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When the going gets tough…

Sep 05 2019 10:59
Simon Brown

Simon Brown, founder and director of JustOneLap.com.

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I’ve had a number of people commenting recently about how the markets have become impossible to trade for derivative traders – mostly equity contract for difference (CFD) traders. Oddly, there have been two different and opposing views.

 

The first group is worried that, with the markets going nowhere, how does one make money? The second grouping is concerned that increased volatility and bad news from companies make it far too risky.

 

The “going nowhere” argument is misplaced. Sure, the Top40 is sitting at levels we last saw in 2015, and so far in 2019 the index is up only 3.4% at the time of writing (excluding dividends). But this misses the point. At one stage this year the Top40 was up over 11% for the year and is down some 3% over the last 12 months. So, we’re seeing lots of movement that should be profitable for derivative traders.

 

The second issue is that the increased volatility is making it harder to trade. I agree with the concept – more volatility is actually hard to trade. 

 

Sure, traders need movement in order to profit, but movement that is orderly and not too extreme is always better. However, while we’ve had a fair bit of volatility this year, it’s not anywhere near the crazy levels we have seen before, for example in 2008/09. And, of course, volatility is a factor of what one is trading.

 

The real issue has been an absence of clear longer-term trends, which for me personally as a trend-based trader has made life very difficult. But I solve that issue by dropping my time frames. 

 

If the daily chart is showing no trends, I move to an hourly, or even 15-minute chart. The thing is, there is always a trend. And the job of a trader is to find it. In my case, I’m finding the first 30 minutes of the index futures (08:30 – 09:00) very profitable and have settled into just trading that period.

 

That said, I am fortunate that I am able to trade the shorter intra-day time frames. For those with a job, that is not an option as you’ll not be able to focus on either and will end up losing money and your job.

 

But there is perhaps a bigger issue here. I think part of the issue is that bull market trading is easy. Everything is going up, so you buy something, gear it with a derivative and you make money. 

 

The current market is more testing, but traders who can make money now will be printing money when the bull returns.

 

However, the reality is that trading is hard, and we need to learn real skills to be successful. The adverts make it seem like Fica regulation is the only challenge. 

 

But the reality is that trading is a multi-skilled endeavour that requires serious mental, risk management and emotional skills. It’s not just fancy technical analysis and, boom, you’re off to the races with bags of profits.

 

Novice traders also generally fall into the trap of trading geared equities and as such take on massive single-event risk. But one nasty trading update, or another ethane cracker plant delay, and suddenly your trade is well under water. 

 

My advice to newbie traders is to ignore equities (especially geared equities), unless you have been successfully trading them ungeared for at least a couple of years. 

 

Rather focus on indices. They are significantly less volatile, have much less single-event risk and you can trade the ALMI (mini ALSI contract) at R1 a point – meaning you only need R10?000 to start your trading journey. Even a worst-case scenario will likely see you lose no more than R1 000 in a trade that goes horridly wrong. Yes, it will be a large percentage of your portfolio, but it is unlikely to ruin you.

 

This article originally appeared in the 12 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

trading  |  derivatives  |  jse top40  |  jse  |  markets  |  simon brown  |  cfd
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