Markets and Indices

Celticheart Investor

A beginner's guide to trading and investing

When it comes to investing one of the most important considerations is which markets do you invest in. By that I mean do you invest in the main stock markets such as the Footsie which tend to be better regulated and more stable or do you invest in one of the smaller markets such as AIM http://www.londonstockexchange.com/companies-and-advisors/aim/aim/aim.htm which is made up of smaller cap companies and is without doubt a more volatile market? Ultimately it comes down to your approach to investment and risk.  

AIM is, at least according to their website, the most successful growth market 
in the world. Since its launch in 1995, over 3,000 companies from around the world have chosen to join AIM. 

There are of course many indices in the UK stock markets: 

• FTSE 100
• FTSE 250
• FTSE 350
• FTSE All-Share
• FTSE AIM All-Share
• FTSE techMARK All-Share
• FTSE SmallCap
• FTSE Eurotop 300
• Ethical Indices

The main markets are more stable with generally a far higher share price, particularly in the Footsie 100, the growth rate might not be spectacular but the risk is generally far less (although nothing is certain in today's market) and you are far more likely to get a dividend paid on your investment.

The added advantage of investing in the main markets is that they are ISA allowable, whereas previously AIM stocks have not been although looks like it is about to change as is explained below: 

During the recent budget announcement, George Osborne announced that from April 14th next year no stamp duty will be payable for shares that are listed on AIM and other so called "growth" markets (currently 0.5% duty on all markets). He also said that he was in consultation over the allowance of AIM shares into stocks and shares ISA, this has now been approved and will become allowable from 5th August this year.

Until now the only AIM stocks that were allowable were those that were dual listed e.g. listed on both AIM and ASX http://www.asx.com.au/ or AIM and ISE http://www.ise.ie/

It is also worth bearing in mind that these share are not subject to inheritance tax, provided they have been held for at least two years.

I am restricting my market listing to those in the UK as, for most small investors in this country that is where they choose to invest, even though the companies they invest in can also be listed on other global markets.

One thing I have noticed is that investors who frequently monitor their holdings rarely seem to look at the overall performance of their Indices. This year I think it is fair to say that the smaller markets have taken a real hammering and have been seen as very Bearish but recently all of the UK Indices Ichimoku Trader on http://www.ichimokutrader.com/ seem to be indicating a Bullish trend or Bull run is imminent. I sincerely hope that they are right.

Footsie 100 (Chart courtesy of amCharts.com)

AIM (Chart courtesy of amCharts.com) 

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

Bulletin Boards

Celticheart Investor

A beginner's guide to trading and investing

Although I have mentioned Bulletin Boards (BB's), also known as Discussion Boards in the past, I feel it is worth looking at some of the positives and negatives of posting messages on these boards.

In theory they are meant to be an outlet for investors and traders alike to exchange information and discuss the various merits and pitfalls of companies that are either invested in or are considering investing in.

There are many excellent and well researched posters out there from whom you can learn a great deal, not just about investment but about the technicalities of the companies involved. I am interested in oil and gas production and have learned a lot about the specific terminology used in exploration and recovery of both. When investing in any company it helps to have a decent understanding of how they function.

The problem is that as well as genuine and knowledgable posters there are others that have other less savory motives for posting. These can range from cynical exploitation to the modern day phenomenon of Trolling.

So what exactly is a Troll, well to quote an extract from Wikipedia:

"In Internet slang, a troll is a person who sows discord on the Internet by starting arguments or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community (such as a forum, chat room, or blog), either accidentally or with the deliberate intent of provoking readers into an emotional response or of otherwise disrupting normal on-topic discussion."

The problem is, those that facilitate the boards don't always read or moderate what is written but what they will do is respond to a direct complaint through their neighbourhood watch facility. Some boards are better than others and as a result are less prone to abuse. My advice is simple, don't get involved with these people, they want a reaction, that is their sole purpose for being there, to disrupt constructive discussion.

Sometimes it is hard to understand why people would spend so much of their time posting on boards where they have openly declared no financial interest simply to tear down the company's shareprice in any way they can.

I have heard it said that these boards do not influence the shareprice but I disagree, the sheer volume of posting some of these people indulge in pushes the discussion up the search engine rankings so new investors researching a company often come across negative and false information.

Beware also that responding to these trolls can draw the attention of the facilitator/moderator to your own posting, often resulting in suspension of your right to post. I sometimes feel that this is the true reason behind the trouble causing posters, the removal of any positive sentiment that might counter what they are trying to achieve.

If you feel that a fellow poster has been wrongly suspended for a period or even banned for responding to these people, let the moderator know either through neighbourhood watch or via e-mail. If enough supportive posters do that then those wrongly targeted will be re-instated.

Continue to post on these boards as sharing valuable research and information is helpful, particularly to those relatively new to the world of investing just be careful who you trust and take nothing at face value

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

Taking Profits

Celticheart Investor

A beginner's guide to trading and investing

Now this is going to sound obvious but until you actually realise your profits it is pretty much academic how well your investments are doing. You would think that this would have a significant effect on how people manage their profits but frequently it doesn't.

How many times have you heard this statement, spoken with regret:
"If only I had sold when it was at its height"?

Look at how many potential "Dot com" millionaires saw massive paper profits only to see them evaporate before their eyes. The problem comes down to one thing and one thing only, greed. The reluctance to sell a single share when the price is rising for fear of missing out on that "multi-bagger" (a common term for when an equity realises multiples of the original buy price).

We all have to work out our individual strategies but my advice would be to lock in some profits on the way up, that way if the price does retrace you can always buy back in at a lower price. The other benefit is that if your profits allow you to you can sell enough to cover your original investment leaving you with what is in effect a "free carry" for the balance.

This method of profit taking is often referred to as "top slicing", which simply means taking profits off the top of your holding, de-risking your investment as you go.

There is always the danger that the company will do so well you will look back with regret at the percentage you sold thinking you could have made even more money, but that is what investing is all about, taking profits when you can.

There is always going to be the risk of getting the timing wrong, sometimes we will sell prematurely and sometimes we will delay selling until the price has peaked and retraced. Only you can decide when is the right time to bank those profits, you just have to learn to live with those decisions. On balance they will protect your investment and you will probably sleep better.

There is also the danger of getting too emotionally involved with your holding feeling that by selling you are somehow showing loss of faith in that company.
That sounds strange I know but I have seen it happen and even felt myself being drawn into that situation as well.

Recently a CEO of a company I invest in was criticised becase he dare suggest that investors in his company would have been wise to bank some profits along the way. He was not suggesting that shareholders should sell out simply that they should reap the benefits of a volatile market. It was, in my opinion, one of the most honest things I have ever heard a CEO say but it was met with derision by the very people he was trying to advise.

Investing is a business and like all businesses it is ultimately about profit so take a long hard look at your holdings and ask yourself should you be banking some profits or simply holding on in the knowledge that, on paper at least, you are doing very well indeed.

Next time:  A glossary of terms

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

 

Communication

Celticheart Investor

A beginner's guide to trading and investing

One thing we all rely on in making our investment choices is receiving information both from the companies we are interested in and about those companies. You would imagine that keeping private and institutional shareholders well informed would be a pre-requisit of any sound business but in truth, the quality of that information varies from company to company. Some do it extremely well and others fail miserably.

So what are the sources of this communication and where can we look for it?

That largely depends on the kind of information you are looking for, any company who understands the value of effective communication will have either its own shareholder information department or, will employ the services of a financial PR company. This is fine if you are looking for an overview of the company's management structure, its operations and its philosophies.

If however you are looking for price sensitive information, the kind of data that will have a real impact on the shareprice, good and bad, then you will have to look to the Stock Exchange's official news service, the RNS or Regulatory News Service. By law, any information that could have a direct impact on the company's value has to be released through this service. The theory being that by informing all of the market at the same time it gives everyone the same chance to make their value judgements.

Occasionally of course sensitive news is leaked in advance, it should not but the reality is it happens. This might be someone genuinely in the know or simply an observant member of staff lower down the ranks. Either way it can be classed as insider dealing and can often be the source of ill founded and damaging rumour. My advice would be, if it is not in an RNS take it with a pinch of salt.

So how do you find these RNS messages? Well the easiest way is to go directly to source and sign up for the LSE website, from there you can simply log in, click on the NEWS tag and enter the epic code of the company concerned

http://www.londonstockexchange.com/products-and-services/rns/rns.htm

There are of course many other ways of acquiring information such as the many bulletin and discussion boards that are a daily part of communication for many investors. The problem with these boards is they vary immensely in both the quality and reliability of the information on offer. Some of these boards have knowledgable, experienced posters from whom you can learn a great deal but sadly and far too frequently for my liking there are many posters that have little to offer except cluttering up these boards with nonsense.

Some of these posters have their own agenda of course either talking down a company (de-ramping) or talking up a company (ramping) to try and influence weaker shareholders into either buying or selling their holding. You might think that this would have little effect on the shareprice but when you consider the hundreds of thousands of people who read these boards every day (far more that  post on them), you can see the influence that it can have.

Social media has become a powerful tool with applications such as "Twitter" and "Facebook" being very effective at reaching large numbers of people in a short space of time. Recently I notice that even CEOs of companies are not exempt from posting "Tweets" about seemingly innocuous events in an attempt to score points over their competitors. Whether this is a professional way to behave is questionable in my opinion but for some it is a way of life.

There are of course other means of acquiring information such as the press, many newspapers run financial columns with both free and subscribed share tips available. Whether or not you trust their judgement there is little doubt that they have a following and can often influence shareprice simply by weight of numbers. Before you invest your hard earned money on the back of these tips I would strongly recommend that you do your own research too as, all too frequently, prices spike on the back of these tips and you can easily get caught out by buying in at too high a price only to see the price retrace rapidly a short time later.

There are of course the paid investment advisors who run subscription only services with varying degrees of success, this could be provided by your stockbroker or by an independent advisor. Whichever catches your attention you would do well to look at their past record before paying them for their services.
Some of these, even high profile ones do not always get it right, sometimes spectacularly so.

There has recently been a growth in the number of professionally run seminars and forums where companies get to present their case to private shareholders. This for me is an invaluable source of information as the presentations are often made by senior management, even by the CEO and COO of the company. Podcasts have been used effectively too with online interviews with CEOs presenting their case.

For links to these events simply look on line for investor forums such as http://www.proactiveinvestors.co.uk/ or http://oilbarrel.com/pub/conference

Next time:  Locking in profits

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

 

Stop Loss

Celticheart Investor

A beginner's guide to trading and investing

Setting a stop loss is one of those things that, at first glance seems like a great idea but when you look into it in  greater depth can be less appealing. So what exactly is a stop loss you might ask?

A stop loss is any order that you place with your broker or automatically online to sell a security when it drops below a pre-set price. The idea is to limit your losses in the event of a sudden drop in price. This is also know as a stop order or a stop-market order but to be honest the term generally used is stop loss.

So what could possibly be wrong with a system designed to reduce your risk of losing money, after all risk reduction is what it is all about? The problem is this, imaging that you stop monitoring your shares for a while whether for a day, a week or a month having set your stop loss at say 15% below the current price.

While you are gone the price drops dramatically for a very short period of time, maybe because of profit taking, bad news or just rumour. Regardless of the reason behind the drop if it falls below your set limit your shares will be sold.

You will have lost 15% of the value of your holding but 85% (less the trading fee) will still be intact, in cash, back in your account. The problem arises if this was little more than a temporary drop caused by sentiment rather than any major catastrophy so the shareprice recovers, possibly even back to the level you left it at or higher.

You return to your holding to find that not only are you 15% down on your investment but  to buy back in will cost you even more, as usually the Ask (buying price) is higher than the Bid (selling price). So what seemed like a good idea has in fact turned out to be a bad thing.

Now I am not saying that stop losses do not work, of course they do, in the event of a sustainable drop in the price you will have limited the damage to your funds possibly even getting the opportunity to buy back in cheaper.

This is where it gets tricky, how do you decide when a stop loss is a good thing or not? I would suggest that, as with much to do with investing (or trading) that there is no simple answer except that the more volatile a share is the more likely it is that you will get spikes and retracements so the more likely you are to trigger your stop losses.

If you ask the more savvy investors they will tell you that it is not uncommon for a share to come under an attack often referred to as a "stop loss raid", where a price is deliberately driven down to trigger stop losses and as a result free up shares which will inevitably then be bought cheaply. Whether or not this is just one of those myths associated with trading or not it is impossible to say and even more impossible to prove, suffice to say it does appear to happen more when a security is in demand.

One way of protecting yourself is to monitor the volatility of a share which many charting packages will allow you to do. If the security is high in volatility then you are probably best to ride the peaks and troughs but if it is low in volatility then a sudden drop could be significant so worthy of setting a stop loss. Ultimately only you can decide the risk level you are prepared to take and whether setting a stop loss is the right course of action for you.

It is probably worth mentioning that stop losses can also work when shorting a security by limiting the price at which the share is bought but the same risk applies with a spike triggering your purchase at a higher price than you wanted to pay. Personally I do not "short" a stock but many do so worth a mention.

A stop loss can of course also be used positively to lock in profits by setting a sell price at a level of profit you are happy with lets say 10%. In a volatile market where spikes are common you might decide that it is worth ensuring you gain some profit rather than miss out on selling on a spike, the danger here of course is that you sell prematurely and miss out on a much bigger profit.

You can of course set what is called a "trailing stop loss" where the stop loss level tracks the current shareprice by a fixed percent for a given period of time making the risk of getting caught out less likely.

Next time:  Communication

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

 

Relative Strength Index (RSI)

Celticheart Investor

A beginner's guide to trading and investing

The relative strength index (RSI) is another technical analysis tool created by the renowned J. Welles Wilder who, surprisingly enough started out as a Mechanical Engineer by profession.

He was also a keen investor in real estate and, after just seven years quit working as an engineer to concentrate on real estate full time. It was only after he sold out to his business partner that he started to focus on research and trading, concentrating mainly on silver futures.

He is best known for having developed several technical analysis tools that are now regarded as "core indicators" in trading, such as "Average Gain / Average Loss" and one which we have already covered Parabolic SAR

The RSI is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. It's prime function is to compare the amount of recent gains to recent losses to try and identify when the stock has been overbought or oversold and is calculated using the following formula: RSI = 100 - 100/(1 + RS*)

I have extracted a concise description of how RSI works from Wikipedia (with thanks) as it explains it far more succinctly than I could:
How the Relative Strength Index (RSI) works.

http://en.wikipedia.org/wiki/Relative_strength_index

"The RSI is regarded as a momentum oscillator, measuring the velocity and momentum of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum."  (Quote courtesy of Wikipedia)





For a more in-depth look at RSI check out the link below:

http://www.investopedia.com/terms/r/rsi.asp#axzz2HC5UYARm

Next time:  An overview of charting

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

The MACD

Celticheart Investor

A beginner's guide to trading and investing

The next logical step after looking at moving averages is the Technical analysis tool Moving Average Convergence - Divergence, more commonly called the MACD.

The MACD was created by Gerald Appel in the late 1970's and is used to identify changes in the strength, direction and duration of a trend in a share price.

Developed by Gerald Appel in the late seventies, the Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average (26 day) from the shorter moving average (12 day). 

The MACD Line is calculated by subtracting the the 26 day EMA (long term) from the 12 day EMA (short term). In addition to which the 9 day EMA is used as a signal line (also called the trigger line) to identify trend changes. The MACD Histogram (bar chart) shows the difference between MACD and its 9 day EMA, the Signal line. The histogram is positive when the MACD Line is above thes Signal line and negative when the MACD Line is below the Signal line. 

The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Consequently, traders can identify signal line crossovers, centerline crossovers and divergences to generate trends.

The term MACD is confusing at times because it is used to refer to the indicator as a whole and also the MACD line itself. Just like the EMA the MACD is based on historical data so is always going to be lagging behind the current sp. Although the MACD does not lag behind as much as the EMA as the convergence or divergence can be anticipated in advance, using the zero line as a point of reference.

Although the most common periods used for calculating the MACD are the 
12 day, 26 day and 9 day EMA, other periods can be used depending on the trader's strategy and goals.

For a more in-depth look at the MACD check out the links below:

http://en.wikipedia.org/wiki/MACD

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 

http://www.investinganswers.com/financial-dictionary/technical-analysis/moving-average-convergence-divergence-macd-851 

Next time:  Fibonacci Numbers

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.
 

Bollinger Bands

Celticheart Investor

A beginner's guide to trading and investing

Having looked at some examples of candlestick charts 
it is obvious that alone they are not always conclusive enough (something which seems to sit uncomfortably with shareholders that want clear direction), which is why we use other tools to supplement these charts to help make sense of what is going on. 

This blog is not meant to be an in-depth analysis of any individual company so my apologies to those that took it that way, I was simply trying to show an example of how, sometimes, the charts do not tell us enough.

Moving on, the first additional tool that is used to complement candlesticks is referred to as "Bollinger Bands" or BBs for short, so what exactly are they?

"Bollinger Bands" is a technical analysis tool devised by John Bollinger in the early 1980s and trademarked by him in 2011.

There are in fact three bands, the upper middle and lower bands. The middle band which is a simple moving average (usually set at increments of 20) which tracks the intermediate trend and the upper and lower bands track the overall volatility of the share price. 

If the BBs are wide apart then the trading is pretty volatile but when they are close together this shows that the sp is becoming more stable. This can often help, in conjunction with the chart patterns themselves to give a more accurate indication of where the share price is going.

I believe this is a good example of how the BBs close up when market sentiment turns in favour of the share in question.

How Bollinger bands are interpreted varies depending on the individual's trading strategy.  Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger

As I said at the beginning, BBs are a great tool to use in conjunction with candelstick charting to add confirmation to trends. For a more detailed look at Bollinger bands check out the links below

http://en.wikipedia.org/wiki/Bollinger_Bands

http://www.bollingeronbollingerbands.com/chart/main.php

http://www.bollingerbands.com/

Next time:  Moving Averages

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.