Readings: Week 16 - 22 Oct 2017


A student mentioned to me that one of his common trading issues was taking profits too soon. In my humble opinion, this is a lesser known symptom of trading with fear, the fear of losing.

Experienced traders accept that losses are a cost of trading. If you struggle with a fear of losing, you may be trading larger position size than your account/heart/stomach would allow.

There are 5 possible outcomes to any trade: A large loss, small loss, flat or break-even, small win, and large win. When you eliminate the large losses by using stops properly, we expect the small losses and small wins to cancel each other out, leaving you only large wins. Sounds easy enough, right?

Here is the problem: many traders get into the unfortunate habit of closing their winning trades too soon, before the move is done. Why would they do this? The reasons are varied but two stand out to me.

If you consistently exit your winning trades too early out of fear of losing profit, guess what happens to your big wins? They don’t exist, that’s what! You might not be losing money as a trader with this strategy, but your probably aren’t making good money either. New traders often quit because they just aren’t making enough to continue to trade. T

The Solution to Exiting Trades Too Early. The first is to trade in the direction of the trend. The second recommendation is to stop staring at your screen when you are in a trade!

Resources Stocks: What's The Problem?

As per always, investing in commodities and related stocks in the share market is a matter of timing and of perspective.

Clearly, global growth is not the only factor in play here. In fact, there is but a fair argument to be made that policy changes in China have a more decisive impact on prices for commodities, as again witnessed this month through sharp divergence in iron ore producers performances.

China's policy of winter pollution controls is forcing steel manufacturers in the country to buy higher grade ores (62% Fe). This has in a short time created a price gap of 40% between higher-grade and lower-grade ore. As a result, producers like BHP, Rio Tinto and Vale continue to enjoy highly profitable conditions, but a number of lower grade producers are now underwater and at risk of going out of business. After the Congress, Chinese authorities are expected to focus on pollution control and on improving air quality which means government officials are putting the brakes on industrial output. This is why analysts are anticipating a slowdown in Chinese economic activity should soon manifest itself.

Electric Vehicles. Macquarie's team of specialists earlier this month highlighted potential upside risks from the global switch towards Electric Vehicles, including new-technology batteries. The impact is likely most pronounced for cobalt. Even as battery producers are moving away from heavier cobalt loadings, Macquarie still projects global demand to grow by 8.9% CAGR between 2017 and 2022. For a relatively small market, with primary supply highly concentrated in that top five producers supply more than 50%, and with 60% of total mine output from the as ever unstable Democratic Republic of Congo, Macquarie suggest global cobalt seems poised to experience severe shortages. This should translate into much higher prices. Macquarie has also become more positive on the price outlook for other lithium-ion battery related commodities nickel and lithium. A recent sector update saw the broker lifting the price target for Clean Teq Holdings (CLQ) by no less than 75% to $2.10. Clean Teq is the owner of the Syerston Nickel/Cobalt/Scandium Project in NSW, which the company wants to develop into a low cost supplier of nickel sulphate and cobalt sulphate into the lithium-ion battery market.


I am not bullish or bearish, I don't make market calls, or predictions and I don't have opinions about the markets that I trade. I just follow my process, which is based on risk management, money management, price and moving averages.

I follow core concepts: respect Price, respect Risk and always be Prepared for any outcome.

1. Experienced/High level traders focus first on how much they can lose in a trade and how to manage risk.

2. Stocks and markets often go down faster than they go up

The adage goes, that stocks take the stairs up and the elevator down. Fear and greed are the two emotions most prevalent in stock markets, and fear is the strongest of the two.

3. You will have losing trades

4. You will have a string of losing trades Many greats discuss trading smaller when they hit these losing periods. By using fixed percentage risk sizing (risking the same percentage of account equity per trade) a trader ensures that they will be trading smaller in drawdowns and losing periods, because trade size is dictated by account equity. Lower equity means less $ at risk per trade. As their performance improves, net trade size will increase in line with equity. The key here is to be prepared for losing periods, to stick to the plan, and to not try to revenge trade their way out of a drawdown or losing period. Markets don't beat traders, traders beat themselves because they try to impose their will on the market.

5. Most traders think they can mentally handle larger drawdowns than they really can

My trading mentor taught me "traders can handle unlimited volatility...on the upside". Many seem to feel like they can handle volatility as long as the market is trending in their direction and the P/L keeps creeping up. We are all brave with the wind at our backs. Once any significant pullback or drawdown happens and traders see their equity contract and the red days add up, many often panic and cut technically sound positions just to stop the pain of the drawdown. More often than not, markets turn around right after they flip the panic switch and the trade resumes it's uptrend , without them in it.

6. Stop losses are essential, but they do not cap your risk

Great traders know what gets them out of a position before they get into it. They ask 2 questions.

- How will I know that I am wrong? and

- What will I do to minimize the damage?

7. Most traders overtrade and leave themselves overexposed in one or more ways

Overtrading does not just mean trading too frequently. It can also mean having too many open positions, too many correlated positions, having too much money at risk in positions or accounts as a whole, and taking on significantly more risk than they need to.

8. The best true hedge is cash and reduced exposure Some think that they can counter long positions, and or overexposure by hedging away risk using derivatives or shorting techniques. While a 130/30 long/short strategy may sound great, it may not be the best approach for most. Some people make a living driving 200 miles per hour, but for most of us, that would likely result in a less than optimal outcome. Derivatives do not always move the way they are expected to, due to a variety of variables and short positions can go up while long positions go down.

9. Ignore predictions, forecasts and market calls

10. Realize that any outcome is always possible and that markets or stocks can unwind at any time for any reason, or for no reason at all

For some reason, many believe that to trade profitably they need to know "why" markets move the way the do. Fact is, nobody really knows why. Markets are made up of millions of participants and computers, all with a different process. One reason that computers outperform humans for the most part is computers don't waste time trying to rationalize things, they just follow the process. Once we accept that markets can up go because they are and go down because they are, we can accept that not every move has to be explained or justified. Holding onto downtrends because the fundamentals are "good" or the chart "looks good", and ignoring the fact that the trade is moving against you can be very costly.

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