As featured in this month’s Master Investor Magazine.
Now ladies and gentlemen, following the completion of “Maria’s Golden Rules for Trading CFDs”, it is time to continue with our previous educational articles series, a subject that we last discussed in Master investor Magazine’s April edition. This is the seventh in the series of these educational articles, all of which are focussed on the best habits of winning traders and investors, the most common mistakes traders make and the best ways to avoid them.
Our subject today is the ever famous search for the “Holy Grail” in trading and the financial markets.
So what do I mean by “Holy Grail”? Please allow me to clarify. The “Holy Grail” is this one single trade whose successful conclusion will make you richer than your wildest dreams. It will produce a return of, for example, 300% in the space of a few days.
For example, you buy stock x today, it goes up by 300% by next week. Now don’t get me wrong, I am not saying that this can never happen; up to a certain extent, it can, and it does. In fact, this is what often happens when a junior oil explorer discovers oil in one of its exploration fields, or when a junior miner secures permission to explore a likely gold-rich geographic area of the world.
What I am saying however is that forever looking for and investing all of your available funds in this one junior explorer that if successful in its efforts will make you filthy rich is by no means a full proof trading strategy, nor is it a prudent way to achieve consistent returns over the years.
Obviously when saying this, I assume that one’s investments involve no element of market manipulation, use of inside information or any other related form of financial crime that both I and the FCA would clearly advise you to abstain from.
You see, what I am about to share may sound a little mean, but I am convinced that there is a very specific reason that occasional financial press celebrities who claim they consistently make 300% (and above) returns on their trades in very short periods of time cannot “sell” to professional traders like me. This reason is that I have seen enough of the markets to realise that they are either lying or are actually guilty of some form of market manipulation, insider trading or some other offence. In either case, I would rather keep as far away from these types of people and situations as possible.
I believe that trading and investing are a business, and should be approached as such. As some of you will know from running your own business, or simply ensuring that your daily work contributes towards your employer’s success, businesses need to be consistently performing and profitable in order to survive and prosper. The exact same principles apply to investing and trading.
As any honest professional investor will tell you, the way to make money in the markets is to be consistently profitable over a period of time. This period is not a few months or years, rather it is many years or even a lifetime. In order to achieve this, one needs many small winning and losing trades, a few big winners, and no big losers.
One is bound to have big winners over time, though not necessarily by design or because one is focussed on this. Let me give you an example that I often come across in my own trading and when advising my clients. Many of my clients as well as myself like trading companies’ annual or semi-annual results announcements, by buying into a company’s stock a few days or even the previous day before the announcement when looking for good results, or alternatively selling short the company’s stock when we believe the results are going to be bad.
One of the most recent trades of this type I advised clients on, and discussed on TV was a Buy in Workspace Group (WKP.L). On 6th March 2015, the company reported annual results which beat analyst expectations and the stock closed 6.52% up on the day. In money terms, this means that if you had bought £10,000 worth of Workspace shares during the last days preceding the announcement, you would have made a profit of £652 at market close on 3rd March. If you had used leverage – i.e. CFD products for this £10,000 trade – you would have made five times that given that the CFD margin for Workspace is 20% with most UK clearing brokers. A £10,000 initial deposit would have given you exposure to £50,000 worth of the underlying shares, so a gross profit of £3,260. This is a 32.6 % return on your initial investment in the space of a few days.
So yes, quick high returns ARE possible even in liquid FTSE 100 and FTSE 250 stocks. The point I made earlier though, is that they are neither the actual trading strategy nor the “Holy Grail”; rather they are the result of adopting a well-researched trading strategy. In this particular case, the strategy involves buying into companies that have been doing well, and selling short companies that have been doing badly prior to their results’ announcements.
Although making such trades obviously entails a higher level of risk than just buying and holding blue chip shares for the long-term, it is (or at least should be) based on thorough analysis of the company’s past financial performance, competition, related news flow, and other factors. In other words, it involves taking a calculated risk, and is neither gambling, nor hoping and wishing for this one single trade that will make you rich. Furthermore, it is not every time a company reports good results that you see its stock price rise by 6.5% on the day. More often than not, even if results announcements are good, liquid stocks tend to move by a 1-2% threshold instead. You will have to learn to be happy with achieving these small successes, because the truth of the matter is that as long as you manage your risks properly, these will ensure you make consistent money over time.
I repeat this to the clients and traders I train: The financial markets are NOT where you should derive all of your life’s excitement from. Taking this one step further, the markets are also not a place where you should expect to “win the lottery” or meet your “one true love”, the quest for both of which closely resembles investors’ ongoing quest for the “Holy Grail”. Yes, you may get lucky enough to actually win the lottery or meet your one true love on any day. After all, “who am I to disagree” when, as an old song goes, “I travelled the world and the seven seas, and everybody is looking for something”? But until you find either, how about you focus on consistently growing your trading capital in a more consistent way? Hopefully, after reading my article you are at least more open to the idea.
Until next month,
Happy trading everyone!