You can't always be a winner wena!

The highs and lows of trading. It's often glamorised and very often we are made to believe that once you have a strategy or a mindset that let's you win, the market becomes your own personal money printing machine. The truth is though that it's not. Every so often the market challenges us and forces us to step outside of our comfort zones and learn, or perish. 

Drawdown is a reality that all traders face on a fairly regular basis. I'm sure that everyone reading this knows what drawdown is, although for redundancy I'll explain it anyway. Drawdown is when your account, by a series of bad trades or trades that stopped out, shrinks. Your account stays in drawdown until it is back to the level that it was when the drawdown started. Practically, if your account started at 100k and grew to 120k, clearly you've been doing great. If your account shrinks back down to 110k, then your account is in drawdown and remains in drawdown until it breaches 120k again. 

A simple enough concept really, but the effects of drawdown can be devastating to your mindset. It can strip you of confidence and/or make you make very silly greed or fear based decisions. There is a way to avoid this though. Not drawdown, that is unavoidable, but the impact it has on your mental state. 

The easiest way to deal with drawdown is simply to exit the market completely and take a week or two off. Sure you'll miss some opportunities during that time, but you will have had the chance to clear your head and come back with a fresh set of eyes and no recency bias. Allowing you to 'start again' and fight your way back to the top of your own equity curve. 

Another way would be to simply trade smaller. Trade so small that it hardly matters if you get it right or wrong. Once you've strung together a couple of winners (5 or more), you can start increasing your size again until you are back up to normal size. Again helping you to fight your way back. 

Alternatively you can accept that you cant always win and just keep trading and sticking to your rules. This is probably the hardest thing to do because it places you under higher amounts of stress than the other two options. If you can accept, deep within the core of your being, that losing is OK and that you do not need to know what is going to happen next in order to make money, then you can muster up the courage it takes to waveringly stick to your rules and trust your edge and simply keep trading. This certainly is the fastest way, albeit the most difficult, to get out of the red and back on track with growing your account. 

All of this of course means that you have to track the performance of your account on a daily or trade-to-trade basis. This is handy because it allows you to plot your equity curve on a graph. Trust me here, seeing on a graph that even though you are in drawdown you're still up from where you started can create a tremendous feeling of comfort that helps keep you in a confident and care free mindset. Just the kind of mindset that you need for trading successfully. 

If the market has mistreated you some over the past month or so, chin up! You'll learn something about yourself you never knew and soon be back on a winning streak. 

@TraderPetri
27 May 2015

Take the time to find the setups

Sometimes it feels as if I have run out of trading ideas. Especially when the market has thrown me from pillar to post for a few weeks and has taken some money from me. I then become prone to take trades that ‘look good’ without actually doing the leg work required to properly validate the trade opportunities.

In order to avoid this, I need to remind myself that I need to take the time to find the right setups. There are a few factors that need to be combined just right in order for a trade to be deemed a ‘high probability’ trade and therefore finding the right ones takes time, patience and effort. The last 4 or so weeks have been rather tough for me. Other than a big win on an Aspen short, the majority of my other trades I’ve either stopped out of or are currently running against me. This puts me in a precarious position and in danger of making irrational decisions. The sure fire way of me to avoid costly mistakes is to bury myself in the process of relooking at the entire universe of shares that I am trading in. This does not mean that I need to only relook my share universe after a bit of losing streak. It should be relooked every single month, at least. It does however take me, mostly, out of the market for a period. Allowing my mind to reset itself and also allowing me to find those trades that really count. 

So starting with looking at each industry, I need to look at the monthly and daily charts to see if there are any major trends that are changing. This is followed by looking into each industry to find the best and worst performing shares in each sector. This allows me to have a list of potential longs and shorts. 

Once I have a list of shares that I want to be long and a list of shares that I want to be short, I can start looking reading up on them. This is the boring part, but probably the most important. I need to read the last few years’ worth of SENS articles and get a firm grip on how the company makes money. I also need to compare some of the key ratios against those that I deem to be in line with what I require from a share to be able to go long or short it. Some shares will fall off the list and some will stay. 

What I am then left with is a list of shares that I am comfortable to long and short, depending on what the overall index is doing. This whole process is sort of ongoing, although I think that taking a day or two ‘off’ to spend the time digging through the market can only be helpful to my mind-set and bottom line at this point of the game.

Happy trading!

@TraderPetri
13 May 2015

Caps on interest rates and the impact on Transaction Capital

The impact that the interest rate caps proposed by the SARB will have on micro-lenders is something that I don't want to speculate on. I do however want to understand the impact that the proposed cap on interest rates will have on Transaction Capital, seeing as much of their income is generated via financing taxis (SA Taxi). Now there are a few differences between financing assets (like taxis) and unsecured lending. Firstly, in the case of Transaction Capital's SA Taxi, they are doing asset backed lending. Which means that they have an asset to repossess if all goes wrong. Secondly, they are granting what is classified as Developmental Credit. This is because they are essentially financing small businesses and not just cars/taxis. Each taxi they finance belongs to an entrepreneur and is operated as income generating assets which is why they fall into the Developmental Credit criteria. Now if we look at how the proposed regulations impact this type of credit and subsequently how this impacts Transaction Capital, we see the following: 

• SA Taxi can loan currently at a max interest rate of 32.65% (although their pricing ranges between 18% and 26% to average 24.6% yield). The proposed regulations in fact increases the cap on interest rates on Developmental Credit to 32.78%. Which means that if they wanted Transaction Capital could in fact charge a higher interest rate on their taxi finance deals. In other words the new regulations will have no impact at all on their EBITDA (seeing as they are well within their max limitations already - and the cap is being increased). So if they wanted to be greedy, they could probably squeeze a bit more margin out of it. 
• In terms of initiation fees, the current max for Developmental Credit is R2500, and the new proposed max is R2600. Again, higher and again in Transaction Capital's favour. But as they only originate about 6700 to 7000 new credit agreements each year, impact on EBITDA will be low. 
• As for monthly service fees, the new regulations increase this from R50 to R60 for Developmental Credit. So with 24 500 accounts, the impact on EBITDA will also be rather negligible. The key is here that the nature of the credit is to stimulate economic growth and social upliftment, and not get consumers spending. In other words, this is 'good debt' that is used to start and run small businesses. 

Bottom line is, the proposed regulations by the SARB will do no harm whatsoever to the earnings capabilities of Transaction Capital. Worthy of note also is that a while ago Transaction Capital sold Bayport. Did management see the train coming and got off the tracks in advance?

We must not forget that Transaction Capital also has MBD within it's stable. MBD does debt collection both as principal and as agent. Which means that they both buy debtors books in their own capacity and collect on the debt, and they collect debt on behalf of other institutions. This is a tricky business to understand, but from what I understand various 'unsecured lenders' NEED them to collect on their debt. I say need, simply because Transaction Capital is the biggest player in the field (in SA) and is often the only one that has enough cash to buy or collect on these bad debt books. Now there was a recent ruling about garnishing orders in the courts that could have one worry about the impact this will have on debt collectors. Here economies of scale again work in Transaction Capital's favour. Less that 1% of MBD's total monthly collections come from this EAO collecting mechanism as MBD rather makes use of the good old fashioned call centre method. Once again, this will have a negligible impact on EBTIDA, as Transaction Capital is largely unaffected by the recent court ruling. 

So when I look at this whole situation and the recent developments, I see a company that is well positioned to succeed while others might start to feel the pinch of court rulings and proposed new regulations. It appears to me that the management team foresaw much. I guess this makes me a bigger bull than ever.

Find a research report (to which this adds) here.

Sure it's a megaphone... but how does it work?

Two charts, two targets...

In the first one the megaphone is measured from where the price touches the upper end of the megaphone for the last time, by drawing a line straight down to the bottom of the megaphone.

The the second one the megaphone is measured from where the price touches the lower end of the megaphone for the last time, by drawing a line straight up to the top of the megaphone.

So the question is... which one is right?

Learning to understanding my emotions

Many people tend to think that one needs to remove all emotion from trading. From my experience, this is not possible. There are some very old and primal instincts that we are ingrained with that can be challenging to overcome. Removing those primal instincts – and I’m talking about Fear and Greed here – is perhaps possible, but probably not plausible. Therefore I think that learning to control emotion will not only be a lot easier, but will also not turn you into the robot that never smiles and just can’t seem to embrace the concept of dancing.

So to avoid turning into an emotionless void, while also trying to avoid making silly trading mistakes due to bad decisions made under the influence of irrational emotions, I need to teach myself to control my emotions in such a way that it is not to the detriment of my overall mental wellbeing and also to the advantage of my trading.

It may sound a little crazy, but this is a real issue. The argument that you had with your spouse or parent or child can and will influence the way in which you make decisions. The frustration you experience in traffic will overflow and accumulate with the frustration you feel because of that trade that is going against you. The impact that our everyday emotions have on our ability to make rational decisions, and thus good trading decisions, cannot be ignored.

From what I have read and understood, there are a few things one can do in order to achieve emotional control. The four A’s of emotional control, if you will. I don’t think they go in any particular order as the circumstances around the constant stream of decisions that need to be made and the emotional framework in which they need to be made are constantly changing. I do however think that the last one will always be to Act.
The basic idea is that there are 4 steps:

The first step is to Acknowledge the emotion. “I am feeling angry because I didn’t take my stop loss”, or “I am feeling confident because I banked a big winning trade”. There are a variety of them and each has a different effect of you. You need to first understand what emotion you are feeling and most importantly, what is causing it. This should help you deal with the cause of your emotions and bring you back to a rational state in order to make a good decision.

Then you could Anticipate the affects that various possible outcomes of a potential decision would have on your emotional state. “If I took this next trade and I lost my entire month’s gains if it didn’t work out, I would be very angry with myself and feel rather crushed and hopeless”, or “If I take this next trade and it also turns to gold, I will feel extremely confident and feel like nothing can ever go wrong”. This should help you deal with the effects of emotions before they are able to influence your decision making. This way you are creating a road map of your emotions and it should be easier for you to acknowledge them when they crop up.

You then need to Accept these various outcomes and try to understand how these new emotions can influence your decision making. “I am on a hot winning streak and I am feeling supremely confident”, or “I just banked a huge loss and I am feeling very scared of the market”. Again the purpose here is to bring you back to a state of rationality. By accepting the emotion you are feeling, you are taking the power away from it.

The last step would be to Act in a rational manner. You now understand your emotion, what has caused it, what could influence it and how it could change. You also accept the potential impact that this emotion could have on you. Knowing all these things should allow you to sit back and see the bigger picture, if you will, and allow you to make a decision independent of emotional influence.

I have to say here that I am no expert at this and that this concept is rather new to me too. It is something that I will be working on in the months and years to come because I believe that it can be incredibly helpful in all aspects of decision making. The purpose is not to remove emotion, but rather to understand it and counteract it if it is proving detrimental to your own best interest. Seeing as trading is essentially just that, making decisions that are in your own best interest, I believe that mastering this should be one of my highest priorities.

@TraderPetri
28 April 2015

Ignore the noise and trade the charts

Over the past few weeks it feels like the market has become that extra degree more difficult – to me at least - and I have noticed an increase in what I perceive to be market noise. Market noise to me is news-flow in general, but mostly other traders calling tops and bottoms and handing out “I told you so” ‘s like it was free candy.
Sure, the other traders have been right more than I have over the past few weeks and I have no shame in admitting that. But allowing them to influence my way of thinking has never worked out for me in the past and therefore I doubt that it will start working out now. Not because they are wrong, but because my personal trading style differs from every single other person’s out there. I have been in the situation before where I copied the trades of a phenomenally successful trader, lost a ton of money, and watched as he banked profits on the very same trades I stopped out of. This was because his way of trading was vastly different to mine. Therefore I need to stick to my own method and rules and not allow outside influences to have an impact on my trading.

A few years ago someone told me that I should “trade with my eyes”. What this means is that you need to trade what you see in your charts and ignore whatever the news and other people are saying. If you have levels that you are trading, stick to them. Do not let the fear or confidence of others influence the way that you make decisions.

If you have been watching a setup develop over a few days or hours or whatever timeframe you trade in, do not allow the comments of others or what is being said on the TV make you either; enter your trade before you get a valid entry signal or, abandon the trade before it has confirmed a failure. Stick to your rules and trade the setup that you saw. Equally as important is that if you are in a trade, do not let others influence you to close early or, not close when you reach your target.

As a practical example; I was short ACL (Arcelor Mittal) with a target of R19.00 and I closed it early because I allowed myself to be influenced by someone else. I can’t blame anyone for this other than myself and therefore must take responsibility for it and learn the lesson made available from the experience.
Trade the charts, ignore the rest.

@TraderPetri
15 April 2015

Three Magic Words

Trading is a paradox. Everything about it goes against what we have been taught in school and by society. Concepts like “it’s wrong to be wrong”, for example, don’t apply to trading. Trading is also, I am told, one of the most difficult skills to master. In fact, the most successful traders in history often said that the only reason they were successful to start off with, is because they were willing to keep learning and improving.
By now, I am sure that most readers understand that doing better analysis and gaining more knowledge is not the answer to consistently successful trading. There are three major concepts though, that will help traders achieve the success they are striving for. These are Time, Patience and Perseverance.

Time

Time is our most precious commodity. Once gone, it is gone forever. We often take the meaning of time for granted though because we know that, given time, all things can be accomplished. So even though time is constantly working against us, it is only by applying ourselves over a long period of time that we can achieve any true measure of success. We need to teach ourselves to worry less about tomorrow and focus more on the present moment. In trading you need to make a decision now and thus your focus needs to be in the now. At the same time, the journey to becoming a successful trader is going to take a long time and we must accept this fact.

Patience

In a sense this ties in with time very closely. It also means that sometimes we have to be incredibly patient with a trade. The best traders are often identified by being those traders who are patient enough to wait for the right setup or the right trade to materialise before taking action. This is the patience to sit around and wait, and do nothing, for days, while you wait for the right opportunity to take a trade. We are taught that if we are not working we are not productive, and thus believe that if we are not actively trading in and out the market all the time we are not working. The truth is actually that most of this game is waiting for the right opportunity before doing anything. In reality this means that we often have to show a tremendous amount of restraint to not take trades and exercise a tremendous amount of patience to wait for the right moment or predetermined set of circumstances to take action.

Perseverance

The ability to hold a course of action, belief or purpose without giving way to the forces of fear. I cannot stress enough how important perseverance is. 90% of new traders fail. The reason is that those 90% of traders give up after having a lost more than what they can bear. I cannot tell you how much money I have lost in my pursuit to become a trader, or how many times I literally cried over how much money I’d lost and wondered why I ever chose this particular dream. I can however tell you how grateful I am to my friends and family who allowed me to live on their couches while I kept trying to make this trading thing work. People ask how to become a trader and the answer is very simple. Do not give up. It will take a long time, it will make you question your priorities, and it will make you question everything about life and yourself. If you stay true to the course though, I assure you that it will reward you. “Persistent people begin their success where others end in failure.”

Perseverance, patiently applied over time will make you successful. Not just in trading, but in all aspects of life. There is no easy road to becoming a successful trader. School fees have to be paid and single minded focus needs to be applied. Perhaps not what a lot of people want to hear, but the cold hard truth. Personally, in my own development, I still have a lot to learn and a long, long road ahead. I am by no means as good as I could be and only by being cognisant of these three concepts will I have any hope of getting to where I aim to be.

@TraderPetri
1 April 2015