I started this blogsite with the intention of looking back at my analysis and trades and somehow extract lessons from the year that was. And now, I just would like to share some of my realizations that might also help new traders in their analysis and trades.
Technical Analysis Lessons Learned
1. Don’t forget to look at the broader picture!
During basic technical analysis, we were taught that there are 2 kinds of approach in analysis, its either you go from macro to micro view or you go the other way around, whether it be fundamental analysis or technical analysis. Either way, the approach intends for the person doing the analysis to take also into consideration the broader picture of the market. That lesson did not stick much in my mind because I was subscribed to the idea that focusing on the micro view was all that I need since the micro constitutes the macro view. Any movements in the stocks will definitely affect the index. While it is true that movements in the micro view will have an effect in the macro view, the problem with subscribing to that idea was that sometimes the general movement of the market does not become immediately obvious in the micro view.
I learned from this the hard way when the first big market drop happened last Feb 2007. I was very much subscribed to the idea that the micro view is all that I need to aid me in my trades. What happened was that the stocks I was trading were doing well in the market and since it was doing well, I was not paying attention to the broader picture given by the index, which at that time, was already displaying a bearish divergence, with the price going higher and MACD and RSI going lower. Ofcourse I was stuck when the drop happened.
2. RSI = 30 is not the bottom
In basic technical analysis, we were taught that RSI of 30 means oversold and usually once a stock breaches this level, bulls come in and pick up the stock at a bargain price and consequently pull up the price. The year 2007 opened my eyes to first hand experience of a very bearish action in the market, where the RSI for the index went as low as 18 and some stocks going as low as 7 in their RSI.
I previously had a strategy of picking out stocks based on RSI that is near oversold level of 30. I learned a lesson the hard way when I started picking up stocks last July, those with RSI breaching the 30 level. Since the market was very bearish, the pull up that I was hoping did not materialize and I got burned. The mistake I had was relying too much with the oversold indicator of the RSI without considering the general movement of the market. I had luck in applying this strategy in the previous years because the market was ranging in 2005, and in 2006, an RSI near 30 immediately pulls up because of the bullish sentiment in the market. The RSI is only reliable during ranging market and is unreliable during trending markets. During bullish trends, it gives you an unreliable overbought signal and while during bearish trends, it gives you an unreliable oversold signal. I fell for the latter and got burned.
3. Time frame of the divergence.
In my previous analysis, I was calling bullish and bearish divergence on some stocks but was not seeing it materialize. That’s when I got very much confused with the concept of divergences. Thankfully, thru the advanced technical analysis sessions given by the Absolute Traders, I learned that I also have to consider the time frame when the divergence occurred. A shorter time frame makes a divergence much more reliable. The mistake I had was that I was calling divergence on a wider time frame, making the divergence less reliable.
Trading Lessons Learned
1. You have to be agile in changing your trading strategy to conform to the market trend.
This was pointed out by Fitz Aclan in one of the Absolute Traders’ Chart Analysis Forum sessions. In order to minimize losses, a trader has to be agile enough in changing their strategies to conform to the market trend. This was one of the big realizations that I had this year. I started trading stocks on 2005 and during that time the market was moving sideways. I was used to the trading strategy of having quick, short term positions because of the ranging movement of the market. When 2006 came, the market started to move in an upward trend. Because I was used to having quick, short term positions, I was not benefiting much from the bullishness of the market in that year. It took me some time before I was able to adopt a new trading strategy of going long and riding the bullish momentum. And again when 2007 came, since I was not paying attention to the broader view of the market and also since I adopted a strategy of going long on the stocks, I found myself loosing some of the gains that I had when the market started to drop. I was going long, when I should have been locking in the gains.
I was lacking on 2 things in my trading strategy, first is looking at the broader picture of the market and the second is at being agile in adapting to the current market trends. I was not looking at the broader picture of the market, so I did not have an idea of where the market was at that time and where it’s poised to move. And since I did not have any idea of my environment, I was not able to quickly adapt to the change in the market movement. I was going short, when I should have been taking advantage of the momentum and I went long when I should have started going short and locking in profits.
2. When you increase your fund size you have to be ready with a plan.
The year 2006 was fruitful year for me in my trades. In that year I had accounted for a considerable profit from my fund and I saw the potential of earning more with my trades. And so I was lured into increasing my fund size for 2007.
Having a small fund before, I was used to trading small amounts, having small profits and incurring small losses. I could still bear the loss even if the stock’s price went below the cutloss level. When I increased my fund, I was not psychologically prepared. My mindset was still in trading small amounts, so when I made some trades, I found myself having some funds left. Being a gung-ho, trigger happy trader, I either increased my current position in a stock or bought other stocks. This was going well for me when I was winning the trades, however when I started to incurr losses, I also found out that I was also not emotionally prepared for it. Having more positions, I of course incurred more losses and I was very much disappointed and depressed with most of my trades. And being emotionally unstable when trading, led me from one trading mistake to another.
Being an inexperienced trader, much more a fund manager, the only equation that I had in my mind was Increased Fund Size = Increased Earnings. Now, having incurred those losses, I painfully discovered the other half of the equation was Increased Fund Size = Increased Risk. I was not psychologically and emotionally prepared with handling more funds. I did not have a game plan. David Hanson had an article in his blog about this, and as he puts it, increasing your funds means your “starting a new career because your capital has changed”.
Now how do you become psychologically and emotionally prepared for it? You map out a game plan for your fund, even if it is just a small fund. These are just some items to consider for your plan: Know how much earnings you desire to achieve for your fund and when you’ve reached that, lock in your profits. The other side of it is knowing how much losses you can take if incase the market is not in your favor. Study and plan out your trades, know when to get in and out. Know how many stocks you can hold at the same time while also ensuring that you can properly follow and promptly react to their movements. This was a mistake that I had, having a larger fund, I took in 5 stocks at the same time and ofcourse this was going well when I was winning, but it had me panicking when I started to loss on all fronts. My attention was divided and so I was not equipped with the proper study and plan for each stock and also I was not able to react promptly to each movement.
3. Earn to give.
I read this article in Inquirer by Conrado Banal III about the GMA7 IPO.
"But there is more to IPOs than just raising the interest-free cash. They are the only definitive equitable way to spread the wealth.
Look, when GMA Network (Channel 7) for instance recently did its IPO, it also did not need the money, as the foreign fund managers pointed out to the GMA 7 people, particularly Felipe Gozon, president and CEO, during the company’s roadshow for the IPO.
Well, the network was looking at a cash flow of about P3 billion this year.
What Gozon told the fund managers might have floored them. He said the network just wanted to share its good fortune with the public."
Wow! That statement definitely floored me. They were doing the IPO to spread their earnings! Which lead me to ask myself, why was I trading? What was my purpose for trading? Bo Sanchez’s book “
8 Secrets of the Truly Rich” also asks a similar question,
"Why am I earning money and why am I in business anyway?"
And his answers were simple, first, because he loves his family, and second, because he wants to love beyond his family. And again…Wow! Sometimes when I trade, I only think of earning for myself and my family. The blessings that I receive never went beyond my space. Having thought about it, it makes perfect sense to apply these in my trades: I trade because I want to earn and I want to earn so that I could give more to my family and to others. Applying this frame of mind means being responsible with my trades. I need to do my best, do my homework, observe my stops and lock in the gains, because it is not only me who will benefit, but also others can benefit from my earnings. Sometimes, when I trade I only consider myself, thinking that I alone, am assuming the risk and the losses. But when I apply this mind set, I am also involving my family and others in the risk, so I need to be responsible with my trades. When I do not follow my trading plan because of “greed” in winning trades or follow and nurture “false hopes” in loosing trades, I am willfully risking the opportunity of giving more to my family and to others.
The above are just some of my realizations. I hope that others may also benefit and learn thru my mistakes and realizations.
PSEi Weekly Chart
PSEi (Chart: Daily Resistance: 3330 Support: 2980)
EEI (Chart : Daily Resistance: 2.50 Support: 2.36)
TEL (Chart: Daily Resistance: 2900/3000 Support: 2740)
