The Essential of New Year Trading Strategy 2013.

In my opinion, this is a must-have trading strategy for 2013 for medium-term traders or investors. This strategy is more or less emulate the big cap list strategy with a little twist. It would consume less of your time monitoring your portfolio on daily basis but could offer a fairly good return with a minimal risk.

I have been back-testing this strategy at The Star business 'My Portfolio' section. 

Big Market Capital 
Screen for listed companies on the Main Board that have more than RM 10 billion market capital. There are considered as blue chips companies with strong fundamental business and revenue streams. The FTSE Bursa Malaysia KLCI Index comprises of the largest 30 companies by full market capitalisation on Bursa Malaysia's Main Board. You may see stocks like PPB Group Berhad, YTL Power International, Axiata Group Berhad, Felda Global Ventures and Petronas Gas Berhad. 

Government Linked Companies
From the largest 30 companies, identify companies that have government linked companies (GLC) status. GLC companies are controlled by Malaysian government via Federal Government-Linked Investment Companies. In addition, Malaysian government also has a power to appoint members of board of directors and senior management positions. 

From that 30 companies, GLC are including Malayan Banking Berhad, Sime Darby Berhad, CIMB Group Holdings Berhad, Petronas Chemical Berhad and Axiata Group Berhad. 

Dividend Yield
Again, a simple calculation of dividend yield would mark an ability of a company to pay out dividend each year. It may pay on quarterly or annually basis. However, the bottom line is it represents the return on investment for owning a stock. So hence, you should be interested to look for stocks that have high dividend yield. 

On Bloomberg, the easiest indicator would be 'Dividend Indicated Gross Yield'. The yield range that we are looking for is between 2% - 7%.  

Lowest Price
The last filter is to select probably five stocks with the lowest price. With no preference, now you have a top five big market caps government linked companies with a good dividend payout record at a bargain price. 

At the beginning of the year, buy equal amount of each stock. The aim is to hold these stocks before liquidating them in the final quarter of the year. Check your position and stock performance perhaps once a month or a quarter. If the performance of the stocks went south for more than 5%, you should be selling it to cut your loss. However, it also depends on your risk tolerance. 

Happy New Year and Happy Trading!

The Essential: Basic 3Ms to be a Trader or Investor

I couldn't help myself repeating the same answer to people who trade stocks or people who think they are stock traders. In any given gathering or talk, expect common questions such as:
i.   which method do you use to decide whether to buy or sell?
ii.  how much money should I put into each trade?
iii. should I worry about not calling the top or bottom of the price?

Of course the answers are as absurd as the questions. There is no right or wrong answer. It is more in between, depending on your trading style. But usually self-traders or private traders or individual traders or whatever you wanna call them, imposing these questions. 

Institutional traders are far superior in term of market reach, capital, leverage, trading systems and support services. They have a very systematic algorithmic trading in place to say the least. They called themselves market-makers, since a pool of them could shape the movement of stock indirectly. 

So, how could you be, at least, a sound trader? 

By now, you should have THREE BASIC Ms; money management, method (trading system) and mind (trading pyschology).

Money Management

I have to put money management as the no 1 ingredient. This is a skill that would differentiate between a novice or a professional. It is very crucial for a trader to understand the risk and reward in his or her trading method. A good money management would help traders to manage the risk at the acceptable rate. 

I do not intend to touch too much on the technicality of several principles such as positive expectancy, stop loss and target levels. 

In essence, money management sometimes dictate your risk tolerance rate and profitability of your trading. A positive expectancy should produce a profitable trading system. Stop loss, on another hand, would help you to reduce uncertainty and further loss in unfavorable trading environment. Whilst target levels usually would be point of your exits in any trading session. 

Method (Trading System)

Trading system is a sum of parameter or variable that determine entry and exit points for any given instruments. These points are also known as signals. On the other hand, many would relate trading systems to the method of choosing the stock or stock screening. 

Having a trading system may sound simple but having a system that produces profit, would be the hardest part. I gather that it would take some times to experiment or to tweak in finding the Holy Grail of trading system by yourself. Maybe for a start, you could consider adapting the existing proven trading systems in the market. Some of the proven system are published like Turtle Trading System developed by Richard Dennis and Bill Eckhardt, Joel Greenbalt and The Naked Trader. 

Mind (Trading Psychology)

It is equally important to have a good set of mind in trading. If possible, you should shut down your emotions while trading. Some people even develop a trading mind software to basically to train your mind for trading. I remember reading about the psychology of trading in which the stock movement is a sum of emotion of traders. 

In trading, you need to be as objective as possible. No indecision. It would eliminate uncertainties in your chosen trades and it would increase your confidence in every trade you made. The stock movement does not reflect on your gut feeling. By using the right trading system, you should have a solid foundation as long as you detach your emotion in your trading session, if possible.

In conclusion, trading is a discipline. Having these 3Ms probably is the best start to get into the game. You can learn them. Maybe for a start, subscribe to one proven trading method that you are comfortable with. Do back-testing, paper trading simulation and establish your own discipline en route to find your ways to be a trader.  

Enjoy!

Fundamental Analysis vs. Technical Analysis

Yes there is an undeclared financial war among fundamental and technical analysts. Pure 'fundamentalists' will enforce the superiority of objectiveness in fundamental analysis systems in relation to the 'correct' price against the market price. Certainly, being 'technical', they rely on the accuracy basing on historical and present data that are already encapsulated in the stock price. Their price or price movement predictions extrapolated from historical price patterns.

In essence, these models distinguished the analysis approach towards the 'value' and 'price' of the stock.

Fundamental Analysis

Fundamental analysis is taking into account the intrinsic value of the stock. Meaning, it considers company, industry and economy values in order to determine the rightful or true value of the stock. So hence, when a stock labelled as a BUY, it means that the intrinsic value is higher than the market price. You HOLD when the intrinsic value is equalled to the market price and you should SELL when the market price is higher than the intrinsic value.

Investors that subscribe to fundamental analysis look at macro financial information such as business model, the industry outlook, governance and government policy. Quantitatively, they look at company financial information such as ratios, financial statement analysis, price/earning to growth (PEG) ratio and return on capital (ROCE).

Technical Analysis

Unlike fundamental analysts, technical analysts believe that the intrinsic value of the stock is already reflected in the price. Therefore, they evaluate the stock based on the historical performance of prices and volumes. Based on these findings, technical analysts use charts to generate patterns and trends. The latter, in fact, is used to determine the future movement of price.

In order to predict the direction of the future price movement, technical analysts use technical indicators such as Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI) and Stochastics. These indicators are derived from the generic movement in the price of a stock. Normally, technical indicators are very helpful in defining your entry and exit point.

So, which one is better? I don't have the answer. In my experience, investors use both analysis to complement their existing stock analysis methods like Capital Asset Pricing Model (CAPM) or efficient market hypothesis (EMH).

Personally, I would use the top-down approach. Like from macro to micro level. For example, using fundamental analysis:

1. narrow down the performing economy, market, sector, industry and companies.
2. assess the fundamental values; ratios, economic cycle
3. choose and create the list of performing sector

Then, choose stocks based on your familiarity with the technical analysis or charts.

In conclusion, the issue of superiority of these two analysis regimes is not a case. The potential of using both to complement existing stock analysis should be highly considered by investors. Many said that fundamental analysis usually for long term investors. Whilst, technical analysis may be suitable for short-term investors. You decide.