Posts Tagged ‘trading’

Christopher Weaver ‘4 Keys to Profitable Forex Trend Trading’ interview

Wednesday, February 8th, 2012

Forex trader Christopher Weaver talks about his new book ‘4 Keys to Profitable Forex Trend Trading’ with Trading Diary.

1. Who are you?

Christopher Weaver: forex trader and authorI have been around the trading scene for a while. Having never really worked for any large financial institutions, the majority of my trading has been private accounts. I spent a few years writing and delivering trading courses in London for a company that teaches and trains private retails clients how to trade the financial markets. I actually really enjoyed that experience although I haven’t done it for over a year now. I spend a lot of my time now in front of the trading screens and writing books with Harriman House which I really enjoy.

2. What is your new book ‘4 Keys to Profitable Forex Trend Trading’ about?

It’s about learning how to identify solid trends and then trade them profitably. It’s a very practical book and it has over 200 images of charts in it. I felt that it was important to have almost an overload of charts simply because technical analysis is a very “visual” experience. This book helps train the readers mind to instantly identify trading opportunities. It helps the trader develop an instinct for trend trading.

3. Why did you write this book?

I wanted to write a book that had definite and clear trading strategies laid out for the reader. I find a lot of books on Forex trading seem to shy away from doing this and it doesn’t make sense to me. People who read books on trading are normally looking for practical tools that they can apply and implement immediately. In this book “The 4 Keys to Profitable Forex Trend Trading” there are 8 different trend trading strategies that define the entry and exits specifically.

4. Who is your book aimed at?

The book is aimed at individuals who have a basic understanding of trading, for instance they know how to place a trade and understand the basics of a chart, and who want to focus their trading very specifically on trading with the trend and increase their profitability.

5. What in particular interests you about forex rather than other derivatives?

I have always loved the idea that the forex market is a market that is “made of money”. Plus, it is very liquid, and as far as I am concerned, liquidity is always a good thing. I also believe that the forex market provides opportunity for so many different types of trader. It doesn’t matter if you have a short, medium or long term trading style, there is normally something for you to trade.

6. Do you just use technical analysis for your forex trading or do you look at the fundamentals as well?

I believe that it is possible to trade successfully by using only technical analysis. I also believe that by introducing a small amount of fundamental analysis the trader can improve his results dramatically. The non-farm payroll figure that is released monthly in the U.S. is for me, a key fundamental piece of information that I focus on. If the figure is consistent with the current trend of the time frame that I am trading, I see that as an opportunity to potentially enter the market. If it is inconsistent with the trend of the chart that I am analyzing I tend to stay out of the market completely.

7. I often find that by the time I start trading on a trend, the trend is nearly over and reverses. What can I do to identify the trend earlier?

Yes, this is key. Traders, like to “see the trend” before they “trade the trend”. As you say however, by this time it may be too late as the price action is likely to be overextended and ready for a pullback. A basic way that I define a trend is by looking at the relationship of the 50 EMA to the 200 EMA. If the 50 EMA is above the 200 EMA, the trend is up, and if the 50 EMA is below the 200 EMA, the trend is down. The only problem with this is that once the cross of the moving averages takes place there is normally a pull back against the trend which happens. So, if the 50 EMA crosses down through the 200 EMA, I will wait for the price action to come back and test the 50 EMA before I start shorting and vice versa. This is just a general rule. In my book, there are a number of other techniques which I talk about that assist on determining the trend and also the timing of the entry.

8. You have spent extensive time trading forex. Do you have any particularly memorable trades (either good or bad!)?

It’s funny but the first thing that comes to mind is actually a trade that never happened. I got up early one morning at about 5am, which is little bit earlier than normal, because I wanted to see how the USD/CHF had traded overnight. I had been watching this pair closely as it was trending rather strongly and I didn’t want to miss any opportunities. As soon, as I opened my screens up I saw the setup I had been looking for, which was a bounce off of the intraday pivot level. So, I set a sell limit order directly at the price of the pivot. If the price action traded up to the pivot I would be triggered into a short position automatically. I was very excited about this trade as my target was four times that of my risk and so I was hoping this would work out as planned. After I placed my order I turned off my computer and started to get ready for a meeting that I had in London. 2 hours later on the train to London, I checked the price of the USD/CHF and it had already hit my target! The only problem was that the price action never made it up to my entry price – it missed it by one pip! I was therefore never filled on the trade and missed a perfect 4:1 reward to risk trade by just 1 pip. I was certainly disappointed to say the least.


Guy Thomas ‘Free Capital’ interview

Monday, April 25th, 2011

Guy Thomas talks to tradingdiary about his new book Free Capital: How 12 private investors made millions in the stock market.

Who are you?

guy thomas free capital suitI am an actuary and investor. I qualified with a firm of consulting actuaries and then spent some years as a university lecturer. I left that job in 1999 in my mid-30s to concentrate full-time on investment, also continuing with some academic research.

What is your new book about?

The book profiles 12 private investors. Each of them has accumulated £1m or more – in most cases considerably more – mainly from stock market investment. Six are ‘ISA millionaires’ who have £1m or more in an ISA – a result which is arithmetically impossible without exceptional investment returns. The profiles cover the 12 investors’ backgrounds, how they made their fortunes, and how they spend their days now.

Why did you choose to write this book?

As a full-time investor myself, I have long been curious about other investors’ methods, literally what they do all day. How much of their time do they spend reading company reports as opposed to talking to company managers or analysing share price data? For many years I hoped that somebody else would write a book like this. Nobody did, so eventually I decided to write it myself.

How did you decide who to interview?

guy thomas free capital bookI posted descriptions of the project on investment bulletin boards; I asked stockbrokers, CFD providers and spread bet firms for introductions to their most successful clients; I asked friends and friends of friends. I wanted to include a variety of personality and career backgrounds and investment styles. In general terms, around one-third of the interviewees are ex-City professionals; one-third are other degree-educated professionals; and one-third left school at or before age 18. Most gave up all employed work in their 30s or 40s to be full-time investors.

Are there any common qualities that the successful investors you spoke to share?

The final chapter identifies some common qualities. One is the attitude that money is a source of quiet freedom, rather than ostentatious spending power. They aren’t high spenders: they tend to live very modest lifestyles relative to their accumulated wealth.

Another common factor that they all work alone, with a very strong psychological self-reliance: they prefer to figure things out for themselves rather than seeking advice.

Another commonality is that they seem to enjoy the process of investing, rather than just the proceeds. Several spoke of investment as a game, more like playing poker or chess than working.

Is there anything that surprised you during your interviews?

The variety of approaches which appear to work. In my own investing, I’m a fundamentalist focused exclusively on smallcap equities. I spend a lot of time reading accounts and researching the competitive position of the underlying businesses represented by the shares in which I invest. My time horizon is months or years. But there is at least one person in the book who never looks at a set of accounts, and generally has little idea what a company actually does. His time horizon is minutes to hours, trading mainly on short-term newsflow and price charts. So writing the book opened my eyes to the possibility that for some people, some very different approaches to my own seem to work.

Have you changed your strategy as a result of meeting and interviewing these 12 investors?

In Chapter 9 on Owen, the activist investor in closed-end funds, I wrote that his was the approach I most wished I could emulate. I particularly envy his time efficiency. So yes, I have tried to increase my own focus on closed-end funds. But Owen has more than 20 years experience of this type of investing, and his depth of knowledge is not easy to replicate.

Why are you donating the author royalties from this book to charity?

I didn’t write the book to raise money for charity, I wrote it for fun. But any author of investment books is susceptible to a critique along the lines of those who can, do; those who can’t, teach. Or something like: those who can, make millions in the market; those who can’t, make a few pennies writing books about it. Donating all royalties to the United Nations Stop Tuberculosis Partnership is potentially a way of deflecting this critique. I chose this cause and organisation with help from the charity evaluators Givewell, whose research I strongly recommend.

Are there any finance or investment related books you recommend?

I have always found books of interviews with professional investors are enjoyable and inspiring, albeit somewhat remote from my own activities as a private investor. I enjoyed Jack Schwager’s Market Wizards books and John Train’s Money Masters books; and for an insight into UK professional investors, Jonathan Davis’s Money Makers.

I read many investment books, both academic and professional. But I think anyone looking for a definitive book on investing will be disappointed. Investing is much more a practical craft than a formal discipline. Almost all the people in Free Capital have learnt mainly through their own experience and reading bulletin boards, rather than from textbooks.


Guide to stop losses

Wednesday, February 23rd, 2011

Every forex trader likes to think he is able to think swiftly on his feet and respond to any which way the market turns. However the truth is that when caught with an unexpected market movement, the initial gut instinct is not always the right one. In a world where one bad decision can mean the end of a trader, it is essential to have a strategy for when the deals don’t go as planned. And have no doubts, this will happen. Frequently.

Stop losses are one way of protecting the capital in the account to ensure there is always enough left to continue trading. It is essentially just another name for a risk management system where the trader pre-determines exit levels which when hit mean the deal is closed, regardless of the dealer`s position.

trading stop losses

Some dealer’s dislike the concept of stop losses as they feel they are a reflection on a dealer’s ability to judge when to exit the market and restrict trading. However, when the market is moving against a deal, it can be very tempting to pursue a position, in the vain hope that the odds will eventually turn. However, by the time they do, all of the capital funds may have been obliterated meaning the trader is unable to continue.

Stop loss level

Every trader will decide at what point they will set up their stop losses but the recommended value is around 1-2% below the support level. There is little point setting stop losses just below the support level as it is expected that this level would be tested with minor break throughs, before rising back above the level again. Setting the stop loss level too low could result in deals being closed too early, when support levels are merely being tested by the market and not actually broken.

Trailing stops

Trailing stop losses are possibly one of the loosest types of orders to place, with no set numerical value specified. Trailing losses follow the market with the stop loss stepping in when the market dips below a certain percentage, but allows for fluctuations.

Slippage

However, when stop loss orders are executed, the price is not usually exact. A broker may not be able to exit the market until the next available price, meaning there may be a slight difference in the actual close and the stop loss order. This difference is called slippage. There is a way to prevent this and this is by using a guaranteed stop loss order. This means any deal will be closed at the exact price the stop loss order specifies but usually command an additional fee from the broker.

Time based stop loss

An alternative approach is time-based stop losses. This type of trading very much relies on the good judgement of the trader and perhaps is not the easiest approach for beginners. A trader decides beforehand on the exact amount of time he will stay in the deal for and exits at exactly that time, regardless of how the deal is going. The skill lies in finding the right trade to enter sat the right time so that the market goes in the right direction to make the gains.

Regardless of how many traders feel about using stop losses, they are an essential part of forex and will help protect capital from being wiped out.

Andrei Knight ‘Trading Forex for a Living’ interview

Friday, September 24th, 2010

Andrei KnightAndrei Knight is a highly sought after speaker and coach for professional traders and individual investors alike. His first book will be called ‘Trading Forex for a Living: A Practical Guide to Achieving Financial Independence with the Foreign Currency Markets’. He is interviewed here for www.tradingdiary.co.uk.

1. How would you describe your job?

My primary focus is on earning the best returns I can for my investment clients, while carefully monitoring risk exposure, and increasingly I’ve devoted more and more time and energy to helping other traders succeed through the Knight Trading Academy and fxKnight.com.

2. What made you decide to write a book?

One of the most frequently-asked questions from visitors to our website is “Can you recommend a good book for me to start out with?” I often catch myself recommending two or three titles, as I cannot think of one which is really ‘complete’. So I set out to write the book I wish I had when I was starting out, one which arms traders with all the tools needed to succeed in the markets. The very same strategies I use to manage my clients’ funds.

3. There are loads of forex trading books out there. What makes yours different?

So many books focus on theory and leave out specific strategies, while others present ‘systems’ which are mostly rules for entries and exits, with minimal mention of money management. I lay this business of forex bare, pointing out the pitfalls to avoid, and help readers create a solid plan for leaving their jobs and transitioning to trading full-time. “Trading Forex for a Living” features not only more than 100 charts and trading examples, but also detailed coverage of the ‘for a living’ part, including topics such as psychology, setting up a home office, trading other people’s money as a business, and balancing work time with family.

4. Your book jacket says that 95% of traders lose. What percentage of people who read your book do you think can be winning traders?

I’ve trained hundreds of traders over the years, and can think of perhaps three or four former Pro members who gave up and went back to their old jobs. In almost every case they left us in favor of jumping into live trading after only a month or two of training and practice, thinking they knew everything. I think anyone can succeed at this if they put their mind to it, devote the time to learn, and the effort to practice.

5. What will your book teach the reader?

How to be a consistent, confident trader. Consistency is the cement which holds everything else we’ve discussed to this point together. It will also show them how to supplement their income with trading, make a full-living as a trader, or even start a business and trade for others.

6. What are the typical trading mistakes that you see people making?

Not sticking to their system and trading plan, and losing all faith in themselves and their analysis the moment the markets tick a bit against them. The cure for this is to do more long-term, scenario-based analysis, and to resist the temptation to jump into or out of trades mid-candle. People don’t realize it, but if you don’t wait for the candle to close it can still change back and forth – so this is like having NO system at all!

7. How did you first get interested in trading?

My father traded the stock markets here and there, and he once told me that if I wished to understand anything which happened in the world I only needed to “follow the dollar”. I am someone who loves keeping up on news and current events, and trading provides me with a way to act on my opinions of what I see happening around me. If the world is indeed a stage as Shakespeare once said, then following the financial markets is like having a front row seat. You know you’re on to something when you catch yourself a bit sad as things begin to wind down on a Friday afternoon, and actually looking forward to the following Monday.

8. What did you have to go through before you realized that you were good enough to be able to give other people advice on trading?

I was more or less pushed into it, and felt far from ready when I first started. People kept asking for help and advice, and so I shared what did and didn’t work for me. Hearing about other people’s success then served to encourage me, and as more and more people used the system and added their experience and feedback, its evolution naturally speeded up. What we have today is the result of more than six years of testing and tuning.

9. Are you still an active trader? Are you placing trades using your own money?

I invest in the fund that I manage, so whenever I make a trading decision with my clients’ money my own is on the line as well. We also employ ‘high watermark’ accounting, so if we ever have a losing month, we don’t consider money earned to return back to break-even as a gain for calculating commission. We only get paid when we make money for our clients.

10. Do you think that that trading automation is making it harder for individual traders?

Only in the sense that it gives them false hope. I’ve seen a bank that I was working for invest $2B in a system to help them calculate and manage risk exposure in real-time; it did not place trades on its own. Banks haven’t fired their human traders. Yet people still believe that a $99 piece of software is going to be the answer to all their problems. Software can help automate some trading tasks, but let any robot run long enough unattended and it will eventually empty your account.

11. What Japanese martial arts were you studying? How did studying them help you in the financial markets?

Bujinkan Taijutsu. The main thing it taught me is patience. Let the opponent show you their intention. Miyamoto Mushasi, perhaps the greatest swordsman in Japanese history, once said, “he who moves first often loses”. Another really useful skill is flexibility – not being trapped in a single, rigid line of thinking but being open to clues from the environment around you and being able to adapt your strategy as required.

Trading Forex for a Living is being published by Harriman House and will be released during January 2011. For more about Andrei Knight you can visit his website at fxKnight.com.


Five tips for winning at forex trading

Thursday, December 17th, 2009

1. Exits are more important than entries

Forex traders often over think about when they should enter a trade. Huge amounts of time can be spent looking at indicators, reading news, and drawing lines on charts to try and figure out if now is the perfect time to open a trade.

Unfortunately for them they should be focusing some of that energy elsewhere.

It is true that a good entry into a trade is important. For example opening a new ‘long’ trade when the price has massively spiked is probably a bad thing, as the price will probably reverse just as quickly.

What is more important is when you exit the trade. It is at the time of exit that your trade becomes either profitable, non-profitable, or breaks even. It doesn’t matter if you were up 10% one hour ago. If you close the trade when you are down 2% then that is the final result. Being right about the price direction for the much of the trade duration gets you no profit if you closed the trade after a large reversal.

japanese currency yen

By all means spend time working out when to enter a trade – this is an important thing to do. But do also spend time thinking about when to exit. Don’t just exit in a panic. You should have a plan and then stick to it.

Which brings us onto…

2. Have your trade lifecycle planned out before you enter

Some people treat trading like a computer game, just clicking on the buy and sell buttons in the hope that they will make money. These people will probably find that their account balance goes down very quickly.

Blindly entering and exiting trades without having any real plan in place is only going to lead to one thing – a smaller bank account balance!

Before entering a trade you should know:

  1. Why you are opening this trade?
  2. How long you expect the trade to go on for?
  3. At what level would you either take profit or tighten your stops?
  4. At what price would you accept that your initial analysis was wrong and exit the trade?

Many traders find that small losses become large losses because they haven’t planned their trade in advance. They just entered the trade without thinking it through. The trade goes against them, and rather than exiting they stay in the trade hoping that it will turn around. Does this sound familiar?

If you are unable to trade in a disciplined way then you will consistently lose money to those traders who are able to trade with a disciplined methodology.

Trading with a disciplined methodology means trading with a plan. A plan means having answers to the four questions above – and then sticking to the plan!

The 4th question is about knowing when the trade has gone wrong so you can exit. The next tip covers an important aspect of planning your exit.

3. Have a stop loss in place in case it all goes wrong

As covered in my previous blog post about stop losses, a well thought out stop loss can be worth its weight in gold. It can stop you from losing large amounts of money, and enable you to ‘lock in’ your profit.

A stop loss should initially be the record of your trading plan’s worst-case exit price. Placing a physical stop loss is much better than using a ‘mental stop loss’ as the physical stop loss isn’t affected by your emotions.

As the trade progresses then you should tighten the stop loss according to your trading plan. What you should not do is decide to loosen your stop loss because you want to stay in the trade for longer.

Loosening a stop loss, or removing it altogether after it has been placed is a sign of not having control over your trading.

4. Monitor your trade appropriate to the timeframe

Unless your trade’s exit points are always determined by a stop loss and limit order that you placed your trade will require monitoring whilst it is in progress.

You should monitor your trade in a way that is appropriate to the timeframe in which you are trading.

If you are trading a small timeframe such as 1m, 2m, etc, then you obviously can’t afford to leave the screen or room for a few minutes as you might miss an important exit signal and end the trade in a loss. At very small timeframes even going to the toilet can cost you real money!

If trading longer timeframes such as 1h, 4h, 1 day, 1 week, etc, then you really shouldn’t be spending large amounts of time staring at the screen watching your trade. Doing this will turn you into a nervous wreck as the price continually moves up and down. Trading at a longer time frame should mean you don’t need to know about such micro-movements of the price.

5. Understand how much money is ‘on the table’

No matter what you are trading you should always have a thorough understanding of just how much money you have at risk.

Don’t just think about the potential profit. Think about the potential loss. Think about the worst case scenario. How much money could you lose? If you are not comfortable with the figure then you are trading with positions that are too large for you.

You should always be able to withstand all your positions going against you at the same time, no matter how unlikely it may seem. If you can handle it (note – just handle it – you don’t have to be happy about it!) then you are trading at an acceptable level.

Book review roundup – Forex, Turtles, LTCM, Stock market and Randomness

Wednesday, December 9th, 2009

I’ve been reading finance and trading books faster that I’ve been able to review them! Here is a roundup of the last five finance and trading related books that I’ve read.

Currency Trading for Dummies by Mark Galant and Brian Dolan

Mark Galan and Brian Dolan both work at forex.com which is one of the largest forex retail brokers in the world.

They’ve put their knowledge into this book, packaged in the familiar ‘dummies’ style.

Even though this is marketed as a ‘dummies’ book there is a surprisingly large amount of detail in the book which makes it worth reading even if you have been trading in forex for a while.

They explain the differences between the major currencies. They talk about how the world economies interact. They provide a good slice of standard trading advice (strategies, stops, trade size, etc). And they cover other topics such as technical analysis, trading from the news, and trading do’s and don’ts.

Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders by Curtis Faith

Curtis Faith was one of the original ‘Turtles’. The turtles were ordinary people who were taught how to be professional traders by Richard Dennis as part of a bet as to whether successful traders are made or just born.

Curtis gives a brief account of how he was selected to be a turtle (which to me would seem to invalidate the idea of the bet – it they wanted to see if anyone could become a successful investor then shouldn’t they have randomly selected people?). And he gives a brief account of his time as a turtle trader.

Most of the book is however about writing and testing trading systems. He covers topics such as how to do a good backtest – important to make sure you don’t bias the results. And he talks about rules that a good trading system should use.

If you are interesting in writing trading systems then this book gives plenty to think about. A quick read and very interesting.

When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein

When Genius Failed tells the story of the mighty rise, and then mighty fall of Long Term Capital Management.

This is the account of how ex-Salomon Brothers trader John Meriwether created LTCM and how it became one of the largest arbitrage hedge funds in the world in a few short years.

When Genius Failed continues parts of the events that were covered in the book Liar’s Poker by Michael Lewis – another recommended read.

John Meriwether managed to recruit some of his old team from Salomon Brothers and added two Nobel Prize winners – Robert Merton and Myron Scholes for good measure. To add further credibility to the fund he recruited David Mullins, the ex-Federal Reserve Vice-Chairman.

With his prestigious team in place he was able to obtain billions of dollars of capital, and get highly advantageous terms from the brokers and clients they dealt with.

They thought they were invincible, and for a time they produced amazing returns.

However things went wrong when they got too big and started diversifying into new areas. They were stung by the Asian currency crisis of 1997 and then in 1998 their downfall was cemented when Russia defaulted on its debt.

This is a fascinating read of how huge success can lead to spectacular failure. This book is a warning for anyone who takes on risk beyond his or her means.

How the Stock Market Works: A Beginner’s Guide to Investment by Michael Becket and Yvette Essen

How the Stock Market Works is a small book that does as its title suggests. It tells you in brief how the stock market works.

It tells you what shares are, how you research them, and how you can buy them.

It explains how you can read the financial pages in newspapers and how you can understand a company report. If you want quick descriptions of what all those financial rations mean then this could be the book for you.

It is not what I’d call a ‘fun or interesting’ read, however there is a lot of useful information in here.

This book is pitched towards people who are investing for the long term. It does not cover shorter term trading.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Fooled by Randomness is a fascinating book that explains how much our lives are affected by pure randomness.

There are a lot of examples of how this relates to the trading world (Nassim is an options trader), but there are plenty of non-trading examples as well.

Fooled by Randomness flits from one topic to another at speed and is one of those books that makes you think.

One of the most important messages that he tries to get across to traders is that just because you win many trades don’t assume you are a good trader. It could just be you are benefiting from random luck. Sample size is all important – winning trades over a number of months or even years may not be enough to tell you anything about your trading skills.

The author is clearly very intelligent and has put together a highly readable and interesting work, but sometimes he does come across as a bit arrogant – he could do with toning some of his personal insults down.

Nether the less – a fun read – and I’ve already got his follow up book The Black Swan: The Impact of the Highly Improbable, on order.



Always have a stop, and ideally a limit

Thursday, November 26th, 2009

When trading financial derivatives such as forex, CFDs should you always use a stop?

Short answer: Yes!

Long answer: Yes you should always have a stop in place – even if you think you really don’t need one.

Note that I’m only referring to financial derivatives such as forex and CFDs where you trade on margin. If you are trading or investing in instruments where you pay the full price up front (as you will usually do with shares) then this doesn’t apply to the same extent.

Leveraged price moves

A stop is very important with derivatives because when you are trading on margin any moves in the market price is magnified (often by huge multiples –1:400 leveraged forex – are you insane!). A move in the wrong direction can easily wipe you out – along with any other unrelated positions that you currently have open. In the worst case you could even end up owing your broker money – and that is not a good place to be.

forex trading screen 4

Stops are for wimps!

If you talk to people or read the trading bulletin boards there is often a certain amount of bravado about trading without a stop. Some people seem to think that stops are for wimps or are irrelevant for the strategy they are using (“I don’t need a stop because if the market moves against me I manually close out the position in time”).

Emotional decision making

Some people may be disciplined enough to close out at a sensible price but most aren’t. When the numbers on your screen start moving against you it is all to tempting to think – “I’ll stay in a bit longer – the price might go in my favour again”. The chances are that it will just keep going against you making your loss bigger. If you have a stop then you remove your emotions from exiting at the right time.

You should decide your worst exit price when you place the trade when you are thinking more rationally. You of course always have the option to exit earlier if you realise you are wrong before you stop gets hit. Just whatever you do don’t start loosening your stop. Remember the reason you set it at that value in the first place.

My strategy doesn’t require stops

Some people (for our example we’ll call our trader ‘MrNoStop’) will argue that the strategy they are trading does not require stops. They talk about never leaving the screen when a trade is open. If something happens there are always at hand – and cool headed enough – to close that trade.

So what happens then if some huge incident occurs which has a massive impact on prices. For example an unprecedented terrorist attack. Imagine that due to the incident the internet grinds to a halt – as it did on 9/11.

Suddenly MrNoStop’s trading platform stops responding, his previously fast internet connection grinds to a slow trickle. Now MrNoStop can’t exit his trade using his computer. Never mind thinks MrNoStop – I’ll telephone my broker. I always have their number to hand.

MrNoStop calls the number. It is engaged. He keeps trying. Eventually the number rings but no one answers. What is going on? Well of course MrNoStop isn’t the only one affected by the internet outage – all the broker’s customers are affected and they are now phoning the company on mass to either find out what is going on or close their positions. If only MrNoStop had used a stop.

Even if his normal strategy didn’t need a stop he still should have used an ‘emergency contingency’ stop to prevent this kind of thing from happening. It could have saved him a lot of money.

It can be good to have a limit order in place

In the title for this post I mentioned that you should always have a limit as well. Why is this?

Well let’s go back to MrNoStop’s bad situation. It is entirely possible that the terrorist attack could have had a massive positive effect on MrNoStop’s position. The price could have spiked up and then headed back down whilst MrNoStop was unable to use the internet or get though on the phone. If he’d used a limit order as well for this trade then it is possible that he may have made it out with a profit.

Some caution suggested

Maybe I’ve convinced you that always having a stop and a limit order is a good idea.

Well I’ll give you some warnings as well. If your trading platform implements stops and limits as separate tickets from the main trade then you need to be very careful to make sure you know exactly what tickets you have open! Make sure that you don’t accidentally get into trades that you didn’t mean to. If you close your trade ticket then close any associated stops and limit orders as well. Ideally you should have a blotter listing all your open tickets permanently on screen. If you have enough monitors then using one of them for account information can be worthwhile.

If your trading platform implements the stops and limits as part of the same order (and automatically cancels the stop and limit when the trade is closed) then things are much easier. This is because you can’t end up with forgotten stops and limits that are waiting to trigger when you least expect them!

The Naked Trader by Robbie Burns – book review

Thursday, September 3rd, 2009

Robbie Burns quit his job in 2001 to become a full time trader in the stock market. He has proved to be a very successful trader building up a substantial sum in his ISA pension.

In this very light hearted book he explains how he goes about picking the right shares to invest in. He discusses how to understand company finances, how to choose when to buy and when to sell.

He talks about how to identify problems in annual reports by using his traffic light system, and there is a brief introduction to more advanced topics such as using Level 2 and direct market access.

His strategies are suitable for trading over a medium term period of weeks or months rather than shorter time frames.

There are some fun chapter with reader’s letters and a section on big mistakes that traders have made.

The book is written in a very chatty style. In between the ‘meat’ are references to eating toast and having a nap. The style will appeal to people who like the easy to read nature of the ‘dummies’ series of book.

This is a quick read, but it is highly recommended – especially if you are new to trading and want a simple introduction to playing in the stock market.