RELATED TOPICS
--> |
Timing JSE for profit the PowerStocks Way |
--> |
 Trading individual shares using JSW |

About 70% of PowerStocks subscribers actively trade short and medium term trades in addition to maintaining long term investment portfolios. This approach is discussed in detail in "Timing the JSE for profit - The PowerStocks Way". The purpose of this instructional page is to guide the trader in the use of the various quantitative trading timers and tools we provide.

1. INTRODUCTION
Trading is defined as purchases made in the JSE for periods less than 6-8 months and many times 10-20 days or less than 90 days duration. Trading is much more risky than investing since you do not get the benefit of the risk reduction qualities brought about by TIME. To see how TIME in the market diversifies away your market risk, you can read "How risky is the JSE?".  As a general rule, the longer the time horizon of the trading strategy, the more likely you are to win (the less risky the model.)

Additionally, profits from trading attracts income tax as opposed to long term investing which only attracts capital gains tax on profits realized after 36 months. For this reason you are advised to keep separate brokerage accounts to account for your various trading activities separate from your investing activities. In the case of Standard Bank On-line Share Trading, they give you as many free sub-accounts as you want and even have discounted trading accounts for derivatives such as warrants and single-stock futures. These discounted accounts are highly cost effective from a transactions costs point of view (R50 per trade) and is what we use.

At Powerstocks Investment Research, we have developed a range of powerful funds-grade trading strategies and tools to suite various risk profiles and trade durations. From beginner to advanced, low leverage to high leverage, there is something for you. All our tools have been developed in-house and based on accepted international quantitative theory and robust back-testing and actuarial performance measurement.

2. INSTRUMENTS OF THE TRADE
All our tools time the overall JSE ALSH index and its sectors using our unique market breadth data. For this reason best results are obtained by trading in instruments that closely track the JSE, such as SATRIX-40 ETF's, TOP40 Warrants or SSF's and CFD's with SATRIX as the underlying and so forth. If you rather want to examine our tools for trading individual shares, then read  Trading individual shares using ShareTrader tools in JSW

Our tools and methodologies are unique in the SA market in that we only utilize market breadth (advances, declines, up-volume, down volume etc.) There are many successful traders that use more traditional daily price-related tools such as Stochastic, MACD etc, but we do not get involved in any of that. Many of our subscribers continue to use these traditional tools but use them as supplemental to our tools. We have a view that breadth based timing is for more accurate than price-based timing and this is our area of specialization.

Since our tools identify high confidence periods when JSE strength is to be expected, you could trade in individual shares on the expectation that "a rising tide floats all boats", and that when the JSE rises your favorite share will rise with it, but this is only performed by experienced traders. This is certainly the case if you choose large-cap shares such as BIL, SOL, ANG etc since these shares exert large influences on the JSE due to the JSE's skewness to a few large shares dominating the index. So if we make a bet that the JSE is going to rise, you can be assured that the rise will come from the 10 largest shares on the JSE which dominate the ALSH index. So if you choose to trade individual shares to capitalize on our BUY signals, make sure they are among the top-10 for best results.

In exceptional circumstances such as large JSE corrections of the order of 9% and above, we also have a quantitative system called the Crash Peak Recovery strategy that identifies 5 or so individual shares that are likely to benefit the most from the rebound that occurs after we issue a BUY signal. But these are rare (albeit profitable) occasions and for the most part part you are better of trading the ALSH as opposed to individual shares.

Trading tries to get in on lows and sell on highs. It requires superb timing to be successful. Our tools provide the timing. But the timing tools are only 50% of the ingredients needed - the other 50% comes from your psychology, discipline and emotions and how you react and control yourself in the face of greed and fear.

More often than not trading is accomplished with exotic geared instruments such as warrants, single-stock futures (SSF's) or Contracts for difference (CFD's). This is because you can only expect small gains in the short term holding periods and you use the gearing of these instruments to amplify the returns. So for example a successful trade that nets you a 2.5% gain on the JSE within 20 days would actually return 20% or more on a 10x geared warrant. But remember, the losses are also amplified. Since we provide high confidence trading signals, the probability of winning is higher than that of losing and that makes leveraged trading a profitable endeavor from a probabilities standpoint.

Using geared instruments not only amplifies losses and gains, but also greed and fear emotions. It takes guts to make a trade and endure a day or two of the JSE falling 1 or even 2% when you have a 10x warrant in play! Similarly, when you have made 25% in one day it takes guts to not succumb to greed and take your profit! Or, when the trade is up 100% it takes guts to take your profit and SELL and not let greed force you to keep hanging in for more!

Losses are a fact of life with trading. Live with it or don't trade. A successful trader restricts the losses in his losing trades and lets the winning trades run. It is quite feasible to successfully make profit with a strategy that only wins 30% of the time, provided the losses made on the losing trades are outweighed with the gains made by the winning trades.

3. EXCHANGE TRADED FUNDS (ETF's) FOR BEGINNERS
If you are a BEGINNER, we suggest you trade without gearing and by using Exchange Traded Funds (ETF's) as opposed to trading individual shares. In addition to comprehensive timing systems for the JSE and Resources indices, we provide conservative medium-term timing models that allow you to trade individual sectors and commodities such as JSE  Industrials, Financials, Gold, Property etc with easy to trade and cheap ETF's available through your online broker. An ETF is merely a share on the JSE that track a sector. Its like a unit trust but without the costs and complexity. You can read more about ETF's at http://www.etfsa.co.za or http://www.satrix.co.za . To read more about the conservative sector timing models we provide for beginners (but most advanced users of ours use them too since they are so successful) go and read PowerStocks Sector Timing Models.

TIP: Beginners should use the SATRIX-40 ETF with our conservative "ZWEIG LAZYBOY", "TURTLE-S3", "HEDGETRADER" and "SINCERITY TRADER" and use other readily available ETF's with our SECTOR TIMING MODELS.

4. TRADING STRATEGY CHARACTERISTICS
We have various trading systems that flag low-risk, high-confidence entry signals into the JSE. Some of them are LOW FREQUENCY systems which means they are quite stingy about raising BUY signals, but the benefit of this is they are high confidence with good chances of success. But combined together, they offer enough non-overlapping signals to keep the active trader busy.

We have over 13 different JSE ALSH Index trading models. They all vary in frequency (how often they trade), length (how long their trades are) and risk (how much you win versus lose) You need to judge the best systems for your requiremtnts and risk profile but we advocate trading 3-4 systems from varying time horizons and strategies to obtain the best results. To choose the systems suitable for your requirements you will have to look at each systems characterisitics and expected behaviour. The list below describes the most important characteristics of a trading strategy:

Trades = The amount of trades concluded during the period
Wins = How many trades resulted in a profit
Losses = How many trades resulted in a loss
Win% = What percentage of all trades were winners
Avg Trade = Average gain of all the trades (winners & losers) together
Avg Win = Average size of winning trades
Avg Loss = Average size of losing trades
Max Loss = maximum loss encountered
Avg drawdn = average peak-to-trough drawdown per trade
Max drawdn = maximum draw-down achieved across all trades
Pts up = percentage points accumulated in winning trades
Pts dn = percentage points lost in the losing trades
Net points = Pts up less Pts down
Gain/Loss = Pts up divided by points down
14yr TRI = total return of R1 re-invested in each trade over the entire period
CAGR = Compound annual growth rate achieved over the entire period
%Vested = how long the model kept you invested in the JSE
Sterling Ratio = compound growth divided by average draw-down (risk/reward measurement)
Tri Power = out performance of the JSE for the same measure of risk (1 = same as JSE)

The most important items we look at are the Win%, the Avg drawdn, the Gain/Loss ratio, the Sterling Ratio and the Tri Power. A high Win% is good for psychological reasons. Most non-professionals cannot stomach losses, especially strings of losses. The average draw-down is also important as large draw-downs cause discomfort during the course of the trade and are likely to trigger you into cutting the trade short in panic. Draw-downs can be viewed as the volatility or riskiness of the strategy. The gain/loss ratio shows how much more the system accumulates winning points than losing points - any value over 4 is deemed acceptable as then you claw back 4 points on your winning trades for each point you shed on the losing trades. The Sterling ratio is used by Hedge Funds to calculate risk adjusted return. High returns with gut-wrenching draw-downs will yield lower numbers than moderate returns with low draw-downs. Higher Sterling ratios are better than lower ones.

Finally the Tri-power is the total return achieved by the system divided by how long the system has been in the market (%Vested), then multiplied by 100 to compare returns similar to a fully vested buy+hold JSE strategy. We then divide this by the total returns (TRI) of the buy+hold over the same period. A number of 1 means the strategy achieved identical return for the same risk as a buy+hold. A value of 3 means the strategy achieved 3 times the buy+hold performance for the same risk. The higher this value the more the timing systems out-performs the buy+hold.

All the above characteristics for each of the PowerStocks Trading Timers is summarized in the Trading Systems Actuarial Tables. Normally when subscribers see a timing signal flag a BUY, they will go and reference these tables to determine their odds of success and optimal holding periods which will in turn drive their decision as to what underlying instrument (warrant, SSF, CFD) and what gearing to use for their trade.

5. POWERSTOCKS TRADING TIMERS
We have a full suite of trading timers with varying win rates, gain/loss ratios, frequencies and holding periods to suit just about any traders' style and risk acceptance. These systems have been robustly back tested on 15 years of daily JSE data and have been chosen according to robustness at the expense of frequency. They all treat the trading timing problem from different aspects and angles, and have very few overlapping signals which means running them all in parallel makes for an excellent strategy diversification approach. Also a bunch of highly robust, infrequent non-overlapping timers solves the frequency problem many of them suffer from. No timer is perfect all the time so by running multiple strategies you create enough signals to keep the active trader busy and diversify your risk. You can access the detailed theory and performance of all the timers from the TIMING main menu.

We personally run all the strategies in parallel with real money. Yes, because we practice what we preach but also it makes sense to diversify your short term trading among multiple, robust systems coming from various angles and with different holding periods. None of them are perfect, so why back only one horse?

6. STARTING OFF RECOMMENDATIONS
Trading is riskier than investing. We do have subscribers that make a good living from it, but they have the years and the scars behind them coupled with the right psychology they have developed to be successful. So keep it small, learn the lessons and discover your  own psychology and the amplified reactions to greed and fear on these geared trades. Our preferred approach is smaller trades where we exit after 15-20% losses (on 10x geared warrants) but ride the winning trades for +50, +60 and sometimes +80%. But that’s just us and some of our subscribers can teach us a lesson or two! We only started active trading in earnest (previously a harmless fun activity) when we built the short-term timers for our clients since our philosophy is to trade what we advise and build.

If you are a beginner to Swing-trading or short term trading then we advice you start small and start with high confidence signals from  ZWEIG LAZYBOY, TURTLE-S3 and SINCERITY TRADER. Start with straight un-geared TOP40/RESI ETF’s (like SATRIX) or instruments with lowest gearing (least risk) and play the long holding periods (80 days and up) to diversify away your trade risk and get large enough gains to make up for the fact you are using an un-geared instrument.

You can play the high confidence TroughFinder signals (large A and B signal sizes) but keep it small till you get comfortable with the various psychological pressures of fear and greed and your reactions to them. Learn the lessons. TroughFinder is good but not as high-confidence as BITS, STORM and the others. We have made 20 Swing-trades since we started short term timing for clients and we still learn a lesson out of every one (and as we have shared with them, we still  make the occasional mistakes and bad judgments.)

All the timers' theory are accessible under one roof in the TIMING main menu on the website. The strategies we have designed offer superb risk reduction and lean heavily off probability models to stack the odds in your favor. Nothing is ever guaranteed, but it sure beats random trading and relying on luck and hope. Each strategy has an actuarial table describing results of our back-testing done in the development of the strategy. The actuarial tables are available from the TIMING main menu right at the top. 

Find the strategy that suits your style or do what we do and play them all. They come from different angles and rarely overlap signals so you will be kept busy enough. Use the historical actuarial trade statistics we publish with each strategy to measure your risk and see what the optimal holding period will be. We personally run all the above strategies in parallel with real money. Yes, because we practice what we preach but also it makes sense to diversify your short term trading among multiple, robust systems coming from various angles and with different holding periods. None of them are perfect, so why back only one horse?

7. UNDERLYING INVESTMENT INSTRUMENTS
You need to find the underlying instrument you are most comfortable with for your trade, be it conservative vanilla un-geared SATRIX40 or RESI ETF shares (lowest risk but smallest gain), TOPI Warrants, TOPI knock-out warrants, TOP40 or RESI Single Stock Futures (SSF’s) or Contracts for Difference (CFD’s).

The decision to go geared or un-geared depends on your trade horizon. If you are playing SwissClock or BITS-41 then you know trade horizons can span 2-6 months, even 10 months. During those months there will be ups and downs. You are probably better off with an un-geared (vanilla) ETF such as SATRIX40 or SATRIX-RESI or with a low-geared SSF or CFD. SSF's have time limits depending on length of the contract so you may prefer CFD's that have no time limits and give you access to the dividends from the underlying share you are trading.

For shorter-term strategies such as BITS-45 and BITS-ST or STORM with high confidence entries, you may go for the highest gearing possible such as a knock-out warrant.

With warrants, SSF's and CFD's you can trade almost any share as the underlying including the TOP40 index. If you see a BUY signal from one of our systems, you may decide to punt a large-cap share such as BHP or SOL as well, since you feel they will benefit (they almost always do) from the rise in the JSE we are predicting. The larger the share in terms of market capitalization, the greater the probability it will be a beneficiary to any pending rise in the JSE. In fact there is a strong correlation between JSE returns and individual share returns, the larger the share.

Geared instruments are highly suited to high confidence PowerStocks signals since the downside risk presented by the leverage is minimized and you are mostly exposed to the geared upside. This allows you to to use R5,000 say, to purchase R50,000 worth of shares assuming a 10x gearing. You are exposed to all the gains/losses of the R50,000 worth of shares. If the shares go up 5%, then your profit is R2,500 which is a 50% return on your initial R5,000 leveraged exposure as opposed to the 5% gain achieved by the vanilla (un-geared) investor who had to lay out R50,000 to achieve the same profit. Obviously the geared trader will experience more volatility than the un-geared trader, so you have to configure a trade you are comfortable with.

Brokerage with leveraged instruments is normally about 50-60% of the price of brokerage on normal share trading. Check with your broker if you can get a discounted derivatives trading account (such as that provided by Standard Bank.)

This section is not intended to exhaustively cover the difference between the various geared instruments you can use, but we provide the below table from Standard Bank that summarizes the main structural differences between the various derivative instruments. You are advised to investigate further with literature provided by your on-line broker.



8. USING THE TRADING SIGNAL CHARTS
If you are a PRO account holder, all the short term trading timers have signal charts in a separate PRO TIMERS sub-sheet in the JBAR report (item 2 below.) which is published every 2nd day. If you are a STANDARD subscriber you get this once per week in the Friday JBAR publication.



The last few signals of each strategy are shown with their gains/losses and vested periods shaded in relation to the ALSH index so you can see where they got in and where they got out. Sometimes a signal line is shown together with the thresholds that trigger BUYS and SELLS so you can even "forecast" the odds of a BUY or SELL in the near future based on trends.


9. CONCLUSION

Make sure you match your trade to your underlying instrument (warrant, ETF etc.) If you're playing BITS-41 then signals can be anything from 100-200 days and your instrument will need to stomach some intra-trade volatility. Its probably not wise to play it with a massively geared knock-out warrant that may get knocked out during a intra-trade downturn or consolidation. A vanilla TOP40 ETF (SATRIX) or long term (6-month)  SATRIX40 SSF or plain TOP40 futures contract is probably better matched  to this strategy. If you're playing BITS-ST then a geared product is probably fine. Try the vanilla SATRIX RESI ETF (Top 20 resource shares) as its actually a lot more volatile and sensitive to JSE moves than the TOP40 and can be more profitable on smaller moves.

Look at the actuarial table of the strategy that has just fired a signal to see what win-rate, average gain, volatility (Sharpe) and gain/loss ratios you can expect from this system on the 5 and 10 day trade horizons. This should guide your instrument selection and risk matching process.

If you're new to this, stick with the high confidence strategies and stick with low-geared derivatives or vanilla ETF's to get a feel. There is no rush, signals are always coming so you can afford to do some basic low risk trading. The market always has volatility that will generate signals and we have systems that capture a lot of signals when combined and the JSE is never going to go away so don't think you have to bet the farm on a single trade because you will "miss a great opportunity"

Trading is no "get rich quick scheme" and many people lose their shirts early on in the game so resolve yourself to the fact that it can be rewarding, it can be properly risk managed and profitable but the big money only comes when you've been doing it for a year or two and you should only be trading with no more than 30% of your vested capital. Use the rest for medium term trades and long term investments as outlined in The PowerStocks Way.

Many of our trading systems give you advance warning a situation is developing which you must prepare for. We have written a tutorial on what you need to do to prepare for a SwingTrade, based on TroughFinder signals, but the principles pretty much apply to any of the timing systems we have discussed here. It is therefore probably worth while to read that as well : Preparing for Trough signals

RELATED TOPICS
--> |
Timing JSE for profit the PowerStocks Way |
--> |
Trading individual shares using JSW |
 
Make a Free Website with Yola.