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[ANALYSIS] Concentrate on trading and not on the money to win your game

Den Somera

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[ANALYSIS] Concentrate on trading and not on the money to win your game

Guia Abogado/Rappler

'As serious investor, you are in the hunt to either one or both of these two money-making purposes: that of trading for a living or trading your way to financial freedom'

We had a shortened trading session again last week because of the proclamation of last Friday, April 21, as a non-working holiday by PBBM in observance of Eid’l Fitr, the Islamic religious holiday marking the end of the month-long fasting during Ramadan (the ninth month of the Muslim calendar, during which strict fasting is observed from sunrise to sunset).

If you will remember, the market was already hanging by the edges on its estimated immediate support level in the PSEi chart on the 15th week of the trading year.  In particular, it closed on April 14, at 6,481.91, down with a weekly loss of 6.60 points or 0.10%.  And overall performance was once more driven deeper into negative territory for a year-to-date total net loss of 84.48 points or 1.29%. At this point, the market was only 31.91 points or 0.49% away from breaking down its immediate support level estimated, more or less, at 6,450 of the PSEi.  

Yet, notwithstanding the resultant net loss suffered by the market for the week, something positive seemed to be developing. This was faintly evidenced by the increase of daily weekly average value turnover to P5.63B.  

The results of trading on Friday, April 14, provided stronger evidence. The market broke out from its losing streak on a lower total value turnover of P4.41B. It closed the day with a total gain of 33.04 points or 0.51%. Foreign investors remarkably turned net buyers on a market participation equivalent to 49.87% of total value turnover for the day.  

The following week contributed more form to what’s happening. To start with, the market traded on thinner total value turnover on lower volume but it culminated with a net gain of 38.53 points or 0.59% for the week. Foreign investors also came out as net buyers. They had a strong buying activity on Friday, April 20, that canceled out all what they have sold all week long. All counters were as well up except for the property sector and the oil and mining sector, which were down 20.90 points or 0.77% and 470.62 points or 4.24%, respectively.   

Needless to say, the market at this point has climbed higher to a more comfortable lead at 6,520.44 of the PSEi; and now only 45.95 points or 0.70% nearer to where it started this year. 

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Balance of ‘bulls’ and ‘bears’

If we look at the trading results of the last two weeks within the context of the dynamics in play between the two main market forces, namely the balance between the buyers (bulls) and sellers (bears), what was happening becomes easier to see.  

As mentioned earlier, daily weekly average value turnover grew larger to P5.63B. This was brought about by the following transactions: P5.37B for Tuesday, April 11; P7.22B for Wednesday, April 12; and P5.31B for Thursday, April 13. Despite these higher value turnovers, however, the market still ended with negative losses except on Friday, April 14, which paradoxically had a lower total value turnover of P4.41B.  

The above uptick in daily value turnovers signified the increase of confidence in buyers to enter the market, which included foreign investors, who turned net buyers for the week. But the negative losses at the end of the day signified the reluctance of both local and foreign investors to snap up higher prices, that sellers are forced to sell down.  

Things continue to evolve last week. Daily value turnover became lower, again. And after the market’s recovery from two days of losses on Tuesday and Wednesday, it closed on Friday with a bigger-than-usual net gain of 74.09 points or 1.15% (again, on low total value turnover).  

This could only mean that buyers have turned bolder last Friday to bid higher but sellers held back for better higher prices.  

Due to this changing balance of buyers and sellers last week, the market was back at 6,520.44 of the PSEi – in play for the ranges.  

Trading basics 

As serious investor, you are in the hunt to either one or both of these two money-making purposes: that of trading for a living or trading your way to financial freedom. Otherwise, you’ll just be like a floating boat without a destination, like most retail investors who continue to remain unsuccessful in the market.   

In this connection, there are several trading basics that you have to observe to succeed. Old hands sometimes forget or fail to observe them. It is in these instances that they fall into the inevitable fate of being on the losing end of their hunt.

The first of which is about how you trade. According to Alexander Elder in his book Trading for a Living, your goal is “paradoxically, not to make money…but to trade well…as in developing your abilities to the fullest.” In other words, reach your personal best to – paradoxically – make money.  

Second, is control of your emotions. Emotions can cloud judgment when focused on the money you wish to make. It distracts you from making wise decisions, especially when the market starts to go against your trade. This brings the importance of a trading system to the fore. The trading system structures your decision-making. It allows logic to prevail over emotion.  

Third is the size of your equity or capital. The amount can vary in size. The point is to be able to establish a trading portfolio that will allow a diversity of source – with varied degrees – of financial returns to play with. It is very difficult, if not impossible, to rely on one stock only for the growth of your investment.

Fourth, limit your risk. Limit your losses between 1% to 2% of your capital on any single trade. In relation to the “recovery table,” a subject I have written before, losses grow arithmetically and profits required to recoup increase geometrically. For instance, a 30% loss will require a profit of 42.9%, while a 60% loss will require a return of 150%. (The recovery table is an indispensable North Star while on the hunt.)    

According to the recovery table, confine your losses not to go beyond 20%, it only requires a 25% profit to recoup. When the loss goes beyond 20%, the profit needed to recover goes up exponentially, as shown above.  

Last, but not the last among the trading basics, is position sizing. Borrowing from the language used in gambling, position sizing refers to the size of “bets” made on stock positions to maximize overall returns. 

We’ll deal more on this subject in succeeding articles of the column together with the trading best practices on “when to buy, sell, and/or fold.” Don’t miss it. –

The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. You may reach the author at  

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