THE EQUITY TRADER: FIGHTING THE BATTLES AND NOT THE WAR.

When I operate in the stock market, I prefer to use technical analysis instead of fundamental analysis because I am, basically, a visual person. I always question the validity of the fundamentals as the news pour in regarding a particular stock. As an individual trader, I have to make some decisions as to whether to buy, to sell or to stay by the sidelines. Thus, I do not rely upon the fundamentals as much as others do, especially when they have under their command. a group of analyst who do the research and present the reports. Technical analysis is a tool that permits me to make investment decisions for myself. That does not mean that technical analysis is superior to fundamental analysis; it merely helps me in taking my investment decisions such as going long or short in certain positions or to do nothing at all. Of course, the main focus is the money management aspect of the trading which permits me to be profitable. In my investment decisions, the fundamental analysis represent only 5%-10% in terms of weight whereas the remaining is technical analysis. When there is a big news that is going to come out, I just stay away from it and I avoid trading it. And if I have positions that are going through while the big announcement is made, I have clear cut rules as to what to do which are based upon the importance of the news that is coming out.

Fundamentals are always important in the equity markets but I prefer to use technical analysis. Certainly, every trader is supposed to know very well the markets he will operate and I have preferred to concentrate on equity markets rather than F/X markets, despite I have an eye on it. And I concentrate on two major stock groups: S&P 500 and S&P/TSX Composite. I keep abreast about what they are doing and the interrelations between them. If I were to follow the fundamentals alone, I would not be able to keep up with all of the stocks. As far as the fundamentals are concerned, they are simply to know when the news are going to come out, to know what are going to be the interest decisions which are going to affect all the markets and to look at the technical picture in order to time my entry.

I use a limited number of screens in order to follow the markets. When I did my military service, I was taught to use several screens at the same time in order to have a snapshot about the events, to understand what was going on and then to shape them in my mind in order to arrive to a conclusion which in turn would set the base of my decision. The vast majority of the traders are facing too many screens and the information that is being pumped in is far too much. And this leads to excessive analysis which in turn becomes analysis paralysis. The trader gets confused and starts to mash up keys as he is overloaded with data and becomes an impulsive trader.

Basically, I prefer to use a single laptop with a few pages open and I don't need any fancy recent high tech features which I believe as to be useless. If you are not able to trade on your laptop, then having a dozen screens will definitely not improve your trading.

In terms of great trading profits that can be made in trading great trends, the vast majority of the markets have a well defined trend only 30% of the time and the remaining 70% of the time, the markets spend their time in the range bound environment by moving between the support and resistance levels. If one follows trend following method and the market is in the range bound environment, he will get chopped into pieces. When a market is moving in a very nice and smooth trend, one may take profits too soon. For example, if the trader had a period of losing trades and sees some profit on the table, he immediately takes it and sees afterwards the market going up. Consequently, the traders have to find a simple way to determine that there is trend, then join and stay with that trend in order to acquire the good results.

There are for M's of trading: Markets, Method, Money and Myself.

Markets:
There are several thousands of different instruments that one can trade and which are offered by various brokers across the globe and they are grouped under the following headings: equities, commodities, F/X and bond markets. Within these groups, one has thousands of instruments that can be traded. Thus, it is very important to know in what type of market and instruments you are going to trade based on your risk profile, your lifestyle, your character, your size of trading capital, your goals and outcome. In short, you have to know the right market that you are going to trade. The other thing that the trader has to know is whether the market is in trending or is in band consolidation. The trend markets go up or down in a consistent fashion with very small pullbacks. The other type of market is the range bound where the price is bouncing between the support and the resistance levels. The vast majority of the traders love trading in a trend environment but in the vast majority of the case, it is the range bound consolidation that prevails. One has to know which type of market he faces in order to decide what to do.

Method:
Every investor loves to hear about strategy and they surf the internet for it and talk to other traders/investors on the matter. One can find a lot of these strategies on the internet alone but the reality is that it is far less important than one thinks it is. What is important is when to exit a position. The trader has to know whether his method works better in a trend environment or in a range bound consolidation. Basically. if the trader's method is following the trend but the market is operating between a given support and resistance level, the chances of making money are slim. Alternatively, if the trader is using the range bound strategy and the market starts to trend, the trader has to struggle a lot. Consequently, the trader has to trade the right method in the context of the right market environment.

Money:
It involves money management and risk management. All new traders have to focus on this area first before looking to other areas. The trader should ask himself whether he is well capitalized for the market, for his method and also for his trading goals and outcomes. For instance, to aim to grow 1.000 USD into 1.000.000 USD in three months has very little probability of realization despite the fact that in the markets, everything is possible. So, the trader has to ask himself whether he is capitalized rightly and adequately for the thing he wants to do. Once this is solved, the trader has to work on his risk profile. The risk profile ranges from extremely conservative to extremely risky. This, in turn, will determine how much the trader is going to bet in one individual trade and how he is going to bet it. For this, the trader must never trade without a stop loss and must trade only a fraction of his capital for when he faces a loss, he will be able to come back.

Myself:
Many traders often forget that managing myself is the fundamental key to the managing of the remaining 3 Ms. When talking about the Myself segment of the trading, I mean the physical health and to be in a good position to handle the stress. It also means understanding the emotional health. When engaged into a trading, one faces risking his financial capital as well as his emotional capital, especially in day trading activities. If the trader is trading in order to pay down debt or meet its monthly expenses, he is already in a bad position. There is also the mental health where the trader looks at himself, how he sees himself as a trader, what kind of an image he has about himself. A negative mental health will impact negatively upon the trades. The trader has also to build a support structure around him for he is also a social human being. When sitting alone at home as a trader is frustrating and the trader has to go out and meet other traders. The trader should share his trading adventures with other traders and this will help him to manage better himself.

Back testing:
Back testing forms an important part of the trading strategy but sometimes people take it too far. I have developed some very good ideas just by looking at the charts, noticing how the market or the stock has moved. Most of the time, I have back-tested the chart configurations manually in order to assess whether the idea is valid enough in order for me to start to test it with real money in the market. What I have discovered was that one gets rapidly to the area of curve fitting. The markets change all the time and I have tried to forward-testing my ideas with real money and that when I started to see really was whether it worked or not based on a sample size of trading. If it works, then I start to consider the size of the betting. It's a part of a process and just by simply basing real money trading upon the back-testing is dangerous.

Growth or Income?
You must determine whether you are a growth trader or an income trader. Unfortunately, most of the traders' accounts are not big enough to generate income and thus they become growth traders. Realistically, they can only be growth traders until their account become substantial at which point they can become income traders. Another option would be to have two separate accounts in which one would serve the income aspect and the other would serve the growth aspect. But the trader must have a clear mind when doing this. The trader should not consider seriously his money on the account but instead should concentrate upon his trading. If he starts to consider his money on the account, then his mind will be blurred and his trading activity will be adversely affected. The money is just the outcome of the trading activity and as the trading are all recorded, a mere study of them will be sufficient to evaluate one's trading approach as a whole.

Trading exit strategy:
After I have done the technical analysis of the stock, I determine the stop loss level in case the position goes wrong thus cutting my losses in order to live another day. But when the stock behaves as expected, I have to devise an exit strategy. If you want to be a successful trader, you have to develop your own analysis style. Part of the routine to get into the game is to analyze the chart, to put the relevant support and resistance levels as well as the trend, to determine the probable course of the stock and to place on paper the possible stop loss levels as well as take profit levels. I set the entry point slightly above the support level and the exit point slightly below the resistance level; whereas I set the stop loss level slightly below the support level of the stock price. As far as the trend based trading is concerned, I use the trailing stop in order to catch the bulk of the movement. Basically I don't listen to the news and I just focus on doing my own analysis, planning my own trade, trading my plan and manage my own risk. This approach makes me a better trader for I am taking responsibility on how the trade fared. If the trade fails, the responsibility is mine and I don't blame anyone on this matter.

What to do when successive trades went wrong?
When I recognize that I am in a losing game, I stop trading. Then I go out for a walk or take some days off. After that, I study my losing trades, organise my thoughts and then proceed again. I review my basic points and keep a good diary of all my trades whether they are losing or winning trades which serve me as a compass for my future trades.  Together, they will constitute the basis of a successful trader. When a trader has a slump, by going back to his notes and the point formulated above, he can recover quickly. For example, if a trader finds out from his notes that 50% of his losses were generated in the trading performed on Mondays and Fridays, then when he stops trading on these days, his results will improve dramatically. The traders always ask themselves whether it is possible to recover from catastrophic trades? I suggest yes because I have seen individuals achieve that. It has to do with context. If you have lost a sizable fund, it will have a catastrophic blow upon your emotional as well as your physical health. The crucial question will be how they respond to that? For some people, it will be too much for them. Other may get into a spiral of revenge trading in order to get that money back but that seldom works and actually they compound their losses. Some others take a few days off in order to assess what happened, what went wrong and then work upon a plan that will permit them to turn around the situation. It may take a year to recover the loss taken in a foolish day; it can be done but it has to be done in a right way. To recognize is a part of the trader's journey.

Trading badly or being unlucky?
As soon as I see someone who is managing badly his risk, not keeping good records, diverting from his method or strategy, not preparing for the trading day, I can surely say that this person is trading badly. It definitely tells me that there something that is going wrong with that person; it could be his life or his health. The best thing to do is to redefine what success means. If I plan my trade and manage my risk, then that trade is a successful trade, regardless of its outcome. Planning the trade and managing the risk are the only ones that I can control. And this provides me to take away the pressure I feel in the trades. By focusing on what I can control,  my performance got better thus having a better confidence on myself, a better belief in what I was doing as a trader. This does not happen overnight; it's a long process with a turning point. Plan your trade, trade your plan and manage your risk; that's all you can do. You may have an excellent chart of a particular stock; you plan your trade and place your bet. Then suddenly, an unexpected news hits the trading floor and your stock heads south and takes you out from your stop loss level. Anything can happen in the market and the best thing to do is to plan the trade and implement it; that's all that a trader can do. Once the bet is placed, the only thing that the trader can do is to watch things happen.

THE KAISERSCHLACHT OF THE CAPITAL MARKETS

The investors keep waiting for the imminent market correction that has taken place since the summer of 2013. And yet, the chances for this to happen are growing stronger ever since. Then the question that comes to their mind is: when?

To be sure, the bear market that should characterize such a decline is taking place partially. The well known North American indices have a hard time to go further despite being near their all-time highs. But this event hides a different reality: many average stocks present within these indices have already started to drop significantly thus entering to the bear market phase. And these average stocks will inevitably force the large-caps to follow suite by the time the actual indices start to show some signs of weakness.

This situation is due to the divergence between the rise of the index in question through the price hikes of large-cap stocks and the decline in price of the mid- and small cap stocks. The market breadth, or the number of advancing stocks versus declining stocks had a tendency to fall since last summer and has accentuated its pace since January 2014.

All major indices have either set a new record or were close to it and this event has led the investors to believe that everything was fine, at least on the façade. But the number of stocks that are pulling up the indices has a tendency to drop. The late declines point to a major correction which may last until August before the traditional rally starts. Consequently, I don't say that the investors should liquidate their stock portfolio but they should recognize that the performance of these stocks, despite being in some cases spectacular, is overdue and they should think of placing stop loss levels in order to limit possible losses in case of a severe market downturn. And they should also think of taking their profit in some of their stocks and place the balance into the bonds, just for the sake of being in the safe zone.

Investors are currently blinded by the large-cap stocks that have performed quite well until recently and consequently, they do not see yet the signs of a major correction lying ahead when considering the  broad market benchmarks; the performance is masking the price weakness of the majority of the mid- and small-caps. This is mainly due to the shift toward the larger caps, other than large caps.

Up today, the bull market, which has entered to its sixth consecutive year, is characterized by the traditional broad participation of the majority of the rising stocks. And from a historical perspective, one could say that the large-cap outperformance as seen this year is a feature of the market tops. This may not be a sign that the stocks are going to reach the peak or have reached it already but the declining market breadth suggest that a major correction is on its way. Sooner or later, the large-cap stocks will not be in the position of supporting the underlying trend of the late bull market. Thus, a point will soon be reached where the market will reverse its course.

The behaviour of such stock markets have some consequences for the investor. The future prospects are not as good as it used to be and thus, it will become more difficult for the diversified portfolio to perform well. This market favors the intuitive stock pickers and currently the major picks are large caps. One can see this in the portfolio rotation of the institutional investor who shift their positions from risky growth stocks into large and safe companies. The logic is that large stocks drop less than the others when the market declines significantly. Also, such an environment should force the investor to think cautiously about possible buying opportunities during the market pullbacks for a point will be reached when such an approach will not work. A possible avenue of investment could be to switch to some sectors that tend to do better during the mid or later stages of a bull market.

Finally, this situation will last until August 2014 at which point, the market should start its rally lasting until late this year. But. beginning next year's spring, the expected rise in the interest rates will affect adversely the stock markets and one may expect a severe correction that may last a couple of years and then a slow recovery with wild fluctuations, coupled with rising inflation and interest rates environment. The consequences for the economy may be a slower growth and a mild stagflation. As far as the market correction is concerned, a drop by 1/3 of the major indices would not be met as a surprise but will also set the ground for the rise of small-cap stocks while the large- and mid- cap stocks will be trading sideways.