We Are In A Bubble

I have been following the S&P 500 for a while now looking for a short opportunity. I have created a leading indicator that anticipates market downturns using a series of data. I will not be going into details as to how the indicator was constructed but I will briefly explain how it works.

Above shows a graph of the S&P 500, my indicator (CRI - Crash Risk Indicator) and the Drawdown of the S&P 500.

The green line is the historical price of the S&P 500 and the blue line is my indicator. The red area on the bottom is the drawdown of the S&P 500.

The idea is when the CRI is above 0.5 (the horizontal black line), there is a potential of a crash. Doing some backtesting, there were 2 major spikes for the CRI which happened in the year 2000-2002 and 2008. If your memory serves you well, you would know that these was the Dot Com bubble and the Subprime crisis respectively.

In more recent times, the indicator spiked before the China devaluation in August 2015 and another one in 2016 January sell-off. The indicator recently touched the threshold in the past couple of weeks but it did not trigger a potential market crash as it did not exceed 0.5. However, I am monitoring this closely as the S&P 500 has reached an all-time high and I foresee a sell-off in the near future.

I cannot tell you exactly what the cause of this bubble will be, but I can say that the indicators that I use for my CRI is giving a very grim future.

My model is based on 4 indicators. I will list what are the factors that I consider for this model for you guys to get a better idea of that I am focusing on to determine whether or not the market is heading for a crash.

1. Moving Average
2. Error Adjusted Momentum
3. Option Adjusted Credit Spread
4. Market Regime

That is all for now, I will keep you guys updated with what lays ahead. As always, happy trading. Cheers.

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[Bullish Setup] - Wynn Resorts (NASD: WYNN)

I have entered a long position in Friday 30th September to Wynn Resorts. I see a potential reversal to the previous swing high.

Entry: $101.89
Take Profit: $109.30
Stop Loss: $97.28

RRR: 1.61

As always, happy trading.

Cheers.

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August Trading Review

August was a pretty quiet month with only 1 trade. Made a loss of about $800 USD from shorting FedEx (FDX). Remember not to let losses discourage you from sticking to your plan. It is part of trading and one has to be able to deal with it in a rational manner. I refer you to one of my previous post about stop losses if you would like to read up more on my thoughts.

Hopefully September presents some interesting opportunities. I am also currently looking to short the S&P 500 as I believe it is in an overbought scenario. Will be keeping you guys updated.

Cheers.

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NEW Singapore Stocks Charting Tool

I have always used ChartNexus as my go to charting application. It is fairly simple to use and hey, it's free after all so not much complains here.

Recently, a new charting tool for Singapore stocks has been brought to my attention and I am here to share it with you today.

The website is by InvestingNote and you can click here to view the charts. It is based on TradingView’s charting software and it has an array of technical indicators that you can apply for your own strategy. TradingView’s original software does not contain SGX stocks but InvestingNote has managed to solve that problem.

It is completely free; you can even make an account to save the charts as well as view other trade ideas that others might have. Currently, you can only view the daily, weekly and monthly chart. Intraday charts are still unavailable.

Feel free to share if you have other charting tools that you’d like to share.

Cheers.

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Why You Should Start Saving Now

Nowadays, the youths don't see the importance of saving early. And I guess, it's hard to see it because society moves so fast. It's hard to take a step back and do something to reap the long-term benefits.

I am going to try to help you understand how saving early can have a pretty big impact on your financial health down the road with a simple example.

Imagine that there are 3 person, Mary, John and Tom. I know, I have no creativity, but bear with me.

They are all 25 years old. They all save $1000 a year and they all currently have $10,000 in their bank account. Let's assume that the interest earned from their respective banks are the same at 0.50%

Mary spends all her annual savings buying her favourite bags. Givenchy, Balenciaga, you name it, she buys it. (Okay, I know $1000 can't really get you those bags but assume she gets it on carousell or something.) She only realises that she better start saving after year 20 years, when she's 45 years old.

John is the kind of guy that doesn't spend on much now, he wants to save up for a big purchase in the future. Perhaps a nice watch, a down payment for a car or a great holiday getaway. He saves every year till he is 45 and starts spending all of them.

Tom on the other hand is a no nonsense guy, he saves every year without fail. He plans to retire comfortably and knows the importance of compounding. The goal is to be like Tom.

I have done up a simple excel spread sheet to help you visualise the effect of these 3 different saving pattern.

You can see that at the end of 40 years, Mary has the lowest amount of money. Even though she saves the same amount of money as John. The only difference is that she spends first then saves later, while john saves first then spends later.

Due to this tiny difference, John has about 7% more savings than Mary.

Tom's saving pattern is basically the combination of Mary's and John's. He saves for the first 20 and the next 20 years combined.

Tom has a whopping 70% more savings than Mary and 59% more than John.

And this is only at 0.5% interest rate. When the interest rates start going up, the difference between the savings amount will be amplified.


You can see a chart below to better help you see how their savings move with time.

I have attached the excel spreadsheet for you to experiment with it.

You can download the excel spreadsheet here

Feel free to change the:

• Initial Capital
• Interest Rates
• Individual Amount Saved
• Their names if you don't like them

Till next time,

Cheers.

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Why Stop Losses are Counter Intuitive

(Source: Forbes)

I'd like to start out this article with a personal story. When I first started trading, I made one of the worst mistakes any trader could make, which is to not adhere to your predefined stop loss level. I would enter a trade, if the trade went in my favour, I'd start to move my stops to tighten it. But if the trade went against me, I'd start adjusting the stops to make sure that I wouldn't get stopped out. (You're probably cringing)

If you are new to trading and you're struggling with sticking to your stop loss, keep on reading.

I ended up losing more than expected, and closing winning trades way too early. Perfect recipe to wipe your account out. As humans, we are psychologically predisposed to be excited when we see the small gains. But when there is a losing trade on hand, we become optimistic and hope that it will eventually reverse. Its known as prospect theory people value gains and losses differently.

A simple example to demonstrate this theory would be the following scenario:

Imagine if you could either have $100 now or a 50/50 chance of either getting $0 or $500. I'm pretty sure most of you would just take the $100 although logically, you should pick the second option.

I think I might have a solution to help you cope with sticking to stop losses.

The term "Stop Loss" has a negative connotation to it. It makes us feel like we've made a mistake.

"Stop playing with your gameboy!"
"Stop watching tv!"
"Stop adjusting your stop loss!"

Just things I've heard my mum tell me growing up. Okay, maybe not the last one, but you get where I'm going with this.

"Loss" is pretty self-explanatory.

So instead, let's rename "Stop Loss" to "Start Save". Adhering to the stop loss levels enables you to prevent additional losses saving your capital. It also gets you out of trades that are not going in your favour and frees up your capital for other opportunities that might present themselves.

I hope this has helped you to understand why following your stop loss start save level is crucial to trading.

As always, happy trading.

Cheers.

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[Bearish Setup] - Fedex Corp (NYSE: FDX)

Another shorting opportunity presented itself on Thursday 14/07/16. There was a shooting star formation coupled with other indicators indicating an overbought condition (I will discuss about the indicators in future posts). To sum it all up, I will be taking a short position as I expect a mean reversion to happen within the next couple of weeks.

I took a short position on Friday 15/07/16 at $161.42.

Entry: $161.42
Take Profit: $154.43
Stop Loss: $165.79
RRR: 1.6

Take profit was based on the previous pivot level. One has to note that there was a price gap that occurred a few days after earnings results were released. I will be slightly tighter with my stops once the price is approaching the gap area which is between $156.40 and $154.07

That's all for now, this is my only opened position in my active portfolio. I will be sharing my passive portfolio details in the future! Stay tuned for that!

As always, happy trading.

Cheers.

4/8/16 Update: I am still holding on to my short position. Currently at a small profit, will continue to hold on to this short.

10/8/16 Update: Fedex is now hovering close to my stop loss, I'll be following my plan and not shifting my stop loss

12/8/16 Update: Fedex hit my stop loss, I have exited the position. Losses are part of trading and I look forward to sharing with you the next setup that presents itself!

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[Bearish Setup] - Sallie Mae (NASDAQ: SLM)

This ticker caught my attention after the market closed for NASDAQ. Potential mean reversal trade back to the pivot of $6.33

Entry Price: $6.99
Take Profit: $6.33
Stop Loss: $7.30
RRR: 2.13

Remember that this signal will be invalidated once the price exceeds the previous day high which is $7.13.

As always, happy trading.

Cheers.

Update: The signal has been invalidated as the price has breached the previous day high. I will not be taking this trade.

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How to use Pivot Points to Trade Profitably

Today, I will be discussing what Pivot Points are and how it can be very useful in trading.

Personally, my style of trading is classified as swing trading or momentum trading. I look for short term reversal in prices and capitalise on that in order to make a profit.

The question remains, where do you close your position and take profit? This largely depends on your risk appetite and trading style. The more aggressive traders would have their take profit further away while the more conservative would have it closer.

However, Pivot Points provide a very good estimate as to where short-term support and resistance are located. Basically, these are areas where prices then to bounce on.

This is helpful to me in 2 ways:

1. It helps me determine if a reversal pattern is valid (aka, if it occurs near a pivot point, the reversal is more valid then if it occurred randomly)

2. It helps me determine my take profit in order to calculate whether my risk-reward ratio is acceptable based on my risk appetite.

Let's look at a recent trade that I made, Skechers USA Inc:

The highlighted candlestick is a reversal pattern known as "Hanging Man". All the yellow lines are known as " Pivot Points".

Pivot Points (Standard) have the following labels and there are calculated as follows:

Pivot Point (P) = (High + Low + Close)/3
Support 1 (S1) = (P x 2) - High
Support 2 (S2) = P - (High - Low)
Resistance 1 (R1) = (P x 2) - Low
Resistance 2 (R2) = P + (High - Low)

The source of the high, low and close depends on what time frame you are using to view your charts.

• Pivots for 1, 5, 10, 15 charts use the prior day's high, low and close. 
• Pivot Points for 30 and 60 minute charts use the prior week's high, low and close. 
• Pivot Points for daily charts use the prior month's data.

Click here to read more about Pivot Points as well as different variations on it.

Based on my trading methodology, I will look for reversal candles, like the "hanging man" that occur near a particular pivot point. After which, my take profit would be as follows,

Short Entry

My take profit would either be the higher of the previous swing low, or the next immediate pivot point.

Long Entry

My take profit would either be the lower of the previous swing high, or the next immediate pivot point.

So back to the Skechers example, I shorted the stock based because the reversal candle occurred near a pivot point. The previous swing low was higher than the next pivot point below it. Therefore, I used the swing low as my take profit level.

Using this method to identify swing trading opportunities coupled with the risk management that I mentioned in the previous post, the odds of making a profitable trade are in your favour. 

I will be posting more updates about the indicators that I personally use to identify my trades so stay tuned!

As always, happy trading.

Cheers.

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May Trading Review

After taking a break from trading in April to relook into my trading methodology, I'm glad to say that the results seem to be improving. After implementing the new risk management technique that I mention in Part 1 and Part 2, my losses have been significantly lesser. Of course, I will incur a higher trading cost, but that's the price I'll have to pay for protecting my downside risk.

Total profit after considering trading cost is roughly $1130 (approximately 16%) which is pretty decent. Hopefully I'll be able to generate this kind of returns for 2016. I'll be back with June's performance in about 2 weeks.

I will also be discussing new indicators that I am currently using which have definitely helped me screen for higher probability of trades. Stay tuned!

As always, happy trading.

Cheers.

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Risk Management Part 2

In my previous post, I discussed the mentality one should adopt in order to manage their risk effectively. I also touched on how to adjust your order quantity such that your loss is calculated and therefore, reduces your uncertainty.

Today, I will be discussing another technique which I personally use for managing my risk. In simple terms, I close half my position when the price hits the mid point between my entry price (the price I buy/short) and the target price (the price I will close my position).  After closing half my position, I will move my stop loss to either just below the low of the day or breakeven, whichever is higher for long positions, or whichever is lower for short positions.

Let's go through the examples.

Example - Starhub

Lets assume you want to buy 1000 shares of Starhub at the price $3.34. Your target price is $3.5. You calculate the midpoint by taking ($3.5-$3.34)/2 + $3.34 = $3.42

After longing the position, the price eventually hits your midpoint price, you sell 500 shares and move your stop loss to the higher of either the day's low or breakeven. In this case, it is the day's low (note: place stop just below the low)

You keep adjusting the stop loss every day to move it to just below the day's low until you get stopped out or the price hits your target price.

In this case, the your remaining 500 shares for Starhub would have been stopped out at $3.42. It did not go according to your plan which is $3.5, but it was still a profitable trade. If you keep this up, you will greatly minimise the the losses that you will experience.

This strategy of course isn't the optimal strategy for everyone. You will have to access your personal risk tolerance and see if this fits in your overall strategy and goal.

I find that by having this strategy, there is a lesser chance my unrealised profits will be wiped out. Essentially, once the price hits the midpoint, I am guaranteed profit on the trade. You will have successfully removed all uncertainty regarding potential losses.

What a great position to be in wouldn't you say?

As always, happy trading.

Cheers.

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What is Proper Risk Management? Part 1

It's been a pretty long time since my last update. I have been focusing on exams but I'll be continuing to post my trades and my methodology on this site so stay tuned!

Today, I wish to discuss 'risk management' and how important it is for anyone who is investing/trading.

I started out trading with the mentality of asking myself "How much could I win?". This mentality made me hold on to positions even though it was going south. In my mind, I was constantly telling myself that I wouldn't close the position unless it was making at least some profits. If this sounds familiar to you, better read on!

I have shifted my view on this to what I feel is a more appropriate way to view a trade, which is to ask yourself "How much am I willing to lose?". Having a predefined amount that you are willing to let go off in the event the trade goes against you lets you feel in control. Your level of uncertainty when it comes to losses is greatly reduced. To do this, adjust your order quantity so that it allows your potential loss to match your risk appetite.

Lets me give you an example:

This is the chart of Sembcorp Marine S51. Lets assume that you want to short at $1.695 and you calculated a stop loss of $1.81. The next question to ask yourself is, "How many contracts should I short?"

In order to ensure that you have a controlled level of risk, lets assume you are going to risk $200 if the trade does not work out. You should calculate the "distance" or the difference between your entry price and your stop loss.

In this case, it would be $1.81 - $1.695 = $0.115

Therefore, the number of contracts you should short would be = Risk Amount/Distance = $200/$0.115 = 1739

If you shorted 1739 contracts of Sembcorp Marine S51 at $1.695 and placed your stop at $1.81, your estimated potential loss is $200. Doesn't this sound way better than an undefined amount where you base position size on "feel" rather than calculated risk?

I will be posting more articles about risk management soon so stay tuned!

Feel free to leave a comment and I'm happy to listen to any of your suggestions or feedback.

As always, happy trading.

Cheers.

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[Bullish Setup] - Starhub (SGX:CC3)

I was looking through some Singapore stocks and Starhub caught my attention. I have entered long on Starhub, I believe it will be going through a mean-reversion in the next few days. I am also considering purchasing Starhub for my dividend portfolio, will keep you guys updated soon.

Entry: $3.42
Stop Loss: $3.32
Take Profit: $3.56

RRR: 1.52

As always, happy trading.

Cheers.

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[Bearish Setup] - Macquarie Infrastructure (NYSE:MIC)

I have identified a shorting opportunity for MIC and I'll be risking a little more money because it's in line with the direction of the S&P 500.

Entry: 59.41

Stop Loss: 63.22

Take Profit: 52.94

RRR: 1.7

I am still monitoring the markets right now giving it some time to stabilise before placing an order. You don't want to place an order within the first hour of trading using this strategy as it can be accidentally triggered due to the large movement in price by the market movers.

As always, happy trading.

Cheers.

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Did you trade S&P500 (NYSE) with me for a $1675 profit in 6 days?

Wrote a post last week about a shorting opportunity for the S&P 500. I closed my position using a trailing stop. I will be monitoring it for a chance to go long before looking to short again. My overall sentiment towards the market is still very bearish.

I could have gotten a little more if my trailing stop did not get triggered, but I can't complain. The lesson I got out of this trade was to let the market work itself and perhaps use a trailing stop on a longer timeframe.

Congrats to all who followed the call!

As always, happy trading.

Cheers.

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