On the morning of 11th September 2020, for some unknown reason it came into my mind about the kinds of Returns that people can make on Leveraged Spreadbet Accounts - and I got a bit carried away and chucked loads of Tweets out. I think there was some really valuable stuff in there and as a result I have copied the Tweets into this Blog and embellished them with some further comments and hopefully more clarity where appropriate.
The original Tweet text (with spelling errors corrected !!) is shown in italic and the new text is not in italic !!
How I plan a Spreadbet Trade
This is without doubt one of those Blogs that I really should have written ages ago, but I guess it has not even occurred to me before to do it because it is about something that is so mundane and everyday for me, that I didn’t even figure that actually it might be quite useful for Readers.
For many years now I have been utterly obsessed by Hedging my Portfolio of Stocks and Long Spreadbet Positions by using Short Spreadbets on Major Indexes such as the FTSE100 and the S&P500. I think the simple truth is that I have always had a fascination with Technical Analysis (the posh name for ‘Charting’) and part and parcel of that is Short-term Trading which is very much an approach which will not work without a good understanding of some basic Technical Signals/Principles. Thankfully this experience and practice with Shorting has really helped me a lot in the current Market difficulties.
I have been meaning to get on with writing this Blog for quite some time now but for various reasons (mostly good old-fashioned procrastination and farting about), I have been putting it off but at last I have to bite the bullet and get it done.
My interest here is to look at the Charting (Technical Analysis) factors which surrounded the eventual Bottom when the Markets floored out in 2009 before that monster Rally of 11 years or whatever it was. Of course we will struggle to find Signals and Indicators that point to precisely where the Bottom is (I may use the term ‘Proper Bottom’ for this because I am sure we will have lots of little Bottoms on the way to actually reaching the final one), but I think many Readers will be surprised by what I dig up here and the implication is that we can use some pretty basic Technical Indicators and Tools to help us ascertain the Proper Bottom.
If you haven’t read Part 1 yet, you can find it underneath this Blog on the ‘Educational Blogs’ page or simply click this link:
This next paragraph from the Article is interesting – it essentially says that all Market Participants can be a bit mad and prone to psychological errors but that these cancel each other out if these traits are common on both the Sell and Buy side of the market. Problems start when everyone starts thinking the same and this makes sense in my experience. For example, when Fear grips the markets and we get a general sell-off, then people are mostly thinking the same and there are lots of people selling and very few buying – it is only once it gets extremely low that the fearful Sellers dry up and the Buyers can then take the upper hand and before long the people who were Sellers now become Buyers and everyone starts thinking alike again and driving the Prices up. Herd mentality and all that.
“The presence of overconfidence alone doesn’t create an inefficient market. Indeed, a market with overconfident buyers and sellers on both sides creates a heterogeneous, diverse, and therefore wise crowd. But crowds tend to go mad (and thus inefficient) once investors all start to follow the same rules and think alike.”
I strongly recommend that you read Part 1 of these Blogs before attacking this chunk - otherwise it probably won’t make a whole lot of sense and it is really key that you understand what is meant by Upside Breakouts and Consolidations in particular. You can find Part 1 here:
The Stages of the ‘Trading Bases’ Approach
Right, you need to concentrate for this bit. If you are a bit jaded - you know, big night on the Fevertree and Gin last night or ‘too many beers’ (yeah, I know that is impossible but I‘m sure that never stops you trying to find the limit) - then go and get a stiff Black Coffee and take some deep breaths to get mentally and emotionally focused.
I must have had this Blog in mind for the best part of three years and the simple concepts within it I have explained to various people in the Pub many a time since I first figured out what Jason @Stealthsurf was up to. What had stopped me writing it up until now was an inability to figure out how to ‘draw’ it and it was only after mucking around with Microsoft Paint to do those ‘Mechanics of a Trade’ Blogs that I realised I had found a tool to enable me to create what was needed here.
OK, I have to admit that despite my truly remarkable MS Paint talents, some of these pictures can hardly be called a Rembrandt or Van Gogh (and I have both my ears thank you very much !! …….or I did last time I looked in the mirror…..) but hopefully they are clear enough and simple enough to get the key points across and to provide Readers with either an entirely new way to go about doing things or at least to give a lot more appreciation of ‘Break-outs’ and how this could help boost their Trading/Investing Returns.
This Blog Series covers some pretty complicated stuff and I recommend that you read Parts 1 and 2 before you attack this one - you can find them here:
Example 3 - You want to buy 3 Shares in Company XYZ - a ‘Tree-Shake’
This next situation only tends to happen on Small Stocks which are illiquid and where the actions of one Market Maker can affect the Price - on a large and liquid Stock, this kind of thing simply cannot happen as in effect it can throw up an arbitrage opportunity where another Market Maker can take advantage of the artificial Price move and in addition such big Stocks are watched by Traders in general for every tiny move and any mis-pricings would be quickly bought or sold away.
It’s funny the things in life than can really get under our skin and something that really grates with me is when I see people on Twitter sending out a Tweet to the effect of “A big Buy for 200,000 Shares just went through on XYZ……” (heck, even just typing this is getting my Blood Pressure up !!).
Apart from the fact that the vast majority of people who Tweet sh*te like this are probably Rampers (or perhaps they are just not very clued up on what is really going on), the big issue with this is that if there is a Buy for any Shares then it is a simple truth that there is always one or more Sells on the other side. So if you are taking notice of a Buy Trade and thinking that this is a good thing, then you must be making the cognitive leap that whoever was on the Buy side knows more than whoever is on the Sell side. Without knowing who the individuals are, that is obviously impossible to know and even if you did know who was Buying, you are making an assumption that they are correct (no one is 100% right - even Warren Buffett gets things wrong).
I hope you have enjoyed the festive period with your families and taken the time off to relax. Due to the pressures the stock market puts on us, and certainly if you’re an investor, it can add stress to our lives as global equities take a tumble.
That said, next year is another year. Another year to build on the lessons of 2018, improving our strategies and refining our stock selection processes. The beauty of compounding is that both money and knowledge compound and so every year we have a bigger advantage than the year before.
Extreme volatility often signifies a potential peak. We saw this in February, with the Dow plunging, only to recover and make new highs. However, there can be no doubt over the past few months that we are in rocky waters. The last week has been nothing short of a rout. I don’t believe that anybody can predict a recession (I’m certainly not clever enough to) and think that the only people who claim they can are either 1) lying, or 2) selling something - but managing risk is something that we can all do. We have had a brilliant bull market for the past decade – whilst nobody knows the top we can say with absolute certainty we are always one day closer to it. Headwinds such as interest rates and Brexit may not be resolved for a while, and though there is always something to be scared of, we are seeing significant changes in price action. Being prepared is the best defence.
My mate Michael (@vilage_idoit on the Tweets) has done me a huge favour and offered up this great piece of writing to help me out at a time when I am struggling to produce Blogs for the Website because of my ever dragging on Health aggravation. It is very relevant to the current unpleasant Markets we are all suffering and well worth reading.
Big THANKS mate, WD
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