不待鞭扬蹄自奋--天凉好个哈糗的说

We've had a tremendous response in recent weeks to the ASX200 commentaries which were written when the market was in severe meltdown mode. It was then that traders were blowing up left, right and centre and a few wise words were at a premium.

Really, the line between Strategy Centre article and ASX200 is often blurred. As a result, we’ve had numerous requests to collate some of the little gems of wisdom from the ASX200 commentaries into one place in a Strategy Centre article.

Our job is to teach you as much as we can about the markets. I think many would agree that we hold little back in this regard and have been generous with imparting our knowledge and experience.

If anything, it’s often comforting to know that someone has been there and done that before, and it is fair to say that the only way to learn is to make mistakes. Also, it’s handy to have a mentor who can perform the role of strict disciplinarian to pull you back into line when necessary.

We all know how easy it is to stray from the right way of doing things in this game, and fall back into our old, nasty habits. Trading is a constant battle against one’s emotions. Vigilance is required for success in this endeavour.

We’ve left the excerpts below largely unchanged from their original publishing at various times over the last few weeks, but have added appropriate titles to merge them into one ‘mega-article’.

Most snippets were published when the market was copping a major hiding, and this should be considered during their reading.

Who’s left holding the bag?

That was carnage for the first part of the morning (15 Aug). Investors are starting to panic.

We’re getting more and more worried every day that the correction we are experiencing is not going to be the “short, sharp, nicely packaged” event many had predicted.

The selling we’re seeing now isn't based upon fundamental factors – although we still think that these are largely intact (fingers crossed!) for now.

Rather, what we are beginning to see is forced selling. This is the selling which occurs when falls in asset prices wipe out the equity on leveraged positions.

The falls become so severe, that all the equity disappears, and leveraged positions go into margin call. The holders of the securities under call then have to sell to meet the call.

If there’s a short fall after the sales – other assets need to be sold to make up the difference. If some investors default altogether, then the lenders who gave the initial margin loan fall into trouble – they too have to sell some assets.

So, the borrowers are leveraged, the companies who gave the borrowers the leverage are leveraged, the companies who gave the companies the leverage to give the borrowers leverage are leveraged, the companies who gave the companies who gave the companies the leverage to give the borrowers leverage are leveraged, and the companies who gave the companies who gave the companies who gave the companies the leverage to give the borrowers leverage are leveraged…

Get the picture.

That’s a lot of forced selling.

Who dares wins (but not in trading?)

Selling forces even more selling as more and more investors are stopped out and liquidated from positions in which their equity has dropped to zero.

There is nothing left.

Generally, these were the ones who considered themselves to have “figured the market out” on the way up, and had assured themselves that they “knew what they were doing”.

The practiced the Bull market proven tactic of “buying the dip”. And why not? It had worked every other time in the last 4 ½ years.

They knew better than the market. They were invincible.

There were many of these “Bull Market Magnifico’s” on the way up. They’re all toast now (16 Aug).

Long suffering readers of this commentary would know that our motto – and what we have hopefully made the motto of all of our readers is, quite simply – “Don’t be toast”.

It’s not “Fortune favours the brave”. It’s not “Who dares wins”. It’s not “Win at all costs.”

These are the mottos of those traders who come and go in the markets.

The traders who stick around the longest, and make the real money, are the ones that fear destruction.

Not the ones who fear losing mind you – because they understand that losses are a necessary part of trading. But those who fear losing it all.

These are the traders who both fear and respect the market for what it is: A generous friend at the best of times, a ruthless and vigilant opponent at the worst, but most of all, and always – a great teacher.

Not just about trading, but about ourselves.

Don’t be toast

Yes, we fully admit that it is times like this that we get all philosophical and "navel gazey", but it is times like this that we hopefully get through to our readers.

Why?

Well, we have been hearing from various contacts at the larger of the two major CFD providers in this country – you know who they are – that dozens upon dozens (our estimates are hundreds upon hundreds) of CFD accounts have simply been liquidated today (16 Aug).

Poof! All the money gone.

In fact, on the website of one of these providers – the most traded position for the month is still “LONG BHP”.

Incredible. Absolutely toasted.

The liquidated accounts belong to the most stubborn, naïve participants in the market – the punters.

Punters get liquidated through greed and stubbornness to take a loss. For the sake of denting one’s pride and losing just a little – they risk it all.

We have very little sympathy for the punters.

Traders are not immune to being liquidated either – but this will only happen when the best calculated, and researched trades, go wrong. When an extended run of outs eventually takes its toll.

It can happen, and in this case, we have utmost sympathy for traders in such a situation. To be fair however, those who are following the rules we profess, of “patience, discipline, and capital management”, would be most unlikely to be the ones who were liquidated today.

In the case of traders losing money – it is not completely lost forever. The money shouldn’t have gone to “Money Heaven” (where all good trading losses go) in vain.

This is because traders learn from their mistakes. They resolve to make the necessary changes to strengthen their systems, and their patience, discipline, and capital management, to ensure that the chance of a similar mistake is reduced in the future.

Traders will never be perfect however, nor should this be their pursuit. Nobody will ever be perfect. We just need to be persistent.

The pursuit of happiness

We’ve harped on enough – and you guys are probably sick of it – the one’s that are doing the right thing already that is! But, we are just so passionate about showing traders the right way to interact with the markets.

Every trader in our senior trading team has been there before. Each one of us has blown ourselves up making all of the mistakes many of you are making right now.

Personally, your correspondent has blown up his account – and we’re talking 6-7 figures here each time – enough times to not leave too many fingers standing on one hand.

I don’t hold the record either.

It’s only when one finally makes the choice – as Paul Tudor Jones put it so eloquently in Market Wizards – to change the way we are pre-programmed to act – that we can finally find success.

Not the success which lasts for a Bull market – but the success which lasts a lifetime.

‘I said “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather that pain?”’ (P.T.J, Market Wizards).

You have to enjoy your trading. You should look forward to seeing what the market will throw at you next – not dread it.

If you feel dread when you are trading, then you are taking too much risk. Stop trading! Reduce your position size to a level where trading becomes enjoyable again.

Nobody’s perfect – use a stop loss

Following on from the above, it is inevitable that traders are going to have open positions during such major corrections – nobody is perfect, and nobody can be blamed for being long inline with what was still very much an overall uptrend.

But, when markets don’t do what you expect, preservation of capital is paramount. The best way to preserve your capital is to use a stop loss.

If you are too stubborn not to use a stop loss, when something like this hits you could find yourself liquidated, and out of the game - right at the very low.

You’ll be looking on from the sidelines at the exact point those who did use stops will be reapplying their capital at discount prices for the next big move back up.

Trading is exciting, it is probably one of the biggest challenges one could undertake – but let’s enjoy our trading, even in times such as this.

You’ll only be able to do so by protecting yourself from potentially species ending events such as today (27 July). Always use a stop loss.

The Great Teacher

Now, we do harp on a bit about patience, discipline, and capital management in this commentary and indeed throughout the report – but it is markets just like this one, which crystallise why these factors are so important.

It’s not the end of the world if you have broken any of these rules, and have sustained heavy losses.

Seriously, as little as you want to hear this right now – it’s only money.

Think of the money you have lost as tuition fees. It just part and parcel of the learning process.

If you are prepared to become a disciple to those three factors above – patience, discipline, and capital management – we guarantee you will make the money back.

Now, normally we don’t guarantee anything – but that’s how strongly we feel about even the most novice trader finding success in this pursuit.

Stray from these factors, even for an instant, and well, there are no guarantees.

Profit from perspective

From the entire ASR Team, we sincerely hope you weathered the storm this week (30 July – 3 Aug). If you have profited – congratulations, that truly is an impressive feat. Figure out what you have done right – and keep doing it.

If you have lost – don’t feel too despondent. You are certainly not alone. Most market participants lost this week, and many lost everything.

Promise us, and yourselves, that you will not let the money you have lost simply go to Money Heaven in vein. Thoroughly analyse what you have done wrong. Implement the necessary changes to your system to prevent those mistakes occurring again.

There's one thing which can be said about markets such as the one we have all endured over the last week or so – and that there has been so much to learn. We can all learn something new about the market, about trading, and about ourselves.

Let’s make the most of it.

Have a safe and happy weekend.