Your blueprint to financial freedom

  • Tired of the Brexit yet?
  • The defining moment in a trading career
  • Why successful trading is all about preparation

With Kris Sayce on leave, I’ve lined up a series of guest editors for this week’s Port Phillip Insider.

Yesterday you heard from Callum Newman, our resident property bull. He labels the constant calls for an Australian property collapse nothing less than ridiculous. And he showed you a host of stocks ‘defiantly’ moving higher to support that claim.

Today we have a guest article from Jason McIntosh, the editor of — and brains behind — Quant Trader.

Now, I’ll be honest with you. My understanding of algorithmic trading systems is right up there with my knowledge of phylogenetic analysis. What I do understand, though, are results. And since Quant Trader’s launch in November 2014, those results have been consistently impressive.

If you haven’t checked out Jason’s trading service yet, you can do so here.

Today Jason brings you a personal trading experience that helped to shape his career and his trading style. But before I hand you over, a quick look at the markets.

Markets

Are you sick of the term Brexit yet? Or just annoyed with the impact the global jitters are having on your portfolio? You’re not alone.

Over in the US the Dow Jones Industrial average opened the week in the red, down 1.50%. Meanwhile the NASDAQ fell 1.98% while the S&P 500 shed 1.81%.

Across the pond markets fared even worse. The FTSE 100 closed down 2.55%, the German DAX lost 3.02%, and the French CAC 40 fell 2.97%. And that’s following on the CAC’s 8.04% loss on Friday.

The Japanese market is bucking the trend. After posting a modest gain yesterday, the Nikkei 225 is up 0.40% at time of writing.

Not so the ASX 200. As of writing, the Aussie index is down 0.62%, wiping out yesterday’s 0.50% gain.

West Texas Crude is at US$46.91 per barrel.

And gold is settling back a bit following its post-Brexit spike, down about 0.7% to US$1,315.25 per ounce.

That’s still a long way above its 1999 lows of US$252.80 per ounce. Why do I bring that up? Because as gold plummeted in 1999, Jason McIntosh was on the right side of the trade.

He tells you the full story below.

Cheers,

Bernd


My Blueprint to Financial Freedom

By Jason McIntosh,
Editor, Quant Trader

We all have defining moments…events that shape our future.

I want to tell you about one of these times.

It’s about a trade that had a huge influence on my career. A trade that would cement my views about what it takes to be a great trader.

I remember the time well. It was 1999 and I was a senior trader at Bankers Trust.

My job description was simple. I could trade just about any market: currencies, bonds, stock indices, precious metals. I just had to do one thing — make the bank money.

The story I’m about to tell you took place in the precious metals market. It was at a time when gold was down and out. Sentiment was near an all-time low.

You see, the yellow metal had been through a crushing bear market. The price had sunk to US$275 — the lowest level since the 1970s.

This was a bleak period for gold. Producers were selling metal they were yet to mine. Central bank sales were also hitting hard (the Reserve Bank of Australia was a seller).

Needless to say, the outlook for gold was awful. Just about everyone was bearish.  

Extreme negativity can only last so long. There often comes a point when the bears have nothing left to sell. This type of situation can lead to some of the best buying opportunities.

The key to profiting from these situations is patience. You need to wait for prices to break higher. 

One of my trading rules is never preempt a break. Buying ahead of higher prices may seem like a smart idea. But all too often it proves costly when the breakout never comes.

So I waited…and waited some more.

Gold finally began to grind higher during April. It was a promising sign. But I still wasn’t ready to pull the trigger.

Then in early May there was a surge. Prices shot to a six week high in overnight trade. This was the confirmation I was waiting for.

I got the call from the night desk in the early hours of the morning. The voice said, ‘Jason, you’re filled on your gold order’.

The exact size of my position is blurred by time. Although I remember thinking that I had bought more gold than some producers mine in a year.

Quite simply, I was long a lot of gold!

This was one of my largest positions ever.

Within hours a shock announcement came out of London. The Bank of England was planning to sell a huge chunk of its gold reserves.

Prices plummeted in an instant. My briefly promising trade was going to hell in a handbasket, and FAST!

One of the first rules of trading is you always have an exit point — a stop loss.

I had placed my exit stop when I first took the trade. This meant my sell order was in the market when the announcement hit. The problem was the price immediately gapped lower.

My broker called with my selling price, and it was ugly. I lost more than three times what I was expecting. It was a disaster of massive proportions.

What happened next was my defining moment as a trader.

Gold had now broken to the downside. My trading rules were clear — go short if prices break lower.

There was no time to re-consider the rules. I reversed my position and went short without hesitation.

I’d patiently waited to buy for many weeks. Now, within a few minutes, I had sold two large parcels of gold — the exact opposite to what I was expecting.

The first sale was an exit of my long position…the second was a new trade that would profit if gold fell further.  

And fall gold did. The decline lasted more than two months…and I held on for the ride.  

Staying with the trend is part of my trading strategy. It’s the single most important rule to maximising profits — and this time was no different.  

I finally closed my position around seven weeks later. It was just days before gold made a final bear market low of US$252.80 per ounce. 

My second trade made back the initial loss, many times over.

The post-trade analysis told me a lot about myself. I had held my nerve during a chaotic time and made good decisions. I’d passed the biggest ‘stress test’ of my career. 

Having a system — a set of rules — made all the difference. This helped me quickly make good choices under pressure.

Many traders head to the sidelines after a big loss. And I can understand why…it feels safe. But this takes them out of the game. I would have missed the year’s best trade if I chose to ‘sit it out’. 

Trading rules were my plan for a ‘black swan’ — a surprise event with a big impact. It’s because of this that I was able to quickly regroup after a large and sudden loss.

Following a system wasn’t new to me. I had been trading that way for a while.

What made this situation different was the speed of events. There was no time to think. It was a case of following the rules without freezing up.

Here’s the thing. You set trading rules when there’s time for calm level-headed decisions. You then rely on the rules when clear thinking is all but impossible.

The system trader knows what to do in any situation…this is a big advantage. They can be decisive and take opportunities many traders would miss.  

This experience gave me an unshakable confidence in system trading. I knew that consistently following a well thought-out set of rules was the key to long term success in the markets.

I now fully understood why so many traders fail…it all came down to preparation. The system trader has a plan for everything, while many traders have a plan for nothing.

System trading gave me a real edge. It was my blueprint to making a lot of money.  

Regards,

Jason McIntosh