My problem with using moving averages

One of the first things that traders learn when they are starting off is the technique of using moving averages. The statistical definition of one is “a succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values.” Now, these are good if the price is remaining at about the same level over a period of time, but what if a stock is appreciating or depreciating rapidly?

The data that moving averages are based on is entirely from the past, and, as they say, you can’t predict what direction the market will go in. Yes, maybe it’s been bullish over the past month, but tell me about now. When a stock is volatile, moving averages serve little to no function, as a small spike in any direction can result in huge losses, and what past trends were does not affect that.

It does not take into account significant changes in supply and demand. A great example of this would be the price of crude oil. Great, you’ve used a moving average for when it was at $100/barrel, but how is that going to help you when supply has skyrocketed and the price has fallen to $50/barrel?

Even if a stock has been at the same level for a long time, how will moving averages help you then? There would just be a horizontal line. You could say that you should buy when the price goes above the moving averages, but stocks often exhibit cyclical behaviour, and the stock is just as likely to plummet as it is to skyrocket.

All in all, because of these reasons, I don’t believe that moving averages are a very effective tool, as all they are based on is past data and they just don’t work for volatile stocks.

When, and should, footballers stop earning ludicrous amounts?

Like every bubble, the football one has to burst eventually. What I’m struggling to see is if that will happen during my lifetime, given the vast mainstream exposure and cult-like following that football has. In a football stadium, it’s sacrilegious to support the “away team”.

People are constantly saying that footballers get paid far too much and that doctors and nurses should get that salary. What they fail to realise is that footballers are in very high demand and very little supply, while, even though it’s true to say doctors are in high demand too, there’s a lot more supply of them.

You are far more likely to find a skilled doctor than you would a skilled footballer. And when you take into account the joy that footballers provide to people everywhere, their salary, while still being ludicrous, does not seem that exorbitant. Shows such as “Football Saved My Life” perfectly explore this concept.

I’m not denying that doctors and nurses save lives and that their salary should be closer to footballers’, but what I’m saying is that the people who say that footballers should be given a “normal” man’s wage are not taking into account certain key factors.

Maybe salaries such as Falcao’s 300k a week or Rooney’s 310k a week are unfair and exaggerated, but show me one person out of 100 that can do what they do on a weekly basis and I’ll change my mind.

The football bubble is bound to burst eventually, I’m not denying that, but they at least deserve some of their wage.

Give them some respect, guys.

Is it better to be conservative or reckless when trading?

When trading, there are some who are conservative, who look for the “perfect trade” which almost never comes. And then there are others who look at the tiniest changes in price and think “there we go, that’s my opportunity.”

But which one is it better to be? The low volume, low risk trader or the trader that opens positions with reckless abandon?

In actuality, my opinion is that it is the former who I would most likely place my money on to earn more. In trading, as in other areas of life, “less is more”, as they say.

Although there is potential of even the most meticulously planned trade going the wrong way, careful planning and a strong investment thesis reduce the chance of it happening exponentially.

The same can’t be said for the high volume trader, where even one failed trade will wipe them out.

Be safe, stay safe.

The issue of ethics in trading

Investing in fossil fuels has become an issue of ethics lately, especially with the issue of global warming plaguing our world today. The financial issues that investors face have now become more complicated with the additional dimension of ethics involved too.

Why do people think investing in fossil fuels is bad? They think that it’s unnecessary promotion of something that could be catastrophic to the world today. The issue of ethics isn’t just lodged in this one example, there are countless others.

Say it just came out that McDonald’s have been paying immigrants less than minimum wage to work 12-hour days,  for example. Some would say that this is cause enough for them to not invest in this company, as they would be promoting what essentially is a great evil in the world today.

My opinion, you ask? I wholeheartedly understand, but do not necessarily agree with the people who choose not to invest because of ethical reasons. Essentially, what they are doing is decreasing demand for the stock in question, creating a shift in the supply-demand curve and driving down prices.
Now, when prices are low (an example being WTI crude oil right now), people will invest. And when they invest, the price will be driven up again. So essentially, these people are not doing anything significant, rather, they perhaps might be worsening the cause they are supporting.

There is one scenario where I concur with these people, however – if they are doing it for their own personal reasons and gratification. They do not want to be associated with the unethical nature of a company and so will not invest in it, simply to give them a good guilty-free night’s sleep.

The majority, however, do it for the first reason which I have already explained. What these people don’t understand is that they are not having a monumental impact on prices, and their time would be better spent petitioning or protesting – that will have a far greater impact than simply not investing in a stock.

Scalping: How hard is it really?

Some say that scalping is not in the spirit of trading and should be outlawed, which is why some major CFD brokers such as Plus500 don’t let you take your profits if you have scalped.

But this blog post is about how hard it really is. Is sitting in front of a computer screen waiting for minor fluctuations in the price of a stock actually challenging? The problem with this statement is that it is very biased – it does not take into account the lengthy periods of time that scalpers have to sit in front of a computer screen waiting for the tiniest profits.

Of course, when trading CFDs such as Brent Crude, this time is dramatically reduced as a result of the volatility. Scalpers nominally traditionally trade on the more volatile stocks to get profits not even in the double digits some of the time, but their sheer volume of trades makes them profitable.

What most people don’t take into account is that scalpers have to continually monitor their screens and be vigilant and alert waiting for the tiniest shifts in price.

The actual act of scalping in itself is not that difficult, with the only slightly challenging thing being to be quick when your trade goes into the green. Aside from that, even a beginner can do this.

So, overall, I would conclude that scalping is quite easy if you have a lot of time on your hands. If not, I would advise one to pursue other avenues of CFD trading.

Why I am uncertain about investing in oil companies right now

There is a sense of security that every trader has when they know that a stock has been trading around and about the price which it is now for a long time, perhaps a few months or years. But, in the case of oil, there is a complete lack of certainty around the market right now.

Should I go long? Short? Neither? The overwhelming response right now is the latter, with most investors scared to use their money. The thoughts going through most people’s heads right now would be “If I go short, the price of oil will rocket sometime soon” or “If I go long, oil will drop even further!” Now everyone knows that these two are mutually exclusive and cannot possibly co-exist together.

The problem is that lingering voice of doubt in the back of our minds which keeps telling us not to invest. This problem is exacerbated if you have made a loss an oil recently, and most people just sit there licking their wounds long after that. The bulls of the market will be telling you to buy right now, and that is probably solid advice considering oil has to skyrocket sometime now, right?

Try getting a margin call when oil goes down and see if you can say that again with a straight face. No-one has any doubts that, when oil rises and eventually hits around $60-$70 a barrel, people will be going long like there’s no tomorrow.

But I can’t exactly say the same for right now, even though oil is $20 lower.

A book review of Making Money From Trading by Cat Davey

Firstly, I would like to state that this book is one of the only ones that explore the emotional journey that a trader goes through, and it does it very well, with a “Waterworld” or “ego trade” a page. It perfectly captures the mental anguish one goes through when making a loss trading. So, on that note, this book gets full marks from me. However, this book really doesn’t have much in the way of strategy when trading, and although the references to the emotional aspects of trading were good, it did feel a bit overdone and sensationalised.

What I mean is that I doubt the average trader would go for neurolinguistic therapy.

However, this book was not entirely exempt from references to trading – she does list her favourite stocks and how many positions she opened at the time, and the Profit/Loss accounts with the win/loss trade ratio at the beginning of every chapter was very well done. It really conveyed the concept that you don’t have to win most of your trades to make a profit.

What this book also did well was that it showed how her change in mindset was a factor in her success and exactly how it was a factor. Her continued Waterworld references conveyed her point of how easy it is to be consumed by your ego when trading excellently, and I liked the doses of her personal life that she sprinkled in, for example meetings with her ex-boyfriends. The best thing about this was that it all was eventually related to the stock market – she did not digress in any way.

One of the major issues I had with this book, however, was that it listed the technical terms to know at the end of each chapter. The reason why I think this was bad is that the reader would not want to read through a chapter not knowing what some of the words mean, only to discover that it was there at the end of the chapter after all. Even if the reader did want to know what the words meant before the actual chapter, he would have to find the end of the chapter and go back  to look at it all over again. This was more of an inconvenience than anything else, to be honest.

Overall, I really enjoyed the book, mostly because of it’s show of the emotional journey of the trader, something which very few books do. However, I do feel that there should have been more references to trading, for example technical analysis and charting. I would also have sequenced the book in a more chronological way with the “key terms and lingo” at the beginning of every chapter, rather than at the end.

Despite these issues, however, I would say that this book is a must read, simply because of its brilliant uniqueness, more than anything else. Cat Davey has done a scintillating job with this book.