2012, and for the most part, fairly smoothly. More importantly, though, it does not look overstretched. Its monthly relative strength index (RSI) is nowhere near the frothy extremes above 70 per cent which have coincided with significant tops in the past. This leaves the way open for gains towards 3000p in due course. Bounces from around the 13-day EMA make obvious buying entry-points.
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Dominic Picarda’s Technical Take
Kazakhmys - Short opportunity Sooner or later I reckon the UK listed mining industry is going to stage a terrific rally. It is already very cheap by historic standards, and investors will realise this once they see that the economic outlook isn’t as disastrous as they currently believe. However, I never like to jump the gun in these situations. It’s the current trend that matters most to me as a short-term trader, and the trend in Kazakhmys is firmly downwards for now.
CHART - KAZAKHMYS What is more, there are few signs of a bottom forming in the price of this copper mining giant. Despite bouncing sharply from the 569p low in September, it has since twice failed around 800p. However, unlike certain other miners, it is not horrendously oversold on any timeframe. A retest of that 569p low looks probable. I’d short around the 13-day EMA.
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Why do you spread bet? Have you ever thought about it? If not, perhaps you should. Chances are you fall into one of two categories...
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Why do you spreadbet?
1. You’re a gambler.
So how do you outperform?
You treat spread bets in much the same way as you treat a bet on a horse or the throw of a dice or the spin of a roulette wheel. If this is you, stop reading right here.
The chief concerns of investment managers such as those working at investment giants like Fidelity are to conduct fundamental analysis (trying to assess whether a company is undervalued according to a number of accounting and valuation measures); to assess risk; diversification (not having all your eggs in one basket — which we believe is an absolutely necessary first principal) and possibly asset allocation (for multi asset funds) — how much of the portfolio to invest into particular asset classes.
2. You really believe you can beat the market. You may not be doing that consistently right now, but you believe that if you can just get your technique right, the results will come. That’s probably why you’re reading this first-class magazine.
“But it’s a well-known rough and ready rule of thumb that, in any given year, around 75% if not more, of all investment managers cannot even match Here’re some interesting facts — over the past three years a typical successful mainstream unit trust investing in London-listed equities would have returned around 12%. But it’s a well-known rough and ready rule of thumb that in any given year, around 75%, if not more, of all investment managers cannot even match their benchmark index. And you’re unlikely to get rich by putting all your money with that particular fund manager because the chances are that if that manager’s fund was in the top quartile in one year, it will be in one of the bottom two quartiles the next year. Additionally, the typical charges in a unit trust are generally an immediate 5% haircut on your capital just for the privilege of the fund management company taking your cash and where, if an IFA or introducer has been involved, up to half of this is paid to them. Thus a clear incentive on an introducer’s part to push you into high fee-paying funds. Whatever the reasons (or excuses) for such poor mainstream performance, the plain fact is that a skilful spread better can run rings around the professional, and at a much lower cost and additionally being tax free!
When you incept a particular bet, chances are that you have either carried out some degree of either fundamental or technical analysis, no matter how cursory this is (for example, reading bulletin boards or newspaper tips!) — it is still a catalyst that occurs in your mind and prompts you to place the trade. You probably do not consciously pay heed of the diversification element, although those traders looking for a longer involvement in the game should definitely ensure there are some offsetting “shorts” against longs, particularly if higher levels of leverage are embraced. The asset allocation is almost a by-product of the trade idea, i.e. US/dollar FX exposure v sterling if investing in US stocks, for example. Now, without sounding like a broken record, the common theme that we try to embed into our readers month after month is not the usual mantra’s that are wheeled out by so-called trading “experts” that you must “run your winners and cut your losses” — as if adherence to this simple advice will carry you to the hallowed ground of spread betting riches, but that you must control your leverage. It is an open secret that many spread betting and CFD client accounts do not survive beyond 12 months. The reason for this, in my educated opinion, is primarily due to the over indulgence of the leverage offered; Adverts that shout “Control £50,000 with £1000” are all well and good, but if the client then uses the entire available leverage — a 2% move and the game-over sign spins up! Coupled with the inability of most people to take a loss and which in itself is due to educational conditioning in society that you “must persevere and try and try again...”, if you are heavily leveraged in a losing position, then throwing into the mix the typical male pride (female accounts actually last longer, empirical evidence shows) of always wanting to be right, and it’s a recipe for disaster in trading. This, to me, is the collective reason why a typical share trading account will last immeasurably longer than a spreadbet account.
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With a share trading account there is generally no leverage and so if you hold just 5 stocks then you have to be exceptionally unlucky to have all 5 go bust on you. Vice versa if you have 5 spreadbet positions and you are 5 times geared then just a 20% move will wipe you out. Let’s return to the headline question of this piece, that being, “Why do you spreadbet?” If it is to be “right” and to make big money quickly and/or for the “excitement” that leveraged trading brings, then unfortunately the evidence shows that you will likely be a net loser to the market. The market, remember, is a mechanism to take money from the unwary, inexperienced and impatient to the hard working, disciplined and patient investor.
Maximising the odds of success To maximise our own odds of success in the market we apply the following overlays: 1. Never leverage your account more than THREE times the net equity with regards to stock positions. By this we mean if you have an account of £10,000, the maximum underlying notional exposure will never be more than £30,000 in aggregate.
Compared with the constraints of a traditional fund manager, a well armed and competent spread bettor can materially outperform through (a) the judicious and appropriate use of leverage — leverage that a standard fund manager cannot embrace; (b) concentrated diversification with no regard for benchmarks — this is what really hamstrings most orthodox fund managers — “benchmark hugging”; (c) the ability to go short as well as long — not many traditional funds can do this; (d) sheer nimble-ness — unless you trade in the tiny AIM stocks, not very many private traders will carry unwieldy positions that cause a problem to get out of, whereas many funds effectively become stuck in positions and finally (e) the wonderful concept of the movable guaranteed stop — this really is spread betting’s biggest benefit — nowhere else, not CFD trading or share trading, can you pass the risk of a large “gap down” on, for a surprisingly modest cost (and subject to a typical minimum distance of 10% from the prevailing market price). Hopefully you can see that through relatively simple risk management principles that it really is possible to outperform a traditional fund manager without risking wipe out.
2. Never risk more than 6% on a trade — this is quite high for many traders, but my own personal success rate is over 70% and therefore statistically we can afford to run a higher drawdown on a non-performing position. 3. No one stock position is greater than 25% of the net equity. This means a stock can fall by 20% and it isn’t going to hurt us — something that actually happened recently in our Oil Explorers fund with Chariot Oil & Gas. I have learnt the hard way that putting too much capital into one position generally tempts “sod” and “law” to make an appearance. 4. With indices, we never risk more than 3% of our net equity on a trade and with currencies no more than 2%. My own personal success ratio on these is lower than the overall 70%. 5. Only trade when BOTH our technical and fundamental analyses align and be prepared to be patient. Sometimes your best trade is no trade.
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Zak Mir Interviews -
FTSE Trading Guru Mark Austin This month Zak Mir interviews a man widely accepted to be THE FTSE trading expert — Mark Austin, and who claims to have a 70% success ratio playing the FTSE — a market that is almost universally deemed to be one of the hardest to day-trade.
According to the “Dear Leader” aka editor of Spreadbet Magazine, no one makes money on a consistent basis as a short-term trader of the FTSE 100. Do you have a challenge to this view?
ma: I personally have been consistently trading
the FTSE 100 profitably for a decade. I launched my FTSE 100 service in April 2010 and since then we have only had two losing months, with all the other months positive. Perhaps I am the aberration!
You are, therefore, one of the few traders who get the FTSE 100 right. Where is everyone else going wrong?
ma: People go wrong because they spread their
skill-set over too many markets, not allowing themselves to become a specialist in one particular area. There are many systems out there to trade off, some good, some bad but of the good ones, a lot of people don’t make them work because they have a jumping ship mentality: that is jumping from system to system.
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Really, the key is finding a market that suits your personality, focusing on it and then finding a system to go with your personality and going on to master it. Once you do that you will start to recognise the traits of a market that will then, if you follow your system, lead you to make money.
But how do you know the system you pick on will take you to the right place? You start off with a couple of good trades, bad, good, and then the whole thing blows up. How do you know you will be taken on the correct journey, that the market won’t mutate and render the system useless? Is this not like religion, where it is a question of faith as to whether you will reach trading heaven if you follow the correct strategy?
As I said, I think the first thing anyone must do is to find a market that suits their particular personality. For example, I do not like too much volatility when I am trading which is why I trade the FTSE 100. Something like the Dow is a wild animal, so trading that is more complicated. Over the years I have found that the FTSE 100 repeats many different weekly personality traits of its own which can be capitalised on.
“Is this not like religion, where it is a question of faith as to whether you will reach trading heaven if you follow the correct strategy?” ZM:
So you knew which market to pick on. I might have chosen dollar / yen or gold and turned out to be horrifically wrong in my choice. It seems that there was an element of intuition on your part in getting to the right market. I call you Mr FTSE 100 on the basis that I know of no one else who has such a consistent method and record for this very popular market which everyone is trying (and failing) to get right. Indeed, I probably would not have got into the business of attempting to call and predict the markets myself if your service had been around 20 years ago. I would have just followed you. This is, of course, flattering, but it also underlines how, despite the overload of FTSE 100 experts who are growing by the day, very few, if any, have been able to conquer the North Face of the Trading Eiger.
MA: At the beginning of my trading career I did test many other markets and failed, but I learnt by my mistakes and I was very persistent. By nature I have a very stubborn personality and rarely give up on anything which I think is key to this business. Once I found an approach which fitted with my personality it was then a case of focusing and mastering the market I was using. The FTSE has many repetitive personality traits which repeat over and over again. Like my core system, these are all linked to how the market actually operates rather than on subjective price action. I think the downfall to many traders is they focus too much on indicators which only get you into a move after it happens. My approach to the market always gets me into the market before a move starts which I believe is my biggest edge.
Having followed the service, it seems that the bulk of the preparation for the trading day is done well before the open. In a way, you seem to have all the bases covered. This can mean that while I might be all revved up in preparation for buying on the open and looking for a 50 point win in the first hour, you will then say at 5 minutes before the open — no trade today, no set up, not all of your criteria have been met. How do you manage not to trade on some of the biggest occasions, especially knowing that you are sending a message when the majority of those in the market have jumped in with open arms? Isn’t the non-trading part the most difficult part?
It is actually the most important part, as less is more in trading. It is something which you have to learn time over time. But too many people come into the market with the intuitive response that the more you trade, the more money you will make. In reality, what you need to be is counter intuitive — go with the idea that the less trading you do, the more likely you will be to make consistent money. I wait for the easy / most likely set ups to come along and trade them, rather than doing lots of trades of set ups that I am not really completely confident on.
But aren’t there just some days when you say to yourself, “To hell with it, there is no set up, but this is obvious, the markets are going up 100 points, I am just going in.”?
Yes, but I hold off. Like today (Tuesday 13 November), I thought the market was going up, but the price action did not confirm what I was thinking and I am not on the losing side of a bad trade at the moment.
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Trade today at cityindex.co.uk/theglobe Spread betting and CFD trading can result in losses greater than your initial deposit. *1 point spread available during market hours on daily funded trades & daily future spread bets and CFDs (excluding futures). December 2012
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“It is actually the most important part, as less is more in trading.” ZM:
Are there any times when you find yourself lost in the wilderness? You have a position running against you and you don’t know whether to cut or run? Do you ever get into those situations now, or is that consigned to history?
These days I do all the planning beforehand which, helped by living in the Far East, means I have half the day to concentrate on what the market has done and then plan ahead. That is the big edge I have for my service and my subscribers in that I can construct a thorough trading plan. Generally, I know when I am going to get out of the market before I have entered, so if the trade does not go according to plan I am out.
ZM: Do you find it easier to have subscribers who are beginners or experts? Do you have particular issues with the different levels of trading knowledge? Is there an ideal or typical subscriber?
“so if the trade does not go according to plan I am out.” MA: The service is suited to all, but ideally a
subscriber would have at least some previous experience to get the maximum benefit. That said, what I am trading is very transparent, so that each day I am giving a full explanation of why I am taking a trade. This is in contrast to many other services who dish out trading ideas “willy-nilly”, with the trader having no idea why they are taking the trade.
ZM: So that transparency is a key difference
between you and the competition, a subscriber will know why you are buying / selling on the basis of, say, a 5 minute bar breakout for example?
MA: Exactly, so I am always giving the client
reasons why I am looking for a short or a long trade. This is all in my early morning trading plan so we are then all on the same page.
ZM: I have interviewed enough people since the
summer and over time to spot a common theme among professional traders. For instance, I asked Alpesh Patel what his trading set up was and he described multiple time frame charts and the MACD indicator, check the news flow, watch the screen for a few minutes, take a trade, make some money and head off home. All very easy if you have an IQ of 178! Or there is Lex van Dam who is a hedge fund manager capable of making millions — an extremely intelligent person. With you, it is clear that you are a very focused person with incredible self discipline and insight. Not everybody has these attributes of course. Obviously if you have these skills, then it seems you could make money from almost any market, even the FTSE 100. I can, of course, follow you as a subscriber, but for people who want to make it on their own, the message seems clear: if you are not obviously exceptional intellectually / psychologically; forget it. Hence 90% of people lose money.
Actually, my approach to the market is not complex, but I do have an understanding of how markets work. 90% of people lose money because of the common traits of over trading, no discipline, no patience. But with access to right information and discipline, there is no reason why you cannot succeed. You do not need to be exceptional either intellectually or psychologically; in fact the opposite can work better!
But how do you acquire that discipline? I am sure there are many traders who are told what to do, but cannot for the life of them follow the instructions. These mind issues are extremely difficult to conquer. It is like not smoking or following a diet, or any other addiction.
A lot of people talk about these issues, but do not address how to overcome them. I hold seminars to help overcome the psychological problems of trading and make them understand the causes stemming from the brain. Understanding how the brain works is also very important. For example, when we deploy patience we are using the most advanced part of the brain, the frontal lobe. When we are acting irrationally / emotionally we are using what could be described as the part of the brain that originated in primates. So what I tell people is that if you are trading emotionally, you are trading like a monkey.
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Zak Mir Interviews
If you want to be successful in trading and want to separate yourself from the herd, use patience from the most advanced part of your brain. Another trick is when you trade you should imagine you are physically handing over the cash to execute a long / short. If you were doing this as opposed to just clicking a mouse, you would certainly pay more attention before placing that trade.
“So what I tell people is that if you are trading emotionally, you are trading like a monkey.” ZM:
For me the core of this issue is that while you are providing a service which may be a consistent money maker, and this is great for those who are unable to do the analysis / develop an approach, there is still the practical issue of following the service. Not saying, “ I am not going to trade, I don’t like that one.” And of course that turns out to be a big winner...
For those who have been with me for six months plus, they are already learning that it is best to wait for the good trades — like the magnet set-ups.
We are coming up to what I am sure has been another successful trading year. Are there any developments for 2013 that we should look out for?
MA: I am looking at launching a lower end
service for those with no experience of the market on the FTSE 100. It would be around two trades a week, but with no technical jargon, or analysis. Just simply buy or sell. Obviously the seminars are doing well — POM is our premier coaching club. We have an increasing number of members who have turned professional and who are advancing very well. So for 2013 I would be working on that to develop more full-time traders. Web: http://www.markaustintrading.com
MA: I am finding these days that a lot of my
subscribers are coming around to the idea that less is more. Due to the high hit rate of the service, they are happy to wait until there is a signal, as there is a high probability of winning anyway.
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Best of breed U.K. based tech companies For technology investors, the lack of investment choices in the U.K. compared with the U.S. Nasdaq has been frustrating to say the least. Many of the companies which dominate in the space such as Apple, Google, Facebook and Microsoft as well as a plethora of start ups are based on the west coast of America where engineering talent is readily available and Angel investor/Venture Capitalist money is plentiful and ready to take on risk â€” a situation that one cannot really apply to the UK at present.
In contrast, many British entrepreneurs appear to be tempted by early offers to sell their business or struggle to find the finance in the first place to get their ventures off the ground. The experience of inventors like Sir James Dyson in getting his vacuum cleaner business to the fabulous success it is now was one of frustration at the lack of long term thinking by suitable investors and the banks.
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Best of breed U.K. based tech companies
“A few woeful statistics – the number of UK listed technology companies has dropped by around 40% in the last 5 years and the technology sector now accounts for less than 1 per cent of the London Stock Exchange’s value compared with 8% of the New York Stock Exchange.” If Facebook was based in London at its inception, it probably would have struggled to get off the ground! Then, the other issue for British companies has been the number of acquisitions by foreign companies of our leading technology enterprises. In August 2011, Autonomy, the UK’s largest software company, was bought by Hewlett Packard for £6.3 billion and it was delisted from the FTSE 100 in November 2011. In August 2012, CGI of Canada bought software outfit Logica for £1.7 billion plus debt. But despite the frustrating limited number of mid to large-cap technology plays in the U.K., a few names have emerged on this side of the Atlantic which for early investors have proved fruitful investments and against the odds they remain independent. For now, though, the U.S. Nasdaq remains the focus for tech freaks. Here’s a few U.K. techs that have gone against the grain:
ARM Holdings plc is the world’s leading semiconductor intellectual property (IP) supplier but, unlike other major chip companies like Intel, it does not manufacture any products itself, but rather licenses its technology to a variety of technology partners such as mobile phone manufacturers and Apple.
“In 2011, ARM partners shipped nearly eight billion chips.”
The partner companies pay an up-front license fee to gain access to a design and also a royalty on every chip that uses the licensed design, and it takes an average of 3-4 years from the time the semiconductor company signs the license until they start to pay royalties. In 2011, ARM partners shipped nearly eight billion chips. A characteristic feature of ARM processors is their low electric power consumption which makes them particularly suitable for use in portable devices. The company’s designs are used in more than 95% of the world’s mobile phones including Apple iPhone and Samsung. In addition, their chips are used in the iPad, iPod, PlayStation portable and Nintendo devices. The company is in the FTSE 100 and has produced incredible returns for shareholders over the last 5 years, rising from around £1 in 2009 to be over £7 today, now valuing it at £9.8 billion — a true UK tech success story. October’s upbeat third quarter earnings have helped propel the company close to its 52 week high, helped along by strong demand for Apple products. It reported pre-tax profits of £55.3m from sales of £144.6m, up 28 and 20 per cent respectively and ahead of consensus forecasts of £140 million in sales. Licensing revenues rose 17% while royalties increased 30%, compared with 2011. Earnings per share increased from 3.05p to 3.71p, compared with analyst estimates of 3.60p. It boasts a healthy balance sheet with net cash at the end of the period of £477.9m, down marginally from £495.9m at June 30th. In early November, ARM announced the acquisition of 498 patents as part of a consortium from U.S. based MIPS Technologies for $350 million (ARM’s share was $167.5 million) in cash in order to protect itself against potential legal action by so called “patent trolls”.
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The MIPS deal, as well as ARMâ€™s overwhelming strength in portable semiconductor IP, makes the company well placed for the continued shift in consumer demand from desktop PCâ€™s to tablets and mobile devices. ARM certainly is a best of breed U.K. technology company with an enviable position in its chosen market.
But with a 2012 year end price/earnings of 49, not a bargain buy by any means for any investors wanting to start a position in the stock. Though with Apple possibly dumping Intel in the near future as its main semiconductor supplier for its Mac range, this could offer additional licensing deal opportunities for ARM, meaning that earnings upside may be round the corner in 2013.
CHART - ARM
The Imagination Technologies model is similar in many ways to ARM holdings, making much of its revenues from IP licensing of semiconductor products. It is a leader in multimedia and communication technologies providing silicon and software intellectual property (IP) solutions complemented by an extensive portfolio of software drivers and developer tools. Target markets include mobile phones, tablet computing, in-car electronics, telecoms, health, smart energy and connected sensors and controllers.
Also like ARM, its shares have had a similar trajectory, rising from less than 50p in 2009 to the current 437p, valuing it at ÂŁ1.15 billion, but way off its 52 week high of 717p attained early in 2012. It sits in the FTSE 250 right now. In early November, Imagination acquired the operating business and around 82 patent properties of MIPS Technologies for US$60 million with many of the other 498 patents being simultaneously divested to ARM and its partners as previously discussed.
66 | www.financial-spread-betting.com | December 2012
Best of breed U.K. based tech companies
“anaLyStS EStiMatEd tHat tHE dECiSion wouLd KnoCK an EStiMatEd £10M (12 pER CEnt) FRoM FuLL-yEaR REvEnuES.” Its last interim management statement was poorly received with doubts raised whether Imagination will meet its full year numbers due to vague language from the top team. Despite strong growth in unit shipment volumes, with the key segments of mobile phone, computing/tablets, mobile multimedia/gaming and home consumer all seeing growth, average royalty rates have been getting steadily diluted as the company’s IP is being used in cheaper devices as well as subdued iPhone demand in which the company’s chips are used as consumers waited for iPhone 5. With Apple currently struggling to meet demand for iPhone 5, the concerns remain.
With a forward price earning for the year end April 2013 of around 31, Imagination, like ARM, is hardly cheap despite the sell off from the highs this year with some of its customers under pressure. In the short term, the focus is on the half year results for the period ending end October which are due December 12th, to see whether royalty level deterioration is continuing and whether chip volumes have remained resilient despite the global economic downturn. Imagination remains a strong U.K. tech player, but its position probably remains less robust than the ARM holdings powerhouse.
In mid-September, the company’s shares were hit hard by the decision by Texas Instruments, the second-largest US chipmaker by revenues, to refocus away from smartphone and tablet chips. Analysts estimated that the decision would knock an estimated £10m (12 per cent) from full-year revenues. CHART - IMAGINATION TECHNOLOGIES
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CSR is at the forefront of developing semiconductors and software for a host of world-leading technology platforms and standards, including Bluetooth®, GPS and other location technologies, FM radio, Wi-Fi®, Near Field Communication and numerous others. Unlike both ARM and Imagination Technologies, CSR’s share price has been somewhat more volatile over the last five years. Its shares currently sit at £3.42 giving it a market cap of £730 million. The shares took a tumble back in early 2011, when it announced the acquisition of video specialist Zoran Corporation for an eye watering price for such an early stage company. CSR did ultimately cut the offer price from a $679 million all share offer to a new price of $484 million comprising $313 million in cash and the rest in CSR shares. The price cut came after Zoran had a profits warning in May 2011 after Cisco stopped making the Flip Video camcorder. The deal completed in August 2011 despite much shareholder skepticism about the use of the company’s significant cash pile. In July this year, Samsung Electronics announced it was buying the mobile technology development business of CSR for $310 million meaning that CSR transferred key patents in handset connectivity and location services as well as development operations in WiFi and Bluetooth connectivity components plus satellite positioning systems.
After suffering a series of losses in the early part of 2012, predominantly because of integration issues at Zoran and declining orders from key customers like Nokia and Research in Motion (maker of the Blackberry), the latest third quarter results have been encouraging for shareholders. Third quarter revenue came in at $282.7m, up from $243.3m the previous year. Underlying operating profit was $32.2m, with earnings per share coming in at 13c. As a result of the Samsung deal, a $285 million payout via a tender offer representing around a quarter of the share capital at a price between 335p and 375p will complete at the end of November with proceeds being paid out in early December to shareholders. Over the last year, CSR shares have rebounded around 92% following the Samsung deal and the company now seems well positioned for a return to solid growth, but much of the good news seems baked into the price at this level and many of its customers remain under pressure given its focus on consumer markets such as wireless headsets and automotive products. Out of the 3 U.K. tech majors, for value orientated players, then CSR is obviously the one to watch, particularly on any weakness in the overall market like we are experiencing at present. Any move back towards the 300p level and we think the stock worth accumulating, particularly if you believe in the Research in Motion 2013 renaissance story.
68 | www.financial-spread-betting.com | December 2012
Best of breed U.K. based tech companies
CHART - CSR
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Robbie Burns AKA The Naked Trader - ‘Movember’ Diary My goodness, I had a revelation yesterday. Nope, I haven’t found God; I remain Atheist-lite (‘lite’ just in case). I was sitting doing a seminar with a lovely bunch of people and we were discussing stop losses. A few stories came up the same way. A share was bought, the stop loss set at anything from 10 to 20% away from the entry price. Yup, you guessed it, the stop was then hit and the loss taken. This was either a good or a bad move depending on whether the share moved further down or bounced back.
In other words, traders shouldn’t be afraid of saying to themselves, “I made this buy at just the wrong time, I should admit that and exit fast. I got it wrong for now.” They shouldn’t say, “Never mind, I’ll just let the stop loss take me out if it has to and wait for it to bounce back.” Let me give you an example. I made, in hindsight, a terrible trade buying SDL at around 575 — it had fallen from the mid 600s and I thought the sell-off overdone and I was being a clever so and so by spotting it.
That is when the revelation hit me.
However, I was in reality making a bum trade.
A stop loss is just a last line of defence against a stinker. You don’t have to wait for a share to get to the stop loss before getting rid of it.
Now many would have put in a stop loss here of say 10-15%, say somewhere between 500 and 525. Which you could argue is reasonable. However, I decided quickly I had a made a terrible mistake and I came out fast as it sank further, getting out around 560 for a small loss. If I had held on and let a stop take me out at say 520, I would have lost a whole lot more.
What we shouldn’t be doing is getting an entry point, setting a stop loss and then letting it stop out or not whatever happens. That is crazy in the end. We need to just change our minds if we think we got it wrong. So, when getting an entry point on an initial trade, if the price starts to slip, don’t necessarily wait for the stop loss — get the hell out with very minimal damage much earlier on — then try and get another better entry point. Similar stories came up. “I bought this share at a fiver, I set my stop at 420p and it got sold at a loss, how could I have prevented it?” Well, early on in any trade I think you should monitor it really closely. The share was bought at a fiver. The market generally falls and the share falls to 490. How’s about getting out there and taking a tiny loss fast?
“A stop loss is just a last line of defence against a stinker. You don’t have to wait for a share to get to the stop loss before getting rid of it.”
70 | www.financial-spread-betting.com | December 2012
Robbie Burns’ Trading Diary
“We need to just change our minds if we think we got it wrong.” The stop indeed would have worked, as it ended up going under 500. But I would have lost a lot more money by just relying on the stop.
What can I learn from this? It’s fine to take profits on those trades — but I should learn to re-enter them as they break out higher.
If the trade had worked and the share had carried on rising over 600 instead, I could then have changed the stop to breakeven at 575 initially, and then relax with the trade.
We’re heading into the end of November now which is usually horrible. At the time of writing a lot of stocks are getting creamed.
So, what I think I am saying is the first day or two of a trade are probably the most important. If the trade works then you can relax, move a stop up. One thing I know I have been doing terribly wrong recently: and that is selling winning trades too early. The worst one was Smiths News. The trade plan worked, buying in the low 90s and selling at 110 where there was previous resistance. It’s now 150. Bah! And the trade I talked through a couple of months ago, Playtech. Again the trade plan worked — bought at 325, sold near 400. Now 425. A good profit but could have been an even better one.
Check out my Naked Trader 2013 diary which you can buy on this link http://books.global-investor.com/books/868876. htm?ginPtrCode=10453. I see some of the weakest days of the year are on the way. Back end of November and early December often see falls. Many of the weakest trading days of the year await. But this has an upside because after such heavy falls, this can lead into a nice Xmas rally. So my thoughts for now are to hold off, then snap up stock on a particularly bad day, then wait for the rally... Happy trading.
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Richard Donchian The Father of Trend Following By Phil Seaton - ls trader In this month’s article we’re going to discuss a trader who has had a very large impact on trading and managed futures. He’s also known as the father of trend following. For those that don’t know, his name is Richard Donchian. Donchian is also well known amongst technical traders for his trend following systems, in particular his 5 & 20 moving average crossover system and his weekly breakout system. More on those shortly. Firstly, Donchian started the first publically managed futures fund in 1949, his firm was Futures, Inc. He is therefore considered by many to be the creator of the managed futures industry. He was, however, primarily focused on systematic trading and developing systematic approaches to futures money management. As happens with most who go down this path, he ended up believing that trend following was the optimal approach based on the results of his research.
He was so successful with his trend following approach that the Richard Davoud Donchian Foundation, which was formed after his death in 1993, is still giving away funds that Donchian’s systems made, to charitable causes. This shows two things: firstly, not only is trend following profitable, it has been for over 50 years. Secondly, and perhaps the biggest takeaway from this, is that simple systems work; primarily because they are more robust than other more complex approaches, and are certainly easier to follow. As mentioned above, he became known principally for two simple systems. The first of these was a simple moving average crossover system that used the 5 & 20 moving averages. The rules were, quite simply, to buy when the 5 SMA (simple moving average) crossed above the 20 SMA and the instrument in question is trading above both, and sell when the 5 SMA crossed below the 20 SMA and similarly the instrument in question is trading below both.
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“He is therefore considered by many to be the creator of the managed futures industry.” The system was therefore always actually in a trade as a crossover was used to exit the current trade and then reverse the trade. This led to frequent losses, known as whipsaws, but over time, when the market did go on to make large trends, these small losses were more than covered. He also developed a weekly breakout system which was so simple and profitable that it was later adapted and used by many successful traders and money managers, including Richard Dennis of Turtles’ fame. Donchian’s weekly breakout system was adapted and taught by Richard Dennis and Bill Eckhardt to the group of traders known as the Turtles, who went on to collectively make around $175 million trading a version of Donchian’s breakout system. Admittedly, there was more to the Turtles’ success as the rules were refined and improved and, most importantly, good money management rules were added. Nonetheless, Donchian’s breakout system was an integral part of the system used, and used with great success. One downside to both of Donchian’s systems, particularly the 5 & 20 SMA system, is that they were too short-term. Because of this they took too many trades, which generated too much in the way of commission and therefore eroded profits. Additionally, both of these systems would end up taking trades in the direction of the short-term trends but that were counter to the long-term trends, thereby giving a lower profit expectation. As a general rule, trades taken in the direction of the long-term trend have a greater profit expectation as they tend to run further and are less likely to run into resistance. With both systems, superior results and lower transaction costs can be achieved simply by using a longer time frame. In the case of the moving average crossover system, slowing the averages down to 20 & 80, for example, gives far superior results. Traders who have the time and inclination and the right software for testing can actually test this and prove it out for themselves. It may surprise you to find out how much more profitable a system can be by slowing down the moving averages and making the system more long-term.
To delve a little deeper into using simple systems and their effectiveness, it should be easy to see that a system that uses numerous indicators and has too many rules is very likely to be curve fitted to past data. This is a bit like creating something after the fact, or with hindsight. Many people develop systems that are not robust and that are curve fitted to past data. Such systems have little or no value in the real world of trading. There are a couple of ways to make sure that a system is robust. The first is to keep it simple and not use too many indicators. Both of Donchian’s systems tick that box. The second is to test a system out over real market data across a variety of markets and, more importantly, different data periods. In other words, before deciding that a system is fit to trade in the real world with live funds, the start and end dates should be changed in the testing period to ensure that it gives similar performance across different data periods, thereby confirming that it is robust.
“Many people develop systems that are not robust and that are curve fitted to past data. Such systems have little or no value in the real world of trading. One thing that strikes me with both of Donchian’s systems as well as the trading rules that the most successful traders use and those that have maintained trading longevity, is simplicity. Ockham’s Razor states that, all things being equal, the simplest answer is likely to be correct. And so it is with trading. Keep systems and trading rules simple. Many times I have seen traders with so many indicators and lines on their charts that they can barely see the price data! This is not that way to trade. Next time you load up your charts and see lines and indicators all over the place, ask yourself, “Do I really need all this?” The answer will be “No”. A simple system that relies on a few rules that cover when to enter, when to exit, as well as good, robust risk management rules will win out in the long run.
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CHART - DAX
For those that don’t have the time or the inclination, or the expensive software required for testing systems, not to mention the costs of market data, there is another solution, and that is simply to sign up for a trial of our own trading system, the LS Trader system.
“oCKHaM’S RaZoR StatES tHat aLL tHingS bEing EquaL, tHE SiMpLESt anSwER iS LiKELy to bE CoRRECt. and So it iS witH tRading. KEEp SyStEMS and tRading RuLES SiMpLE.” One thing that strikes me with both of Donchian’s systems as well as the trading rules that the most successful traders use and those that have maintained trading longevity, is simplicity. Ockham’s Razor states that all things being equal, the simplest answer is likely to be correct. And so it is with trading. Keep systems and trading rules simple.
as with Richard donchian, our exhaustive research showed that trend following was not only the most profitable long-term approach to trading the markets, but was also the easiest to apply and takes the least amount of time. For example, a weekly system such as the LS trader system can literally by traded in less than one hour per week. this is simply because the rules of the system are so precise that orders for the week ahead can be programmed in to your spread betting account to open or close trades automatically. this approach is so effective for numerous reasons, not least of which is that it removes the emotional rollercoaster from trading as you can place your orders at the weekend when the market is closed so that your trading decisions are not influenced by what’s going on in the markets or the latest newsflash. those that have tried trading and sitting in front of the screen all day will know how hard it is to do, and how much simpler it would be if you could simply place orders at the weekend to be filled automatically. now you can and you can test it out free of charge. Due to you being a reader of SpreadBet Magazine, you qualify for a free 30 day trial of the LS Trader System simply by visiting the following link: www.LSTrader.co.uk/spreadbetmag This trial is not available anywhere else and is a real world value of £147 per month. Simply visit the link above to get started today. Good trading, Phil Seaton
74 | www.financial-spread-betting.com | December 2012
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Markets Suffer From Low Volatility by Eimar Daly, MonexEurope FX Analyst
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“The VIX volatility index hit a near 6 year low in August this year and FX volatility index hit a five year low.” Forex traders must be hoping for another “Grexit” scenario as exchange rates have recently traded in a pretty much straight line. Major exchanges have narrowed into tighter trading ranges and traders are left with just 50 pip moves to try and turn a profit. In contrast, the Great Financial Crisis and Euro Sovereign Debt Crisis provided us with major swings in the exchange rates. The news flow is still hitting the exchanges, but rates now seem immune to the news. For now... The VIX volatility index hit a near six year low in August this year and FX volatility index hit a five year low. No FX rate is more symptomatic of a lack of volatility than EURUSD, most traded exchange rate of all the major pairs. Throughout the last four years the exchange rate has been contained within an increasingly tight range.
Implied volatility is now measured at 9.0748, the lowest level since September 2008. This isn’t an isolated theme. Realised GBPUSD volatility is also back in the region of volatility experienced prior to the 2008 crisis. Realised volatility for USDJPY is at an all time low and with a sharply narrower spread. The most alarming indicator to me at present is, indeed, the lack of volatility as displayed in the FX VIX Index and which illustrates clearly that we are back at levels seen prior to the 2008 financial crisis. For four years currency traders enjoyed high volatility as the Euro sovereign debt crisis evolved from the US 2008 Great Financial Crisis. Since January of this year, volatility has persistently declined. The ECB’s LTRO and write down of Greece’s debt burden has helped to reduce the perceived risk in the forex market.
CHART - VIX
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“Implied volatility is now measured at 9.0748, the lowest level since September 2008.” The European Central Bank has been pretty unequivocal that it will stand behind the Euro by supporting its major banks. An alleviation of a proportion of Greece’s debt-burden — the Euro’s Achilles heel — has also helped to calm volatility. In September, the ECB’s Outright Monetary Transaction (OMT) bond buying plan effectively underlined its position as the one central bank for the economic union. The Bank would act as a lender of last resort for nations, although some small print was attached. With volatility so low at present, this is either pointing to a stabilisation of financial markets as Europe moves closer to a solution to the seemingly never ending story that is the debt crisis or the market is being dangerously complacent... Markets have reached a stalemate, wedged between two global economic issues. The fiscal cliff, if not averted, will hit the US economy on the 1st of January 2013, and so we currently have just over one month for the deadlocked US government to strike a compromise on taxes and spending to avert a renewed recession. The Euro Zone Crisis faces another ticking time bomb. Details of the ECB bond buying programme provided Spain, in particular, with some reprieve.
Now it’s a question of how long the market’s patience can last without any bailout request... The last time volatility persistently declined in this manner was in 2009 in the time gap between the outbreak of the Great Financial Crisis and the Euro debt crisis. We are moving back towards normal market conditions it seems now, and should another global economic crisis not rear its head, then the new low volatility is likely to last. Although we do predict a short-term outbreak of higher volatility on the approach to the looming fiscal cliff deadline, the broad trend remains down. Greece will continue to be an issue but the market believes Euro area leaders are resigned to bailing the nation out. The very existence of the OMT will limit volatility as the euro is reinforced by a strong central bank. The US fiscal cliff is a risk to the US economy but nothing to what the US has already survived in recent years. In comparison to the Great Financial Crisis, the fiscal cliff is a negligible issue. Sure, it is a source of short-term volatility, but nothing to trigger the havoc of the GFC and Euro Sovereign Debt Crisis. There may be one last bout of market chaos, but it seems we are returning to more placid waters.
Its bond yields eased lower in the immediate aftermath as investors held faith that a bailout request and subsequent ECB bond market intervention was coming.
78 | www.financial-spread-betting.com | December 2012
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Early season ski-ing Focus on Lech, Austria
82 | www.financial-spread-betting.com | December 2012
Focus on Lech, Austria
Lech has long been the favoured ski destination of royalty (Princes William & Harry, no less, learnt to ski here), European aristocrats and well-heeled skiers. Although being easily accessible from one of the main Austrian hubs â€” Innsbruck â€” it is sufficiently high-altitude, however, to be snow-sure throughout the season and in most years enjoy early season snow from December. In fact, during December 2011 a veritable truck load of snow fell, so much so, in fact, that many chalets were almost buried! December 2012
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Lech itself is an attractive village occupying a high, sunny valley in a quiet corner of the mighty Arlberg ski region. Accessed via the precarious Flexen Pass from Zurs, this old farming village is characterised by traditional chalet-style hotels and has a pollution free river running through it that also continues to flow during the winter. Its excellent snow record and high sunny slopes are particularly good for intermediate and beginner skiers. The “Arlberg Pass” also covers the neighbouring resorts of St. Christoph, Stuben and the “party” resort of St. Anton. For the “powder hounds” there is extensive off-piste skiing to explore, as well as over 20km of cross country skiing trails in Lech alone. Adventure seekers can try skiing the famous ‘White Ring’ route — a 22km on-piste circuit of red and blue runs that takes in stunning scenery as you traverse the slopes around Lech, Oberlech, Zug and Zurs — highly recommended on a late-season sunny afternoon, although go easy on the alcohol on the way back to the village! Heated chairlifts and smart hotels make Lech a comfortable, upmarket choice, perfect for couples, and there is a lively après-ski scene too, centred around a number of hotels in the heart of the village. It’s fair to say that if you are looking for a cheap, alcohol-soaked ski break, then Lech is not for you; stick to Andorra and some of the other Austrian resorts like Soll. Lech and its sister resort Zurs — which is just up the road and at a little higher elevation, really are for the ski connoisseur — those who appreciate sumptuous hotels, fine wine and Michelin star quality food in a stunning setting. One particular hotel that we would personally recommend in Lech is the 4* Superior Hotel Der Berghof which is the first hotel in Austria to be included in the exclusive “Châteaux & Hôtels Collection” whose members characterise particular charm, character and exclusivity; a certain “’je ne sais quoi’ that leaves an unforgettable impression”, remarks Isabelle Burger — proprietor of the Berghof.
The hotel is located right at the heart of the village and just a stone’s throw from both main ski lifts, the boutique shops in the small shopping centre and some cosy bars like the hip Fux bar where you can enjoy a well earned glass of Champagne after an evening walk in the crisp mountain air. The hotel boasts an elegant Spa & Beauty centre for a sensual pampering experience and facilities which include; a steam bath, a Finnish sauna and bio-sauna, infrared treatment, cold water and kneipp-basins, warm beds, a relaxation area, sauna drinks and tea bar, a fitness area and gym room. With only 57 rooms, it is not too large and impersonal. A particular stand out feature of the hotel is the cuisine and after a hard day working the old leg muscles on the slopes, it is particularly enjoyable to indulge in the Berghof’s six course gourmet menu complemented by a selection of fine wines. When the day comes to an end and your appetite is suitably sated, a fire is already crackling in the Berghof bar. In this cosy atmosphere a rich selection of whiskeys, cognacs and wines are offered — no doubt helping you regale your friends with tales of the day’s ski adventures! For visitors old and new to Lech, we cannot recommend highly enough that the Der Berghof hotel be allowed to indulge you during your ski holiday.
Visit www.derberghof.at to learn more about the hotel and www.lechzuers.com for more info about Lech & Zurs.
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school corner Thierry Laduguie of E-yield’s top 3 combined technical signals In my trading, I actually use a variety of indicators depending on what instrument I am trading. If I am trading stocks then I would go for standard technical indicators like the relative strength, moving averages and RSI. If I trade the index however I would go for more advanced techniques like Elliott wave analysis and sentiment indicators that I find are more reliable in predicting the direction of the market.
On the chart to the top right of Diageo (DGE) the stock is compared to the FTSE 100 index and the relative strength is the blue trendline. When the relative strength moves up the stock outperforms the index performs better than the index. When the relative strength moves down the stock underperforms performs worse than the index. When the relative strength moves sideways both the stock and the index perform the same.
What does the relative strength tell us? At first glance a rising relative strength over a six-month period or more tells us that the stock has strong fundamentals, and it could be one of the reasons why the stock has outperformed the index.
One of my favourite technical signals combines the relative strength and the 55-day moving average (a particular moving average that I note Dominic Picarda - another contributor to this magazine is keen on albeit of the ‘exponential’ variety). Relative strength (a comparative measure) compares two securities/instruments to show how they are performing relative to each other. A stock’s price change is compared to the index price change (the base security), the relative strength is calculated by dividing the stock’s price by the index price.
In the case of Diageo, the relative strength has been rising for more than six months, the stock is still making new highs whereas the FTSE 100 is not. In this situation, each time the stock drops below its 55-day moving average it is a Buy. This occurred twice this year in May and September (blue arrows).
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Top 3 combined technical signals
CHART - DIAEGO
on indices One of my favourite signals on indices is a five-wave move (Elliott wave) accompanied by a divergence on the MACD (moving average convergence divergence) between the third and the fifth wave. Here is an example:
CHART - FTSE 100
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A divergence occurs when prices make a new low but the MACD makes a higher low (or when prices make a new high but the MACD makes a lower high). The divergence occurs between the 3rd and 5th wave and there should be 40 to 80 bars in the five-wave sequence under observation. If there are less than 40 bars or more than 80 bars the divergence might not be visible. These divergences confirm the end of the move and can be seen in any time period (intraday, daily, weeklyâ€Ś).
Investor sentiment By far the most important piece of information is investor sentiment. A major advance starts when sentiment becomes extremely bearish as indicated by the 13-day BTI. I created this indicator to measure extremes in sentiment. For example after the stock market correction from March to May this year, the 13-day BTI became oversold (extreme in bearish sentiment) on 17th May 2012. This meant the FTSE 100 was near a bottom. It took another two weeks before the FTSE 100 made a final low (1st June). During the ensuing rally in June-July, sentiment improved, this can be seen on the e-Yield Sentiment Indicator chart:
CHART - E-YIELD Bullish sentiment improved until 19th July but the stock marketâ€™s advance continued it advice right through until October. As you can see on the above chart, between 19th July and 9th October bullish sentiment was receding (declining line) while the FTSE was advancing. This bearish divergence was a warning that the uptrend was about to reverse. The message conveyed by the Sentiment indicator was correct, from 18th October to 16th November the FTSE 100 dropped by 5.2%. This example illustrates the power of investor sentiment. The stock market rises and falls in line with sentiment but when sentiment reaches an extreme it is often a turning point.
An extreme in sentiment at the end of a five-wave sequence has greater forecasting value. To conclude, there is not one particular holy grail indicator that will deliver you to trading riches. For me, the key is to find out which indicators intuitively work for me and that I understand and then combine these into one chart format. For example at the moment, the sentiment indicators on the FTSE are showing oversold indicators and so I am looking to Buy the index on a completion of a 4th wave count and ideally a rise back above the 55 day moving average. Check out my system at www.E-yield.com to learn more and register to receive a FREE guide to Elliot Wave theory.
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Mid Cap Corner
Mid Cap CoRnER oFFERing good vaLuE to inCoME SEEKERS at tHE CuRREnt pRiCE ICAP, the FTSE 350 listed inter dealer broker headed by ex Tory party Treasurer Michael Spencer, announced their interim results on the 14th November and which illustrated starkly just what a harsh environment the City brokers are currently operating in: with low customer trading activity and compressed margins that are already razor thin being the order of the day. Spare a thought for you friendly City broker this festive season!
ICAP is responding by cutting costs (annualised savings of at least £60m are expected by year end). A bigger issue is the future impact of regulatory changes, particularly affecting ICAP’s interest rate swaps (IRS) activity. This will inevitably involve some negative impact, but management views it as an opportunity overall.
The company does, however, remain profitable and cash generative, and has embarked on an extensive cost cutting program to restore margins. Cyclical revenue pressures will at some point ease, although ICAP sees no immediate prospect. The more fundamental issue exercising investors’ minds is whether the business can use its electronic transactions and post-trade service platforms to benefit from regulation changes.
A range of regulatory reforms are in process that are likely to substantially affect the over the counter (OTC) derivatives market — an element of ICAP’s voice broking revenues. ICAP expects limited displacement of its OTC products by exchange based futures and expects to benefit from its electronic platform capabilities and post-trade services across the whole business.
negative trading environment amidst regulatory uncertainty Economic weakness, continued bank deleveraging and re-capitalisation, and uncertainty over regulatory reform all contributed to low customer activity in the first half of 2012 and so resulting in the 14% decline in revenues and 26% fall in underlying PBT.
Regulation: threat or opportunity?
valuation focused on threats and ignoring opportunity The share price reacted poorly to the interim statement on the 14th November and now trades some 35% below the high hit in March. Although the negative operating environment has gone on for longer than expected, the underlying issues have not materially changed.
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Even without a rebound in market activity, cost cuts and ICAP’s electronic platforms in broking and post trade should support market share gains and so future earnings. With a robust balance sheet and very strong free cash flow conversion rate (109% at the half year stage), the valuation discount relative to the market is reaching the extremes of its historic range. Another factor that hit the stock price this year was the stocks ejection from the FTSE 100 and so creating some temporary incremental selling pressure that traders could take advantage of, minded to the bull side.
Technical Overview The weekly chart displayed here is very interesting to us. The fundamental backdrop paints a Buy picture, yet the downtrend still shows very clearly that it is intact. In fact, it looks like a classic pattern, known as a Head & Shoulders formation, is in the making — labelled on the chart for clarity.
Technical analysis dictates that should the “neck-line” break — centred around 280-290p on a weekly closing basis, then the ultimate fall one can expect is per the height of the “Head” — measured from the neck-line to the peak of the head and which is around 300p. This implies ICAP will ultimately go bust. Looking at the balance sheet, this is an almost impossibility at this stage and so we assume that the Head & Shoulders formation will be negated and hence the stock rise from this level. We are looking for a number of successive weekly closes above the 310-320p to indicate that the recent nose dive is over and that the stock is back in an uptrend. The current down draft is now 2 years in the making — generally a point of exhaustion, particularly given the fundamental backing the stock has.
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Mid Cap Corner
Conclusion As we have seen with Man Group that now trades on an unbelievable yield of 14%; although ICAP would ordinarily be expected to obtain support at the current income level of 8%, particularly against cash rates that are effectively nil and long dated bond yields sub 2%; this is no guarantee of support. The one thing that ICAP does have relative to Man Group, however, is the fact that the dividend is nearly twice covered by earnings, as we can see from the table below which reflects consensus estimates for 2013 and 2014.
A PE of 8 times for 2013 is very much at the bottom end of its PE trading band over the last 5 years and we struggle to see much downside from here. For those punters looking for a nice dividend yield to supplement their account, ICAP are looking interesting around the 290-300p mark.
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Mid Cap Corner
CONSENSUS ESTIMATES YEAR END
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A strategy to minimise your downside but still enjoy potential unlimited upside.
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Minimise your downside
There is no such thing as a “free lunch” in the markets as anybody who has played in them for any period of time will tell you. There is, however, occasionally a “good-value and satisfying lunch” and this applies particularly to the options arena where the flexibility of multitude strategies opens up a wide variety of profit and loss scenarios. This month I am going to explain how to structure a strategy that offers up the seeming holy grail of limited downside but also unlimited upside.
At the time of writing, the FTSE is trading around 5700 and you take the view that you would be happy to buy the FTSE around this level, reasoning that the market is quite heavily oversold and is due for a bounce, quite aside from the seasonal odds that generally tip the market towards a bullish stance. However, with an eye on the risk-side, taking account of the US “fiscal cliff” situation and continuing euro-zone woes , you decide that any break of 5550 and the market is likely to be lurching much lower.
This strategy is essentially the combination of a Bull Put Spread and an outright Call purchase and it is simpler to view it as the two respective legs. The strategy can be structured with the sold Put at the same price as the purchased Call, or there could be a gap between the two depending on your level of bullishness — the more bullish you are, the higher the strike of the Call you would purchase relative to the sold Put.
The FTSE Dec 5700 Puts are priced at 115 and the FTSE Dec 5550 Puts are priced at 62. Thus you can SELL the Put spread for a Net credit of 53. This means you would be purchasing the FTSE at 5647 (5700 - 53) — a good 50 points lower than the current level. Your downside on this strategy is the difference between the spread (5700 - 5550) and so 150 minus the credit you received. Thus your maximum risk is 97 points. You cannot lose any more than this as long as you keep the purchased Put open.
Let’s look at the 2 legs in turn.
Here is the Profit & Loss diagram of a Bull Put Spread:
This strategy is particularly suitable for oversold markets or indeed individual stocks where you are expecting a sharp rally but there is the potential for another final lurch lower and you do not want to run the risk of being stopped out in a typical long spread bet. This is the major benefit of such an option strategy, particularly when using a spread bet account, as the spread bet firms typically settle the positions at cash at expiry and so you would not be “put upon” with index plays, in particular, should the instrument breach the sold Put level. Returning to the other side of the leg — the simple outright Call purchase.
Again, to remind ourselves of the profit and loss profile of this instrument:
A Bull Put Spread is simply the sale of a Put strike and the simultaneous purchase of a lower strike Put. The purchase of the lower priced Put covers your downside in case the instrument price trades through the sold Put level and you have the instrument put upon you. Using a topical and current example, you might decide that the odds of a Xmas rally for the FTSE are on your side and consequently you would like to implement the strategy we detailed below.
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We can see that with regards to our FTSE example that our level of bullishness will dictate the Call strike price that we purchase. If you are particularly bullish and think that we may run towards 6000 by the year end, then perhaps a 5850 Call could be bought. At the time of writing these are priced at 26. The purchase of the same amount of Calls as those sold with the Bull Put spread element of the strategy would, in this example, result in a net overall credit of 27. If you are particularly bullish, then you may purchase twice or more the amount of Calls as sold in the Bull Put Spread example so your net overall credit would be effectively nil in this case and your breakeven level rises from 5673 (5700 - 27) to 5700 â€” the sold Put strike price. In effect, you are simply using the credit from the Bull Put spread sale to finance the purchase of the long Call on a 1 for 1 strategy implementation.
The benefits of a Bull Put Spread are as follows It limits your losses if the index or stock suddenly plunges. Your loss is limited to the total differences between the strike prices of your short Put (the Put you sold) and long Put (the Put you purchased). It has the ability to profit, even if the stock barely budges in price as a consequence of the net credit receipt. The risk is significantly lower than writing a naked Put as your maximum downside is limited by the Put option you purchased. In the event the stock or index continues to decline, an investor can buy to close the short Put position and continue to lock in gains from the long Put as the price of the underlying stock drops.
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SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
Issue 12 - January 2013
in next month’s edition...
new year Edition top tips and ideas for 2013 StoCK MaRKEt CRaSHES oF tHE LaSt 100 yEaRS PART TWO SpECiaL FoCuS on japan WILL 2013 FINALLY BE ITS YEAR? RobbiE buRnS, doMiniC piCaRda & ZaK MiR’S TOP PICKS FOR THE FORTHCOMING YEAR
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SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.
See you next month! www.financial-spread-betting.com
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