Trading Critic: Forex, Stocks - Shining a Light on the Trading Industry

David Trew, AVO and CMC Market's clients

Tue, 01 Jul 2008 01:06:44 -0700

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Last weekend The Australian had a report about the CMC Market's Australia Managing Director - David Trew having to take out an AVO (Apprehended Violence Order) for a client. I've heard pretty bad things (rumours only) about CMC Market's clients and CFD trading. Nothing substantial. I guess this client took it to the next level...

It's funny how the news report about David Trew and the frustrated CMC Markets client was written. The report actually made the front page of the broadsheet's weekend issue with a massive photo of David Trew himself. The report infers that there is something fishy going on but doesn't really point fingers. It highlights how one client has taken steps to vent his frustration of losing money from trading. Then it highlights how CFDs is a little "shonky"/"shoddy" because it isn't allowed in USA, and it was used by a collapsed broker. and I agree that contracts for difference are "one of the riskiest financial instruments on the market". They are a double edged sword. The article ends in a slightly twisted note of how Mr Trew is living large while this bloke is obviously suffering financially.

The question is... what next? It is a highly "known" fact (well people always mention it but there are no numbers to back the statement up) that most traders lose money. With CFD's those losses are multiplied because of the massive leverage which is readily available. If you lose money from trading - especially trading CFD's you are personally at fault. You must accept that you, and you alone are at fault. Because you must do your own due diligence. CMC Market's have an easy to read PDS which explains the risks. If you can't handle the risks, or take steps to prevent those risks from eventuating, then don't trade. When the losses come and you can't accept it or handle it - don't trade. If you can't confidently take a risk on the market with your money - don't trade. If you haven't educated yourself about sound trading principles - don't trade. There is no such thing as a lucky gambler on the financial markets.

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Electronic money trading - CFDs

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Greedy and Gullible: Make $5692 in 7 days

Tue, 19 Jun 2007 16:06:57 -0700

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Are you greedy and gullible? I hope not. But if you are reading this post, you must either be in the business of making money or just in the search for making an easier buck. Flip open the classifieds section of your local newspaper and you'll find plenty of programs promising easy money. Make $5692 in 7 days selling health supplements, cosmetics, jewelry, lingerie or clothes. The advert claims the money is easy. "Fire your boss!" They claim. Of course, these types of advertisements come in all shapes and forms, some extremely tacky and are obviously targeting the very desperate to advertisements that target the "smart players" or the white collars with something that may seem very easy to do but in reality it is rare to succeed. I am not going to point fingers at companies, but they are out there. Some are MLM companies and others are involved in share trading or options. I've seen companies try to entice people to buy their products purely on the basis of gullibility and greed. Other products companies try to promote on this same pretence are resume products, software and other informational "learn to do it yourself and sell your service" type courses.

Their target market are the greedy and the gullible. Those who have heard riches can be easy to come by. A technique used by these companies are to herd in a few hundred people into a free seminar. They present case studies of successful people who have bought their product. This leaves the audience in awe and wanting more. Statistics says that someone is bound to succeed just based on numbers… if 1 percent of the people who bought the product succeed the company can use them as the testimonial success story then plonk a "results may vary" statement on the bottom.

These companies utilise techniques that can be classified as NLP (Neuro-Linguistic Programming) techniques. Suggest the good stuff during the presentation and people will tend to lean on the good stuff, even though they have heard the bad stuff, the risks and the actual numbers of people that succeed. Logically it doesn’t make sense. But emotionally, we tend to lean on the prospect of the dream of better rewards, and tend to give bias towards that. Once the gullible are convinced there is not return.

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Advertising to the Greedy and Gullible: Make $5692 in 7 days

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Fund Collapsed on Investors

Tue, 29 May 2007 14:35:31 -0700

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You know what? It collapsed. The fund collapsed and all the investors are left with is whatever the Administrators can dig up and claim back. Which fund? The fund that had unrealistic returns and benchmarks, the one that promised 109% return in three years. According to this SMH article, administrators have been appointed voluntarily to the company, Australian Capital Reserve (ACR) Group on Monday (28th May 2007). The fund has A$330 million invested with a total of about 7000 investors. An administrator called McGrathNicol has been appointed to review the property development investments of ACR to look for strategies to "maximize the potential return to noteholders, secured lenders and unsecured creditors alike." This company is the third property group to fall in recent years, previous flops include Fincorp and Wespoint.

"ACR was not unknown to the corporate regulator.In 2004, the Australian Securities and Investment Commission (ASIC)examined the prospectuses and selected advertising for debentures issued by 11 companies, including ACR and Fincorp, offering high-yields such as interest rates that were four per cent per annum above bank term-deposit rates. ASIC said high-yield debentures were typically a risky investment, and there was no guarantee that investors would get their money back. The corporate regulator expressed concern the advertising for high yield debentures was aimed at retirees, and featured images of happy older couples. ASIC also forced ACR to lodge a supplementary prospectus in November 2005 due to concerns about a lack of disclosure of ACR's financial position. ASIC also blocked a cash-strapped ACR from raising money from retail investors in March this year."

An Australian Capital Reserve (ACR) noteholder information session will be held on June 4 at venues in Sydney, Brisbane and Melbourne. At the session the administrators are expected to give their initial outline of ACR's financial position. Noteholder information sessions will be held at 3pm at the following venues: Sydney: Wesley Centre, 220 Pitt Street, Sydney. Brisbane: Sofitel Grand Ballroom, 249 Turbot Street, Brisbane. Melbourne: Grand Hyatt Savoy Ballroom,123 Collins Street, Melbourne.

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Australian Capital Reserve collapsed: all the investors are left with is whatever the Administrators can dig up and claim back

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Share Trading is Gambling

Thu, 10 May 2007 16:11:00 -0700

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Share Trading is gambling. There. I said it. The worldwide stockmarkets are one big glorified casino. Or is it? It depends on how you see it: your perspective. I've defined what gambling was and concluded that trading WAS NOT trading in this article at MyShareTrading.com. But I revisited the idea after discussion and reflection about the topic with a few colleagues and I eventually turned my perspective to conclude that trading WAS INDEED gambling in "Gambling Revisited". To keep the argument simple, everything in life involves risk. Driving a car is risky. Having a job is risky. Setting up your own business is risky. Living is risky. And so Investing is risky. Owning a house is risky. Trading is also risky. And so anything to do with risk, playing the odds for a "positive" result, is a gamble.

Personally, I associate share trading with gambling because it is so similar to a visit to a casino. Professional casino gamblers usually have some sort of gambling system they follow. And in turn, professional share traders (or stock traders) also have a system or a trading plan which they follow. Both want returns. Both ventures aren't creating anything useful except a positive reward if the odds go your way. Investment isn't usually associated with as much risk as it is usually longer term compared to share trading. Investment can include property, longer term stock investing or putting money into a business venture. Why aren't they associated with as much risk as short term share trading? Because the results can be researched more thoroughly, and because of the long term nature of the investment, actions can be taken to fix or improve returns. But in my mind, it is still a gamble - just in the longer term. You make your own mind up.

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Share Trading can be Considered as Gambling

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Stupid Trading Mistakes

Mon, 26 Feb 2007 23:41:13 -0800

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We all do it. We're only human. Stupid trading mistakes. That's right, trading mistakes that are plain stupid. Remember that Japanese broker who put in the wrong figures and ended up losing the firm millions of dollars? For amateur traders, or should I say, retail traders any mistake of that magnitude translated in our home office would almost certainly mean financial ruin.

Yes, you have a trading goal. Yes you have a trading plan - and in that plan you have a money management plan, a trade entry plan and a trade exit plan. And surely if you execute that system to the dot you would be certainly in profit? I'm not talking about erroneous trading systems here. I'm talking about the minor human mistakes that traders can make in between making the decision to enter and executing the order and the time when you have decided to exit and execution of that exit strategy.

Yes, I'm talking about the typos and pressing the wrong buttons when you surely intended to press the other button. It happens. Minor mistakes can be costly. So besides your other plans, you should also have a systemised approach in checking and cross checking your orders when you do execute them. One such simple system could be to type in the number, or if possible set a default in your system. Check if your trading system tells you to go long i.e. BUY, or to go short, i.e. SELL and then press the relevant button. Double check your order ticket, then double check your executed orders as well as your account balance to make sure everything has been processed correctly. And here's one final tip: don't trade under the influence of any substance and don't trade wen you have just woken up two minutes beforehand.

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We all do it. We're only human. Stupid trading mistakes. That's right, trading mistakes that are plain stupid.

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David Tweed

Sat, 30 Dec 2006 13:01:31 -0800

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David Tweed, the notorious share raider has again made an approach to shareholders to purchase their shareholdings at a discounted price. David Tweed had recently approached AWB shareholders back in November 2006, hoping to convince shareholders to let go of their stock at $1.50 when the ongoing market rate was around $2.71. This time, David Tweed has sent out a letter to Commonwealth Bank (CBA) shareholders in a bid to buy their shares at $35 per share. CBA shares were trading at around $48.75 when the offer was made - some 28 percent discount to the actual market price.

David Tweed has a long history of approaching shareholders of companies offering a discounted price for stock. Tweed operates under his company, "Direct Share Purchasing Corporation." The letter has a heading of "Offer to Buy" and appears to look like an official bank communication. Commonwealth Bank has some 699,000 shareholders, 80,000 has been sent letters by CBA's CEO, Ralph Norris to warn shareholders of the offer. In the letter Norris warns that the offer is substantially under market value and that the offer has no association with the Commonwealth Bank. Norris also explains that the bank was obliged to provide shareholders' names and addresses to David Tweed's outfit as required by the Corporations Act. The extraneous mail out by CBA to shareholders cost the bank $50,000.

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David Tweed, the notorious share raider has again made an approach to shareholders to purchase their shareholdings

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What Does Hawkish Mean?

Sat, 09 Dec 2006 19:50:39 -0800

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What does Hawkish mean? We've heard it a lot lately in the financial news. "RBA maintaining a hawkish stance", "Yen gains as BOJ keeps up hawkish rhetoric", "Paris shares close higher, supported by less hawkish ECB comments", " Euro gains brief boost from hawkish Trichet comments" and "RNBZ Gets Hawkish, And Does Nothing". We all know that a hawk (noun) is a, "relatively small diurnal bird of prey with short rounded wings and very good eyesight which hunts by pouncing on small birds and mammals." To go hawking (verb) is to hunt with a hawk. To be hawkish – the adjective form of the word is simply described as "like a hawk". So in financial terms, what is the definition for hawkish?

The definition of hawkish is this: it is an aggressive stance. Just as a hawk is aggressive in hunting its prey, being hawkish relates to the aggressive stance taken with regard to the topic. For example, if there is a threat of high inflation, to describe the reserve bank of a country being hawkish in any official statement may mean they are leaning towards a stronger action such as favouring an increase in interest rates to dampen high inflation. The antonym (opposite) to hawkish is dovish. Good luck in your trading!

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What does Hawkish mean? We've heard it a lot lately in the financial news. Here is the definition for Hawkish.

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About Price to Earnings (P/E) Ratio

Tue, 21 Nov 2006 18:40:58 -0800

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The Price to Earnings (P/E) Ratio is the most commonly used valuation metric used by investors to help determine is individual stocks are reasonably priced. It is a simple ratio to calculate but can be confusing to interpret. The ratio can be useful in some cases yet useless in others. The ratio was popularized by Benjamin Graham - author of "The Intelligent Investor" (a must read for all serious investors). Graham used this financial ratio as a quick way to determine if the company stock was trading on an investment or speculative basis.

How is the Price to Earnings (P/E) Ratio Calculated?

The Price to Earnings (P/E) Ratio is rather simple to calculate. You simply take the net earnings and divide by its average outstanding shares and then divide it with its Earnings Per Share or EPS.

P/E Ratio = [ Net Income - Dividends on Preferred Stock ] / [ Average Outstanding Shares on Issue ]

So if the stock is at $50 and the company pays out a dividend of 10 percent or $5 a year then the P/E ratio is 10. Most brokers would have some facility to automatically display the Price to Earnings (P/E) Ratio for a stock. If you are hard pressed to find it you can even look up a company's P/E ratio on Yahoo! Finance. There are two ways to calculate EPS which result in either a trailing P/E or a leading P/E (projected P/E). A trailing P/E takes historic data using the EPS from the last four quarters. A leading P/E takes estimated EPS figures expected over the next four quarters (which is just the analyst's best guess).

Now that I've calculated the P/E Ratio, What does it Mean?

Most investors would nominate the P/E ratio to be "the" financial ratio to use to determine if a stock was cheap (if the company had recently fallen out of favour) or overpriced (could be the stock was the latest "hot-pick"). To give the number some meaning, or a little bit of context you'll have to research the typical Price to Earnings Ratios of other companies of the same type and industry - you could calculate comparable company P/E's as an average. This will determine what P/E ratios are "normal" for that type of company in that certain industry and this benchmark number can give context to the P/E ratio you calculated and hence allow you to compare the two numbers. Usually similar types of companies or companies in the same industry are classified in industry sectors like infrastructure, retail, biotech, pharmaceuticals, telecommunications and utilities.

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The Price to Earnings (P/E) Ratio is the most commonly used valuation metric used by investors

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Religion, Politics and Trading

Fri, 03 Nov 2006 21:30:11 -0800

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Religion, politics and trading. At first glance they don't seem to have anything in common. However, there is something that ties these seemingly different topics together. We'll delve into that later. What you will find out in this article (the professional trader's secret) is important for your own professional trading health and safety. You may think your trading is FINE but if you don't use this secret tactic in your trading, you are bound to be a loser. Save yourself that distress and keep reading!

So, what do these three have in common? Religion, politics and trading... three totally different things. One is the pursuit of the "bigger picture," call it spirituality, God, the circle of life... whatever. The other is the pursuit of order and control for the greater good of society. Trading is gambling - and is wholly the pursuit for more money. So what do they have in common?

The answer not coming to you yet? Each pursuit, is not an exact science. Unlike mathematics and certain areas of science, there are proven laws; religion, politics and trading are not exact sciences. In mathematics, one plus one is always equal to two and ten times ten is always one hundred. The speed of light will always be 299 792 458 metres per second and gravity on Earth is always 9.80665 metres per second. There are many religions on our planet, many differing views that is a source of much conflict. There are many political parties, each with a different view - left wing, right wing or somewhere in the middle. Are any of the religions the right one? It depends on your personal beliefs. We'll definitely find out which one is the right one when we die. Is any of the political parties the right one? No, not all the time - that's why the political landscape always changes. The same goes for trading.

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What do Religion, Politics and Trading have in common? Find out a secret about trading the markets successfully

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Shares that Double and Halve

Wed, 18 Oct 2006 02:27:56 -0700

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There are stocks on the Australian Sharemarket that readily double or halve in value the short term. Better yet, there are traded financial instruments that are linked to the volatility of the larger valued stocks which also are highly volatile. The former are simply vanilla stocks. The latter example relates to derivatives, namely warrants and Exchange Traded Options (ETO's).

There are stocks that increase their value exponentially on the exchange markets in the short term. It is not only restricted to the Australian Stock Exchange (ASX) but this effect translates to exchanges around the world. What you are looking for are the stocks that are plainly labelled as "penny dreadfuls" or "penny stocks". One of the main characteristics of these stocks is that they are cheap, usually under a dollar or even a few cents a share. They are highly speculative and they don't have much trading volume if at all. The ASX is famous for these types of shares especially in the resources arena, as they let any speculator to invest their money hoping to hit the big jackpot. When a miner or an exploration company finds more to dig, that's when you'll find their stock to escalate. If the news that the property they own or their exploration hasn't reaped any rewards find their stock slide into the doldrums. This type of stock price movement isn't restricted to resource stocks, other stocks like pharmaceuticals or even retail have their share prices jump on the back of news of any success.

Derivatives. Be warned, derivatives are risky. Risky because they require a little more know-how and experience to be used effectively. Risky because they are a double edged sword. – profits are exponential: losses are exponential. Warrants and ETO's are both traded on the ASX. The catch is that warrants is basically a synthesised market created by the market makers – the major stockbroking companies that choose to participate. With ETO's what contracts you can write or trade is limited by the trading volume. There is simply too much depth in this topic to explain in this short entry, but I hope I have got you thinking and perhaps got you actually researching about these financial instruments.

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There are stocks on the Australian Sharemarket that readily double or halve in value the short term

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T3 Telstra Deja Vu

Mon, 09 Oct 2006 00:43:53 -0700

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Here's the main reason why I don't read tabloid newspapers: they give useless mish mash information that does no one any good. One case in point was a short piece about the upcoming Telstra (T3) (TLS) float in the one-page "Business" section of the The Saturday Daily Telegraph. It took a quote from the Channel Ten "Video Hits First" show host: Faustina "Fuzzy" Agoiley (The woman that reminds me of a golliwog because of her hair). The "news" piece reported that she had been one of the 1.6 million shareholders that had bought into T2 at $7.40 a share. Asked about whether she would invest more of her money into Telstra in the T3 float she sensed a case of déjà vu stating that: "I wouldn't invest into [T3] because I'm still burnt from T2 and I'm still looking for a long term gain from that so I wouldn't see why people would want to invest more money into those sorts of shares."

Now what good is that reporting that crap in the newspaper? As a trader it makes no sense at all. As an investor the reasoning in that statement isn't logical. Okay, she has the right to claim she has been burnt from the Telstra (TLS) share price halving in value and hence wouldn't invest in T3. If she stopped there, I would be empathic to her case. I have a problem with the two last points: the long term gain and the point about not investing in "those sorts of shares."

If I was really an investor and I was really in for the long term I would see the upcoming float as an opportunity to buy into more Telstra (TLS) shares. I would see it as a discount. As an investor, if you had no belief in the shares, you would have let go of those shares a long time ago. As a trader, if you were to buy into this cheaper price with a bullish view and you are still holding your T2 shares then you are effectively lowering your break even price.

Finally, what does she mean by "those sorts of shares"? Shares that you put money into and which halve in price? I didn't know there was such a classification. If there was a class of shares that regularly double in price let me know. (Actually there is a class of shares on the Australian Stock Exchange (ASX) that regularly doubles or halves in price – will post more about them in future). When you invest in shares there are inherent risks. Any investment holds risk. There are no guarantees. Even the long term chart showing the markets from early 1900's slowly worming up is no sure bullet proof reason that the markets will continue to go up. "Those sorts of shares"? If you don't know the risks of any investment don't put your money on it.

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Faustina 'Fuzzy' Agoiley seeing Deja Vu in the T3 Telstra (TLS) Float

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CMC Markets Margin Call

Tue, 26 Sep 2006 22:28:44 -0700

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Have you ever wondered what a Margin Call looks like? Here is an actual margin call notice from CMC Markets I had the benefit of receiving by email the other day. Why did I receive it? Well… I had recently withdrawn some money from my trading account, effectively taking some profits. Then a recent trade went against my position, so the account went into the red on the margin side because of the lack of funds.

If you don't know anything about CMC Markets, they are a market maker which means that for the financial products that they provide: namely derivatives of the CFD (Contracts For Difference) type, they derive their prices of their products from the market. They do this for markets like the Australian Stock Exchange (ASX), NYSE, NASDAQ and more. Because it is a derivative product, there are many terms and conditions that make this product work - too many to describe here. But here's an interesting thing to note: CFDs are legal in England and Australia among other places but illegal in USA. Go figure. (I think it has something to do with their options/derivatives markets)

If you do get a Margin Call from CMC Markets don't fret too much. They don't immediately do anything to your account. You just simply get continuous emails either on the hour or whenever the price of your portfolio/stock/share/forex trade or whatever dips against your position (either long or short) to negate your margin in your trading account. I do suspect however, once the debt, or the negative margin eats into the capital on hold they would definitely close off your trade in order to protect you and themselves from further losses. (However, don't take my word as gospel though - there is that inherent risk of the market crashing tomorrow - who really knows right?) The question in the back of my mind is that, what will happen if the market does crash, or the position your are holding does crash through your stop loss limit (if you had taken the time and spent some money to take a guaranteed stop loss (GSL) then you would be safe), and through the margin you hold in your trading account? What then? That's a pretty big risk if you think about it - it is a probable event, but in my opinion unlikely. (But of course, you must be prepared to take any of the consequences if you dare to trade the markets) CMC Markets are famous for their derivative product: CFD's

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Ever wondered what a Margin Call notice looks like? Here is an actual margin call from CMC Markets

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The Price of Holding a Position

Thu, 21 Sep 2006 17:10:47 -0700

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When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic. If you trade with options and similarly with warrants, there is time decay to consider. With CFD's as well as forex contracts, the price of holding a position is much simpler than dealing with delta's that define decay with derivative instruments such as options.

In this example we shall look at trading one standard forex contract across the AUD/USD (Australian and US dollar) currency pair (with the base currency set for Australian dollar) of AUD$100,000. In this case study, we will go long on the position – meaning that we are bullish for the currency pair. The amount of US dollars you can buy with AUD$100,000 is determined by the current price of the forex pair.

The AUD/USD dollar stands at 75 cents, and you determine from your own analysis that there is a prospect that the dollar will rise to 75.30 cents which means that when you trade long your one standard forex contract you will be able to buy AUD$100,000 (or sell US$75,000) and you are looking to sell your position at 75.30 cents which equates to a US$300 profit (Sell AUD$100,000 to Buy US$75,300). Even though you are trading on margin, your dealer would naturally see charge you the cost of borrowing that AUD$100,000 per day. The current Australian interest rate stands at 6% and the forex dealer or stockbroker usually adds a 1.5 percent to 2 percent premium on top of that. So you may be liable for 8 percent per annum interest rate for your position and usually your broker will collect the interest charge daily. The calculation is as follows: $100,000 @ 8% per annum / 365 days = 21.9178 = AUD$22 a day (about 2 pips) per contract

Your dynamic BEP (Break Even Point) if you have a take profit target of 10 pips, would be around 5 days. This is because after 5 days you will be liable for about AUD$110 in interest charges. If your target is 30 pips, then your break even point if 15 days, or about AUD$330.

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When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic

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Unrealistic Returns and Benchmarks

Wed, 20 Sep 2006 03:10:15 -0700

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I was watching local Australian TV the other day and I cringed when I heard saw an advertisement for investment properties and this voice over stated:

xxx returned 109% over three years for their investors – try to match that with a bank.

We all know that "past performance is not a guarantee of future performance". Of course that was written with small print on the bottom of the screen. I have no qualms about that. The point is that the investment property and an investment in a long term deposit or a high interest bearing account in your bank are totally different investment classes. You can't realistically compare them because they have different risk profiles. It's like comparing apples with oranges.

How's this related to trading? Well, when I first began I used to benchmark my trading with returns from bank accounts – the interest rate. After a while I realised that it wasn't realistic to compare your returns (or losses) from trading as they massively exceed (or fail at) equitably comparing with the modest gains of an interest account at a bank. (In Australia, the typical high interest bearing account is at 5.85 percent per annum) So what do you benchmark with? You can make up your own (how much you want to earn) or benchmark with another trader with a similar risk profile and capital base.

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Unrealistic returns and benchmarking in your trading

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Compensation for the Lack of Disclosure

Wed, 20 Sep 2006 03:04:32 -0700

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Imagine getting compensation for the lack of disclosure by a company listed on a public stock exchange. That's what happened on the 6th of September 2006 with Jubilee Mines (JBM), a Western Australia nickel miner. In a precedent decision, Jubilee was ordered to pay a former shareholder almost $2 million because the company failed to disclose to the market an important nickel find on its tenement. After ten years in the courts, the Supreme Court has found that the nickel miner should have released details of the newly discovered metal deposit when they become first aware of it back in September 1994. The former shareholder was the family trust of Kim Riley - the company's former managing director began selling Jubilee shares in that same month. The company only disclosed the find in 1996, and by that time the trust has released their entire share holding. Jubilee will be investigating avenues for an appeal.

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Imagine getting compensation for the lack of disclosure by a company listed on a public stock exchange.

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