The above is known as the Mandelbrot set, named after the mathematician Benoit Mandelbrot who discovered the fractal phenomenon in nature. Now he is dedicating his research in the financial market. He wrote a book called, “The Misbehaviour of Markets”, which I strongly encourage you to read. I reckon it a prequel to “The Black Swan” and this man has great influence on Nassim Taleb. Mandelbrot reasoned that the financial markets behave in multi-fractal characteristics. Clueless? I am none better. His book covered many issues in finance and to make it easier to digest, I will break it down and focus on one concept at a time. Let’s begin with this:

Some people say that short term trading is risky. Intraday trading is risky. Long term investment is safer. Mendelbrot disagrees with it. He suggested that no matter what time frame, the risk is the same. Hence, a trader looking at an hourly chart is no difference in his exposure to risk as compared to a buy-and-hold investor who look long term. Take a look at the above pictures. The picture at the top left corner is the entire size of the object. The one to it’s right is a 6 times magnification of the part on the object. Notice the second picture also have a small box? The third picture (left bottom) is the 100 times magnification of it. And the fourth picture shows the 2000 magnification of the box in third picture.

So what is the purpose or significance of this? Mandelbrot has explained in the book why the market behaves more like fractals than the normal bell curve that the academics currently adopted. But I am not explaining it in this post. So I am jumping into things a little, hope you do not mind. At this moment you should just take it to be true, i.e. the market is fractal in nature. What Mandelbrot is trying to show in the pictures is that no matter how much you zoom in, the object does not get simpler. It is as complex as before. In his own words, “Proper fractals remain equally complicated at every level of magnification.” In fact, it always retain a certain similarity or resemblance of the bigger entity. This means that the financial markets are equally complicated in a 10 year time frame as well as a 1 min or 1 hour time frame. They look the same too. Hence, the risk does not change with a different time frame.

The following picture shows the animation of zooming:

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We all know that even in a bull run, the stock market does not run up in one straight line. It always move in a zig zag way. So what is the characteristic of the move upwards?

There is a classical technical explanation to the movement and I have learnt this from “Technical Analysis Explained” by Martin Pring. Generally, a bull run has 3 intermediate cycles. Looking at the figure, each intermediate cycle consists of a primary intermediate price movement (indicated by blue lines) and a secondary movement (indicated by red lines). For example, one intermediate cycle consists of line 1 and 2. An intermediate cycle can last from 6 weeks to 9 months. The secondary movement can lasts 4 weeks to 3 months.

The primary intermediate movement is lasts longer than the secondary movement. The former gets it’s name as it is in the same direction as the primary trend. The first secondary movement (numbered 2) usually retraces 1/3 of the first primary intermediate price (numbered 1). Number 4 usually retraces 2/3 of number 3. And lastly, number 5 will rise very steeply as many retail investors are pouring funds after the market has proven to be bullish. This euphoria will not get them far and this would be the last stage of the bull run.

Although this theory characterises the bull run well, it must only be used as a guide. The duration stated above is only a rough gauge and there maybe more than 2.5 intermediate cycles (or 5 phases) in a bull run. The more accurate warning is when the market shows sign of euphoria, that is when the stock price is rising very steeply.

So now let’s take a look at the current situation. I would say phase 2 just ended and now we should be in the beginning of phase 3. Phase 1 was the recovery after the market bottom and the STI recovered 99%. Phase 2 started when Dubai debts were declared and was sustained with Greece’s demise. Hopefully we are really in phase 3 now and get ready for more profits!

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Everyone has seen how stock charts look like. But have you seen the chart for your investment capital – how your capital rise and fall with time? The way your investment capital moves depend on the type of investor. I have heavily generalised 3 kinds of charts for the Buy-and-Hold investor, Trader and the Clueless investor. This is important because all of us would always monitor our capital time to time to see if it has grown. By doing this, we subject our happiness to it’s rise and dejection to it’s fall. And whether we still have the tenacity to continue investing when we feel dejected. The end point maybe the same, but the journey can be very different. Find out which of the capital movement chart you prefer and you can find out the type of investor best suits you. 

The Buy-and-Hold Investor

As a Buy-and-Hold (BAH) investor, you expect your capital rises gradually with time. It is akin to watching grass grow. You probably would not see the effect within a year. You must have the patience to hold on and it is possible to see your friends reaping higher gains than you. At some point you will feel that you may have made a wrong choice. But over several years, you begin to notice the gains. And since you are a BAH investor, you will participate in every rise and fall of the market. When the market crashes big once in 7-10 years, your investment goes down with it. Seeing your capital dropped 50% is heartbreaking, especially when you see the gains which took 5-6 years to grow vanish within days. But it does not deplete all your profits, you actually end up better off than you started. Of course this will depend on when you enter the market. If you keep holding on, you will participate in the next cycle of bull run and bring your capital to higher heights. Hence, the greatest challenge for the BAH investor is patience, and you must be able to take the hit when market plunge. The moment you cash in after the market crash, the game is over. 

The Trader

The chart would look something like this if you plot the movements of capital of a trader. Unlike the BAH investor, you can profit as a trader during a crash as you can short the market. Hence, your capital growth does not follow the growth of the market. As long as the market moves, your capital grows. But the problem is that the market does not move all the time. In fact, it moves probably about 90 days or less in a year. Hence, most of the time you lose money as a trader. Looking at the chart, your capital depletes most of the time but grows very fast when the market trends. If you cannot take such numerous small losses, you cannot be a trader. Because you will lose faith in your system and even trading itself. Hence, you would miss the big runs which make the year a profitable one.

The Clueless Investor

Lastly, this chart represents what most people investment capital looks like. I hesitated to call this group of people investors because they do not know what they are doing in the market. But since they call their activity investing, I shall call them Clueless Investor (CI). This group of people usually listen to “experts” who may be their auntie, uncle, brother, sister, friend, brother-in-law, coffeshop talk, analyst recommendation, etc. They buy into “hot” stocks, and their participation actually becomes the self-fulfilling prophecy, pushing up the stock price. Until one day when there aren’t enough buyers, the stock price collapses. The CI does not have enough time to react and exit, and they get stuck with the stock. But they are unwilling to accept the loss and they believe the stock price will eventually recover soon and they can sell. But the stock did not recover, and they would give up and sell the stocks. They end up worse off than they begin (their capital is lesser than they started). But they fail to learn their lesson, when the time is long enough for them to heal the wounds, they get convinced to “invest” in the next “hot” stock. They can never succeed in investing.

I hope that by highlighting the difference for these 3 types of investors will help you understand what it takes to be an investor. It is a rather emotional daunting task. Understand how your capital appreciates/depreciates would give you more confidence and a peace of mind during your investment journey.

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It’s only been almost 2 years since I began trading and I must say I am still learning how to trade. I have summarized the lessons learnt so far in my trading journey:

Be patient and wait for the best opportunity to place a trade

Trading is really a patient game. It is not as quick as I imagined in the first place. The duration of the trade can be short, but the time waiting to place a trade is very much longer. The thought of profits urges me to be involved in the market and it just makes the wait feels like eternity. Sometimes, the charts do not show any opportunity but my eyes will try to find patterns to justify for a trade. And true enough, these forced trades usually end up in losses.

Statistics have shown that market generally spend most of the time consolidating (non-trending) or moving within a band. To understand more, read “90 days attribute to 95% of profits“. This is why traders have to spend most of their time waiting!

Back on forcing a trade. What I was doing (and still doing) was to demand the market pay me profits. Who am I to do that? I cannot force opportunities. The wise Sun Tzu said, “to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.” If I may rephrase, “to prevent losses in the market lie in our own hands, but the opportunity of making profits is presented by the market herself”. I have to be the servant of the market, to get paid when she decides to. I cannot expect to jump into the market anytime and reap gains out of it. It just does not work this way. If it does, everyone should just quit their jobs and make a living off trading. Waiting is perhaps the most difficult part of trading and if anyone tells you trading is easy is lying. The earlier you understand the importance of patience and the more you can practise it, the less you lose and the more you gain. Like what Warren Buffett says, “the trick is, when there’s nothing to do, do nothing.” Opportunities do not appear all the time. A good trader will wait for the best opportunity while an amateur trader will make a trade whenever he/she perceive there is one.

But the market is always uncertain. Call upon conviction!

Easier said than done. When is a good opportunity and when is bad? The market always look uncertain whenever I want to make a trade. The problem is that I will only know if the market is good after the trend has started. So what am I going to do before the trend has realised? This dilemma is part and parcel of trading and is also another reason that makes it difficult. I will always have doubts, especially with a few losses behind me. All the “what ifs” will appear in my thought bubbles. I am often put into an emotion turmoil, torn between greed and fear. Greed will tell me to go for it and I will feel very bad if I miss the boat, while fear will tell me not to as I will suffer another loss. To resolve the battle, this is where the conviction comes in. The conviction that my trading system is proven to be profitable. As long as I trade correctly, I will end up in profits. So by understanding that “I can lose money even if I select the right stocks” and having the mentality “it’s alright to lose“, I have the courage to carry out trading even after a string of losses.

Be selective, choose the right time and choose the right stocks

Since patience is key, I need to be very selective on the stocks that I trade. I will disregard and reject stocks that do not fulfil all the entry criteria. The selection has to be very stringent when the market is not trending. When the general market is trending, almost any stock will go up in price. But some will go up higher than others, hence, rules still apply to pick the best winners. In addition to my trading system, I have added some tools and tactics to help me reject trades. It is more important to use tools to reject a trade than to support it. Just like water treatment, good filters are used to remove impurities from water. These tools and tactics are to help me filter the bad stocks away.

- Price trends must be nice. Erratic price movement or excess volatility are bad for trading as your stop orders are easily triggered. Avoid choppy price and trends at all cost.
- Confirm trend with longer time frame. Only buy/sell according to the longer time frame. Reject the trade if it is against the big trend.
- Identifying key resistance and support. Investors have price memories and they form key resistance and support. Price breakouts from these levels will have greater validity.
- Price and volume. Volume is the bloodline for price movement. No volume = no price movement. Rising price must be accompanied by rising volume, if not the price will collapse due to insufficient buyers in the market to hold or push the price higher.

Go for the jugular as I only need a few stocks to make it a good year

“The New Market Wizards” has taught me to go for the jugular when I am right. George Soros said it does not matter you are right or wrong, the important thing is how much you lose when you are wrong and how much you win when you are right. Going for the jugular is important. It means I must capitalise on my correct picks. Ride the trend as long as I can and even increase my positions on these stocks along the way at appropriate intervals. Remember “90 days attribute to 95% of profits“, I just need a few days/weeks of the year, to trade the right stocks, and end up profitable for the entire year.

Building on these, I will continue to refine my trading skills and understand the market and myself. The immediate milestone is to achieve the trading goal of 2010.

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I was interviewed by Timothy Nga in a programme with regard to trading. The programme is called, “What’s Your Position?”, and will be aired on ChannelNewsAsia at the following time slots:

Part 1:
3 Mar 10 (Wed) – 9:30pm
4 Mar 10 (Thu) – 12:30pm repeat telecast
5 Mar 10 (Fri) - 4:30pm repeat telecast
8 Mar 10 (Mon) – 6:00pm repeat telecast

Part 2:
10 Mar 10 (Wed) – 9:30pm
11 Mar 10 (Thu) – 12:30pm repeat telecast
12 Mar 10 (Fri) - 4:30pm repeat telecast
15 Mar 10 (Mon) – 6:00pm repeat telecast

I have yet to watch the programme so I am as clueless as you! Hope you can show some support! Thank you!

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This trade looks a bit risky even though the entry criteria were fulfilled.

Firstly, USD strengthened tremendously from 10am (GMT) onwards. It has gone up so much that I opin it may just take a break or retrace. I was also thinking whether I should wait for a small pullback for a better entry but decided to get in before it is too late. After I got the trade, I was down 30 pips within 15 min and it surely isn’t a good feeling.

Secondly, the rate of fall for EUR/USD has slowed. It is obvious as the weekly pivot levels closed up. For the past one and a half week, the pair is actually range bound. If it can break below the lower band, it should have the momentum to go lower.

The pair did broke below the low and I shifted the stop loss to the day’s high. Subsequently, it appeared to be a fake breakout and the pair rebounded strongly. My stop loss was hit.

Sold 1 mini contract at 1.3477 on 1 Mar 10.
Bought 1 mini contract at 1.3561 on 2 Mar 10.

Loss = -84 pips

• USDCHF (Long) – closed on 24 Feb 10
• USDCHF (Long) – closed on 19 Feb 10
• USDCHF (Long) – closed on 16 Feb 10
• AUDUSD (short) – closed on 29 Jan 10
• USDCAD (short) – closed on 19 Jan 10
• AUDUSD (long) – closed on 13 Jan 10
• EURUSD (long) – closed on 28 Dec 09
• USDCHF (short) – closed on 18 Dec 09
• GBPUSD (short) – closed on 17 Dec 09
• EURJPY (short) – closed on 13 Dec 09

Stocks

The market is flat with no strong trend. Only closed a trade this month and 3 open trades carried over to March. Hope I can close them with profits. The loss of S$335.14 this month pushed me further from my trading goal for this year to S$23,735.80

FOREX

Same to Forex, I have been selective with my trades. Kind of break even this month. Left with S$2,500.76 to be achieved for 2010.

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MOOLAH has launched their bimonthly financial magazine on 28 Feb 10, 12am, and poised to be the first flipping financial magazine online. The articles are contributed by local investors and most importantly, in our context. It is free to subscribe to the magazine and hence, you should do so!

Visit MOOLAH.asia for a sneek peek and to sign up.

They also have an online portal with some articles HERE.

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Here it is, Nassim Taleb himself explaining his theory of Black Swan:

The presentation is rather long and it is advisable to visit the site so that you can select the chapters you are interested to view.

Some interesting topics covered in the talk:

Problem with Predicting

Ignore Experts

Fallacy of Prediction of Markets

Nassim Taleb explains the success of Warren Buffett

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I have been waiting for this opportunity since the day before and finally get the chance to long this pair.

Entry signal for using the PIPS Swing method – on the 4 hourly chart, enter after a full candlestick formed above the Pips Weekly Pivot. Hull Moving Average aqua in color. The only concern was that there was only one GRBB bar that is thick green.  

Unfortunately, the pair did not go up enough for me to protect any profits. I intended to sell once the Hull MA changes color. Before it could do so, my stop loss was triggered. I see that the next candle is a very bullish bar, but this is part and parcel of trading. Have to take the loss as we are not sure how low can it go.

Bought 1 mini at 1.0812 on 23 Feb 10.
Sold 1 mini at 1.0758 on 24 Feb 10.

Loss: -54 pips

• EURUSD (Short) – closed on 2 Mar 10
• USDCHF (Long) – closed on 19 Feb 10
• USDCHF (Long) – closed on 16 Feb 10
• AUDUSD (short) – closed on 29 Jan 10
• USDCAD (short) – closed on 19 Jan 10
• AUDUSD (long) – closed on 13 Jan 10
• EURUSD (long) – closed on 28 Dec 09
• USDCHF (short) – closed on 18 Dec 09
• GBPUSD (short) – closed on 17 Dec 09
• EURJPY (short) – closed on 13 Dec 09