Monday, November 29, 2010

10 Common Trading Errors

1. Little Preparation or Training

When you enter the market arena, you had better be prepared. However, few traders perform the necessary due diligence before moving headlong into the markets: "The market is a food chain — the big fish eat the little fish."

Dr. Elder agrees that many people underestimate what it takes to be a profitable trader.

Recommendation: Enter the market with a sufficient amount of training, through vehicles such as books published on securities trading, educational courses, and trading conferences.

2. Being Too Emotional About Money

According to professionals, the reason many emerging traders fail to consistently earn profits is because of their perceptions of money.

There are ways to desensitize one's emotional connection to money. Start by trading smaller share size (such as 100 shares per trade). Trading in smaller quantities can help minimize both the losses and the emotional distress that often comes with losing larger amounts of capital.

Recommendation: Over time, as a trader becomes more successful, experts suggest slowly raising the share size — without raising your blood pressure — until a personal comfort zone is reached.

3. Lack of Recordkeeping

It's understandable why traders become emotional when trading stocks. To help bring these emotions under your control, keep a detailed trading diary.

Recommendation: Track your trading history by using a daily diary and study your progress.

4. Anticipating Profits

Most traders don't want to acknowledge that a trade could turn against them. They enter the market assuming they'll be successful, refusing to look in the rearview mirror. It's also common for emerging traders to use a calculator to predict how much they'll make and how they'll spend the unrealized profits! It's dangerous to anticipate how much you'll make in advance.

Recommendation: Enter a trade with the understanding that you may not be right. It can then be easier to acknowledge if a trade goes against you.

5. Blindly Following Mechanical Systems

A large percentage of traders use technology — in the form of online trading platforms that provide charting, research, and backtesting tools — to help them refine their strategies. A computer and software can provide important information about the technical and fundamental characteristics about stocks. However, many traders make the common mistake of relying too much on these tools without a full understanding of their capabilities.

Recommendation: Understand that computers and software trading platforms are only tools. Learn how to grasp the underlying trading concepts — such as reading and analyzing a chart —and know the reasons why you bought and sold a security.

6. Not Learning How to Short

If you fail to learn how to utilize short trading strategies, then you have cut yourself out of a number of profitable trades. Many people think that shorting is un-American or too risky.

By not learning know how to go short, you're removing a significnat percentage of potential trades, especially when the Bull market falters. The market is a two-way street, and the person who doesn't short is missing a part of the game.

Recommendation: Don't underestimate the importance of shorting stocks, and learn how to utilize this technique.

7. Lack of Specialization

Many people are attracted to trading because they think it's an easy vehicle for making money. However, there are several types of securities that can be traded in today's markets, including stocks, options, commodities, futures, and currencies. It is a daunting task to learn the characteristics of each security type. Therefore, it's often helpful to specialize.

Recommendation: Know what you trade. Don't spread yourself too thin by trading markets that you don't understand.

8. Improper Timing

It's very common for emerging traders to make timing mistakes. Quite often, a trader may have a good idea, but discovers that he or she bought the stock at an inopportune price. Timing a trade is never an exact science, but it's important for traders to recognize that there are times when it might be prudent to lock in a profit or cut a loss.

Recommendation: A detailed trading diary and experience could help minimize timing errors.

9. Placing Improper Stops

Many traders incorrectly place stop orders, causing their positions to get stopped out too early and failing to capture much profit. It's common for newbies to place stops according to a set percentage, such as 2%, or a set amount. How much a trader is willing to lose depends on his or her risk-tolerance.

Place stops according to what the market is telling you, such as support and resistance levels. When placing a stop, let the stock's behavior, or a standard deviation, tell you where the best stop placements are.

Recommendation: Try placing stops according to the stock's standard deviation, rather than on the basis of percentages or dollar amounts.

10. Not Calculating a Stock's Risk-Reward Ratio

Many traders do not calculate the risk-reward ratio of a stock trade before they establish a position. A stock's risk-reward ratio is the relationship between an investor's desire for capital preservation at one end of the scale and a desire to maximize returns at the other end.

How do you determine a stock's risk-reward profile? There are three common components of a stock's risk-reward ratio: current stock price (a known); and a profit objective and stop exit price (both subjective). Calculating a profit objective and a stop exit for a trade often involves many factors, such as standard deviation or technical indicators, including Fibonnaci and moving averages.

Recommendation: Before you enter a trade, the first question you should ask yourself is: What is the risk-reward ratio of trading this stock? If you are a novice trader, using a low risk-reward ratio could help lower your potential downside.

Friday, November 12, 2010

Strong Economic Growth Ahead For M'sia

Asia leading the global recovery
DURING the first half of this year, Asia was in the lead of the global economic recovery. As analysed in the International Monetary Fund’s (IMF) latest Regional Economic Outlook for Asia and the Pacific (REO), this strength in activity was fuelled by both strong exports and robust domestic demand.
As anticipated, export growth for the region has moderated in the second half, reflecting the sluggish recovery in the United States and western Europe, as well as the maturing of the global inventory cycle.
In line with regional trends, Malaysia too has rebounded impressively from the impact of the global financial crisis. Growth in the first half of the year was 9.5%. While export growth in Malaysia has moderated, domestic demand – in particular from the private sector – remains robust and a broad-based expansion is under way.
The outlook for Malaysia is strong
For Asia as a whole, still accommodative macroeconomic policies, robust consumer confidence, improving labour markets, and higher asset values are all expected to help sustain consumption. In line with this, we project that Asia will grow at 8% in 2010 and a more sustainable 7% in 2011 as the recovery matures further.
The near-term outlook for Malaysia also remains strong. Domestic demand, led by consumption, is expected to continue to make a substantial contribution to growth. Macroeconomic policy settings have been normalised to reflect the transition to private sector-led growth.
The resumption of fiscal consolidation is welcome, while the monetary policy stance has become less accommodative but still remains appropriately supportive of growth. Moreover, the ringgit has appreciated markedly, providing further support to domestic demand as the driver of growth over the near term. In line with the above, we expect Malaysia’s GDP growth to be close to 7% this year and 5.5% in 2011.
The region still faces risks
Despite the overall favourable outlook for the region, some important risks continue to cloud the horizon. The fragility and unevenness of the global economic recovery remains a concern. An unanticipated weakening in activity in the advanced economies would spill onto the Asian economies through weaker export growth. Asia as a whole has also attracted large capital inflows since the middle of 2009, reflecting ample global liquidity and favourable growth prospects for the region.
While asset markets in the region generally do not appear to be overvalued as of now, further capital inflows could pose vulnerabilities if they result in unsustainable asset valuations or excessive expansion of domestic liquidity. Inflation has already bottomed out in many countries across the region, and house price pressures have emerged in some economies.
This constellation of risks calls for a continued and cautious normalisation of macroeconomic policy settings, and careful monitoring of the financial sector. Macroprudential measures that have been implemented in some economies remain an important element of the toolkit to guard against financial sector risks.
Finally, should the downside risks to global growth materialise, Asian policymakers have ample room to readjust macroeconomic policies to counter any adverse effects on economic activity in their own economies.
In Malaysia, the financial sector has weathered the global crisis well and corporate balance sheets remain strong. The authorities have demonstrated an impressive track record in proactive financial supervision and sustained efforts to develop financial markets both in the conventional and Islamic finance areas. Nevertheless, there are some risks that need to be closely watched. For example, Malaysia too could be vulnerable to large capital inflows and excessive asset price rises. Household debt is also high, although this is mitigated somewhat by substantial asset holdings. We are confident that the authorities have the tools to address these risks, should they materialise.
The challenges for Asia over the medium term
What are the challenges for Asia over the medium term? The global financial crisis demonstrated the need for the region to rely more on a “second engine of growth” – namely domestic demand. Rebalancing towards domestic demand requires sustained steps to increase domestic consumption and investment, including through fiscal measures, structural reforms in labour, product and financial markets, as well as greater exchange rate flexibility.
Fewer motives for precautionary saving and greater incentives for businesses to increase investment in domestically-oriented sectors should be among the outcomes of such reforms. In the REO, we demonstrate that improving access to credit for small and medium enterprises operating in domestic markets, including services, as well as to increase investment in infrastructure, could help ignite the second engine of growth in Asia. Indeed, the development of SMEs and access to financing is an area Malaysia has emphasised and made progress on in recent years.
There are significant challenges for Malaysia too over the medium term. The growth momentum which propelled the country from low to middle income by the early 1990s stalled after the Asian crisis.
As a result, Malaysia continues to remain a middle income country while some of its peers that started from similar initial positions have achieved higher per capita incomes. As rightly recognised in the authorities’ Economic Transformation Programme and the 10th Malaysia Plan, rekindling the growth momentum requires deep structural and fiscal reforms to unlock Malaysia’s growth potential.
The key to success will be implementation. The reform process should proceed at a measured pace and take into account the need to protect vulnerable groups. At the same time it needs to be steady and sustained.
Key reforms under way must be pushed forward. In particular, poorly designed subsidies – especially fuel subsidies – should be phased out and replaced with targeted assistance. Improving the business environment by levelling the playing field through reform of government-linked companies and further labour market liberalisation will also pay dividends.
The IMF stands ready to contribute its international perspective and global expertise to the ambitious goals that the Malaysian authorities have set for themselves. We are looking forward to continuing a mutually beneficial engagement.

M'sian market at record high - so what is the next thing?
WHAT next? That might be a common question asked after the FTSE Bursa Malaysia KL Composite Index hit a new record high this week and therefore heads into uncharted territory.
That question is difficult to answer because unlike the previous rallies in 1993 and in 2008, the run-up this time around has been surprisingly orderly.
Volume, often an indicator of fervent euphoria, has remained sane and while the index has set a record, trading activity on Bursa Malaysia is nowhere close to previous high levels. This would suggest there is still more room to go.
Although the rise this time has less to do with direct retail interest as it did in the past, the professionalism in investing these days – where more Malaysians are putting their hard-earned money in the hands of professional managers to invest – is also a good sign.
It’s often joked that when retail interest shoots up and everybody becomes a tipster, it’s time to sell. Also a signal would be syndicate activity returning to the market in a big way.
That, to my knowledge, is nowhere close to the situation in previous rallies and surely is a contrarian indicator worth following.
Another fundamental backing to the rise this time would be borne by the efforts ongoing to revitalise the economy, especially the private sector and the investments it is expected to pour into the country.
Some may argue that economic growth might have some correlation to corporate earnings but the balance sheet and cash generation capability of most companies are far better now then in the past.
Maybe it’s also the better health and performance of the largest companies in the country where more focus and strict adherence to key performance indicators now then before have led to better financial performance and hence their attraction.
Furthermore, as more companies in Malaysia venture abroad and with the large commodity companies riding on skyrocketing crude palm oil (CPO) prices, the story at home might not swing investor focus as much as it did in the past.
But the surge in the local stock market also has to do with the amount of money that is swimming around globally, hunting for the best returns they can get.
Between the United States printing money from its quantitative easing and the still super-low interest rates globally, cash around the world has been hunting for returns.
They have so far got it from commodities. Among this group, CPO is rising and rubber has hit an all-time high.
And in emerging Asia, they might have also found an answer for now by buying the currencies of Asian economies.
The flood of money into Asian currencies has led to reciprocal rises in the stock markets in the Philippines and Jakarta, which have in recent months peaked at their all-time highs, suggesting that money is trying to capitalise on growth in equities as well as currencies. Markets in Thailand and Singapore are also rising strongly.
To pour more cold water on the rally, the market is said to be trading at high price to earnings ratio and economically, the horizon globally is less rosy.
Malaysia’s economic growth is forecast to fall next year to between 5% and 6% from a projected 7% this year.
Is 2010 a replica of the 1993 bull run? I don’t think so although most would love the ride, not the end.
The situation this time is vastly different but any time a market hits an all-time high, some caution should come into play. A market high does not happen often.
Deputy news editor Jagdev Singh Sidhu is cautiously optimistic that the rally this time would not be accompanied by companies with poor fundamentals promising a pot of gold for unsuspecting punters.

Wednesday, November 10, 2010

Malaysia Equities Poised For Bull Run

Malaysia’s equities market is on the verge of a bull-run similar to the one seen in the early 1990s and the indications are that it is sustainable, the chief investment officer of HwangDBS Investment Management said.

“Conditions for 2011 are ripe and any pull-back now is an opportunity for investors,” said David Ng, who manages about RM8.9 billion for the fund house.

Malaysia, he said, is “unexpectedly exciting” so long as the government can execute the projects announced in its US$444 billion economic transformation programme last month.

However, Ng cautioned that it would not be a repeat of 2009-2010 where over 90 per cent of stocks rose following the crisis.

“2011 will be about stock-picking,” he said.

The benchmark FBM KLCI has risen by almost 20 percent since the start of the year, setting a 34-month record on yesterday.

The FBM KLCI has risen more than its Singaporean counterpart, but has not matched the meteoric rises in Indonesia, Thailand and the Philippines, which have surged over 40 per cent each.

Analysts say part of the reason for the KLCI’s climb is the pre-election enthusiasm, but Ng said there were fundamentals supporting the rise. Malaysia is expected to hold general elections next year although they aren’t due until 2013.

Present conditions were similar to those in the 1992-1994 bull run, Ng said, and the low interest rate environment in developed economies could further fuel the growth spurt here.

Analysts expect further massive inflows of capital into Asia, driven by the second round of U.S. quantitative easing and warn that this may spark inflationary pressures and asset bubbles.

“Areas where we are positioned are the oil and gas sector and banking in Malaysia,” Ng said. “Regionally, we like technology and tourism in Singapore.”

The performance of these sectors will continue to be fueled by demand from big emerging economies such as China, India and Indonesia, and are insulated from a slowdown in developed markets, Ng said.

He said he preferred high-yielding dividend stocks as those companies tended to have better fundamentals.

The inflow of funds has been well-documented by international observers, and has led the World Bank to issue a warning over the possibility of asset bubbles. Ng said bubbles posed a real risk but there have yet to form.

HwangDBS Investment Management has averaged a 15 per cent return per annum on its assets under management since 2000, Ng said. - Reuters

FBMKLCI breaches all time high

Persistent support for heavyweights pushed the FBM KLCI to a new all time high today, despite some profit taking in the local bourse as well as key regional markets.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) which has been on an uptrend since last week ended 6.68 points higher at 1,526.53, although it had seen an intra-day all time high of 1,526.67 earlier. It had opened 1.87 points higher at 1,521.71.

The previous intraday high record was 1,524.69 seen on Jan 14, 2008.

The bull trend is expected to extend till February next year amid inflow of foreign funds, especially from the US to emerging markets such as Malaysia, Affin Investment Bank Head of Retail Research Dr Nazri Khan told Bernama.

"It is mainly hot money from the U.S. as a result of the U.S. Federal Reserve's policy of quantitative easing amounting to US$600 billion," he said.

Hence, he said commodity-linked counters would be the main beneficiaries.

Nazri said the local bourse momentum was "a sustainable bull-run" as there was still ample of room for growth in the Malaysian equities market.

"There is room for more volume as compared to the regional peers," he said.

HwangDBS sees boom market conditions
KUALA LUMPUR, Nov 9 — Low interest rates in the US and Asia will drive money into equities, creating boom and possibly bubble-like conditions in the stock market, said HwangDBS Investment Management Bhd chief investment officer David Ng.
The investment manager acknowledged that there were still concerns about a double-dip recession, but he sees easy liquidity outweighing weak growth and said that conditions are “right for a boom market”.
“If the US economy grows 2 per cent, it is good enough,” he said in at a press conference today. “As long as there is slow growth and loose monetary policy, it can fuel a bubble. This is a long-term secular trend.”
He said strategists were beginning to be more bullish on Malaysia and noted that some have been talking about current conditions — such as low interest rates and a strong current account surplus — being similar to those leading up to the “super bullish” years of 1993 to 1995 when Malaysian shares were traded at up to 30 times price-earnings ratio.
“Money is like water and will flow to where interest rates and yields are higher,” said Ng. “You are losing your purchasing power by putting money in a bank. Our investment strategy is based on low interest rates. Money has to find a home.”
He said that as the market will be supported by ample liquidity, any pullback in shares is an opportunity for investors to pick up shares and earn more money.
He said that he still sees markets moving up next year after a “muted” 2010 and likes stocks that pay good dividends as they tend to be of better quality.
While acknowledging that Malaysia has tended to be perceived as a boring, defensive and marginalised market, he said that he has been seeing foreign inflow of funds for the past 23 consecutive weeks.
The HwangDBS forecast of a possible boom in equities comes a day after a US-based asset management firm told Malaysian reporters that the inflationary policies in the US would benefit emerging markets.
Stephen Dover, international chief investment officer of Franklin Templeton Investments, said a large consensus has emerged that QEII — the US$600 billion (RM1.8 trillion) worth of liquidity being introduced by the US Federal Reserve by June next year — is positive for emerging markets and a high portion of QEII will go to emerging markets.
Ng cautioned however that the days of high returns experienced in 2009 are over.
“2011 is about stock picking,” he said. “Investors should not be greedy. The big 50-60 per cent returns are behind us and returns will be more normalised.”
Risks to the stock market boom could come from runaway inflation triggering central banks to raise interest rates.
“Too much liquidity has a tendency of leading to inflation and if inflation becomes too much of a problem, they will raise interest rates,” he said.
While Dover said Asian finance ministers will have their hands full trying to prevent speculation and overheating of their markets due to a surge in liquidity from the US, Ng said that he saw little risk of capital controls being implemented.
“We should be smart enough to know that capital controls would make you undesirable,” he said.

Tuesday, November 02, 2010

Malaysia Bourse Still Has Legs To Run

MIDF Amanah CEO says the run will be driven mainly by inflows of funds as investors start to see the full potential of the Malaysian and regional markets.

THE Malaysian stock market still has legs to run and the rally is still at the early stage, MIDF Amanah Asset Management Bhd said.

Hence, Bursa Malaysia still offers plenty of opportunities for investors, the wholly owned unit of Permodalan Nasional Bhd said.

MIDF Amanah chief executive officer and chief investment officer Scott Lim said the run will be driven mainly by inflows of funds, both local and foreign, as investors start to see the full potential of the local and regional markets.

"The market is not fair. It is very selective. The first wave of money is very particular on what they choose. They always buy the most blue-chip. They always buy the best-quality companies.

"After they have invested, they make their money and the (price-to-earnings, or PE) valuation will become too high, from 10 times to more than 15 times," Lim told the media in Kuala Lumpur last week.

The local stock market, which fell by about 50 per cent during the global financial crisis, has regained its momentum.

It has risen by some 17 per cent so far this year, and jumped 80 per cent from the 829.41 points in October 2008.

Lim said this meant that investors would have to look for better value.

"They will go and hunt for lower-valuation companies that have better growth in terms of pricing. So, the development of the market is that when it has become matured, investors will go to the next tier and when the market grows even more matured, the investors will go to the lower tiers.

"This bull market is still at the very early stage because there is still a lot of values to be found. I am not sure how many more good years the rally is going to be. It all depends on how fast they re-price this market," he explained.

Lim added that while the "smart" money had come to Asia, the next money, or next big wave, would be from those people unwilling to leave the US right now.

"But the wave will come and, when it comes, it will be bigger than the first wave," he said.

Lim also noted Asia's strong economic fundamentals, which will make it the epicentre of growth in future.

These fundamentals include a high population base, favourable demographic, accommodative interest rates, healthy government fiscal balance and strong household balance sheet.

Is there a super bull run in 2010?
Although the economic situation now compares with that of 1993, the last push must come from local retail investors.

THE recent rally in our local bourse has prompted many seasoned investors, especially those who experienced the super bull run in 1993, to wonder whether the current rally is about to turn into a real bull run. Of course, nobody can tell for sure what will happen next, but we certainly can do some homework, comparing the circumstances back in 1993 against the current situation.
In 1991, Tun Dr Mahathir Mohamad unveiled the philosophy of “Malaysia Incorporated” which was a development strategy for Malaysia to achieve a developed nation by 2020. In the early 1990s, despite slowdown in the global economy, as the third largest economy in South-East Asia, after Indonesia and Thailand, Malaysia was supported by relatively strong macroeconomic fundamentals and resilient financial system. With the real GDP growing at 9.9%, ringgit appreciation, strong export growth and the Government’s measures to hold inflation low at 3.6%, the local stock market became an attractive alternative to foreign investors.
Before 1993, foreign investment in Malaysia was mainly dominated by long-term direct investment in the manufacturing sector. However, as a result of measures taken to develop our domestic equity market, coupled with the strong economic backdrop, we saw a massive influx of foreign capital inflow, which helped fuel the super bull-run in 1993. Within the year, the market increased by 98% to reach an all-time high of 1,275.3 points and foreign investors’ participation accounted for 15% of total trading value of our local bourse. This had also driven the market into a highly speculative one, which lured many retailers into the market, thinking of making fast and easy money.
With the presence of new and unfamiliar players, the market became a huge “casino”. Retail investors bought into stocks based on rumours rather than company fundamentals. Among the hottest topics during that time were the awards of government mega projects, privatisation candidates, sector play and regular news on upward revision of corporate earnings. Examples for the highly speculative stocks were Ekran, Ayer Molek Rubber Co, Berjuntai Tin Dredging and Kramat Tin Dredging.
In 1993, with the economy booming, the Government planned several mega projects, including the KL International Airport (RM8bil), Johor-Singapore Second Link (RM1.6bil) and Kuala Lumpur Light Rail Transit (RM1.1bil). The news of contract awarding immediately sent the market into speculative mood on those potential candidates. Similarly, the news of the Government planning on privatising some of the its own corporations, such as Petronas, KTM and Pos Malaysia had also driven these counters into prime trading targets.
Besides, the ease of accessing bank credit by investors also contributed to the market rally. We noticed that a high percentage of loans was channelled to broad property sector as well as the purchase of securities.
As a result of massive inflow of foreign funds and the super bull run in stock market, Bank Negara introduced a number of selective capital controls in early 1994 to stabilise the financial system,
Recently, our Prime Minister Datuk Seri Najib Tun Razak unveiled the Economic Transformation Programme (ETP) with the aim to boost our gross national income (GNI) to US$523bil in 2020 from US$188bil in 2009. The programme is to attract investment not only from the Government, but also (more importantly) from domestic direct investment as well as foreign direct investment. In view of strong economic growth, our GDP growth is anticipated to increase by 6% this year.
In September, we notice that there was a net inflow of foreign funds again in our equity market. Over the past few weeks, the average stock market daily volume had been hovering above one billion shares per day. Almost every day, the top 10 highly traded stocks were those speculative stocks with poor fundamentals. In addition, we noticed that some retail investors had started to get excited again in the stock market.
According to Andrew Sheng in his book titled From Asian To Global Financial Crisis, there were two main indicators to irrational exuberance during the super bull run in 1993. The first was the amah (domestic maid) syndrome. We need to be careful when amahs got excited about the stock market. This was because they did not know what they were buying and would always be the last to sell. The second indicator was when businessmen began to speculate stocks in the stock market. This was because they might neglect their businesses and use some of their cash for speculation.
Comparing our current market situation with the 1993 bull run, there are certain similarities that we see, such as strong economic growth, ringgit appreciation, inflow of foreign capital and ease of credit. However, our local retailer participation is yet to get boiling, which may be the last push factor towards the bull run. Hence, once the participation of the local investors starts to get heated up, together with more inflow of foreign fund, that may be the signs of the market heading for a ‘mini’ super bull run.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.