How stock trading really works

Wednesday, 14 November 2018
Melbourne, Australia
By Bernd Struben

  • A bit of gloating…
  • Do you have an investing edge?

Trading is not like learning to become an electrician.  You can’t read a book and then say you “know” what trading is and how it works.’

The Billionaire’s Trader

If you’re a regular reader of Port Phillip Insider, you’ll be familiar with the Billionaire’s Trader by now.

He earned that moniker because he’s personally managed billions of dollars for some of Australia’s richest people. And now he’s agreed to share his trading knowledge with you.

We’ve featured guest essays from the highly successful — and decidedly reclusive — trader here over the last two weeks.

But I know many readers don’t have the time to follow along each day. If that’s you and you want to catch up to where he is in today’s article featured below, you can find all his essays in our website archives.

Or you can simply click here to discover what he’ll be revealing in his upcoming trading Masterclass, commencing this Friday.

I opened with a quote from the Billionaire’s Trader today. No offence to the sparkies out there. He could have chosen most any profession and it would ring just as true.

But if you can’t just read a few books, how do you learn to be a successful trader?

Here’s what the Billionaire’s Trader says,

You can only learn from experience and from watching how you behave in the face of highly stressful situations. We all go through cycles of hope, greed and fear and the market’s gyrations can be seen as a map of human emotion.

Accepting what you do and don’t know and therefore asking the right questions and always remaining humble and ready to be proven wrong by future data is the way to go.’

When it comes to experience and an impressive track record, only a select few can match the Billionaire’s Trader.

In 1991 he was one of five applicants from a pool of 5,000 chosen for a graduate position with Swiss Banking Corporation. Back then it was called SBC Dominguez Barry. You’re likely more familiar with its current name, UBS.

He went to work on the floor of the Sydney Futures Exchange in the three-year bond futures pit.

Here’s what he has to say of that early, formative experience:

The interplay between short, intermediate and long term traders became very clear while sitting in the pits watching every trade occur. Long periods of relative calm would be broken by short periods of massive volatility as complacent traders were shaken out of positions. Technical Analysis started to interest me greatly and I would use point and figure charts which I drew by hand on graph paper.

There were old hands in the pits who were market legends who would tell me plenty of stories and give me lots of tips. My immediate superiors in the pits went on to run the whole equity trading operations for UBS in Australia so there was a lot I was learning from them.

Now publisher Kris Sayce has convinced him to share what he learned then — and in the 27 years of successful trading he’s done since — with our subscribers.

His three-part trading Masterclass, ‘The 3-Minute Speed Trade Advantage’, commences this Friday, 16 November.

The online Masterclass is free to any of our paying subscribers. All you need to do is sign up so we can include you.

You can do that here.

Now, to the markets.

Markets

Overnight the Dow Jones Industrial Average closed down 100.69 points, or 0.40%.

The S&P 500 lost 4.04 points, or 0.15%.

In Europe the Euro Stoxx 50 index finished up 30.74 points, or 0.96%. Meanwhile, the FTSE 100 gained 0.01%, and Germany’s DAX closed up 146.78 points, or 1.30%.

In Asian markets, Japan’s Nikkei 225 is up 65.64 points, or 0.30%. China’s CSI 300 is down 0.14%.

In Australia, the S&P/ASX 200 is down 93.03 points, or 1.59%.

On the commodities markets, West Texas Intermediate crude oil is US$55.44 per barrel. Brent crude is US$65.47 per barrel.

That’s a 6.0% plunge in WTI crude since this time yesterday.

(More on the oil glut below…)

Turning to gold, the yellow metal is trading for US$1,203.74 (AU$1,663.77) per troy ounce. Silver is US$14.04 (AU$19.41) per troy ounce.

One bitcoin is worth US$6,345.24.

The Aussie dollar is worth 72.35 US cents.

A bit of gloating…

Getting back to oil, West Texas Intermediate crude oil (WTI) is down 27.5% since it hit US$76.41 on 3 October.

Which begs the question, do you remember all the seemingly convincing arguments commodity analysts were putting forth in favour of rocketing oil prices?

Here’s a quick refresher:

Oil was going to spike above US$100 per barrel due to renewed US sanctions on Iran.

Oil was going higher due to the political ineptitude and resulting production slump in oil rich Venezuela.

The US may have plenty of oil, but bottlenecks in the Permian Basin were preventing delivery…the oil price was going up.

US oil reserves were lower than expected…and the Yanks hadn’t been positioning enough new drilling rigs to meet growing demand. Oil was sure to rise.

OPEC was looking to cut production…get ready for higher oil prices.

Then there was the fallout from the Saudi hit squad’s brazen murder of journalist Jamal Khashoggi. The resulting outrage would surely isolate Saudi Arabia and see crude prices rocket.

So where are we at today?

From The Australian:

US oil prices sank deeper into a bear market Tuesday, posting their steepest fall in over three years and a record 12 consecutive days of losses, as fears of oversupply and weakening demand gripped the market.’

And if you have any doubts that the world is awash in oil, have a look at what’s happening in Canada. This headline comes from Bloomberg, ‘Canadian Oil Pain Sparks Call for Government-Mandated Output Cuts’.

The article continues:

The pipeline bottlenecks that have strangled Canadian crude prices have at least one major energy producer calling for oil-rich Alberta to mandate output reductions. Oil-sands producer Cenovus Energy Inc. says the province already has legislation on the books that would allow it to require all drillers to curtail output temporarily to alleviate the glut…’

Despite this, some persistent oil bulls are back to their old arguments.

From The Australian Financial Review (AFR):

A bear market in oil could be over just as soon as it began, with a number of analysts forecasting the price will rise from a seven-month low.

Supply reductions from Saudi Arabia and OPEC, and the potential for the US to revoke the waivers from countries importing Iranian oil, could all push the price of oil higher.’

Just as I called nonsense on all the other bullish oil calls this year, I’ll call nonsense on this one.

These analysts brush off the power of Donald Trump to their own detriment. Here’s Trump’s tweet from yesterday:



chart image

Source: Twitter
Click to enlarge

Yet, as quoted by the AFR, analysts like JP Morgan Asset Management global market strategist Kerry Craig aren’t impressed. According to Craig:

Lower oil prices would help US consumers, however, I doubt that the recent comments would change the view of Saudi Arabia and OPEC members.

Doubt away, Craig. The future is uncertain.

But with the Saudi royalty directly implicated in Khashoggi’s murder, I reckon they’ll dance to Trump’s tune now more than ever. Without US military backing, their days in their palaces would likely come to an unpleasant end.

As a reminder — and because it’s nice to get the big calls right every now and again — here’s what I wrote to you back on 26 September, when WTI was trading for US$71.67 per barrel:

Now I know what you may be thinking. What happened to WTI crude falling back below US$60 per barrel by October…a forecast I first made in March.

The answer?

While oil prices have remained more resilient than I expected, US$60 per barrel WTI crude still looks likely in the weeks ahead of the November US midterm elections. Though that will come as a painful shock to a growing number of futures traders, once again banking on US$100, or even US$120 per barrel…

Though they haven’t done so yet, Russia and Saudi Arabia have more than enough spare capacity to make up for any losses from Iran and Venezuela. And Donald Trump can release millions of barrels form the US strategic reserves with little more than a tweet…

Atop that, Trump continues to up pressure on OPEC members by threatening to withhold military support…and make them pay for it…

Look, anything could happen. But I expect that the oil bulls betting against Trump and a global glut of oil supplies will be looking to exit their long positions in a hurry over the coming weeks.

If you agree with that assessment and are looking for a way to gain as the oil price falls, you could consider the ProShares UltraShort Bloomberg Crude Oil ETF [NYSE:SCO].

SCO is currently up 81.6% since 3 October.

As a reminder SCO is an inverse ETF, meaning it moves in the opposite direction to the price of oil.

It’s also leveraged, intended to deliver twice the opposite of the performance of WTI. Leverage can supercharge your gains, but it can also magnify your losses. Use leverage with caution. And remember, I don’t make official recommendations here. This was just something I thought you might wish to consider.

I hope you did!

At today’s WTI prices, I believe the bulk of the gains from SCO have been realised for the time being.

Though with the world awash in oil, I could be wrong.

Remember to send any comments or queries you may have to letters@portphillipinsider.com.au. In the interest of privacy, if we publish your email, we’ll only print your first name.

Do you have an investing edge?

That’s all from me today.

Read on for the special essay from the Billionaire’s Trader.

Today he reveals more details of his ‘trading edge’, where his focus on buy and sell zones has helped deliver his clients rapid outsized gains.

And don’t forget to sign up for his upcoming trading Masterclass.

‘The 3-Minute Speed Trade Advantage’ will show you an all-new way to potentially siphon thousands of dollars from ordinary Aussie stocks. As I said yesterday, it doesn’t involve options or computer trading.

The free three-part series starts this Friday, 16 October.

You can sign up to secure your place here.


How the ‘Trading Edge’ Helped Some Investors to a 92% Gain
By The Billionaire’s Trader

With the S&P/ASX 200 down 102 points yesterday, I thought it would make sense to revisit a few comments I made on Monday.

I made the case that it was time to start lowering equity exposure because we had seen a confirmation of a monthly sell pivot in the S&P/ASX 200 and the US S&P 500 last month.

I pointed out the last 20 years of data showing that a strategy of lowering equity exposure after a monthly sell pivot, and then covering that hedge on the corresponding buy pivot, made a lot of sense.

It would have allowed you to avoid the worst of the two crashes since 2000. And both the major sell-offs in 2011 and 2015. In other cases where it didn’t work out, the cost was minimal.

To quote, ‘So if we look at the current situation, it could make sense to lower our long-term equity portfolio exposure, or sell futures contracts here and a little higher’.

The S&P 500 had rallied 7.7% over the preceding eight trading sessions before Monday. It’s a great example of what I’ve said over the past few weeks. The opportunity is in what comes after the buy or sell pivots.

That’s where the ‘edge’ is. 

I chose that particular focus on Monday because the S&P 500 had reached the first of my target levels after the monthly sell pivot. There is another level above that level, which I refer to as my ‘Holy Grail’ level. That level is 2,860–2,900.

We may still reach that level despite the sharp sell-off in the US market last Monday evening our time (Monday day session US time). But then again, we may not. But either way, it’s important to get these things on the record.

As I’ve mentioned before, unlike the unaccountable ‘talking heads’ you see on TV, I’m happy to stick my neck out, and then explain how it played out afterwards. Regardless of whether I was right or wrong.

The other reason I was happy to stick my neck out after a 7.7% rally in eight sessions was because the S&P 500 had confirmed a daily sell pivot on Friday. The sell pivot occurred in the sell zone of the range created after January’s big sell-off. It was also in the sell zone of the most recent wave down in the short-term downtrend after the September high.

Basically I had quite a few ticked boxes from the very long-term (monthly charts) to the short-term (daily charts). Plus, there was confirmation of a sell pivot in the sell zone of a long-term range and a short-term trend.  Tick, tick, tick, tick.

All of the above is based on the answers to the three questions that I posed to you a short time ago. It’s the accumulation of ticks across time scales and structure (waves and ranges) that can create amazing opportunities — if you know what to look for.

If you have missed some of my past articles and you are wondering what on Earth I am carrying on about, then please go and search for my articles on the Port Phillip Insider website archives. Or better yet, just sign up for the free Masterclass which will begin on Friday. It will give you a crash course in everything discussed so far. You can sign up free here.

If you had started hedging your portfolio on Monday, you would feel a whole lot calmer watching this next wave of selling unfold. Your hedge would already be 2% in the money in a couple of days, and who knows what’s coming around the corner.

But if trading an index isn’t your thing, or if you want a real example of how this has worked on a specific stock, let’s turn our attention to an actual trade I recommended to my clients a few years ago. It will give you a sense of what I mean by these buy and sell zones.

It’s a good example due to the steady trend that developed with each wave revisiting its buy zone (75–87.5% retracement) before catapulting higher.

It was in the gold stock Resolute Mining Ltd [ASX:RSG]

In the chart below you’ll see I’ve pointed out each wave in the trend and then drawn a rectangle and numbered the corresponding buy zone. So the first wave is numbered ‘1’ and the buy zone related to that wave is also numbered ‘1’.

It should make it clearer for you to read the chart.

Resolute Mining trade achieved 92% in six months



chart image

Source: Tradingview.com
Click to enlarge


It’s quite amazing once you understand how trends develop. You begin to see that buying and selling forces often eventuate in the buy and sell zones of waves. You can then look at charts like this, and quickly see a string of great opportunities that others miss.

The calculations aren’t difficult, but it’s very difficult to ‘pull the trigger’ in the right spot because you are trading against the short-term trend but with the longer-term trend.

In other words, you have to step in front of what looks like a steam train on the short-term charts. I assure you that’s easier said than done. You must have complete faith in your methodology, and be prepared to dump the trade very quickly if you’re wrong.

Because if it breaks the key levels to the downside, there is a chance the uptrend is over.

In this example, with Resolute Mining, we entered the trade at $1.05, with a stop loss at 85 cents. So the risk taken on the trade was a little under 20% of the price of the stock. That is a very small stop loss on a stock like Resolute Mining. Gold stocks are notoriously volatile. You can see on the chart that it was moving 50% from month to month!

We took part profit less than two weeks after entering the stock. After we had taken part profit the trade became a ‘free option’. The stop loss on the trade was set at a point where the overall trade would break-even after taking our initial profit. 

So clients only needed to fret over the price movements in the stock for less than two weeks, because after that, the outcome was to either break even or make money. (That’s assuming the stock price didn’t ‘gap’ lower, which is possible from time to time.)

And, less than seven months later, we closed the trade at $2.02. That gave those who followed my advice a 92% profit on the trade. That’s over 4½ times the amount risked on the trade to begin with.

Look at that chart again and see where the price sold off after we got out of the trade. By now you should be getting the idea of where the buy zones are. Yet again, it sold off to the buy zone exactly and bounced.

Neat trick, huh?

Anyway, I’m sure you’re beginning to get the hang of this. So be sure to sign up for the Masterclass series that begins on Friday. If you do sign up, I’ll also send you a few extra pieces of bonus material when I see something interesting in the markets over the next few weeks.

So, if you’re curious about this method of trading the market, and you want to learn more, make sure you join me in the Masterclass. Remember, it’s free. You can find out all the details and how to sign up here.

Until then,
The Billionaire’s Trader


Finally, don’t forget to check out the latest from The Australian Tribune:

‘Alt-Left Fabricating Fear on North Korean Missiles’

Did you read the mainstream media’s big, double page spreads on North Korea’s “hidden” missile bases this week?

The openly anti-Trump New York Times was the first to run the story on Monday. And many Aussie papers including The Age and The Sydney Morning Herald happily reprinted it.

‘The New York Times would have us believe this “suggests a great deception”. And you didn’t need to read between the lines to see how it’s all…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd