Author Archive

Posted on July 30, 2010 - by Alvin

Calculating Long Term Profitability with Risk Reward Ratio

Tek Wee sent me an interesting Equity Curve Random Generator. So what is this generator about? It is for you to calculate your profitability in the long run, with a specific risk reward ratio per trade. In other words, how many times can you be wrong, yet you can grow your capital continuously. I try to simplify as much as possible:

Fact number 1 – you do not need to be right on every stock/investment to be profitable. Yes, you can lose. But the next question is how much can you lose?

Risk Reward Ratio (RRR) – we know that we need to take risk to gain reward. To be a sensible trader/investor, you should be looking for at least 1:2 RRR. This would mean that you risk $1 to earn $2. For example, you buy a stock at $10, and you are willing to risk $1. You will sell if the stock goes to $9. For the upside, you are looking at $2 gain and will profit take when the stock price goes to $12. Hence, your RRR is 1:2.

Let’s say you always follow this RRR for every trade/investment you make. And you are only right 50% of the time. How sure are you that over 10 years, your account will end up higher than you started? Take a look at the chart, which I generated based on these parameters. Read more…

Posted on July 27, 2010 - by Alvin

The Good and Bad of Fundamental and Technical Analysis

There is always comparison between Fundamental Analysis (FA) and Technical Anaylsis (TA). There is enough supporters at each side of the house, claiming FA/TA is more superior than the other. So which is better? FA or TA?

The reason why market participants require FA or TA is because the flow of information is not perfect. This is especially so for the retail investors. Let’s imagine, if you are one of the first few people to know about something, you are able to act faster than most people. You do not need any FA or TA in this case. Hence, as a retail investor, whether you use FA or TA, you are indirectly trying to get this “information” as fast as possible. By getting this “information” faster than most market participants, you will earn a decent profit. In other words, the EARLIER and MORE RELIABLE information you get, the greater your profits. But then again, you can never do it better than the people higher up[ in the information chain.

The 2 considerations we will discuss are TIME and RELIABILITY. Let’s evaluate the pros and cons of FA and TA. (more…)

Posted on July 16, 2010 - by Alvin

Lessons Learnt as a Trader (so far) Part 3

I have slowed down my trading pace recently. Taking a step back and review my trading behaviour and psychology. It was apt to pick up Conrad Alvin Lim’s “Secret Psychology of Millionaire Traders” from the library to aid in the analysis of myself.

Find Reasons NOT to trade

I confessed I am a compulsive trader. I am quite fearless before I enter the market, which is bad as I tend to take unnecessary risks. I have conviction in the system that I used and protected by stop loss, I always think how bad can it go? But what if I missed the trade and the profits when I did not participate? It is a combination of “no fear” and greed that propelled me to enter trades carelessly. Conrad believes traders should take a defensive approach to trading. Instead of looking for signals to make an entry, traders should look for reasons NOT TO TRADE. This is like playing the devil’s advocate. By finding just one reason NOT TO TRADE, one shall not enter the market. If I have adopted this mentality earlier, I would have rejected many trade signals and save myself from unnecessary losses. Read more…

Posted on July 5, 2010 - by Alvin

Meeting with a Full Time Trader – TW

The good thing about sharing in this blog is that, it is presenting the opportunities to meet some people that I would not have met. Talk about TW, a full time trader, who emailed me for a chat. As usual, with the defensive nature of humans, I was trying to figure out “what does he want out of me”. I even asked him if he was selling something to me :D But I mistook his good intention that he just wanted to meet a fellow trader to talk about trading and exchange views and ideas. TW, I apologise :)

I forgot to ask his age, but my guess is probably early thirties. Humble and sincere person. “Down to Earth” kind of guy. He begin to introduced himself and probably the most surprised thing is that he quitted his job even before he becomes proficient in trading. It was a year since turning full time trading and he admitted that he only managed to make enough to survive. To me, this is tremendous achievement for first year of trading. I cannot even make enough to survive. But maybe this is the difference, when you are at the brink of survival, you tend to be very determined to succeed.

Risk Management
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Posted on July 2, 2010 - by Alvin

Trading Report Card – Jun 10

Stocks

The market has no clear direction of a trend for June. After the stock market came down in May due to the debts in Europe, it was time for a rebound and I bought 2 contracts. 1 in Singapore and 1 in Hong Kong. However, this rebound is a small one and in technical terms, many of the stocks were not able to even reach the previous high. It seems to suggest the market is starting to trend downwards. I would be looking for opportunities to short for the coming months. Below is the results for Jun and you can enlarge by clicking the picture.

PS: I will not be posting every trade that I made, as feedback by readers who do not trade. I will be more selective but the monthly report such as this will continue.

Read more…

Posted on July 1, 2010 - by Alvin

Money, Wealth and You

I have heard from different sources about value creation brings about wealth. You get richer only if you increase the value that you give to others. Zig Ziglar said, “you will get what you want if you help enough people get what they want.” Initially, I am not sure about this principle even when teacher Dennis mentioned about providing value and not to aim for financial freedom as a goal. If I give something to others, wouldn’t it make me worse off? As I continue to learn and inquire about money, that I start to understand this principle. When you provide a service or product that is needed by the society, you solve problems and people who need the service or product will pay you for it. They become better off consuming the service or product, and you become wealthier. It is a win-win relationship. The more value you can create, the more money you can make. Hence, it is contrary to what most people believe, in order to have more, you need to take more. Instead, in order to have more, you need to give more.

Thanks to La Papillion for recommending “Killing Sacred Cows” which gave me a better understanding of this principle. I cannot explain better than the author, Garrett Gunderson, so I shall quote his passages:

“Focusing on accumulating money is like wanting to harvest the fruits of a tree while ignoring the roots. As we accept the accumulation theory, most of us become frustrated with the lack of fruit on our tree – or lack of money in our bank accounts. And what do we do to solve this problem? Read more…

Posted on June 26, 2010 - by Alvin

Do not live below your means. Learn how to own it!

I am not sure if thrift is part and parcel of Chinese’s culture. What I know is that I was brought up with the thinking that there are alot of things in this world that my family cannot afford, and I should not compare my situation with other rich people. Failing which, I would make myself miserable. Thus, I must be contented with what I have, even though there’s a little unhappiness or a tinge of envy hidden somewhere. I must say my mindset is shaped in this way. Only when I was exposed to the concept of law of attraction, that I see the root of all successes begin with the correct thinking. If I think in terms of lack, I will limit myself and abilities to have what I want. The converse is true, if I think abundance, I will have lots. That is why I changed the tagline of this blog to “living a life of abundance“.

Teacher Keane said before, “live below your means” is one of the most limiting phrases to be used. It tells you subtly that you should know your limits and stay in there! Read more…

Posted on June 21, 2010 - by Alvin

Correlation between Stock and Oil Prices

No. 1: If oil price goes up, stock prices will fall. This is because the cost of doing business will increase and stock prices must factor this to account for the drop in earnings. i.e. oil price and stock price are inversely related

No. 2: During an economic downturn, business and production slowed, and hence the demand for oil drops. i.e. oil price and stock price rise and fall in tandem.

Which is correct? 1 or 2? Or both are wrong?

Ken Fisher did an analysis on the correlation between oil and stock (S&P 500). From 1982 to 2005, the correlation coefficient is -0.11(0=no correlation, 1=positive correlation, -1=inverse relationship) which is close to no correlation at all. The R-squared figure becomes 0.01, which means that only 1% of stock price movement is affected by oil prices. It would be better off paying attention on the other 99%.

And for the correlation between oil prices with Britain’s stocks (FTSE All-share), the correlation coefficient is -0.09, and R-squared is 0.01. Same case. Read more…

Posted on June 2, 2010 - by Alvin

A Gift to My Children by Jim Rogers

Jim Rogers wrote a book for his daughters, teaching them the way of life to achieve success and happiness. Here are the things I learned from the book:

About Life

Passion is key to happiness – “Try as many things as you can, then pursue one (or two, or three) about which you’re passionate. I became successful in investing because this is what I enjoyed most… The quickest way to success is to do what you like and give it your best. For me, my love for investing was linked to my fascination with researching amd learning in detail what was happening in different parts of the world… The least-happy people I know are those stuck in jobs they don’t love; many because they can’t imagine giving up a paycheck… People who follow their passions do not “go to work”. They get up each day and cannot wait to have more fun doing what they love to do… Even if you don’t become wealthy pursuing your passions, you will be rich with satisfaction. Plus, you’ll be happy. You can’t put a price on that.” Read more…

Posted on June 1, 2010 - by Alvin

Trading Report Card – May 10

Stocks

A loss in stocks for a consecutive month and this month was worse than the last. Even though I cut down on my trades, I did not cut down on the position size. In an uncertain market during the Apr-May period, I should trade with a much smaller size so that I err on the safe side. But I did not because I was unsatisfied of the potential profits if I win. My trades were driven by greed and this is dangerous and definitely a wrong mentality. I should approach it in 180 degrees change in perspective – Market is uncertain, the probability of win is not that high. I should sit out or if I want to try the best potential stock, I should play with a small amount.

Forex
Read more…