D. Money Management, Stop-loss & Trailing-Stop
The single most
important concept that a successful technical analyst and trader must fully
comprehend is probability. From this vital concept, the following trading
strategies and techniques are devised to improve the chances of success or at
least reduce the odds of failure.
The importance of money management to
successful trading cannot be over - emphasized. In our view, it is the single
most important factor in deciding whether a trader eventually succeeds or fails.
Out of the financial resources available, what is the exposure or amount that a
trader should have to a particular trade has a big influence in the trader's
eventual performance.
The main idea behind these 2 important money
management techniques of stop - loss and trailing - stop is "Let your profits
run but cut your losses."
Stop - loss means that if the price of the
counter falls to a certain predetermined level, a trader should stop the losses
and sell. What the actual stop - loss should be has to be determined by the
trader him or herself. Setting the stop - loss levels can be more complex than
what is generally realised and is dependent on a number of major factors. There
is a trade off in setting a stop - loss " if it is close to your buying price,
the stop - loss can be easily triggered but your loss will be small and vice -
versa.
A trailing - stop is used when a counter after you have bought
has gone up in price. What happens is this : Say the price has gone up from
$2.00 to $3.00. To protect your profits (in case the trend turns ) and yet have
a chance to participate ( in case the price still rises ), you place a trailing
- stop at, say, $2.50. This means that if the price falls to $2.50, you sell out
with a profit. As the price goes higher, your trailing - stops should move
higher too. What the trailing - stops will be will have to be decided by each
trader him or herself.
Saturday, January 9, 2010
Technical Analysis Part III
C) Directional Movement Index
Under this index, two lines are generated. Buy / Sell signals are again given when the 2 lines cross. The signals given are, from our experience, longer term than the MACD or RSI.
Under this index, two lines are generated. Buy / Sell signals are again given when the 2 lines cross. The signals given are, from our experience, longer term than the MACD or RSI.
Technical Analysis Part II
B) MACD
Introduction to MACD
The MACD trading method is actually based on 2 exponentially smoothed moving average and buy / sell signals are given when the 2 lines cross.
The MACD just like the RSI can also be calculated on a weekly or monthly basis. In addition, a divergence between the share price or a market index and its MACD is a powerful indicator of a reversal. It is also useful for short - term traders and should be used in conjunction with other indicators.
Introduction to MACD
The MACD trading method is actually based on 2 exponentially smoothed moving average and buy / sell signals are given when the 2 lines cross.
The MACD just like the RSI can also be calculated on a weekly or monthly basis. In addition, a divergence between the share price or a market index and its MACD is a powerful indicator of a reversal. It is also useful for short - term traders and should be used in conjunction with other indicators.
Technical Analysis Part I
Technical analysis as apoosed to fundamental analysis, includes analyzing charts and technical indicators like RSI, MACD, moving averages, etc.
It has its uses if the trader or investor is aware of its good and bad points.
One weakness is that its interpretations can be affected if you draw the same charts on a different scale, i.e. arithmetic or semi-log scale. Another potential weakness is that the price and volume of a stock can be manipulated so as to give certain patterns or readings for the other traders.
A) RSI (Relative Strength Index)
The number of days can be varied. In our case we choose 9 days instead of the usual 14 days. The RSI can also be calculated on a weekly or monthly basis. The shorter the time, the more sensitive RSI becomes.
The maximum and minimum levels that the RSI indicator can theoretically go to are 100 and 0. Usually if the RSI is above 70, it is overbought and if it is below 30, it is oversold. These are useful for short-term traders.
An important use of RSI is when there is a divergence between the company's price or a market index and its RSI. A "bullish divergence" signals a short-term bottom while a 'bearish divergence" signals a short-term peak.
Introduction to RSI:
This indicator is also very popular with traders in the future markets. Its formula is:
RSI = 100 - ( 100/1+ rs )
Where rs = average of X day's up closes / average of X day's down closes.
It has its uses if the trader or investor is aware of its good and bad points.
One weakness is that its interpretations can be affected if you draw the same charts on a different scale, i.e. arithmetic or semi-log scale. Another potential weakness is that the price and volume of a stock can be manipulated so as to give certain patterns or readings for the other traders.
A) RSI (Relative Strength Index)
The number of days can be varied. In our case we choose 9 days instead of the usual 14 days. The RSI can also be calculated on a weekly or monthly basis. The shorter the time, the more sensitive RSI becomes.
The maximum and minimum levels that the RSI indicator can theoretically go to are 100 and 0. Usually if the RSI is above 70, it is overbought and if it is below 30, it is oversold. These are useful for short-term traders.
An important use of RSI is when there is a divergence between the company's price or a market index and its RSI. A "bullish divergence" signals a short-term bottom while a 'bearish divergence" signals a short-term peak.
Introduction to RSI:
This indicator is also very popular with traders in the future markets. Its formula is:
RSI = 100 - ( 100/1+ rs )
Where rs = average of X day's up closes / average of X day's down closes.
Friday, January 8, 2010
Higher oil prices in 2010E-2011E could boost biodiesel demand
Going forward, we remain positive on the outlook for oil prices. In September 2009, our oil Research team raised its 2010E-2011E oil price forecasts to US$90/bbl and US$110/bbl, respectively, on higher oil demand projections due to upward revisions to our global GDP forecasts and tangible signs of US/OECD demand stabilization.
Higher oil prices are positive for biodiesel demand and also increase the breakeven at which CPO biodiesel is viable for production outside government mandates (which stipulate a blending requirement irrespective of price). For example, we estimate that at current CPO prices biodiesel is viable if prices stay above US$61/bbl (based on export to Europe). Meanwhile, our 2010E-2011E CPO price assumptions of US$850 and US$950, respectively, imply biodiesel breakeven oil prices of US$75/bbl and US$88/bbl, respectively, (export to Europe), which is conservative relative
to our oil price forecasts of US$90/bbl and US$110/bbl for 2010E-2011E.
(Source: Golman Sachs)
Higher oil prices are positive for biodiesel demand and also increase the breakeven at which CPO biodiesel is viable for production outside government mandates (which stipulate a blending requirement irrespective of price). For example, we estimate that at current CPO prices biodiesel is viable if prices stay above US$61/bbl (based on export to Europe). Meanwhile, our 2010E-2011E CPO price assumptions of US$850 and US$950, respectively, imply biodiesel breakeven oil prices of US$75/bbl and US$88/bbl, respectively, (export to Europe), which is conservative relative
to our oil price forecasts of US$90/bbl and US$110/bbl for 2010E-2011E.
(Source: Golman Sachs)
Thursday, January 7, 2010
Parkson (5657) >Current Price RM5.60
After six months of consolidation, Parkson holdings is set for its next rally as it breaches above the RM5.50 resistance. Its daily and weekly MACD is forming an upward reversal, while its DMI and RSI are affirming the return in momentum, Encourage by the strong volume since the start of the rally, i rates Parkson holdings as a trading buy with a target price of RM7.00. Place relevant stop-loss.
Wednesday, January 6, 2010
Malaysia to mull foreign hypermart rules
The Cabinet will mull over the long-awaited new rules that will govern the lucrative business of foreign hypermarkets in the country, as early as today. Sources say the new rules would be crucial because the Government froze licences for new stores for foreign retailers like Tesco, Giant and Carrefour last year. "It is not certain if the recommendations will be approved in totality by the Cabinet," the source told Business Times. The Ministry of Domestic Trade, Co-operatives and Consumerism will present the revised guidelines to the Cabinet. The source was unable to reveal the changes and recommendations, but said that the 30% Bumiputera equity for foreign hypermarkets remains. Industry players have indicated that changes could include a reduction in the population-to-hypermarket ratio and the revocation of licences if retailers took too long to start operation. (BT)
Genting Singapore Plc (GENS SP)
Genting Singapore Plc (GENS SP), an operator of casinos in
London, said it will begin phased opening of Resorts World
Sentosa, its S$6.6 billion integrated casino resort project in
Singapore, on Jan. 20. Resorts World will begin taking room and
restaurant reservations for its four hotels from Jan. 11. The
casino will open once the company gets its licence, it said.
Genting lost 0.8 percent to S$1.28.
London, said it will begin phased opening of Resorts World
Sentosa, its S$6.6 billion integrated casino resort project in
Singapore, on Jan. 20. Resorts World will begin taking room and
restaurant reservations for its four hotels from Jan. 11. The
casino will open once the company gets its licence, it said.
Genting lost 0.8 percent to S$1.28.
Monday, January 4, 2010
Inflation may be coming. Time to look for a hedge!
Inflation may be coming. Time to look for a hedge.
By Whitney Tilson and John Heins
Sunday, January 3, 2010; G03
Inflation may be subdued today, but the debate over inflation is anything but tame. Pessimists, such as hedge-fund manager Julian Robertson of Tiger Management, say rampant inflation is a looming threat. "I ask anyone to give me an example of an economy beefed up by huge amounts of fiscal and monetary stimulus that did not inflate tremendously when the economy improved," he recently told us.
Optimists such as David Herro, co-manager of the Oakmark International fund, disagree. "The global economy is soft, and there's excess capacity, so I believe inflation is still preventable," Herro says.
The debate over gold, considered an excellent inflation hedge by some, is equally lively. Top investors, such as Paulson & Co.'s John Paulson and Greenlight Capital's David Einhorn, placed big bets on gold in 2009. Einhorn explained his rationale at the recent Value Investing Congress: "Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely."
At the same conference, Bill Ackman of Pershing Square Capital Management said he avoids gold because it is "a greater-fool investment." In other words, making money on the yellow metal is less a function of a rise in its fundamental value and more a function of finding someone who is willing to pay you more for it. Tiger's Robertson describes his aversion to gold similarly: "It's less a supply-demand situation and more a psychological one -- better a psychiatrist to invest in gold than me."
Because inflation hasn't afflicted America in some 30 years, it's worth reviewing what rising prices might mean for stock investors. In a 1977 article on the subject in Fortune, Warren Buffett went to great lengths to disabuse shareholders of the notion that they could skate through inflationary times unscathed. He wrote that companies have little ability to improve returns on capital when inflation is high, so investors aren't willing to pay as much for each dollar of corporate earnings. The subpar 5.2 percent annualized return for the Standard & Poor's 500-stock index from 1973 through the end of 1981, a span during which inflation rates often hit double digits, provides ample support for that argument (adjusted for inflation, stock returns were negative).
We'd love for policymakers to successfully reignite the U.S. economy without also rekindling inflation. The more prudent course, however, is to assume that all won't go smoothly.
What do we recommend? We respect many of those who advocate gold, but, like Ackman and Robertson, we believe it's too difficult to assign a value to the metal. Instead, we prefer high-quality companies with significant foreign exposure and the ability to raise prices. Both Microsoft and Pfizer recently reported better-than-expected earnings that signal the resiliency of each company's business. In Microsoft's case, those results don't yet reflect the launch of its Windows 7 operating system, which we think will result in much better profits than analysts expect.
You can also hedge against rising inflation by investing in businesses tied to natural resources, from crude oil to agricultural commodities. One favorite in this category is Contango Oil & Gas, which explores for energy mostly in the Gulf of Mexico.
More adventurous investors who think that higher inflation will lead to higher interest rates can bet against long-term U.S. Treasury securities through options and various exchange-traded funds (bond prices generally fall when rates rise). For example, we've shorted iShares Barclays 20+ Year Treasury Bond ETF, which is designed to gain value when yields fall and Treasury-bond prices rise. If inflation rises rapidly and rates follow suit, Treasury bonds will perform poorly.
By Whitney Tilson and John Heins
Sunday, January 3, 2010; G03
Inflation may be subdued today, but the debate over inflation is anything but tame. Pessimists, such as hedge-fund manager Julian Robertson of Tiger Management, say rampant inflation is a looming threat. "I ask anyone to give me an example of an economy beefed up by huge amounts of fiscal and monetary stimulus that did not inflate tremendously when the economy improved," he recently told us.
Optimists such as David Herro, co-manager of the Oakmark International fund, disagree. "The global economy is soft, and there's excess capacity, so I believe inflation is still preventable," Herro says.
The debate over gold, considered an excellent inflation hedge by some, is equally lively. Top investors, such as Paulson & Co.'s John Paulson and Greenlight Capital's David Einhorn, placed big bets on gold in 2009. Einhorn explained his rationale at the recent Value Investing Congress: "Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely."
At the same conference, Bill Ackman of Pershing Square Capital Management said he avoids gold because it is "a greater-fool investment." In other words, making money on the yellow metal is less a function of a rise in its fundamental value and more a function of finding someone who is willing to pay you more for it. Tiger's Robertson describes his aversion to gold similarly: "It's less a supply-demand situation and more a psychological one -- better a psychiatrist to invest in gold than me."
Because inflation hasn't afflicted America in some 30 years, it's worth reviewing what rising prices might mean for stock investors. In a 1977 article on the subject in Fortune, Warren Buffett went to great lengths to disabuse shareholders of the notion that they could skate through inflationary times unscathed. He wrote that companies have little ability to improve returns on capital when inflation is high, so investors aren't willing to pay as much for each dollar of corporate earnings. The subpar 5.2 percent annualized return for the Standard & Poor's 500-stock index from 1973 through the end of 1981, a span during which inflation rates often hit double digits, provides ample support for that argument (adjusted for inflation, stock returns were negative).
We'd love for policymakers to successfully reignite the U.S. economy without also rekindling inflation. The more prudent course, however, is to assume that all won't go smoothly.
What do we recommend? We respect many of those who advocate gold, but, like Ackman and Robertson, we believe it's too difficult to assign a value to the metal. Instead, we prefer high-quality companies with significant foreign exposure and the ability to raise prices. Both Microsoft and Pfizer recently reported better-than-expected earnings that signal the resiliency of each company's business. In Microsoft's case, those results don't yet reflect the launch of its Windows 7 operating system, which we think will result in much better profits than analysts expect.
You can also hedge against rising inflation by investing in businesses tied to natural resources, from crude oil to agricultural commodities. One favorite in this category is Contango Oil & Gas, which explores for energy mostly in the Gulf of Mexico.
More adventurous investors who think that higher inflation will lead to higher interest rates can bet against long-term U.S. Treasury securities through options and various exchange-traded funds (bond prices generally fall when rates rise). For example, we've shorted iShares Barclays 20+ Year Treasury Bond ETF, which is designed to gain value when yields fall and Treasury-bond prices rise. If inflation rises rapidly and rates follow suit, Treasury bonds will perform poorly.
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