Trading the Indices on Fundamentals

[FXtrader8911]

The suprise of the week was how little markets reacted to geopolitical risk, will trade now be the final straw that deflates the optimism? In my view, complacency will soon start to turn into caution. Aftermarket US Stocks fell further, DOW lost a further 40 points in aftermarket, the VIX spiked 6% in 10 minutes.

We need to see whether sentiment has finally seen that the fundamentals were pointing down for quite sometimes.

I remain net short in the US and long in the EU, the CAC hit an all time high on Fri.

 

[FXtrader8911]

Here's my take on why it's so difficult to successfully day trade the markets:

1982 was the turning point for stocks traders, the face of trading was turned upside down.... no longer could traders determine the value of a stock based on its assets and profit potential then enter a trade in the right direction at a realistic price, but from 1982 it was the index that set the price of the stock rather than the stock price setting the index. Not long thereafter, algo trading targeted the indices, Index HFT was born, the index futures became so dominant that all short-term correlation between fundamentals and stock price were thrown out the window. In fact, many traders of the index don't even realize that say, a 5% drop in the index results in a 5% drop in the individual stock price (sometimes more if the index is weighted) of all the components of the index, regardless the quality of the stock... the index now drives the stock price, not the other way round.

The holy grail in short term trading is no longer in the ability to accurately determining the fundamentals but rather it is in proper risk management. Bots can manipulate markets and reverse a trend for no reason at all, to have a position in the right direction is luck of the draw, losses are inevitable and so only good risk management can make the difference between success and failure as a day trader.

But not all is lost... ultimately, the fundamentals still count, markets will always gravitate towards the fundamentals... it might take weeks or even months but eventually, the fundamentals will adjust stock prices to fair value. Trading on a longer horizon and in tune with the fundamentals still works and IMO is still far more profitable than day trading. 100 years of history of the US markets tell you that the indices will always go higher given enough time, why? because components making up the index is dynamic, failing companies are removed and replaced by new performers. Staying long in the index will always profit you, trading the indices on fundamentals i.e. buying at the oversold point and taking profits at overbought points will not only consistently give profits but will also beat the index's natutal gains.

I wish you good luck on whatever method you chose to trade and if you are day trading, do exircise proper risk management, it is even more important than choosing the optimum entry price.

 

[NotKnown]

Here's my take on why it's so difficult to successfully day trade the markets:

Interesting take. In some way bots have made it easier because software is fundamentally stupid and needs reference points and targets. Having an idea of where these points are makes life a bit easier. Risk and portfolio management is critical to any form of trading. What is your take on ASIC wanting to change margin rates on CFD's? I had a read through their paper and their knowledge of trading is almost non existent. The example they give was not possible to execute and their understanding in the use of margin trading is low. Makes you worry when the people assigned the task of monitoring have no clue as to what they are looking at.

 

[FXtrader8911]

What is your take on ASIC wanting to change margin rates on CFD's? I had a read through their paper and their knowledge of trading is almost non-existent. The example they give was not possible to execute and their understanding in the use of margin trading is low. Makes you worry when the people assigned the task of monitoring have no clue as to what they are looking at.

Indeed, reminds me of when parliament was debating placing controls on the internet, I listened to the speakers for a laugh... they knew nothing about the subject and were making fools of themselves trying to show they did, yet they had the power to regulate. A 25 fold increase in margins knocked me off my chair, as you say, they either know nothing or their intention is to terminate CFDs altogether. My broker is up in arms about it and acknowledges that increasing margins 25 fold will kill that side of the business as the requirement even exceeds the margin applicable to trading the futures directly. ASCI apparently had the sense to ask brokers to submit their views, maybe they will take these into consideration and come up with something more realistic. I made a rough calculation and a 25 fold increase equates to me needing some $300k in margin if I trade as I do now, quite unacceptable, we need to wait and see what the final decision will be. A more logical approach is to apply 25X to new accounts for a period of 12 months or so, traders that know what they are doing and haven't blown their account within the 12 months should then get a waiver of some sort.

The irony is that size of margin does not reduce size of losses, the only gain is that fewer people will take positions, as said, if the aim is to close-off such trading then it makes sense, but if the intention is to limit losses then it's a big fail as depending on how the broker structures its cut-off level, a higher margin can well result in much higher losses for the trader.

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[FXtrader8911]

BTW, BREXIT is getting messier by the day so take care if trading the FSE100, potential of black swans is high.

 

[NotKnown]

A more logical approach is to apply 25X to new accounts for a period of 12 months or so, traders that know what they are doing and haven't blown their account within the 12 months should then get a waiver of some sort.

Their main concern is people losing money. Problem is in derivatives trading, if I am making money someone is losing at the other end. It is trading. It is more or less a zero sum game. I am in the same problem as you in that the new margin levels would make it quite difficult to trade. I also do not like the idea of giving my broker so much of my money for no real reason. Too much risk there.

I am submitting my opinion to them and "correcting" some of their mistake in the document. Apparently they are supporters of the efficient market theory and that each and every trade has a 50% chance of success. They go on to do so maths that I am yet to comprehend to arrive at a conclusion that binary options are bad (you do not need maths to know that) and CFD's are not far behind.

The example they use to justify their position regarding the dangers of CFD's is just wrong and they are not comparing apples with apples in regards to risk.

They also site an example if someone had a $10k account with 500:1 leverage their exposure to the market is $5Mil. Well in theory yes and if you did take that trade on the ASX200 you would be playing with something like 700 per point which is just insane. Maybe people do that but the problem is not margin, it is being an idiot to which no level of legislation will fix.

My suggestion to them is not to focus on margin (does not help as we both know) but on account management for newbies. If someone has a $10k account just limit their position size to some portion of that. Set them a max position size of $10 a point or something and only allow 3 trades open at any one time. With one trade open they would have to nuke 1000 points to blow an account. As there account goes down adjust the max position size accordingly. Also do not allow negative account balances. If the draw down is so deep to almost 100%, just close the position (after warning of course). In fact I would be sending warnings after 50%. This stuff is not rocket science.

If you feel inclined, have a read of the doc. We are invited to submit a response as traders.

 

[FXtrader8911]

We are invited to submit a response as traders.

knew the brokers could submit views, wasn't aware traders could too, I'll have a look.

The casinos (more or less in the same game as trading) have a solution. Newbies wanting to enter need to deposit a fixed sum at the door, if they then blow everything they still have something set aside when they leave. But you are right, the idiots need protection, the ones that know what they're doing don't. In any event, higher margins only deter entry, they do nothing to mitigate losses which are irrelevant to margin, and as said, higher margins can make things much worst. The norm is liquidation when the loss exceeds 50% of margin, a higher margin means grater potential loss... 50% of $100 margin is $50, 50% of $2,500 margin is $1,250.

if I am making money someone is losing at the other end

"loosing" is not the right description, you are making the profit they are missing out on, however, they might already be in profit at the time they sell the instrument to you.

 

[NotKnown]

potential of black swans is high

I am keeping an eye on that but have not been trading the UK100 for ages.

He is the link to the doc if you want to take a look. I think the more of us that point out the error of their ways, the more chance they might do something sensible.

https://download.asic.gov.au/media/5241542/cp322-published-22-august-2019.pdf

Nice short on the DAX for start of session. Under their new new scheme that would require a margin of $82,866 just for one trade!! Idiotic.

 

[FXtrader8911]

T/p on DOW @27,007, S&P @2.990, NDAQ @7,737 then re-ented (Bought) DOW @26,885

German PMI Print at 41, considering its economy is all about manufacturing, I read this a recession. France about the same

 

[Dunno]

I am a simple momentum entry trader (micromanaged trades only) CFD only now with 10 years overall experience for what that is worth.

These new margin requirements that I expect as all collectivised power grabs go where already a done deal months ago at the boardroom level only the process of pretending to facilitate a consultation period remains the stumbling block so time possibly is past due for those insulted to look for other just as competent alternatives.

I would expect when these changes are made I may need up to 20k sitting in a non accredited account to facilitate moving forward, as it exists 2-3k is sufficient, more than really.

My question to anyone with the applied knowledge about offshore company's that may allow a trader to continue in the same vein as before the new rules come into effect?

Great derth of decent applied information around in my searches so far I think the only way forward here is word of mouth from traders.

Also last night there was a market dump on the FTSE and wider, which btw caught me early in trade at the time in the wrong direction so cost a little by the time I gathered my wits enough to exit...cost of doing business.

Curious anyone know what news/whatever upset the bots? Have heard the Thomas Cook travel troubles but I have no idea.