tmp5015 TMP

BUFFETT
Bestselling author and stockbroker extraordinaire Jacques Magliolo

reveals what it takes for a novice to become a successful global market
trader. William Rankin, Millionaire Lifestyle
RICHER THAN BUFFETT
RICHER THAN
FULLY REVISED AND UPDATED

Nowadays, the stock market is no longer limited to rich global traders. Anyone can trade
equities without the help of a broker. Despite this opportunity to build staggering wealth,
potential investors seem to continue to stumble in the dark. Too many take the easy route
of trading on advice from friends or so-called experts. These traders inevitably leave the
market before they are able to create a definitive path to becoming their own stockbrokers.
Indispensable to both beginners and successful investors, this book offers a clear
and simple method for picking winning stocks and managing your portfolio in the
short and long term.
Jacques Magliolo has been described as Africas most successful trader. Today, he
is an associate to a number of stockbrokers, concentrating on assisting traders with
restructuring their portfolios and developing strategies to become more efficient
and ultimately more profitable.
PENGUIN
Non-Fiction
JACQUES MAGLIOLO
This book shows you how to avoid such pitfalls. It outlines what a stock is, explores the
different types of securities and provides advice on the equipment and software required for
successful trading. It also pinpoints strange market behaviour, investigates what causes price
changes and describes how investors can develop strategies for buying and selling stocks.
MILLIONAIRES SERIES
RICHER THAN
BUFFETT
THE DAY TRADERS HANDBOOK
TO ULTRA-WEALTH
JACQUES MAGLIOLO
BESTSELLING
INTERNATIONAL AUTHOR
Richer Than
Buffett
Richer_than_buffet.indd 1
2012/10/19 8:36 AM
By The Same Author

Share Analysis and Company Forecasting
The Business Plan: A Manual for South African Entrepreneurs
The Millionaire Portfolio
Jungle Tactics: Global Research, Investment & Portfolio Strategies
A Guide to AltX: Listing on South Africas Alternative Stock Exchange
Become Your Own Stockbroker
The Corporate Mechanic: The Analytical Strategists Guide
Richer Than Buffett: Day Trading to Ultra-Wealth
The Millionaire Portfolio: New Edition
The Guerrilla Principle: Winning Tactics for Global Project Managers
Women & Wealth: Footsteps to Financial Freedom
Lore of the Global Trader: Strategies to Master International Markets
Master Trader: Novice to Professional in Six Steps
Become Your Own Stockbroker: Revised & Updated
2012/10/19 8:36 AM
Richer Than
Buffett
The Day Traders
Handbook to Ultra- Wealth
Jacques Magliolo
PENGUIN BOOKS
2012/10/19 8:36 AM
Published by the Penguin Group

Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg
2196, South Africa
Penguin Group (USA) Inc, 375 Hudson Street, New York, New York 10014, USA
Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario,
Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc)
Penguin Books Ltd, 80 Strand, London WC2R 0RL, England
Penguin Ireland, 25 St Stephens Green, Dublin 2, Ireland (a division of Penguin
Books Ltd)
Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124,
Australia (a division of Pearson Australia Group Pty Ltd)
Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi
110 017, India
Penguin Group (NZ), 67 Apollo Drive, Mairangi Bay, Auckland 1310, New Zealand
(a division of Pearson New Zealand Ltd)
Penguin Books (South Africa) (Pty) Ltd, Registered Offices:
24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa
www.penguinbooks.co.za
First published by Penguin Books (South Africa) (Pty) Ltd 2011
Copyright Jacques Magliolo 2011
All rights reserved
The moral right of the author has been asserted
ISBN 97801435 ???? ??
Typeset by Wouter Reinders
Cover by Flame Design
Printed and bound by
Except in the United States of America, this book is sold subject to the condition
that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise
circulated without the publishers prior consent in any form of binding other than
that in which it is published and without a similar condition including this condition
being imposed on the subsequent purchaser.
2012/10/19 8:36 AM
Bull markets are born on pessimism, grow on scepticism, mature

on optimism, and die on euphoria. The time of maximum
pessimism is the best time to buy, and the time of maximum
optimism is the best time to sell.
If you want to have a better performance than the crowd, you
must do things differently from the crowd.
Sir John Templeton (1912 2008), US born-British stock
investor, businessman and philanthropist.
2012/10/19 8:36 AM
To my brothers Thierry and Phillip
2012/10/19 8:36 AM
Introduction ...............................................................................................
Preface: Warren Buffett & Mentoring .....................................................
Chapter 1: Psychology & the Traders Mental Game ..............................
Chapter 2: The Road to Ultra-Wealth ......................................................
Chapter 3: Trading to a Game Plan ..........................................................
Chapter 4: Technical Analysis an Introduction .....................................
Chapter 5: Essential Technical Analysis ...................................................
Chapter 6: Simplicity & Trading Profits ...................................................
Chapter 7: Turning Professional The Intraday Trader .........................
Chapter 8: Tools in the Traders War Chest .............................................
Chapter 9: Preparing for The Next Decade .............................................
Appendices .................................................................................................
Contents
2012/10/19 8:36 AM
2012/10/19 8:36 AM
ix
Introduction
Let me get straight to the point to succeed as a day trader you need to
be re-educated. I dont mean going back to school or university, but your
mind-set needs re-adjusting. And I mean in every conceivable way; I will
explain throughout the book, and I am sure that some of the concepts will
probably shock you. However, if you want to prosper as a day trader you
will have to take these concepts seriously.
Over 95% of day traders lose money at least, in their first year of
operation. But those who persevere into the second year of trading, having
gone through harsh (but valuable) lessons, tend to love the excitement of
being self-employed in an industry that can turn funds into millions.
I have seen many traders succeed, but even more fail and give up in
the first three months of trading. Make no mistake, this is not a career
for everybody and those who believe that they will make billions without
encountering problems, will quickly find hard-earned cash turn to cents.
Of course, some new traders do get lucky. The rest get wiped out. Why
do so many new traders wipe out their capital in a short time? The answer
is rather simple. If you start a business without the right information and
foundation, financial trouble will follow. Most day traders simply dont
know what theyre doing. Usually, the reason comes down to a lack of
understanding
Writing Richer than Buffett has been an interesting project, particularly
after the literally thousands of emails that followed Become Your Own
Stockbroker asking me to consider writing a book that concentrated on day
trading. To achieve this, I have broken down the book into eight chapters,
with 29 sets of questions; each chapter getting more complex, with the
final two chapters looking at professional intraday trading and the various
securities they trade.
My advice is to not skip the earlier chapters; these set a foundation for
discipline and techniques needed to make a success of a life as a day trader.
All the answers to the questions are freely set out on the website www.
magliolo.com.
For every trader, there are a host of criteria that go before every trade.
At any given time, any trader should be able to go through a log of a trade
and ask, Why did I make that trade? More importantly, they have to ask
themselves that question as they examine both winners and losers.
Being prepared begins before the market is open; whether you wish to
2012/10/19 8:36 AM
trade Single Stock Futures, Shares or Warrants, preparation begins with

reviewing what markets did the previous day and what you see as that new
days significant price levels. For so many traders both beginners and
those who are experienced the transition from the pre-market analysis to
the trading day is a challenging one.
Another simple mistake new traders tend to make is to assume markets
are influenced only by supply/demand factors. They ignore investor
sentiment, opinions and motivations for buying or selling securities. In
1990, on my first day as an analyst for a large stockbroking firm, the rather
intimidating head of research asked me: What is the difference between a
companys earnings per share and a share price? After much deliberation,
I said: Surely, share prices are influenced by earnings per share.
I wont repeat what he actually said, but the essence was that share
prices have an additional variable: investor sentiment, which you cannot
always determine. There will be times when negative news will see share
prices rise and times when good news has a negative market reaction.
During the trading day, day traders watch markets develop, mindful of
price targets based on the technical charts, including volume, momentum,
moving averages and so on. When it all comes together in line with the
traders strategy and execution, it is exceptionally exciting and potentially
very profitable. The point is that nothing comes together without careful
planning, knowledge and experience, and not simple guesswork. Planning
includes knowing price targets, exit strategies and time frames. And then,
of course, there is the element of surprise. On any given trading day, you
might have to deal with an unexpected earnings warning from a major blue
chip company that causes the market to shudder, or a terrorist attack that
causes a rapid movement in intraday statistics.
Unlike the long-term investor, the day trader is affected by both
rumours and factual data and therefore, the only way to trade is with sound
analysis, calculated action and extreme discipline.
I have spoken to hundreds of traders since 1990 and (in a more focused
approach) during the writing of Become Your Own Stockbroker and Richer
than Buffett, and their simple recommendations to new and aspiring day
traders are always the same:
Always use a stop loss to exit a losing trade.
Never expose too much capital per trade.
Always know why you make the trade.
Always trade with complete discipline.
2012/10/19 8:36 AM
xi
I would add the following to the four unbreakable rules: Change your
mindset before entering the market.
The market is not your friend, but disaster is.
This is the first lesson for day trading and one that you may find a little
unsettling: War in Iraq, higher oil prices, volatile political relationships
with North Korea, terrorism, famine, tsunami, high crime levels and
any other unpleasant global environmental factors are your friend.
Remember that disaster provides market volatility and it is this basic
fact that enables the day trader to take advantage of price discrepancies.
These discrepancies tend to move prices below or above true and realistic
values. In finding these anomalies, the day trader can profit at times to
the extreme.
After all, George Soros made a billion dollars by forcing the UK pound
out of the European exchange-rate mechanism in 1992. It can be done, but
the day trader must be more aware of his or her surroundings.
As such, I have started this book with a simple review of the mental side
of trading. It is an essential part of Richer than Buffett and I recommend that
you do not skip to the more exciting chapters. For the novice trader, this
section will serve as a good, solid introduction to the market and trading
with a plan. Nevertheless, for the more experienced trader, this will be a
refresher in some areas and remediation in others. Remember, no matter
how long youve been trading, you can never stop learning. Always, always
pay attention to the lessons that the market is teaching you.
Now that the teacher pointing the stick part of this introduction is over,
let me introduce you to two very different traders; Linda Racht and David
Owen. For obvious reasons, these are not their real names.
Meet International Futures Trader Linda Racht
In early November 2005, I spent a day with trader Linda Racht and watched
as she operated her online trading room, made trades and analysed the
markets. It was a long day. She was already working when I arrived at her
office 90 minutes before the FTSE opened, and she was not yet done when
I left around 6 pm. Given Racht has been in the business for nearly 25 years,
the long hours are not the result of inefficiency or lack of knowledge; its
the routine shes developed over the years.
Rachts approach can be summarised as applying a wide range of
research and historical testing on a discretionary basis, based on years
of experience. In fact, a large part of the discussion revolved around the
2012/10/19 8:36 AM
xii
importance of experience, both in extracting extra value from trading ideas

and in coping with the psychological challenges of the markets.
Racht is a popular speaker. At work, she insists on having the latest
technology and trading platforms. Given recent developments in the futures
industry, one has to wonder how Racht will be executing trades five years
from now. She is, to all intents and purposes, thorough and methodical and
extremely successful.
Her method of operation is to analyse global markets and hone that
research down to her specific markets. At the end of the 2005 financial year,
she had a record year. She looks for the positive and negative trends and
places trades accordingly; never a bull or bear all the time. All this takes
time; in-depth analysis and thorough understanding of the global futures
markets are not easy.
Her parting words: Who would have thought day trading was real
work?
Well, pretty much anybody whos tried to do it for a living and
succeeded proving again that the reality of trading is a different breed of
animal from what you usually read about or see on TV.
Meet David Owen: South African Commodities Trader
An unpleasant and negative person, but also thoroughly successful.
His starting point: Much has been written on day trading and on how
stupid people have made a great deal of money. Their money attracts other
stupid people, who crave to take it away from them; when this happens and
stupid loses it, there is panic that is when I come in!
Everyone wants to be invested when the market is in a bull run, but
when theres a panic, everyone runs for the same door, at the same time,
and prices collapse. Then everyone talks as if it is the end of the world, and
most advisors recommend clients to stay out of the market.
I agree: in reality, this is the time when you should be fully invested.
As history repeatedly shows, just when everybody is at their most negative,
markets recover.
He may be negative, but the meeting took place at 5 am; he was already
at the office, focused on the Eastern markets and the US$ price of gold and
platinum. He was ready to place his orders and not to be interrupted
pointed to some statistics to make his point.
Statistically, the average price decline (1945 to 2003) during a bear
market was 26.5% and the rise the year after 30.2%. If you are lucky enough
2012/10/19 8:36 AM
xiii
to sell before a panic, it will greatly benefit you to buy after a significant
drop. If, however, if you are like most of us, and didnt see the crash coming,
it wont help to sell after the fact.
You should then be buying more.
So, youve being introduced to two very different traders, one
methodically undertaking research and due diligence prior to trading, the
other profiting from world economic, social and political disasters. Yet both
are thorough, only making informed decisions based on solid and reliable
analysis.
I did warn you that some ideas advocated by day traders are radical. A
market crisis presents an outstanding opportunity to profit because it lets
loose overreaction at its wildest. In fact, in a crisis or a panic, the normal
guidelines of value disappear and people no longer examine what a stock is
worth; instead they are fixated by prices cascading ever lower. The falling
prices are reinforced by expert and peer opinion that things must get worst.
And the astute day trader then profits. He or she, however, cannot know
what has become under- or over-valued without fundamental and technical
analysis.
I tend to advocate a combination of both traders: thorough analysis,
but not to the point of killing a deal. After all, as David Owen would say:
Indecision in day trading is the mother of all F. So, profit from good
or bad times; or both. The door to your trading skills has opened. Take
advantage and enjoy!
Jacques Magliolo
2012
mentor@magliolo.com
www.magliolo.com
2012/10/19 8:36 AM
xiv
Preface: Warren Buffett & Mentoring

Definition: Day trader
(Day trader), noun: A person whose goal is to make his or her profits
from a security in the shortest amount of time.
From the outset, lets clear up a slight confusion over the term day trading.
Around the world, the term day trading can mean the act of buying and
selling a stock/security within the same day or within days. After perusing
literally hundreds of documents about trading securities, I have come up with
definitions to hopefully remove any doubt. These will be used throughout
the book. Lets start with the person, who buys shares, and holds them for
the long term, trading few stocks annually. This is the ordinary investor and,
according to definition, not a trader.
Then we can split the meaning of someone who trades regularly, to
someone who trades every day. Richer than Buffett assumes that trading
regularly can be done by either professional or novice. This is the day trader,
who may hold positions overnight. Now, someone who actually trades every
day and closes all positions at the end of the day has a different set of
strategies and is called the intraday trader.
The important difference is in the manner in which trades are conducted,
the size and types of trades. Again, Richer than Buffett assumes that the
intraday trader is the ultimate target to reach, enabling the novice to turn
professional and to trade all types of securities and to do so for a living.
How, then, do you turn professional?
First, know the rules. This includes trading, technical and fundamental
analytical rules. Know the environment and factors that can (and do)
influence markets, domestically and around the world.
Secondly, immerse yourself in the world of stockbroking, from attending
political rallies, talking to analysts to watching financial broadcasts. Read
company annual reports and get as many financial newsletters as possible.
An old investor once told me that he was every directors nightmare. He
had bought a single share in every company listed on the JSE Securities
Exchange, giving him every right to talk to directors, attend every
presentation and annual general meetings. Only when he was truly satisfied
with every element of a business, would he buy the companys share. I am
2012/10/19 8:36 AM
xv
not suggesting that you do this. I am simply saying that, to be a day or

intraday trader, you have to be serious.
Thirdly, get a mentor. I believe the most effective way to become
successful as a day trader is to learn directly from a professional, who has
already made his or her mistakes and been through the struggle one faces
when starting out in day trading.
I have often met new day traders, who had become confused by all the
day trading tools they owned. I found they had all the trading knowledge
they needed, but no one had ever explained to them how to use those tools.
A good mentor is essential for you to use the tools effectively.
Gates and Buffett
Bill Gates, the richest man in the world for many decades, often talks about
his mentor Warren Buffett, who just happens to be the worlds most successful
investor. It is well documented that Buffett was mentored by the famous
investor Benjamin Graham, who is known as the father of value investing.
Many businesses have formal mentor programmes, as the benefits to
be derived from this have repeatedly been proven. Successful people often
mention that a prime reason of their achievement was having a mentor.
So, if Gates and Buffett have mentors, shouldnt you have one? Finding a
mentor can be challenging, so contact me on mentor@magliolo.com.
When I proposed this book to follow on the success of Become Your
Own Stockbroker, I wanted a title that reflected techniques of day trading,
while tempering the aggressive style many traders have with the sensible
logic of Warren Buffett. Richer than Buffett? Maybe not, but certainly a
wealth target worth pursuing.
To quote Warren Buffett: Put the odds of success in your favour and
get a mentor.
A Buffett Brief
Warren Edward Buffett (born: 1930, Omaha, Nebraska) is a US investor,
businessman and philanthropist.
Buffett has amassed an enormous fortune from his long-term
investments, particularly through the company Berkshire Hathaway, of
which he is the largest shareholder and CEO. With an estimated worth of
US$46 billion, he is ranked by Forbes as the second-richest person in the
world, behind only Microsoft chairman Bill Gates.
2012/10/19 8:36 AM
xvi
Buffetts philosophy on business investing is based on the value-investing

approach of his mentor Benjamin Graham, who bought companies that
were cheap compared to intrinsic values. He reasoned that the market
would eventually realise that these companies were undervalued and share
prices would correct. This would occur, whatever type of business these
companies were in. This is, by all definitions, long-term investing and not
day trading. Yet, this method of analysis does prove successful with day
traders, who can determine anomalies between share price and fair value.
Buffett is thus quite different in his approach to the usual idea of the
super-trader making enormous investments based on a slight movement
of the markets in anticipation of a huge rise or fall. This has brought him
incredible wealth. When everybody was investing in high-tech stocks in
the late 80s, Buffett bought into Coca-Cola, which was at the time a very
unfashionable stock. He saw the potential in that this brand was known all
over the world and was instantly recognisable.
Buffett is a traditional investor who has proved that good, basic
strategies in research and looking to the long term rather than for quick
gains, is a good way to steadily build a massive fortune. He always remained
steady and is still building a progressive growth in the value of his stocks.
I have always advocated a slow, steady approach to investing, which, in
fact, incorporates many of Buffetts investment methodologies. Outlined in
Become Your Own Stockbroker, The Millionaire Portfolio and Jungle Tactics,
it bears repeating.
Step 1: Start small. Build knowledge, from general to market-specific.
Step 2: Open up an online trading account and buy shares. Understand
factors that influence shares, from blue chips to speculative shares.
Step 3: Open up an online alternative investment account. Start with
warrants. These will give you harsh lessons. Move on to Single Stock
Futures.
Step 4: Become an intraday trader. This is the focus of this book
Read this before starting your journey to day trading
Day trading does not need to be complicated. I have seen this with many
of the worlds leading day traders. Without exception, these top day traders
use a few basic strategies in combination with simple tools and day trading
indicators. Keeping it simple is the way to success in the markets, and a
good mentor will make things plain and clear.
Keeping techniques simple does not mean day trading is easy. There is
2012/10/19 8:36 AM
xvii
great scope for failure in the market because day traders must be disciplined
and must stick to their trading methods. This will be repeated numerous
times in this book.
Remember, you dont need to know everything about day trading to
succeed as a day trader. You need only to find a few solid strategies that
work for you; then master them.
A good mentor will help you on this search.
2012/10/19 8:36 AM
2012/10/19 8:36 AM
Chapter 1: Psychology & the Traders Mental

Game
I think investment psychology is by far the more important element,
followed by risk control, with the least important consideration being the
question of where you buy and sell. Thomas Basso, 1994: Panic-Proof
Investing, Wiley Publishing.
Basso is a stock and commodities trader, profiled in the book New
Market Wizards by Jack D. Schwager. He was president and founder of
global firm Trendstat Capital Management, which managed over US$65
million for 300 clients worldwide.
At the outset of this book, let me issue a warning: Day trading is not for the
faint-hearted.
Having said that, the industry has a strange attraction and hold over
potential entres into the world of trading. In Become Your Own Stockbroker,
I outlined specific methods to set up your own brokerage, strategies to
trade and easy steps to succeeding in the market. This book takes all this to
a higher level. The next step is to trade daily and to make this your career.
It is easy to become addicted to day trading, easy to give up your steady
job and to excitedly begin a journey to financial freedom. It is easy to start,
but extremely difficult to do it correctly and professionally. I advocate the
use of a mentor to get you on your feet; contact mentor@magliolo.com for
additional information.
Let me stress again, addiction to trading can result in financial ruin,
bankruptcy, divorce and suicide. Under pressure to make informed
decisions every day, new traders often crumble. Tell-tale signs of a problem
could be spending 12 to 14 hours a day at the computer. Worse, if you
find yourself lying about trading losses or neglecting loved ones, then you
are obsessive. This can only lead to making hasty and disastrous trading
decisions.
Traders typically spend one or two hours preparing for the markets
opening and another two hours analysing what happened after the markets
close.
2012/10/19 8:36 AM
THE BASICS
Here is a truism: people are the weakest link in any trading plan. Emotions
are the traders worst enemy, resulting in errors in judgment. The lesson
is both simple and difficult: ignore the emotions of the masses of investors
and traders in the market, and learn to control your own emotions. This is
essential to survival, but becomes difficult when everyone else is selling. I
have seen the panic on the faces of dealers, screaming sale orders. It is not
easy to avoid that emotion. Advice from experts: if you have conducted
thorough analysis, both fundamental and technical, why sell because others
are? Unless you have missed something in your analysis, ignore the herd.
There is no doubt that the stock market is an emotional place. During
my discussions with day traders, I asked Linda Racht: Have you ever
bought a security, then sold it at a profit, only to see it continue to rise and
rise, ever higher?
Racht: Yes, and it made me frustrated that I had sold too soon. I have
also sold a stock that fell to my stop loss before it continued to fall. I was
happy with the small loss.
I was amazed: Let me get this straight. You made money and felt
frustrated, but when you lost money, you felt happy?
The various securities on any exchange can turn traders (even
experienced ones) into confused and frustrated messes. Every day, there
will be joy, jubilation, grief, frustration and anger in the market.
It is this collision of emotions that creates opportunity for those who
know what to look for. Remember David Owen? Now you are starting to see
how emotion can be used as a trading tool.
By learning how to read the emotion of the market, new traders
can quickly gain an advantage in making effective and profitable trading
decisions. There are two main emotions that can wreak havoc in a traders
daily operations. Fear and greed can equally end a traders career.
FEAR
Be aware of two equally devastating kinds of fear:

Fear of taking a loss
Fear of losing a profit
Each of these can influence the traders thinking and discipline. At all
times, the trader must be in control of emotions in order to make the best
possible trading decisions.
2012/10/19 8:36 AM
Fear of Losing
There is no greater pain in stockbroking than seeing an investment fall. All
that hard work, in-depth analysis and technical analysis, only to be faced
with a security that is falling for no discernible reason. New traders tend
to see such a loss as having to admit failure. Instead of cutting the loss, the
new trader often slips into a state of hope. They hope the security will turn
around. The more the security falls, the greater the hope becomes that it
will become so undervalued that it will turn. The same can be said when the
trader has bought a Put Option and expects the security to fall. Instead, it
rises and he makes a loss. These concepts will be explained later on in the
book.
If the trader is honest, he or she will admit that embarrassment
prevented them from doing what they should have done, but simply did
not; they should have sold at their pre-determined trailing stop loss.
Example:
Leonard has research property cycles and listed property companies.
His analysis shows that Company A has a fair and realistic value of R120.
The share is currently trading at R110.
He places the stop loss at R95.
After one week of buying 1 000 shares in Company A, the share starts to fall
on rumours that the property sector is overvalued.
The share reaches R95, but instead of selling, Leonard insists that the share
is now undervalued and the market must surely come in and buy the share.
The share falls to R85 and Leonard now regrets not having sold the share,
but continues to hope that it will recover.
Leonards instincts tell him that something must now be wrong and that he
should get out. However, the fear of taking a loss overrides such thoughts
and induces him into thinking, I'll get out on the first rally back to my breakeven point.
As a result, he doesn't exit the trade.
This is simple common scene.

Many traders are confused by opposing market views and refuse to
accept that they are wrong in their analysis. Their analysis may still prove
others wrong, but remember that Leonards personal strategy was to sell at
R95. When he didnt, he lost his professionalism and became yet another
amateur in the market. These stories rarely have a happy ending. The point
of no return is hit and all money is lost. Sadly, Leonard could have sold
2012/10/19 8:36 AM
and entered other more profitable securities, but the fear of taking a loss
prevented him from taking action.
Keep in mind that a losing position becomes an emotional and
permanent stain, which will remind him every day of his mistake. It
wears the trader down emotionally. Struggling traders always believe that
tomorrow will provide a better opportunity to exit, rather than today. Such
thinking can only lead to financial ruin! In not selling, traders make their
first fundamental trading error: you buy securities to sell. If you dont want
to sell, dont be a trader.
To make matters worse, some traders buy into this falling stock, believing
that averaging down will minimise risk. Mostly, it does not. Traders who
buy into declining securities often face emotional decisions that become
difficult to carry out.
Fear of Losing a Profit
Lets turn attention to the second type of fear, namely the fear of losing a
profit. Lets enhance Leonards portfolio to having four open positions in
the market. Assume that he is losing money on three of these securities.
Leonard then notices that his fourth position is becoming profitable.
He bought the option at R7.25 and now he can sell it for R9.25. What
do you think most traders do? Despite wanting to hold onto a winning
position, most professional day traders will sell. The reason, they point out,
is that You can never go broke taking a profit. Regrettably, thats exactly how
many young traders do go broke by taking profits too early.
At a conference in 2006, I said that a security can only fall by 100%, but
there isnt a limit to the amount it can rise. I got a laugh from some young
traders, saying that I had a twisted mind. Maybe, but selling too quickly is a
major stumbling block for many traders, so why do they continue to do it?
Fear of losing profit, based purely on emotion and not logic, induces
the trader to sell. From an emotional point of view, the elation felt from
achieving a profit is often quickly crushed if the share price continues to
rise. Therefore, there is no doubt that fear of taking a loss and fear of losing
a profit are very real. The quicker new traders learn to neutralise these
psychological traps, the less stressful trading will become. They will be able
to execute trades more efficiently and with more confidence. Another old
Wall Street axiom needs to be embraced: Cut your losses short and let your
profits run.
However, emotional trading can result in traders letting losses run and
2012/10/19 8:36 AM
cutting profits; a one-way ticket to financial ruin. Said another way, it only
takes a few large losses to kill many small gains. Therefore, when you win,
maximise gains. As soon as you adopt that mindset, results will improve
dramatically. This leads to the next emotion: greed!
GREED
This is best illustrated by an actual event that I witnessed back in the early
2000s, when a colleague invested in gold futures. He started small and kept
rolling these investments over, to the point where his R100 000 was worth
R1 million. All he needed to do was call his investment in. Instead, he rolled
the investment over again, hoping to turn his R100 000 into R10 million.
He had become addicted to the market. He started talking to his broker
five times a day and was glued to global channels, watching the gold price as
if it was the only global issue of any consequence. His obsession made him
feel like a guru. In fact, he became a complete bore, only talking about the
R10 million that was already in his bank account, how he would retire to the
coast and live the high life of a day trader.
Guess what happened next? The gold price (in Rands) fell from R3 211 to
R2 255 in the space of three months. Instead of selling, greed kept him from
doing so, and his expected R10 million became a R1 million loss. Success
had clouded his judgment. Unfortunately, as soon as young traders begin
making money theres a tendency to be swept off their feet with feelings
of infallibility. At such moments, these traders feel they can do no wrong!
Going for the Big Deal
Heres another example, which aims to teach young traders the lesson of
how to avoid the treacherous, psychological trap of greed. Assume that
you have R2 000 to invest and, in the first few trades, you quickly see this
investment climb to R4 000. Great! However, like most people, when youre
making money you always wish you had invested more! After all, R20 000
would have turned into R40 000 and R200 000 would have netted you R400
000! It is exactly this line of thinking that leads to bankruptcy.
Feelings of infallibility become your worst enemy, seducing you into
committing too much money on your next trade. Like my gold-obsessed
colleague, you become intoxicated with success, leading you to make
irrational decisions.
2012/10/19 8:36 AM
In essence, concentrating too much capital into too few deals invariably
leads to disastrous results.
Not only is there less room for error, but cutting losses becomes much
more difficult, since the amount of the loss is that much bigger! Take heed:
big gains, small losses, less money and more deals!
Waiting too Long
Trying to squeeze every last cent out of every single trade is just plain greedy.
Often, traders end up watching profitable positions move back to breakeven or turn into losses. Thus, knowing when to take profits is critical to
success. In fact, before you place a trade, you should already know exactly
at which point youre going to sell. This not only applies to cutting losses,
but also to taking profits. This will keep fear and greed in check and enable
you to make sound trading decisions.
Here is a simple trading strategy example: You plan to sell 10% of your
security when the share rises by 15%, another 30% when it rises to 40%
and the remainder once the share price reaches 110%. If the share falls
by 15% at any stage, you sell. This is a simple example, which is amply
highlighted in Become Your Own Stockbroker. When asked about waiting
before selling, I always answer: You left your original workplace because it
was too stressful. Now you are doing exactly that. Not trading to a strategy
will turn your life into a stress-filled one.
Once traders understand (and accept) that successful trading is 90%
emotional and psychological and only 10% technical, everything falls into
place. There is no need to rush your move to day trading. Do it right and
do it right the first time. Contact me for a financial mentor on mentor@
magliolo.com.
Note: Do not be misled by the statement above that only 10% of trading
is technical. This includes all study and analysis of the market. In essence,
even the best trading system and strategy will be severely undermined if the
mental side of trading is compromised. Too many times traders look for a 100%
accurate, never-fail trading system that will work in all markets, all the time.
Based on 17 years of experience in stockbroking, there is no system
or indicator that is foolproof. The single most important factor to accept,
before becoming a day trader is discipline. Without discipline, it becomes
extremely difficult for a trader to be successful. So, the key to having
discipline is to know yourself. Honesty with regard to risk tolerance and
ability to handle the stresses of trading are crucial.
2012/10/19 8:36 AM
Too many new traders enter trading with a skewed vision of what it will
be like.
Remember, the first year of trading is a learning one and break-even
should be an acceptable level of performance; covering all costs. That way,
the new day trader removes pressure to trade excessively. Rather, goals
should be to gain experience and confidence in trading. This includes
fundamental analysis, technical assessment and trade execution. Trading is
a hands-on learning experience. Books, videos, courses and seminars will
not replace the experience of trading. A vital component of that experience
is mental and emotional reaction to losses. By the same token, I would add
that traders must keep a level head when it comes to successful trades. I
have seen many young traders leave the market due to overconfidence.
THE DAY TRADERS PSYCHOLOGICAL PROFILE
I have heard so many novice traders say that they are mentally strong
when they trade, which tells me that they are well prepared for the rigorous
schedule which traders have to adhere to before they can be consistently
successful and, as such, profitable. Many of these very same traders then
add: which means that I can now take a holiday or I can go to golf or take
this afternoon off and so on.
These traders often dont last long in the market.
When it comes to the job of consistently making money as a trader, being
mentally strong is a good start, but it is also not enough. While it may be
important to look inward to gather strength during tough trading days, the
ability to survive such conditions is noted by experts as the ability to stay
focused when the market is rising strongly and not to panic when it is falling
like a stone.
The ability to remain calm is covered extensively in later chapters, so
suffice it to say that mental strength is different for everybody, but there
are common traits. The following questionnaire aims to establish a traders
psychological profile.
The following psychological profile is about personality, ability to
identify your risk tolerance and lifestyle. The aim is thus to help traders
to, as an initial step, assess whether they are really suited to be day traders.
Maybe they should rather focus on long-term investing? So, if you enjoy
strategising and have the patience to keep to that strategy and the discipline
2012/10/19 8:36 AM
not to ignore your own stop losses, you may find that youre a day trader
at heart.
Note: The following psychological profile is only a guide to help assess
risk tolerance and attraction to trading. Your score is in no way a guarantee
of success or failure, but it is a start.
For each question, select
a reply from 1 to 5
Points
Rate your answers: Be honest

Never
1
Seldom Occasionally
2
Often
Always
A disciplined trader
does not make
more money than
undisciplined one
All losses must
immediately be
recouped with additional
trades
Day traders dont work
very hard to succeed
Day traders use gut
instinct for trading
decisions
Every trade represents a
chance of making it big
I always follow patterns
that experts tell me
about
I always follow television
experts advice, so I
know I cant go wrong
I always trade sideways
patterns, with high
volatility
2012/10/19 8:36 AM
I am always right when I

take a trading position
I am methodical
and plan every trade
according to a welldevised strategy
I am more comfortable
when I exploit day
trading anomalies than
when I take on longterm positions
I believe in my analysis,
so I will wait for before
I trade
I believe that I can
always be correct in the
market
I dont need a strategy
to trade; I go with the
flow
I dont use stop-loss
strategies
I like to take risks in my
private life
I love to take chances in
trading so, I dont plan
before a trade
I view the market as a
gambling arena
I want to be a trader to
be my own boss
I want to be a trader to
make money
2012/10/19 8:36 AM
10
Long trends tend to

stay unchanged over the
longer term
My target is to only
make significant profits
Only successful traders
buy and sell in large
amount
The high-risk excitement
of day trading drew me
to becoming a day trader
When markets move
erratically, I get
confused
TOTAL
Do the following:
Add up your score
Review the following to assess your trading profile.
Indicates
+75
You are
unrealistic and
too erratic to be
a day trader
You have too many negative perceptions

about day trading.
Re-evaluate these perceptions and redo
the questionnaire.
If your answers are still above the 75
points, stay out of the market.
55 to
75
You are more

suited to longerterm trading
If you insist on being a trader, rather look

at a medium-term strategy.
This means trading over a two- month
period.
40 to
55
YOU HAVE
THE MODEL
MAKEUP TO
BE A DAY
TRADER
The profile suggests that you are

aggressive, but also realistic and measured
Score indicates
Score
2012/10/19 8:36 AM
If you really want to be a trader, you will

need to take time to develop an effective
system of trading that works for you.
Look at swing trading as a starting point.
<25
You are
unrealistic and
too erratic to be
a day trader
You may need to work on analysis and

outlook before succeeding as a trader.
This can be done through goal setting and
achievement plans.
You are too

indecisive to be
a day trader
25 to
40
11
Trading Dogmas
Many novice traders expect to become proficient within months. After all,
technical analysts have said so on TV, havent they? These same traders
believe that they will be set up, running and profitable within days. In fact,
novice traders should concentrate on strategy discipline and establishing a
routine before they can have a realistic expectation of making money.
Day Trading Questions: No. 1
Complete the following true/false quiz.
No
Questions
Professional traders have eliminated risk from their

portfolios
Novice traders dont have to understand risk
Novice traders need to be egoists to enable them to

enter and exit trades
Every trader must have a fail-safe method of trading,

i.e. use the same indicators every time they buy or sell
securities
Always let profits run and cut losses
Novice traders should have multiple trades in the

market every day
True
False
2012/10/19 8:36 AM
12
To become professional in the trading arena, you

should be able to know your trading skills and be able
to improve on such skills
The only motivation for becoming a trader is to make

money
When you make a loss, you should immediately place

another trade to make up for any losses incurred
10
Professional traders always use a combination of

fundamental and technical analysis to trade
Losing trades should be a learning experience
A young trading client once asked me Can you learn from your losses I
dont want to repeat these. The following examples should be a lesson for
all traders.
David Owen made the following costly error:
On a wild trading day in June 2012, Owen lost in exactly 15 minutes
R120 000. He was trading in the Asian gold futures on a Friday
morning, and he thought he had made a 50-contract trade with another
trader. It turned out that he had not. That trader had actually traded
with someone else. By the time he had discovered the error, he was
down R120 000. Owen was thorough in his analysis and timing. His
execution is usually immaculate. So, you can imagine how indescribably
frustrated he was. He did fight back and reduced his loss to R80 000.
Even after all these years of trading, all he could think about was the
fact that it would have been a R120 000 profit had it not been for that
error.
It is always difficult to be nonchalant about making poor trades and
thus losing money. While there is no real consolation to a losing trade,
remember that traders must always be prepared and focused when
executing a trade. It may be difficult to not think about the money
being placed at risk, but professional traders tend to think about the
money as just another raw material.
As you can imagine, Owen felt robbed and defeated even after 20
years in the business. In fact, for several days, he felt nervous and too
hesitant to carry out professional trades.
2012/10/19 8:36 AM
13
Why is this story so important?
As you improve from novice to professional trader, you will have to:
Face times when nothing goes according to plan.
Know when to stop trading and review losses.
Know how to handle your risk profile (see questionnaire in earlier
text).
When making a loss, avoid overtrading to recoup losses.
Ask yourself: What did I do wrong? If you kept to your strategy and
still made a loss, review such strategy and see if you can improve on it.
Heres a short exercise on dealing with losses.
No
1
No
Questions
Traders who have losing
streaks should:
Go
home
Reexamine
and assess
technical
indicators
Use
smaller
trading
amounts
All of
the
above
Questions
Trading with stop losses is a waste of time
Stop losses reduce your chances of making a profit
Traders can make profit on all trades
Even professional traders struggle to exit a losing trade
True
False
Can you handle becoming rich?

In 2006, I was commissioned to write a business plan that involved the
launch of a product to the super-rich. My research took me into the realms
of the ultra-wealthy who have so much money that it meant absolutely
nothing to them; they could win or lose millions at the casino and not blink.
Similarly, in trading, achieving ultra-profits can skew your psychology as
much as losses do. The symptoms are different, of course, but the problems
can be as serious.
2012/10/19 8:36 AM
14
I have met many novice traders, both young and old, who genuinely
believe that they can never lose as traders. They start out with the assumption
that, if you rigidly follow basic technical indicators, then how can you lose?
When traders get into a comfort zone after a few profitable trades, many
start to make poor decisions as they slack off doing meticulous research.
It is easy to think that hard work is a waste of time, especially if you are
making profitable trades without market analysis, researching technical
indicators and understanding fundamental variables which move markets.
It is a very short trip from making profits based on rumours and gut feel to
becoming just another unemployment statistic. At the end of every trading
day, the Wall Street trading floor is littered with trading orders from such
fools.
It is strange that anyone can assume that a week of profitable trades
means that they have mastered the art of profitable trading. The norm for
such people is that failure is often the conclusion to that persons trading
career.
Remember:
ALL TRADES must ALWAYS be based on well-established plans and
strategy.
ALL PLANS must be established on a foundation of knowledge.
KEEP to your formulated plans.
No
Questions
When you make a profit, reward

yourself
When you make a profit,

increase trading volume
If you are making consistent

profits, increase the size of each
trade
Possible answers
Always
Sometimes
Never
True
False
Maybe
PSYCHOLOGY LESSONS: LEARNT FROM DAY TRADERS

As a means of closing this chapter, I thought that it would be interesting to
make a list of psychological lessons for day traders, particularly for those
new to the potential ruthlessness of the market.
2012/10/19 8:36 AM
15
Your state of mind will affect your trading: Many traders become
frustrated during the trading day because they are making mistakes or
simply lack an edge against other traders. Working on taking control of
emotions is useless if your strategy to trade is poorly thought out.
Professional traders also experience trading mindset turmoil:
All traders have days when they experience losses and just flat
performances. These can occur during bear or bull markets.
Emotions are affected by losing or winning streaks: Traders find it
difficult to concentrate when external variables, either market-related
or personal, disrupt their trading, eg, the terror attacks in the US in
2001.
Have a strategy to determine the value of each trade: Remember that
the larger the value of a trade, the higher the risk that such a trade
places on your entire capital. The advice is to keep your trades linked
to a balanced and diversified portfolio.
The more you trade, the more experience you gain: It may sound
obvious, but trading does build experience and skill. Without
training and practice, the day trader lacks the skills to survive global
competitive forces from around the globe.
Change is the only constant: Trading will often be volatile within even
stable long-term trends. As a result, no single trading method will
always be successful for a given market. The successful trader masters
markets and the changes in those markets.
Even professionals take profits: As markets change, professionals learn
to take profits and withdraw from trading. They do this to reassess
strategy, themselves and to financially survive lean trading periods.
Find the right strategy and fit: Even companies operating within the
same sector (Index) will have different trends and chart patterns. Some
companies and markets are more volatile or stable than others, so
finding the right fit between trader, trading method and market is the
key to success; amplified in Lore of the Global Trader.
Hone your trading skills: The ability to gauge the best price at entry
and the best possible price on exiting a position will set you apart from
other traders. One way to determine how good a trader you are is
to assess what your average price per security of losing trades is and
compare this to the average price of security of profitable trades. If
your loss average exceeds your winning ones, reassess and immediately
change trading strategies.
Find a mentor to get it right the first time. Successful performance with
2012/10/19 8:36 AM
16
new day traders usually comes from the alliance with a mentor. Such a
person can help the new trader to set up and start out on the right foot.
You learn trading by seeing a mentors logic and by having that mentor
observe your trading. The right mentorship goes a long way towards
shortening learning curves.
The stark reality is that expertise in any performance field is the exception,
not the rule, requiring dedicated practice and training. If the new day
trader is emotionally prepared for the learning curve and excited by the
challenge he or she is well ahead of the mental game.
Start with finding the Three Ms. These are the foundation of success,
upon which you build skills and experience.
Mentor
Method
Markets
Now that weve stated the dangers of emotions, lets move on to trading
techniques and making money from trading. It can be an enjoyable journey,
so lets begin.
2012/10/19 8:36 AM
17
Chapter 2: The Road to Ultra-Wealth
Short-term traders, who only concentrate on the what (what to buy)

and not on the when (when to strike), will be trading on a very shortterm basis indeed. Oliver Velez & Greg Capra, 2000. Tools and Tactics
for the Master Day Trader: Battle-Tested Techniques for Day, Swing, and
Position Traders, McGraw Hill
Youre ready to trade but how do you start?

Type in the words day trading on any internet search engine and you
will see why there is controversy! The profit potential of day trading is
perhaps one of the most debated topics globally. Countless internet scams
have capitalised on this confusion by promising quick, enormous returns.
Meanwhile, the media continue to promote this type of trading as a getrich-quick scheme that always works. The truth is that there is no short cut
to succeeding as a day trader. Those who do engage in day trading without
sufficient knowledge or skill usually end up bankrupt.
Overall, many professional advisors shy away from day trading. At the
very least, they agree that day trading is not for everyone and involves
significant risks. Moreover, it demands an in-depth understanding of how
the markets work and various strategies for profiting in the short term. This
all starts with a very broad understanding of what it is that you really need
financially.
The following steps are a basic starting point to determine whether you
really want to be a day trader.
QUESTIONS
WHY do you
want to be a day
trader?
Professional traders know WHY they entered the

market.
They made that decision after considerable thought and
assessing available material on the subject.
Sit down and think about why you want to be a trader.
Do you really want to put all that effort into an industry
that is rife with technical jargon, volatile markets,
different types of complex market instruments and
hostile competitors?
STEPS
2012/10/19 8:36 AM
18
The act of writing down goals (short, medium and

long term) clarifies whether you are realistic in your
endeavours, or whether these goals are really just
another way of trying to get rich quickly.
Take out a piece of paper and write down these goals,
review them and re-write them.
KNOWLEDGE
must be
continually
expanded
To be successful, you need more knowledge.

Start with equity markets, move on to warrants, then
Single Stock Futures, followed by other securities.
Read books, magazine and attend seminars. A mentor
can help you with a strategy. Go to www.magliolo.com
for free downloads or call me on mentor@magliolo.com.
ACTIVE vs.
PASSIVE
INVESTMENTS
Too many advisors will tell you to buy property before

investing in shares and other securities.
This is NOT the most efficient way of establishing
financial freedom. Active investments (securities) always
come before passive (property).
PERSISTENCE
AND
CONSISTENCY
If you are not serious enough to be persistent, consistent

and focused on all fronts, this is not for you.
ORGANISE
Your planning must be organised. Success only comes

with a plan that is well executed.
TAKE ACTION
Once analysis has been conducted, dont hesitate. Take

action.
REVIEW
YOUR PLANS
REGULARLY
All financial plans should be reviewed twice annually.

Check actual performance against goals.
See if these goals were realistic. If not, ask why and
review your actions or your goals; whichever were the
least realistic.
WHAT are your

goals
If you still wish to pursue a career as a day trader, then you now need to
determine a day trading strategy that suits your timeframe and personality.
Lets start with a simple strategy.
Always keep your profit objective at least three times greater than what
you are willing to risk. Many professionals today believe that this figure
should be five times.
Allow no more than a 5% to 7% stop loss from your entry point. Again,
2012/10/19 8:36 AM
19
some traders have much higher stop losses when they trade Futures,
between 8% and 12%.
This book focuses on the novice day trader. That is, those who want to trade
for a living. These traders must become well-established in the field and
obtain in-depth knowledge of the marketplace.
Here are some of the prerequisites for day trading:
Knowledge and experience: Without knowledge, day traders are
simply guessing and cannot make informed decisions. Individuals who
attempt to day trade without an understanding of market and financial
fundamentals often end up losing money.
Sufficient capital: Day traders use only risk capital, which they can
afford to lose. Not only does this protect them from financial ruin,
but it also helps eliminate emotion from trading. A large amount of
capital is often necessary to capitalise effectively on intra-day price
movements. I suggest an amount of R80 000 to R100 000 as a starting
point to gain experience and build knowledge and capital.
A strategy: A trader needs an edge over the rest of the market. There
are several different strategies that day traders utilise, including:
trading derivatives (warrants, single stock futures) and arbitrage as
well as trading news. These strategies are refined until they produce
consistent profits and effectively limit losses.
Discipline: Profitable strategy is useless without discipline. Many day
traders end up losing a lot of money because they fail to make trades
that meet their own criteria. Success is impossible without discipline.
There are two main types of day trader: those who work alone and/or
those who work for larger institutions. Lets look at those who work alone.
Day trading demands access to some of the most complex financial services
and instruments in the marketplace, such as:
Access to a trading platform: The day trader can, given online trading,
set up his or her own trading desk. There are several organisations that
provide access to stocks, warrants, single stock futures, contracts for
difference and Forex trading. Contact me on mentor@magliolo.com
for additional advice on how to set up a trading desk; also highlighted
in Become Your Own Stockbroker.
Multiple news sources: In addition to news services on the internet,
have a television as part of your trading desk. It would be even better
if you could have one that has satellite access to global market news
2012/10/19 8:36 AM
20
services. In 2001, I was sitting in my office, when the first plane hit the
USs World Trade Centre. Immediately, I sent out an email/sms telling
my day trading clients to switch current positions and to short the US
market, i.e. the Dow Jones, SP500 and anything else that was foreign.
As soon as the second plane hit the towers, I sent out an email/sms
stating that we now hold our short position.
News provides a significant number of opportunities for day traders to

capitalise on, so it is imperative to be kept informed of political, business
and other news events. The typical trading room contains access to the
Dow Jones Newswire, televisions showing CNBC, Sky, BBC and other news
agencies, as well as software that constantly analyses various other news
sources for important stories. A number of these television services are now
available online and thus on your computer. Consequently, I suggest that
your trading room should have two computers, one to trade and the other
to conduct your research and analysis.
Here are some important internet sites for the day trader.
South
Africa
South African Futures

Exchange
www.saifm.co.za
JSE Securities Exchange
www.jse.co.za
South African Bond

Exchange
www.bondexchange.co.za
South African Reserve

Bank
www.resbank.co.za
National Treasury
www.finance.gov.za
Statistics South Africa
www.statssa.gov.za
2012/10/19 8:36 AM
Global
Bank for International

Settlements
www.bis.org
International Monetary
Fund
www.imf.org
World Bank
www.worldbank.org
The Economist
www.economist.com
Transparency International
www.transparency.de
World Trade Organisation
www.wto.org
New York Stock Exchange
www.nyse.com
London Stock Exchange
www.londonstockexchange.com
21
Although day trading has become a controversial phenomenon, its

prevalence is undeniable. Day traders play an important role in the
marketplace by keeping markets efficient and liquid. Some argue that
individuals should stay away from day trading while others argue that it is a
viable means to profit.
And although it is becoming increasingly popular among inexperienced
traders, it should be left primarily to those with the skills and resources
needed to succeed. Therefore, here is another opportunity for you to say:
This is not for me. If it is, a solid grounding to start can be broken into
three steps: knowledge, strategy and trading technique.
Strategy
Fundamental analysis
Basics
Reading price pages
Analysis of financial statements
Trading to a game plan
Environmental analysis
Basic data analysis
How the markets work
Rules
Regulation of markets
Rules for beginners
Rules must should NEVER be broken
Knowledge
2012/10/19 8:36 AM
22
Technical analysis
Charts
Software required
Trading
Techniques
KNOWLEDGE
In Jungle Tactics, A Guide to Listing on AltX and Become Your Own
Stockbroker, I outlined in great depth the methodology of research and
analysis of emerging and First-World markets. While all that information
is important to day traders, it is also important to be able to conduct basic
data analysis as set out hereunder. For additional information on the above
books contact me on mentor@magliolo.com.
Basic Data Analysis
This section briefly describes ways of viewing and analysing data by
examining various types of graphs. This process provides the necessary
background for the sound application of analysis and interpretation of
technical analysis indicators. In addition, the day trader can see how to
apply interpretation of raw data to his or her market trading.
Looking at raw data
The point of departure is simply to look at the numbers in a spreadsheet.
Make note of the number of series, start and end dates, range of values,
etc. If you look more closely at the figures, you may notice some irregular
movement, e.g. a large jump in the values at a point in time. These can have
a substantial impact on results.
Graphic analysis
Looking at the raw data (ie the actual numbers) can be confusing, but
turning data into graphs does help in interpreting the information. Graphs
are essential tools for seeing the big picture and they reveal a large amount
of information about the series in one view. They also help to identify
irregular movement, so the main graphical tools are:
Histograms: provide an indication of the distribution of a variable.
Scattergrams: provide combinations of values from two series for the
purpose of determining their relationship (if any).
2012/10/19 8:36 AM
23
Line graphs: facilitate comparison of series.

Bar graphs
Pie charts
To understand raw data, the day trader can look at the numbers and
examine mean, variance and standard deviation which are discussed in this
chapter. Economists call these numbers (generated over a period of time)
time series, which have up to four components:
Trend (smooth, long-term/consistent upward or downward movement)
Cycle rise and fall over periods longer than a year, e.g. due to business
cycle
Seasonal: within-year pattern seen in weekly, monthly or quarterly data
Irregular: random component; can be subdivided into:
Episodic: unpredictable, but identifiable
Residual: unpredictable and unidentifiable.
Note that not all time series have all four components, although the
irregular component is present in every series.
Indices and base dates: An index is a number that expresses the relative
change in value (eg price or quantity) from one period to another. The
changes are measured relative to the value in a base date, which may be
revised from time to time. Common examples of indices are the Consumer
Price Index and the JSE All Share Price Index.
In many cases, indices are used as a convenient way of summarising
many prices in one series, such as the Top-40 Index, which comprises the top
40 JSE-listed companies share prices. For graphs to make sense, obviously,
they need to have the same base date. Day traders need this information to
enable them to compare different securities to each other, so that technical
analysis can be undertaken. Therefore, there may be times when the base
year may have to be changed.
Splicing two indices and changing the base date of an index. Suppose
you have the following data:
Year
Price index
(1985 base year)
Price index
(1990 base year)
Standardised
price index (1990
base)
1985
100
45.9
2012/10/19 8:36 AM
24
1986
132
60.6
1987
196
89.9
1988
213
97.7
1989
258
118.3
1990
218
100
100
1991
85
85
1992
62
62
1993
75
75
In this example, the price index for the years 1985 to 1990 (column 2) uses
1985 as its base year (ie, the index takes on a value of 100 in 1985), while
from 1991 onwards (column 3) the base year is 1990. To make the two
periods compatible, you need to convert the data in one of the columns
so that a single base year is used. This procedure is known as splicing two
indices.
Calculation:
If you want 1990 as your base year, then you need to divide all the previous
values (ie in column 2) by a factor of 2.18 (so that the first series now takes
on a value of 100 in 1990). The standardised series is shown in the last
column in the table. Similarly, to obtain a single series in 1985 prices, you
need to multiply the values for the years 1991 to 1993 by a factor of 2.18.
Even if you have a complete series with a single base date, you may want
to change that base date. The procedure is similar: depending on whether
the new base date is earlier or later than the old one, you multiply or divide
the entire series by the appropriate factor to get a value of 100 in your
chosen base year. The necessary calculations can easily be performed in an
Excel spreadsheet. When comparing two or more series, it is important to
ensure that all the series have the same base date.
Nominal versus real data
A tricky question for day traders is the choice between nominal and real
terms for data. The problem with nominal series is that they incorporate
2012/10/19 8:36 AM
25
Growth rates
a price component that can obscure the fundamental features that traders
are interested in. This is a problem when two nominal variables are being
compared, since the dominant price component in each will produce close
matches between the series, resulting in a high correlation coefficient. To
avoid this problem, the trader can convert nominal series to real terms by
using an appropriate price deflator (eg the CPI for consumption expenditure
or the PPI for manufacturing production).
Therefore, traders must think carefully about the variables they are
using and the relationships they are investigating and choose the most
appropriate format for the data; be consistent.
In many instances, it makes economic sense to analyse data and model

relationships in growth-rate terms. A prime example is GDP, which is
usually discussed in growth-rate terms rather than levels. Using growth
rates allows the trader to investigate the way that changes in one variable
are related to changes in another variable.
There are two types of growth rates:
Discretely compounded
Continuously compounded.
Smoothing and moving averages
Some time series may be highly volatile, because the irregular component is
dominant. Often this is the case with series in growth-rate form, but it may
simply be the result of some large outlying observations. In some cases, it
may be necessary to implement an adjustment procedure to smooth the
data. One popular method of smoothing a time series is to apply a moving
average (MA) to the data. Essentially, this method replaces a particular
observation with the average of a group of adjacent observations. A
centred MA takes the average of a number of the preceding and following
observations, while a backward MA takes an average of only preceding
values. The former is generally better since it is less biased. Since this
calculation is performed for each observation, the group of values which is
averaged moves through the sample.
2012/10/19 8:36 AM
26
Seasonal adjustment
The trader may want to remove the seasonal component of a time series, but
without removing the trend. The way to do this is to estimate the average
seasonal factor and then remove this component from the time series. This
is done by dividing the original series by the seasonal factor series.
Example: Suppose there is a fourth quarterly spike in new vehicle
sales every year, e.g. the value in the last quarter is on average over the
sample twice as big as the values in the earlier quarters. To de-seasonalise
the series, the trader needs to divide each fourth quarter observation by a
factor of two. If there is a more complicated seasonal pattern (repeated in
every year) involving all four quarters, then the seasonal factor would need
to take this into account. For example, if vehicle sales in the first quarter
are on average only 80% of the value in the second and third quarters, the
factor series would need to divide every first quarterly observation by 0.8
(or multiply by 1.25). Plotting the series often reveals whether there is a
substantial seasonal component, as in the graph below:
2012/10/19 8:36 AM
27
The most common procedure for de-seasonalising a time series is called

the ratio-to-moving average technique. This involves calculating a moving
average of the series and then estimating the seasonal factor series by
dividing the original series by the moving average.
How the Markets Work
The day trader will operate various securities as follows:

Start with equities.
Diversify across sectors
Add warrants to the portfolio
Add Single Stock Futures to the portfolio.
Add Forex, commodities, market-neutral strategies
These are outlined in later chapters.
Rules that regulate South African markets
For more comprehensive documents on organisations that regulate South
African markets, go to www.magliolo.com and click on free downloads.
Regulation in South Africa
The regulatory structure in South Africa is fragmented, with various
financial institutions being regulated by different organisations. Banks are
2012/10/19 8:36 AM
28
regulated by the Banking Supervision Department of the SA Reserve Bank

for banking activities. Non-banking financial institutions are regulated by
the FSB, which is accountable to the Department of Finance. The Registrar
of Companies regulates companies, which forms part of the Department
of Trade and Industry. In addition, medical schemes are registered by
the office of the Registrar of Medical Aid Funds which forms part of the
Department of Health.
To confuse matters even more, in terms of the Securities Services Act
(SSA), the two licensed exchanges, namely the JSE Ltd and the Bond
Exchange of South Africa and the central securities depository (CSD),
STRATE Ltd, operate as independent, regulated organisations. They
regulate their own activities and those of authorised users and participants
in terms of the provisions of the SSA.
The Financial Intelligence Centre (FIC), an independent regulatory
authority accountable to the Minister of Finance, is responsible for the
control of anti money-laundering activities in the economy. Supervisory
bodies like the FSB and JSE Ltd must provide the FIC with any information
on money-laundering transactions that they may obtain as a result of their
supervisory functions.
Financial Services Board (FSB)
The FSB was established in terms of the Financial Services Board Act
(No. 97 of 1990) and became operational as such in 1991. Prior to that date,
regulation was in the hands of the Registrar of Financial Institutions, which
formed part of the Department of Finance.
Departments of the FSB

Financial Advisory and Intermediaries Services (FAIS) Department
Capital Markets Department
The Insurance Department
Directorate for Market Abuse
Inspectorate Department
Collective Investment Schemes Department
Financial Intelligence Centre

According to the Prevention of Organised Crime Act (section 4), money
laundering is an offence that involves concealing the nature of the proceeds
of crime and avoiding prosecution for money laundering or diminishing the
2012/10/19 8:36 AM
29
proceeds of crime. The Financial Intelligence Centre Act, 2001 (FICA) has
also instituted control measures to facilitate detection and investigation of
money laundering.
Council for Overseeing Recognised and Statutory Ombudsman
Schemes
There are several ombudsman schemes currently operating in South Africa.
The Pensions Funds Adjudicator and the FAIS Ombudsman are statutory
ombudsman schemes while the ombudsman schemes for the long-term
insurance, short-term insurance and banking industries are voluntary.
Developments
The government has realised that the regulatory structure in South Africa
is fragmented and a joint task team, comprising members from the SA
Reserve Bank and the National Treasury, has been formed to review the
existing financial regulatory environment. The brief of the task team is to
research regulatory best practice and prepare a position paper to guide
policy formulation by the government.
Rules for Beginners
The stock market is a place for everyone who wants to invest their money
for good return. Some people do this through managed funds or exchangetraded funds. Others invest directly, and that is best done with understanding
of how the market works, key terms and basic rules for good investing.
This section outlines generally accepted rules for successful
investing. These are also covered in greater depth in Become Your Own
Stockbroker.
Success has a greater chance if you have a well-developed trading plan.
While no-one can tell you that you will make profits in the market,
setting targets is the only way of achieving them. A plan based on
established goals will simplify decisions and help you to avoid making
mistakes.
Have a goal to set aside a percentage of your profits: Ensure that your
portfolio is split between a wealth and a trading one. Your planning
should define what kind of investor you are and set clear parameters
for all decision-making thereafter. The worst approach is to continually
2012/10/19 8:36 AM
30
change between goals and investment strategies. Stick to one good plan
unless unforeseen circumstances arise.
Buy value: Returns from share investing are inextricably linked
to the success and profitability of companies. Successful investors
select shares on this basis; they dont simply focus on prices and
trading volumes on the stock market. Get to know companies you are
considering investing in and continually monitor their activities, future
plans, financial results, directors and managers. Also consider the
prospects for the industry that the company operates in and the overall
state of the economy.
Have a viewpoint and stick to it: Success is far more likely when you
have your own well-informed views on the fortunes of companies. This
is not just the preserve of experts with computer spreadsheets. You can
pick out promising companies by reading annual reports, using research
where you can, following market announcements, keeping abreast of
the news and talking to a mentor. The best companies are those with a
sound business, good financial health and solid profit prospects.
Diversify: There is risk involved in investing in securities. The best way
to manage risks is to spread your funds across a range of securities. The
extent to which you spread money will reflect your attitude towards
risk. Higher returns always equate to higher risk. The right balance
will exist for you, depending on your goal and particular approach to
the market. Some companies represent lower risk, for example larger,
established companies with steady cash flows and profits. These can be
contrasted with, for example, start-up businesses in certain sectors that
lack profits today but offer exciting growth in an uncertain future.
Be knowledgeable: Success requires you to keep informed on the
environment within which you want to trade and the global variables
that affect that environment. Staying informed means watching
market and business developments, and doing some basic analysis on
companies. If your plan is to trade in and out of growing companies
to secure high returns, then collecting information will be a constant
imperative.
Volatility: Patience is a definite virtue when it comes to investing in
securities and so are steady nerves. The only absolute certainty is that
prices will fluctuate. The market value of your investment will rise and
fall, sometimes constantly. The rule for success is to stick with companies
you have carefully selected until you see definite signals to sell from
their business or financial figures. Price volatility reflects the diversity
2012/10/19 8:36 AM
31
of views about a companys future fortunes. Different views, some

frequently changing as new information gets into the market, are being
factored into the share price all the time. Volatility is usually greatest
in companies with future prospects for either strong profit growth or
declining profits. Volatility should be welcomed by day trades.
Understand your investments: This rule is simple. Before you trade, do
a little digging. The best traders understand the companies they invest
in. Think of Warren Buffett. The man hardly ever invests in tech stocks.
Why? By his own admission, he does not understand the tech industry.
Likewise, you should stick with companies you understand. Youll make
better decisions and enter trades with confidence.
Liquidity: There is nothing more disheartening than not being able
to sell a security because there are no buyers. Dont go after obscure
stocks. Stick with popular stocks that trade in huge volume. Any stock
in that situation is usually liquid and can be easily sold.
Profitable companies: Companies earning profits tend to have stocks
that trade well. Therefore, it makes sense to focus on profitable stocks.
Why gamble on a company that is making a loss? Trade companies that
consistently show real bottom line profits.
Rules that should NEVER be broken
The following are time-worn rules that should never be broken, no matter
what the situation may be.
Understand how markets work: Markets dont follow scientific
formulas. They fluctuate according to many factors, including irrational
fear and greed.
The trading plan: What type of stocks do you invest in? Do you base
your decision on chart patterns, fundamentals or news? When do you
cut your losses? How much money do you commit to options and each
individual trade? If you cant answer these questions quickly, you need
to sit down and revise your game plan.
Fear and greed cloud the mind: Emotion can result in impulsive and
irrational trading decisions. If you trade according to emotions, you
will develop a herd mentality. You will lose independence and trade
according to what everyone else thinks. A rational individual trades
with intellect. An emotional trader trades impulsively. By executing a
game plan, the trader will remain on a planned course that will keep
emotions at bay. Discipline and objectivity are the keys to success.
2012/10/19 8:36 AM
32
The market may not be your friend, but the trend is: Trade with the
trend, not against it. Use moving averages and/or trend lines to help
you better identify trends. Trying to pick market tops and market
bottoms is a one-way ticket to disaster. If the trend changes, cut losses.
Take a break during a losing streak: A way to create more trouble is
to double up on a position to quickly win back losses. Do not add to a
losing position by trying to average down a loss. Like most things in life,
trading successfully is directly correlated to the level of confidence.
Use risk capital to trade: Never trade with money you cant afford to
lose, e.g. living expenses. Allocate only 25% of your trading capital to
option trading. Small trading amounts (less than R10 000) should risk
no more than 10% per individual trade.
Buy and sell signals: Determine where and when youll exit before
entering a new trade. This will help you avoid second guessing yourself
later on. A very simple tool to help you know when to sell is moving
averages.
Once a stock closes below your chosen moving average, exit the
trade.
Keep risk/reward ratio in proper alignment. Target a 1.5 2 to 1. If
you buy an option for R4 then your upside target would be R8 and
your stop loss would be R2. Thats a 2:1 reward to risk ratio. Thus,
if the option falls to R2, exit the trade. If you hold onto a losing
position, you will create an emotional ball and chain.
Finally, with options you also need an exit strategy based on time.
With three weeks remaining before expiry, exit the position. Time
decay starts to accelerate in those final few weeks. If your target has
not been met, and you have run out of time, exit the trade.
If the trend is still intact, roll over futures positions. This will give
you more time to secure profits.
Trade according to your personality: Stay within your comfort level for
strategy and risk. If you take a more conservative approach, then dont
buy short-term warrants. Align your trading style with your lifestyle.
Cut losses, but let profits run: If the trade goes against you, get
out. Dont fear taking a loss; it will happen. Move quickly and dont
hesitate. Remember that fear of losing a profit is also real. Avoid it by
sticking with your game plan.
Only trade when you have an edge: Make sure the odds are in your
favour: sentiment, trend, volume and news.
Don't trade because you can: If there isnt a clear reason for putting
2012/10/19 8:36 AM
33
on the trade, wait for the next opportunity. There will always be one
around the corner.
Admit when you're wrong: Dont blame external forces or events for
losses. Denial wont turn a bad trade into a winner, but it will destroy
your trading account.
When in doubt, stay out: Too often, traders seek the opinions of others.
It demonstrates a lack of conviction on your part. If you need to ask
anyones opinion as to whether you should put on or liquidate a trade,
youve lost your edge. Get out or stay out. Develop confidence in your
own decision-making process. No one will look out for your money the
way you will.
Remain flexible: Look for both bullish and bearish opportunities.
Stocks go down in strong markets and stocks go up in weak markets.
Maintain an open mind and consider all possibilities.
Diversify: Spread risk across different companies from different
sectors. The day trader also spreads risk by investing in derivatives.
Quality is better than quantity: Maximise gains, rather than number of
wins.
Dont hesitate to trade: Buying and selling is where the money is made.
Standing on the sidelines does no good. Get in the game. Your game
plan should foster the confidence to enter and exit trades quicker and
with razor-like precision.
Get in a zone: Trading should be effortless. If there is strain, stress,
force or struggle, its wrong. Focus on becoming a good trader and
execute your game plan.
You can't go broke taking a profit: Thats exactly why traders do go
broke. They absorb large losses and take small profits. By practising
good money management and making the trend your friend, you will
position yourself for bigger gains and smaller losses.
Don't try to catch a falling knife: Stocks fall for various reasons. If you
buy a stock in freefall, make sure your reasons for doing so are well
founded. Sometimes dead cats dont bounce.
Buy high, sell higher: Avoid weak stocks. They are weak for a reason.
Buy strength and sell more strength. Buy stocks in strong upward
trends.
Keep a trading diary: Write down thoughts and impressions of the
market daily. Make notes of seasonal tendencies, patterns and marketmoving news. If you put on any trades, jot down the reason why.
Review performance regularly. Learn from mistakes and duplicate
2012/10/19 8:36 AM
34
successes. By keeping a diary the trader will begin to recognise the

rhythm of the market.
Avoid watching the market all day long. Another common mistake that
traders make is trading too much. Avoid watching real-time quotes all
day. Its too easy to get caught up in the emotions of general market
trading when you should be doing nothing. The best time to make your
buying and selling decisions is when the market is closed.
STRATEGY
Fundamental Analysis
A more in-depth outline on the basics of shares is available in Jungle Tactics,
The Millionaire Portfolio and Become Your Own Stockbroker.
The following is, therefore, a basic overview of securities, how to read
price pages and financial statements.
What is a share and derivative?
A share is a part ownership in a company. Therefore, the more shares you
buy, the bigger your ownership stake becomes and the more say you can
have in how the company is run. A derivative is the right (but not obligation)
to buy that security at a future date. In other words, you are really buying
the potential growth of a share and not the share itself.
Along with ownership, a share gives you the right to vote at company
general meetings and have a say in how the company is run one vote for
every share you own. Derivative owners do not have voting rights. However,
one of the realities of the share market is that individual investors rarely get
to own enough shares to be able to alone exert any significant influence over
a company thats usually for big institutional shareholders. Consequently, it
is important to carefully research the competence of company management
before you buy shares. Derivatives are based on these same shares, so the day
trader also needs to research and analyse companies. The best measure of
that may be the companys ability to consistently produce profits over time.
How are shares valued?
Company profits, or more precisely expected future profits, are the
fundamental indicator of share prices. Companies must report their profits
2012/10/19 8:36 AM
35
at least twice a year, expressed as earnings per share (EPS). With any
company, there will always be different views on future profits and all the
factors that make its business successful or not. Share prices should reflect
the combination of all such competing views at a particular time.
The market rewards both fast earnings growth and stable earnings
growth. Investors will even buy shares in a non-profitable company that
promises to earn a lot in the future. Declining profits or unexplained
losses have a negative effect on share prices. Companies that surprise the
market with bad financial or earnings reports are almost always punished
with falling share prices. Education is the key to a prosperous future in this
game.
For instance, in late 2005, I recommended JSE securities-listed
electronics-based company Reunert Ltd. The long-term investors that form
part of the trading mentorship programme run by Business Consultants
International (go to www.magliolo.com) bought the share at R50. The
forecast was that the share would rise (on positive earnings growth and
forecasts) to at least R65 within 12 months. Day traders were advised to buy
the share based on a 10% short-term rise.
The share rose to R55 a share in a matter of a week.
Long-term investors made R5 a share. For every R10 000 invested,
they made R1 000 profit, i.e. R10 000 divided by a share price of R50 is
equal to 200 shares. At R55, these shares are worth R11 000.
Day traders: For their R10 000 in Single Stock Futures, day traders
made R10 000 profit or, stated more eloquently, a 100% profit in less
than a week.
These calculations are explained later on in the book.
Company analysis is the means by which investors and their share
mentors/advisors seek to arrive at the best investment decisions. By
analysing past performance and the state of the companys business,
Reunert was a buying opportunity on numerous fronts. Assessment had
followed after an in-depth analysis of the companys profits, cash flows and
ability to pay dividends.
What is risk?
There are risks involved in any investment. Risks that the return will be
lower than expected and risks that the trader will lose all or some of his or
her money, i.e. a company is suspended and declared bankrupt.
2012/10/19 8:36 AM
36
Investing is always subject to one fundamental principle: the higher

the risk, the higher the expected return and vice versa). Some forms of
investment, like bank deposits, are widely recognised as low risk, but these
usually provide investors with extremely lower returns. Generally speaking,
shares are higher-risk than deposits, debt securities and property. But they
also offer the prospect of much higher returns, especially over the longer
term. The next phase of investment is to diversify into derivatives, which are
higher risk-higher return than shares.
Risks in share investing are closely linked to all the uncertainties that
exist around businesses and the profitability of companies, now and in the
future. Some companies, especially those with established businesses and
steady annual profits, involve far less risk than others. Returns tend to be
lower as well.
Risks can be reduced by taking the view of investing for the long term,
selecting shares carefully and spreading investment across different types
of companies. This is called diversification. While history shows that share
prices will rise over time, there are absolutely no guarantees; especially
when it comes to individual companies. Unlike debt securities, which
promise a payout at the end of a specified period plus annual interest,
returns from shares come from dividend payments (companies make out
of profits) and capital appreciation (share prices rising). Neither of these
can be guaranteed.
The worst-case scenario is that a company goes bankrupt and the value
of your investment evaporates altogether. Fortunately, this is not a common
occurrence. More often, a company will run into short-term problems that
depress its share price. In investing, risk is the chance you take that the
returns on a particular investment may vary. Because of the increased
uncertainty of returns, investors will require a higher return if they take on
more risk.
For all the risk, however, there are ways to manage exposure. The best
is to diversify by owning a variety of shares and other investment products,
such as debt securities, single stock futures and warrants. That way, no
single company can endanger your savings. Over time, these spreads can
make a huge difference in the earning power of your savings.
What constitutes acceptable risk?
Its different for every person.
A good rule of thumb followed by many investors is that you shouldnt
2012/10/19 8:36 AM
37
wake up in the middle of the night worrying about your portfolio. If your
investments are causing you too much anxiety, its time to reconsider how
youre investing, and sell those securities that are keeping you awake at
night in favour of investments that are a little less painful.
When you find your own comfort zone, youll know your personal risk
tolerance the amount of risk you are willing to tolerate in order to achieve
your financial goals. Therefore, it is important to start a portfolio with real
cash. Only when you place funds at risk will you really know your own risk
profile. If you need a questionnaire to test risk tolerance, contact me on
mentor@magliolo.com.
Reading price pages
Annual
High
Low
100
80
Share
Ticker
ABC
Yield
PE
Vol
High
Low
Close
52
43000
82
80
81
Div
ABC
Net
Change
Corp
55
38
DEF Inc
DEF
21
55000
67
38
50
Col 1
Col 2
Col 3
Col 4
Col 5
Col 6
Col 7
Col 8
Col 9
Col 10
Col 11
Col 12
Columns 1 & 2: Annual high and low. These are the highest and lowest
prices at which a stock has traded over the previous year. This typically
does not include the previous days trading.
Column 3: Company name & type of share. This column lists the name
of the company. If there are no special symbols or letters following the
name, it is an ordinary share. Different symbols imply different classes
of shares. For example, p means the shares are preference shares.
Column 4: Ticker symbol. This is the alphabetic name which identifies
the listed company. If you watch the markets, you will have seen the
ticker tape move across the screen, quoting the latest prices alongside
this symbol. If you are looking for share quotes online, you always
search for a company by the ticker symbol.
Column 5: Dividend per share. This indicates the annual dividend
payment per share. If this space is blank, the company does not
currently pay out dividends.
Column 6: Dividend yield. The percentage return on the dividend.
Calculated as annual dividends per share divided by price per share.
2012/10/19 8:36 AM
38
Column 7: Price-earnings ratio. This is calculated by dividing the

current share price by the companys latest stated earnings per share.
Column 8: Trading volume. This figure shows the total number of
shares traded for the day.
Columns 9 & 10: Day high and low. This indicates the price range at
which the stock has traded at throughout the day. In other words, these
are the maximum and the minimum prices that people have paid for
the stock.
Column 11: Close. The close is the last trading price recorded when the
market closed on the day. Keep in mind that you are not guaranteed
to get this price if you buy the stock the next day because the price
is constantly changing. The close is merely an indicator of past
performance and, except in extreme circumstances, serves as a basis of
what you should expect to pay.
Column 12: Net change. This is the rand value change in the stock price
from the previous days closing price. When you hear about a stock
being up for the day, it means the net change was positive.
Analysis of financial statements
During the period 1996 to 2000, as head of research for a local stockbroker,
I (and a team of analysts) was expected to have all companies annual
results analysed and forecasts prepared before the 8 am meeting. If 10
company results were displayed in the newspapers, 10 such analyses had
to be conducted. How can anyone be expected to do that? Remember that
in-depth analysis needs full financial breakdown, environment analysis and
future projections undertaken.
To solve the problem, I developed a 10-minute method of analysis.
This method presupposes that you have a sound understanding of markets
and how markets work. Day traders must always remember that company
analysis can be a quick check on financial health and profit prospects, or
painstaking research using all available facts and figures. Professional
analysts build numerical models for predicting profit and other factors
several years into the future. This enables current valuation on the shares
and, in turn, comparison with current market prices. The analyst provides an
opinion on whether a companys shares are under or overvalued, which will
ultimately lead to a buy, sell or hold recommendation on the company.
When looking at a companys financials (in particular profit), ask the
following questions:
2012/10/19 8:36 AM
39
How sustainable is the current level of profit?

If there is no profit yet, when will there be?
Is the company expecting profit growth and where will this come from?
How much of current and expected profits are in cash and hence able
to be paid out in dividends, or re-invested for further profit growth in
the future?
Of course, analysis can become a complex business in itself. But there are
some perennial indicators of value that most investors can access and use
in decision making: price-earnings ratios, dividend yields and net tangible
asset backing are the main ones.
In its simplest form, company analysis focuses on:
Price-earnings ratios (or PEs): the current share price relative to the
companys profit.
Dividend yield: the rate of return from dividends.
Net tangible asset backing: the value of assets theoretically attributable
to each share in the event of the company being liquidated.
Company executives will usually have plans, budgets and forecasts on
exactly those things, but there is no accuracy guarantee on a company's
view of its own future.
Technical Analysis: a Starting Point
The following are some trading indicators used by chartists, also known as
technical analysts. Day traders use a number of these, but seldom use all.
The following are discussed in later chapters.
Map the trends
Spot the trend and go with it
Find the low and high of It
Know how far to backtrack
Draw the line
Follow that average
Learn the turns
Know the warning signs
Trend or not a trend?
Know the confirming signs
Map the trends: Study long-term charts, including yearly, monthly and
weekly. A larger scale map of the market provides more visibility and
a better long-term perspective on a market. Once the long-term has
2012/10/19 8:36 AM
40
been established, then consult daily and intraday charts. A short-term

market view alone can be very deceptive. Even if you trade daily, you
will do better if you know long-term trends.
Spot the trend: Determine the trend and follow it. Market trends
come in many sizes, from long-term to intermediate-term and shortterm. First, determine which one youre going to trade and use the
appropriate chart. Make sure you trade in the direction of that trend.
Buy dips if the trend is up. Sell rallies if the trend is down. If youre
trading the intermediate trend, use daily and weekly charts. If youre
day trading, use daily and intra-day charts. But in each case, let the
longer-range chart determine the trend, and then use the shorter-term
chart for timing.
Find support and resistance levels. The best place to buy is near
support levels. That support is usually a previous reaction low. The best
place to sell a market is near resistance levels. Resistance is usually a
previous peak. After a resistance peak has been broken, it will usually
provide support on subsequent pullbacks. In other words, the old high
becomes the new low. In the same way, when a support level has been
broken, it will usually produce selling on subsequent rallies the old
low can become the new high.
Know how far to backtrack: Measure percentage retracements. Market
corrections up or down usually retrace a significant portion of the
previous trend. You can measure the corrections in an existing trend
in simple percentages. A 50% retracement of a prior trend is most
common. A minimum retracement is usually 33% of the prior trend.
The maximum retracement is usually 66%. Fibonacci retracements
of 38% and 62% are also worth watching (outlined in later chapters).
During a pullback in an uptrend, therefore, initial buy points are in the
33% to 38% retracement area.
Draw trend lines: Trend lines are one of the simplest and most effective
charting tools. All you need is a straight edge and two points on the
chart. Up trend lines are drawn along two successive lows. Down trend
lines are drawn along two successive peaks. Prices will often pull back
to trend lines before resuming their trend. The breaking of trend lines
usually signals a change in trend. It is important to note that a valid
trend line should be touched at least three times. The longer a trend
line has been in effect, and the more times it has been tested, the more
important it becomes.
Follow the average: Follow moving averages that provide objective
2012/10/19 8:36 AM
41
buy and sell signals. They tell you if an existing trend is still in motion
and help confirm a trend change. Moving averages do not tell you in
advance, however, that a trend change is imminent. A combination
chart of two moving averages is the most popular way of finding trading
signals. Some popular futures combinations are four- and nine-day
moving averages, nine- and 18-day, five- and 20-day. Signals are given
when the shorter average line crosses the longer. Price crossings above
and below a 40-day moving average also provide good trading signals.
Since moving average chart lines are trend-following indicators, they
work best in a trending market.
Track oscillators. Oscillators help identify overbought and oversold
markets. While moving averages offer confirmation of a market trend
change, oscillators often help warn us in advance that a market has
rallied or fallen too far and will soon turn.
Two of the most popular are the Relative Strength Index (RSI) and
stochastics.
They both work on a scale of 0 to 100.
With the RSI, readings over 70 are overbought while readings below
30 are oversold.
The overbought and oversold values for stochastics are 80 and 20.
Most traders use 14 days or weeks for stochastics and either nine or
14 days or weeks for RSI.
Oscillator divergences often warn of market turns. These tools work
best in a trading market range. Weekly signals can be used as filters
on daily signals. Daily signals can be used as filters for intra-day
charts.
Warning signs: The Moving Average Convergence Divergence
(MACD) indicator (developed by Gerald Appel) combines a moving
average crossover system with the overbought/oversold elements of an
oscillator. A buy signal occurs when the faster line crosses above the
slower and both lines are below zero. A sell signal takes place when the
faster line crosses below the slower from above the zero line. Weekly
signals take precedence over daily signals. An MACD histogram plots
the difference between the two lines and gives even earlier warnings of
trend changes. Its called a histogram because vertical bars are used to
show the difference between the two lines on the chart.
Trend or not a trend: The Average Directional Movement Index
(ADX) line helps determine whether a market is in a trending or a
trading phase. It measures the degree of trend or direction in the
2012/10/19 8:36 AM
42
market. A rising ADX line suggests the presence of a strong trend. A

falling ADX line suggests the presence of a trading market and the
absence of a trend. A rising ADX line will favour moving averages;
a falling ADX will favour oscillators. By plotting the direction of the
ADX line, the trader is able to determine which trading style and which
set of indicators are most suitable for the current market environment.
Confirming signs: Volume and open interest are important confirming
indicators in futures markets. Volume precedes price. Its important
to ensure that heavier volume is taking place in the direction of the
prevailing trend. In an uptrend, heavier volume should be seen on up
days. Rising open interest confirms that new money is supporting the
prevailing trend. Declining open interest is often a warning that the
trend is near completion. A solid price uptrend should be accompanied
by rising volume and rising open interest.
Remember that technical analysis is a skill that improves with experience
and study. Always be a student and keep learning. If you follow these rules,
breaking them as infrequently as possible, you should make money year in
and year out, some years better than others, some years worse but you
should make money. The rules are simple. Keeping to rules is difficult.
Time-worn trading rules
If Ive learned anything in my 17 years in stockbroking, Ive learned that

the simple methods work best. Those who need to rely upon complex
stochastics, linear weighted moving averages, smoothing techniques,
Fibonacci numbers etc, usually find that they have so many things rolling
around in their heads that they cannot make a rational or quick decision.
One technique says buy; another says sell. Another says sit tight, while
another says add to the trade. It sounds like a clich, but simple methods
work best.
The first and most important rule is, in bull markets, be long. This
may sound obvious, but how many traders have sold during the first
rally in every bull market, saying that the market has moved too far,
too fast? Thus, weve not enjoyed the profits that should have accrued
to us for our initial bullish outlook, but have actually lost money while
being short. In a bull market, one can only be long or on the sidelines.
Remember, not having a position is a position.
Buy that which is showing strength; sell that which is showing
2012/10/19 8:36 AM
43
weakness. The public continues to buy when prices have fallen. The
professional buys because prices have rallied. This difference may not
sound logical, but buying strength works. The rule of survival is not to
buy low, sell high, but to buy higher and sell higher. Furthermore,
when comparing various stocks within a group, buy only the strongest
and sell the weakest.
When executing a trade, enter it as if it has the potential to be the
biggest trade of the year. Dont enter a trade until it has been well
thought out, a campaign has been devised for adding to the trade, and
contingency plans set for exiting the trade.
On minor corrections against the major trend, add to trades. In bull
markets, add to the trade on minor corrections back into support levels.
In bear markets, add on corrections into resistance. Use the 33% to
50% corrections level of the previous movement or the proper moving
average as a first point in which to add.
Be patient.
If a trade is missed, wait for a correction to occur before putting the
trade on.
Once a trade is put on, allow it time to develop and give it time to
create the profits you expected.
Once a trade is put on, give it time to work; give it time to insulate
itself from random noise; give it time for others to see the merit of
what you saw earlier than they.
Be impatient. As always, small loses and quick losses are the best
losses. It is not the loss of money that is important. Rather, it is the
mental capital that is used up when you sit with a losing trade that is
important.
Never, ever, under any condition, add to a losing trade, or average into
a position. If you are buying, then each new buy price must be higher
than the previous buy price. If you are selling, then each new selling
price must be lower. This rule is to be adhered to without question.
Do more of what is working for you, and less of what's not. Each day,
look at the various positions you are holding, and try to add to the
trade that has the most profit while subtracting from that trade that is
either unprofitable or is showing the smallest profit. This is the basis of
the old adage, let your profits run.
Don't trade until the technicals and the fundamentals both agree. This
rule makes pure technicians cringe. I will never suggest that traders buy
or sell unless fundamental analysis is confirmed by technicals. Then I
2012/10/19 8:36 AM
44
can act with authority, and with certainty, and patiently sit tight.
When sharp losses are experienced, take time off. Close all trades
and stop trading for several days. The mind can play games with itself
following sharp, quick losses. The urge to get the money back is
extreme, and should not be given in to.
When trading well, trade somewhat larger. We all experience those
incredible periods of time when all of our trades are profitable. When
that happens, trade aggressively and trade larger.
When adding to a trade, add only 25% to 50% as much as currently
held. That is, if you are holding 400 shares of a stock, at the next point
at which to add, add no more than 100 or 200 shares. That moves the
average price of your holdings less than half of the distance moved,
thus allowing you to sit through 50% corrections without touching your
average price.
Think like a guerrilla warrior. We wish to fight on the side of the
market that is winning, not wasting our time and capital on futile
efforts to gain fame by buying the lows or selling the highs of some
market movement. Our duty is to earn profits by fighting alongside the
winning forces. If neither side is winning, then we dont need to fight at
all.
Markets form their tops in violence. Markets form their lows in quiet
conditions.
The final 10% of the time of a bull run will usually encompass 50% or
more of the price movement. Thus, the first 50% of the price movement
will take 90% of the time and will require the most backing and filling,
and will be far more difficult to trade than the last 50%.
There is no genius in these rules. They are common sense and nothing else,
but as Voltaire said, Common sense is uncommon. Trading is a commonsense business. When we trade contrary to common sense, we will lose.
Perhaps not always, but enormously and eventually. Trade simply. Avoid
complex methodologies concerning obscure technical systems and trade
according to the major trends only.
Entry strategies
A day trader looks for two things in a stock:

Liquidity: This allows you to enter and exit a stock at a good price, i.e.
tight spreads and low slippage.
2012/10/19 8:36 AM
45
Volatility: This is simply a measure of the expected daily price range,

i.e. the range in which a day trader operates. More volatility means
greater profit or loss.
Once the day trader knows what kind of stocks he or she is looking for, they
need to learn how to identify possible entry points. Here are some tools that
day traders use:
Quote systems: these provide a look at orders as they happen.
Real-time news service: News moves stocks. This tells you when news
comes out.
Determining a stop loss
When you trade in derivatives, you are far more vulnerable to sharp price
movements than share trading. Therefore, using stop losses is crucial when
day trading. One strategy is to set two stop losses:
A physical stop-loss order placed at a certain price level that suits your
risk tolerance. Essentially, this is the most you want to lose.
A mental stop loss set at the point where your entry criteria are
violated. This means that if the trade makes an unexpected turn, you'll
immediately exit your position.
Day traders usually also have another rule: set a maximum loss per day
that you can afford (both financially and mentally) to withstand. Whenever
you hit this point, take the rest of the day off. Inexperienced traders often
feel the need to make up losses before the day is over and end up taking
unnecessary risks as a result.
Here is a tip learnt from experienced day traders: Set your stop loss at
two cents below the 0 or 5, i.e. most traders will set a stop loss on a 100 cent
share at 95 cents or 90 cents. If you set the stop loss at 93 cents or 98 cents,
then the other stop losses will be taken out first. There is a chance that the
share price will bounce off these levels. If the share falls past these, then
(and only then) you will be stopped out. Remember that the aim of the stop
loss is to protect yourself from a loss. If you can avoid being sold out, then
that is a better strategy.
Evaluating and tweaking performance
Many new day traders get into day trading expecting to make triple-digit
2012/10/19 8:36 AM
46
returns every year with minimal effort. In reality, around 80% of day traders
lose money. Look at the following survey conclusion:
Less than 20% of day traders earn profits net of transaction costs.
January 2005, behavioural finance study of the Taiwanese stock market
conducted by professors at the University of Taipei and the University of
California.
However, by using a well-defined strategy that you are comfortable
trading, you can improve your chances of beating the odds.
How do you evaluate performance?
Most day traders evaluate performance, not so much by a percentage
of gain or loss, but rather by how closely they adhere to their individual
strategies. In fact, it is far more important to follow a strategy closely than
to try to chase profits. By keeping this mindset, the day trader makes it
easier to identify where problems exist and how to solve them.
There is no doubt that day trading is a difficult skill to master. Well over
50% of those who try it fail. But the techniques described in this book can
help the new day trader to create a profitable strategy and, with enough
practice and consistent performance evaluation, he or she can greatly
improve their chances of beating the statistics.
Day trading is defined as the buying and selling of a security within a
single trading day. This can occur in any marketplace, but is most common
in the stock markets and alternative markets (single stock futures and
foreign exchange). Typically, day traders are well educated and well funded.
They utilise high amounts of leverage and short-term trading strategies to
capitalise on small price movements in highly liquid stocks or currencies. If
you wish to set up a day trading strategy, contact me on mentor@magliolo.
com.
Day traders serve two critical functions in the marketplace: they keep
the markets running efficiently via arbitrage and they provide much of the
markets liquidity (especially in the stock market).
Software required
Trading software is an expensive necessity for most day traders. Those who
rely on technical indicators rely more on software than news. Any software
typically contains many features, including:
Automatic pattern recognition: This means that the trading programme
2012/10/19 8:36 AM
47
identifies technical indicators like flags, channels and even more

complex indicators like Elliott Wave patterns.
Genetic and neural applications: These are programmes that utilise
neural networks and genetic algorithms to perfect trading systems to
make more accurate predictions of future price movements.
Back testing: This allows traders to look at how a certain strategy
would have performed in the past in order to predict more accurately
how it will perform in the future. Just remember that past performance
is not always indicative of future results.
Combined, these tools provide day traders with an edge over the rest of
the marketplace. It is easy to see why, without these indicators; so many
inexperienced traders lose money.
2012/10/19 8:36 AM
48
Chapter 3: Trading to a Game Plan

Technology has made entering the major leagues easy, staying in is
not. Before taking to the fast-paced, high-risk playing field, its absolutely
essential that you have a firm grasp of the rules and a solid game plan.
Farrell, Christopher: Day Trade Online, Wiley, 2001,
After the launch of Become Your Own Stockbroker in 2005, I was repeatedly
asked to give lectures on share trading. After a while, a common theme
of questions started to emerge. One question, in particular, lead to the
writing of Richer than Buffett, namely: Surely, day trading is simply playing
numbers? That cant be too difficult?
Trading successfully is by no means a simple matter. If you think it is,
this book will not provide you with answers. Top day traders and novices are
separated by the rigorous level of discipline they have to follow in their day
trading system and plans. They know that only the trades that are signalled
by their system have a greater rate of success. Matching a method of trading
with personality is the only way that the novice will ever feel comfortable
in the markets which, over the long term, will either result in successful
transition to professionalism or complete failure. Ultimately, day traders
need to position themselves so that they can endure strings of losses, while
maintaining day-trading game plans.
Another question: How much of your capital should you treat as risk?
A day trader should treat his or her capital as 100% risk capital and should
not have to worry that the entire capital may be lost quickly. Good day
traders do not rush into trades.
At the outset of this chapter, it is crucial to stress that day trading is not
just a numbers game. Day trading is like running any other kind of business.
It requires planning, expertise, skill, administration and strategy. Too many
South African companies operate without strategy, which often leads to
managers fire-fighting (dealing with problems), rather than strategising
and implementing goals. This simple fact was repeatedly confirmed during
the past three years, while writing my latest university text book on strategy,
called The Corporate Mechanic: The Analytical Strategists Guide (Juta,
2007). Contact me on mentor@magliolo.com for additional information.
Therefore, like any business, day traders must limit losses, which is far
more important than simply making big profits. Online trading has made
2012/10/19 8:36 AM
49
it easy for the novice to start a trading business. Making money from day
trading, however, is another matter. Be patient. It does take time to learn
the basics. It takes even longer to become proficient in the art of day trading.
Before investing or trading, a strategy or game plan must be developed that
is consistent with goals and style. The ultimate goal is to make money, but
there are many different ways to go about achieving that goal. To simplify
the way forward, lets start by looking at goals, style and strategy.
GOALS, STYLE AND STRATEGY
Goals
The first set of questions regarding goals must centre on risk and return,
and the correlation between the two. Note that, without going into the
mathematics of risk and return, these two are highly correlated. The
higher the potential return, the higher the potential risk. At one end of
the spectrum are government bonds, which offer the lowest risk (so-called
risk-free rate) and provide guaranteed returns. Shares offer reasonable
risk, with highest potential returns (and risk) with speculative stocks. These
exhibit high volatility and high price multiples (price-earnings ratios). The
lowest potential returns (and risk) come from shares in mature industries
(usually blue chips) with stock prices that exhibit relatively low volatility
and low price multiples. At the high-risk part of the spectrum, you find
derivatives and other instruments, like Forex and commodity trading.
Goals are therefore set with short- to long-term plans in place and a
breakdown of the risk profile. As stated in Become Your Own Stockbroker,
split your portfolio into two: equity plus a high-risk one. The starting point
is to have an 80:20 split between equities and alternatives (higher risk). If
you feel uncomfortable, change the ratio to 90:10 and so on. If you enjoy
the higher risk, change the ratio to 70:30. I recommend starting on a 90:10
ratio and moving to an 80:20 ratio once greater understanding of markets
and different instruments is attained.
Style
Once goals have been established, it is time to develop a style that is
consistent with achieving those goals. The expected return and desired risk
will affect trading or investing style. For instance, if the traders goal is to
achieve income and safety, then trading extreme market securities is an
2012/10/19 8:36 AM
50
unlikely style. If the goal is based on quick profits, high returns and high
risk, then trading futures and Forex is more in line with the traders goal.
Styles range from aggressive, where day traders are looking for small
margin profits, to investors looking to capitalise on long-term positive
macro-economic trends. In between, there is a whole host of possible
combinations, from trading futures, warrants and speculative shares, to
trading bonds and Forex. Not only will style depend on goals, but also on
level of commitment.
Day traders are likely to pursue an aggressive style with high activity
levels. The goals would be focused on quick trades, small profits and very
tight stop-loss levels. Intraday charts would be used to provide timely
entry and exit points. A high level of commitment, focus and energy is
an absolute necessity. Alternatively, long-term investors are likely to use
monthly and six-monthly charts. The goal would be focused on long-term
price movements and the level of commitment, while still substantial, would
be less than that demanded of a day trader. So, the more trading that is
involved, the higher the level of commitment that is required.
Strategy
Once the goals have been set and preferred style adopted, it is time to
develop a strategy, which is based on a return to risk preference, trading to
investing style and commitment level. As an initial recommendation, always
have a strategy that focuses on the following:
Portfolio management:
Wealth portfolio: Limit the amount of shares to between 12 and 15
shares. Remember that even long-term shares have to be assessed
regularly.
Trading portfolio: Limit trading to between 8 to 12 securities at any
stage.
Buy stocks for the long term, when shares are falling (e.g. profit taking)
in a bull market and sell shares that are rising (rallying) in a bear market.
Avoid trying to find bottoms/tops of the market. The day traders job is
to find and execute profitable opportunities and not to attempt to find
tops and bottoms (explained later in the book).
Always have an entry and exit strategy. Learn to read the market.
When momentum slows its time to get out. Again, I stress not to wait
until the bottom of the market. Trying to time the market often results
in a lost opportunity.
2012/10/19 8:36 AM
51
Trade small and frequently. It is crucial to preserve trading capital.

This is especially true for new traders. Never chase a market. Let the
market come to you.
Speed: Once a decision is made, execute the trade without hesitation.
In 2004, I recommended that a client buy a JSE-listed share called
Zenith, then trading at 1 cent. My forecast was 12 cents within
months. This was purely a speculative stock, expected to make an
announcement about a corporate deal that could change the future
direction of the company and, therefore, the share price. The client
hesitated and the share rose to three cents. Yet again, he phoned
me and I advised that he must buy the share immediately. He finally
bought the share at eight cents. As predicted, the news announcement
was made; the share rose to 12 cents and then fell back to eight cents.
An opportunity lost. Instead of turning his R10 000 into R120 000, he
eventually made only a one cent profit. He was happy with the R10 000
he made on his investment. Speed would have seen his investment earn
an additional R110 000.
The following example highlights only one potential strategy.
Example: Goal, trading style and strategy of M Miller:
Goal:

Achieve a 20% to 30% monthly return.

This will involve a correspondingly high level of risk.

Given the correlated risk, it would be better to have a 60:40 spilt

between equities and higher-risk securities.
Style:

Although Miller likes to follow the market throughout the day,

he cannot at present make the commitment to day trading.
Therefore, he would look to using a mentor to advise him when
to buy and sell, but only securities that have monthly price
movements.

Indicators will be limited to three: trend lines, 9- and 21-day

moving averages and relative strength models (discussed later on
in the book).

Part of this style would involve a strict money-management

scheme that would limit losses by imposing strict stop losses.
2012/10/19 8:36 AM
52
An exit strategy must be in place before the trade is initiated.

Should the trade become a winner, the exit strategy would be

revised to lock in gains.

The maximum allowed per trade would be 10% of total trading

capital.

For instance, if his total portfolio was valued at R300 000, then
R120 000 (40%) would be allocated to trading. Of this R120
000, the maximum allowed per trade would be R12 000 (5%).
Therefore, he would be in a position to have only 10 open trading
positions at any one time.
Strategy:

The trading strategy is to have 60% of his whole portfolio in

blue chips. This is restricted to the top 40 listed JSE Securities
shares (as valued by market capitalisation). This is Millers wealth
portion of his portfolio.

To maintain prudence, he only looks at long positions in stocks

with monthly bull trends and short positions in stocks with
monthly bear trends.

In addition, he only looks at stocks which conform to correct chart

indicators.

Miller aims to keep the ratio of 60:40 in place, with corrections

made every six months. Therefore, if trading is successful and that
ratio becomes skewed towards the trading, then Miller will place
the additional funds into the wealth side of his portfolio.
This is just one hypothetical strategy that combines goals with style and
commitment. Some people have different portfolios that represent different
goals, styles and strategies. While this can become confusing and quite time
consuming, separate portfolios ensure that investment activities pursue a
different strategy from trading activities. For instance, the day trader may
pursue an aggressive (high-risk) strategy for trading with a small portion of
his or her portfolio seated in a conservative, capital-preservation strategy.
If a small percentage (10%) is earmarked for trading and the bulk (90%)
for investing, the equity swings should be lower and the emotional strains
less. However, if too much of a portfolio (70%) is at risk through aggressive
trading, the equity swings and the emotional strain could be large.
2012/10/19 8:36 AM
53
A THREE-STEP FORMULA
The trader must become insensitive to daily fluctuations of markets. Yet,
even professional day traders ignore this basic rule and get caught up in
market turmoil. In 1999, I was head of research and director of a local
stockbroking firm and was at that stage in the process of developing software
programmes for the trading team. My office overlooked the trading room.
One morning, I was in discussion with software developers when, in the
middle of the meeting, the software companys CEOs eyes became wide. I
turned to (just in time) hear a roar from the trading room. The dealers were
all standing up, eyes glued to the market monitors. One dealer had picked
up his chair and had thrown it across the room. It hit the wall and shattered.
If effective trading depends on ability to triumph over fear and greed,
what happened to this particular trader? It has taken him some five years
to regain his trust in the directors and to prove that he can maintain calm
when the markets are just not performing to predicted norms.
The secret lies in following a simple, three-step formula:
Step 1:
Set up a strategy, called The Game Plan
Step 2:
Write down the strategy (The Game Plan)
Step 3:
Keep a trading diary
A common question asked during the many lectures given during 2006: Why
must you keep a list of all your trades? Losses are not exactly encouraging
and to have to look at these every time you trade is disheartening.
Step 1: The Game Plan
The following will explain why there is a need for such a methodology.
Learn from your mistakes: Every time you open your trading game
plan book and look at that days proposed strategy, losses will remind
you to implement stop losses, or not to buy simply because everyone
else is, etc. It reinforces lessons learnt.
Remove doubt: Many investors think that they have a game plan, but
out of the thousands of emails I received since the launch of Become
Your Own Stockbroker in April 2006, few actually had any plan or else
poorly constructed ones.
Here is the ultimate aim: There should never be any doubt in the
traders mind as to what he or she will do on any given day, and when
and how he or she will do it, regardless of market conditions.
2012/10/19 8:36 AM
54
What should a strong and reliable game plan be built upon? There are
three foundations upon which to build a successful trading programme.
They are:
Identify the trend
Choose an appropriate game plan
Implement a comprehensive, disciplined money-management
programme. This must take into account the traders risk profile
Identify the trend: To become an effective trader, you need to be able to
tell whether a stock trend is moving higher or lower. If the trader can tell
in what direction a share is headed, then he or she should be able to bank
profits. As the adage goes, The trend is your friend. Unfortunately, too
many investors let themselves get distracted by less important matters.
One of the biggest misconceptions among novice traders is that success
depends upon buying at the bottom and selling at the top. That would
require perfection, and extremely few traders are able to do this without
complete luck. Thus, focus on capturing half of an existing trend. Try
changing the adage of buy low, sell high to get in late, get out early.
For example, if a share is expected to run from R15 to R110, get in at
R30 and get out at R90. If you learn to do that on a consistent basis, you
will beat the herd, who are trying to time market movement to perfection.
Let the trend be your friend. By correctly identifying the trend, the trader
dramatically improves the odds of succeeding in the market.
Choose an appropriate game plan: An incorrect strategy will not
be offset by correctly identifying the trend. It doesnt really matter how
good you are at identifying the trend, if you dont choose the appropriate
strategy, youre going to have difficult time making money. An appropriate
game plan will depend on the funds you have, experience, skill and lifestyle.
I suggest to new clients that they need to understand market and trading
fundamentals before they can start to actively day trade.
Choose strategies that enable you to lead your desired lifestyle. For
example, it wouldnt make sense to engage in short-term trading strategies
if you travel a lot or prefer to be on the golf course. Finally, once you
determine whether a security is cheap, fairly priced or expensive you
will know whether to buy or sell it. Overall, dont make trading more
complicated than it is.
Risk and money management: Managing risk and money means that
there is a need to protect your future wealth. You can easily crash and
burn if you dont pay attention to the amount of risk and money involved in
2012/10/19 8:36 AM
55
any one trade. Take a defensive stance every time you put on a trade. Focus
on protecting what you have, instead of focusing on what you want to make.
Also take a defensive stance when you open up an online trading
account to start trading. Make sure you fully understand the language of
the risk disclosure statements that youll be asked to sign. Be honest with
yourself about your financial situation, your knowledge of and experience
in the markets and your emotional and psychological makeup; particularly
when it comes to handling loss.
Factors affecting trading strategy
The prevailing price
Market analysis and sentiment
Trading style and parameters
Experience in the market
To trade effectively, you must use real-time quotes. Delayed quotes that
are freely available from many websites are useful only to the buy-and-hold
investor for whom a 20-minute delay is not material. Some professional
traders use two independent sources of quotes in case of a transmission
error in the data stream.
Quotes will be displayed in any number of charting programmes which
data vendors do provide. As discussed in further chapters, you may use a
combination of daily and intraday charts of varying time frames. Using the
charts, with technical analysis, you can determine the market sentiment and
likely price targets of upcoming moves. Your trading style and parameters
will depend on many factors, including your own objectives and experience,
and the time you have to devote daily to the market.
In general, short-term trading seeks to take advantage of larger moves
in the market and can tolerate comparatively larger moves, which will also
impact your stop placement. Day trading is typically aimed at smaller moves
or a series of smaller moves made intraday.
Your experience in the market speaks for itself. Many traders have
evolved from active investors, who managed portfolios and made longerterm stock trades, moved to shorter-term stock trades, and then graduated
to day trading in stocks and futures. Do not rush the learning curve. Only
you can judge when you feel sufficiently comfortable with the dynamics of
whatever market youre trading to increase your frequency of trading or to
become more aggressive in the market. By building up a game plan using
the above three steps, the trader should have a solid foundation from which
to trade. But creating a game plan is not enough. The next step is just as
2012/10/19 8:36 AM
56
important.
Step 2: Write Down Your Game Plan
When a trader writes down his or her game plan, they are effectively saying
that they are serious about the task ahead and, because they can constantly
refer to the game plan, they are internalising it. The game plan must include
how you trade, which criteria dictate when you buy and sell, and how much
you risk per trade.
Without a doubt, knowing what youre going to do and when youre
going to do it will help you become a more effective trader. It will also
simplify your life immensely. By taking time to write down your game plan,
you create an easy-to-follow roadmap that should foster stress-free trading.
Step 3: Create a Trading Diary
No one starts out trading believing they will lose. However, statistically
speaking, there is a greater likelihood of failure than success. For example,
did you know that the average life span of a day trader around the world
is six months? Did you know that for every 10 people who try their hands at
trading, three will survive the first year? And that of those three, maybe one
will be able to make a decent living?
Keeping a trading diary is an easy step to take to learn from mistakes
you have made. It ensures that you can ultimately make a decent living from
day trading. The following is a template, which can be used by the novice
trader until he or she can customise it to meet their personal requirements.
2012/10/19 8:36 AM
57
TRADING JOURNAL
Week ending: ________________
Todays date: ________________
SUMMARY OF TRADES
Trade Essentials
Date:
__________________________
Time horizon: __________________________
Stop loss:
__________________________
Reason for entry
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
Reason for exit
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
_______________________________________________________________
Outcome
Entry level:
_____________
Exit level:
_____________
Profit/Loss:
_____________
Effect on portfolio:
_____________
Conclusions
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
For more information on a log book, go to the Appendices.

Write down your thoughts and impressions of the market every day.
Make notes of seasonal cycles and market peculiarities such as patterns and
market-moving news. Keep track of various market statistics such as, GDP,
CPIX, PPI, new vehicle sales, new market highs and lows, and so forth.
When placing a trade, write down reasons. Review performance
regularly. Learn from mistakes and duplicate successes. Why is maintaining
a trading diary so important? Firstly, writing down the reasons behind your
decision to enter or exit a particular trade will automatically force you to reexamine your premise for doing so. If your reasons appear flawed, then you
2012/10/19 8:36 AM
58
can avoid placing the trade. Essentially, the diary provides a logical basis
for choosing securities. If you cannot think of a reason to trade, then dont
trade. There will always be opportunities in the market.
Keep track of trades in the diary
All traders have their favourite strategies. At the same time, its imperative
that you pick the best strategy for the market conditions at the time. What
happens when the market trend changes? What will you do when, instead of
hitting resistance levels and selling, the market keeps going up? Similarly,
if you bought a share at the forecast bottom, but the market broke through
the support line and continued down, youd be long in a falling market.
Clearly, that strategy would no longer work.
If a trader is out of sync with the market, the quickest way to determine
why is to look at all previous losing trades. It benefits all traders, both
novice and professional, to keep a log of all trades. This log should include
the time in, time out, whether you were long or short, and the result.
When changes take place, you have to shift your trading strategy as well.
Your trading log should include every trade you make; win or loss.
Record the time you entered the trade, the size of the trade, the entry
point, and whether you were short or long.
Write down whether you were stopped out or exited the trade
deliberately. How long did you stay in the trade? Did you make a profit
or a loss?
Accumulate data on your trades over time.
Analyse the results for insights into how youre trading. For example,
how long do you typically hold on to a losing trade?
How long do you stay in a winning trade?
What types of trades yield the best results for you?
Do you favour the long or short side?
These kinds of results can be helpful for many reasons, including seeing
where you typically make mistakes. For example, you might discover that
you tend to hold on to losing trades far longer than you stay in winning
trades. That may mean you dont exit the losing trades fast enough or
perhaps youre exiting the winning trades too soon. Unless youre aware of
your own trading patterns over time, you wont know where and how to take
corrective action. If you are hesitant to start an actual trading journal, set
up a paper trading diary:
2012/10/19 8:36 AM
59
Paper trading may be helpful to practise certain aspects of trade

execution. However, paper trading cannot replicate the emotional and
psychological aspects of trading or real-time market conditions.
Trading involves the risk of substantial loss of capital. Use only
speculative capital to trade. This means money that you could lose
without impacting your lifestyle or livelihood. Paper trading cannot
replicate potential market and emotional upheaval.
If you trade futures, understand the impact of leverage. For instance,
in single stock futures, a 10 times gearing means that if the underlying
share moves up 10%, your future will show a 100% rise in profit.
Paper trading is simple in this instance, as a simple spreadsheet with a
10 times multiplier can be used. However, novice traders, who paper
trade, seldom take into account the effect of a 10% loss.
For day traders, who are inundated with market information, a trading
journal provides them with the opportunity to review and analyse past
trades. By reviewing their performance, they learn to logically identify why
they are making or losing money. After a while, the novice trader starts to
recognise and fix deficiencies in his or her game plan. The simple question
is: How can you correct mistakes or duplicate successes if you dont know
what youve done? When performance is measured and tracked, it improves!
Above all, by keeping a diary youll better understand the psychology of the
market, but more importantly, improve your understanding of your own
psychological profile.
No
Question
Trading securities online gives you a direct connection to

the securities market
Securities pricing displayed on a computer screen is the

price you will pay on executing a trade
With online stock trading, your broker has several

choices of how to route your trade for execution
Brokers may offer the option, but not the guarantee, of

filling orders at a better price if possible
True
False
2012/10/19 8:36 AM
60
Electronic communications networks are electronic

trading platforms offered by the major stock exchanges,
such as the Nasdaq and the New York Stock Exchange.
With direct access for stock trading, you may pick where
your order is executed
In futures trading, your broker can take the other side of

your trade (i.e., buying the contracts youre offering for
sale or selling what you want to buy)

No
Question
Reasons
for paper
trading
No
Question
Potential answers
Watching
the market
real-time
Determining
entry and
exit points
Determining
stop levels
When paper trading, you can ignore negative mistakes

and focus only on the well-executed trades that you
identified
Paper trading is worthless
To open a trading account, I must have a minimum of

R25 000
Its easy to get a margin account for stock trading
If I trade stocks on 2-to-1 margin, the brokerage firm will

absorb losses on its half of the trade
All of the
above
True
False
Order Types to Execute Trades

The different types of online brokerage share and other security orders
were discussed at length in Become Your Own Stockbroker. I believe that it
needs to be set out hereunder, but with a slightly different focus. As global
markets move rapidly to enable anyone, from anywhere, to trade, I have
included generic order types that apply in most of the First World markets.
Each will have slightly different terminology, but are essentially the same.
2012/10/19 8:36 AM
61
So, when youre trading, there are numerous types of orders that you can
use to enter or exit your trade.
Here is a brief explanation of various order types:
Market order: An order to be executed immediately at the prevailing
stock market price. Remember that electronic trading means that there
is a queuing system. The first person to enter the trade gets served first.
The exception is that the best price offered is taken first. So, a note of
advice if you are selling or buying:
Selling: If the market order does not go through immediately,
reduce the price you want for your security, i.e. place a limited
order.
Buying: If the market order does not go through immediately, bid
higher than the market price, i.e. place a limited order.
Limit order: An order that can be executed only at a specified price or
better.
Day order: An order that automatically expires if it is not executed
on that day. This is an important method for day traders, as you do
not wish to have open orders at the end of the day. Who knows what
tomorrow brings? For example, you could get sick and not be at your
trading desk the next day to stop the order if it goes against you.
Open order: Such orders remain in operation until they are cancelled
or until the contract expires. This type is also known as a good-tillcancelled (GTC) order.
Spread order: An order to buy one contract and sell a different
contract simultaneously, at a quoted differential.
Stop order: An order that becomes a market order only when the
market trades at a specified price. This may also be called a stop-loss
order, enabling a trader to exit a losing position at a specified price for
a predetermined loss. A stop order may be a good-till-cancelled order
or any other form of time-limit order.
Stop limit order: An order that becomes a limit order (to be filled at a
specified price or better) when the market trades at a specified price.
Market-on-close order: A market order that is executed at the closing
price. If its not executed, the order is cancelled.
Market-if-touched order: A price order that becomes a market order
when the market trades at a specific price at least once.
Order-cancels-other order: Includes two orders, one of which cancels
the other when filled. This may also be called a one-cancels-other
order.
2012/10/19 8:36 AM
62

No
Question
The market just broke a key resistance level.

The next target is several Rands away and you
see an opportunity to buy immediately. What
kind of order would you use?
Price
order
Market
order
Limit
order
An Index has traded off the intraday high of

1 308 and is moving below 1 300, where you
believe there is solid support. Youd like to be
a buyer at 1 300 or better. What kind of order
would you use?
Market
order
Price
order
Limit
order
You establish a short position at 1 309.50, and

the market is moving down. Your technical
analysis shows support at 1 301.50. To exit the
short position profitably, what kind of order
would you use?
Market Stop-loss Price

order
order
order
You see key support at 1 298 and expect the market to trade steadily higher
from that level. After the market hits 1 298 and trades slightly higher, you
enter with a market order at 1 298.40.
The market meets unexpected resistance at 1 299; far short of your profit
target at 1 301.50 and begins to sell off.
What kind of orders would best protect your position?
Time and Information

When youre day trading, watching real time prices on a computer screen
can drive you to boredom; to the point that you could trade without plan or
strategy just to alleviate just sitting around. Time is money one new trader
once told me. It is, but without a properly executed trade, based on sound
analysis, the saying becomes trading is a waste of money whatever time you
trade. Set up your own factors that are important to your decision-making
process and split that into four categories, namely economic variables,
business trends, political factors and technological change. These are
discussed in great depth in Jungle Tactics.
It is crucial to understand that markets do not move in a vacuum. A host
of external events and factors, from macro-economic trends to companyrelated issues, impact markets. There may be a regularly scheduled
economic report. Or perhaps there is an unexpected announcement, such
2012/10/19 8:36 AM
63
as an earnings warning by a major company or a surprise rate cut/hike by

the Reserve Bank. If youre trading, you need to know whats going on.
Many professional day traders have television sets in their office, tuned to
financial networks to keep informed on current and breaking news. Further,
these networks frequently interview company chief executives, economists
and analysts, who may provide some insight into market dynamics. In
addition, some online share systems provide scrolling headlines, prices and
graphs on your screen. With two computers, you have the ability to conduct
research, while watching your open positions.
Having real-time information, the ability to interpret such information
and use it efficiently is vital to a traders success. As we all know, the
evolution in trading has been from placing trades through a broker to
online trading. Now, direct access to trading, providing traders with instant
market access, means that more (and not less) discipline is needed to be a
trader. When you trade with a broker, you have someone with whom you
can discuss the deal. Online trading is instantaneous and decisions cannot
be reversed. Whether youre trading futures or shares, the importance of
maintaining discipline and self-control can not be over-emphasised.
After all, traders are just as apt to fall prey to overtrading and the
illusion of control and knowledge as long-term investors. Be aware that
outdated information is as dangerous as not having any at your fingertips.
Some day traders believe that all information is reflected in share prices
and, therefore, do not need to keep informed. Or, they feel so in control
that they are taken by surprise by a sudden move in the market. Markets are
not soothsayers. They cannot predict the unforeseen death of a director, or
that the stock exchange is to demand the break-up of pyramided structures.
Online trading is a growing phenomenon, but cannot be used as an
excuse to trade without information, discipline or knowledge.
No
Question
If you have real-time market information, you are at an

advantage in the marketplace
Complete knowledge of all markets is a prerequisite to

trading
True
False
2012/10/19 8:36 AM
64
An Initial Look at Basic Trading Strategies

Identifying what to buy depends largely on an individuals trading style.
Here is a brief overview of some common day-trading strategies:
Description
Scalping
Scalping is an extremely popular day-trading strategy. It involves

selling almost immediately after a trade becomes profitable. Here
the price target is obviously just after profitability is attained.
Traders who implement such strategies will place 10 to several
hundred trades in a single day. Their belief is that small moves in
stock price are easier to catch than large ones.
The main goal is to buy (or sell) a number of shares at the bid
(or ask) price and then quickly sell them a few cents higher (or
lower) for a profit. Many small profits can easily compound into
large gains if a strict exit strategy is used to prevent large losses.
Note of warning: Assess the cost of brokerage before you implement
such a strategy.
Fading
Fading involves shorting stocks after rapid moves upwards. This is

based on the assumption that:
they are overbought
early buyers are ready to begin taking profits
existing buyers may be scared out.
Although risky, this strategy can be extremely rewarding. Here the
price target is when buyers begin stepping in again.
A contrarian investment strategy used to trade against the prevailing
trend. Fading the market is typically very high risk, requiring the
trader to have a high risk tolerance. A fade trader would sell when a
price is rising and buy when its falling.
Daily
pivots
This strategy involves profiting from a stocks daily volatility. This

is done by attempting to buy at the low of the day (LOD) and sell
at the high of the day (HOD). Here the price target is simply at the
next sign of a reversal, using the same patterns as above.
Momentum
This strategy involves trading on news releases or finding strong

trend moves, which are supported by high volume.
Example: Buy on news releases and ride the trend until it exhibits
signs of reversal.
Strategy
You can see that, although the entries in day-trading strategies typically rely
on the same tools used in normal trading, the exit strategies are where the
differences occur. In most cases, however, the day trader will be looking to
2012/10/19 8:36 AM
65
exit when there is decreased interest in the stock. Determining a stop loss is
outlined in the next section.
RISK & REWARD
There are literally hundreds of books on risk control. So, in Richer than
Buffett, I concentrate on a select few systems that will help traders to make
well-executed trades, while reducing risk. This will require fundamental
and technical analysis for each trade to be balanced by risk and reward.
Therefore, in this chapter, well examine ways in which to control risk,
protect capital and work toward the goal of making well-executed trades.
Whether youre a novice or an experienced professional, the goal is always
to avoid making rash decisions.
One of the biggest lessons in trading is to know when to trade and when
to wait. If you get in too soon, you could find that the market turns and
the expected trend does not materialise. If you get in too late, profits are
minimal and risk that the share will turn is high. Many traders will buy within
the first two hours of the market opening. Then, they wait for exit points,
while analysing opportunities for the next day. Inevitably, the market does
slow down during the midday hours until 1:30 pm. Take a break during this
time, away from the computers and, in fact, the trading desk.
In the afternoon, go over price actions of the morning and see where
and how trading was affected. Did you anticipate breakouts or misjudge the
strength of resistance levels? The greater your ability to focus, the better
chance youll have of making well-executed trades. The backbone of a solid
execution is to control risk.
Risks of Day Trading
Mental fatigue: Watching a computer screen all day, while monitoring

stocks can affect mental alertness, especially during losing periods.
Equipment failure: Online traders are exposed to PC crashes,
overloaded websites and quote system failure. One way to offset these
problems is to have a second computer, which is automatically updated.
If you need assistance, email me on mentor@magliolo.com.
Quality of executions: High-volume days cause a slowdown in order
fills.
Addiction: The ease of entry into online trading has increased the lure
of quick money. Consequently, long-term and day trading have created
2012/10/19 8:36 AM
66
many full-time traders. Experience shows, however, that most new

entres into trading do not plan well enough or run their trading as a
business. Most will, therefore, not survive a full year.
Controlling Risk
Stops
To control trading risk, the day trader uses stops with every executed trade.
The placement of such stops must also be part of technical analysis. For
example, assume you have a long-term investment position in a share
trading at R1 301, with a profit objective of R1 306, because your technical
analysis has indicated a resistance band from R1 306.50 to R1 307. You
place your protective sell stop at R1 298.50, just below a key support zone
at R1 299 and R1 300. Your rationale is that, if the market breached R1 299
to R1 300, the downside pressure would increase.
The risk-to-reward rule is that profit potential must be a minimum of
twice the loss potential per trade. Alternatively stated, the amount that you
stand to lose must be no more than half of what you stand to gain.
No
Question
Profit and risk potential must be the same
The best way to limit a loss is with a stop loss
Never move a stop loss during trading
Always increase the size of a trade to make up losses
Controlling risk and capital exposure is the primary

goal of any trader
True
False

No
1
Question
Be brief
Assume youre long of a R20 stock, with a profit objective of

R22.75. What should your protective sell-stop placement be?
2012/10/19 8:36 AM
You take a short position in an index at 1 305 after the market

fails to break through resistance at 1 3061 307. You see
support at 1 2991 300. Where would you place your exit
target for a profitable trade?
In the preceding example, where would you place your

protective buy stop?
67
Trailing stops
When you trade Single Stock Futures (or other derivatives), you are far
more vulnerable to sharp price movements than when trading in shares.
Therefore, using stop losses is crucial when day trading. One strategy is to
set two stop losses:
A physical stop-loss order placed at a certain price level that suits risk
tolerance. Essentially, this is the most the trader will want to lose.
A mental stop loss set at the point where your entry criteria are
violated. This means that if the trade makes an unexpected turn, youll
immediately exit your position.
Day traders usually have another rule:

Set a maximum loss per day, which you can afford financially and
mentally to withstand. Whenever you hit this point, take the rest of the
day off.
Inexperienced traders often feel the need to make up losses before the day
is over and end up taking unnecessary risks. The result: more losses.
One way to prevent unnecessary losses is to have a system to determine
what to buy. For instance, if the trader has analysed the retail sector and
has concluded that furniture stocks are the next wave up, what does he or
she buy? Does the trader buy speculative share valued at below R10? Does
the trader acquire Single Stock Futures in underlying furniture shares? Or,
does the trader take a longer position and acquire furniture blue chips?
To approach the problem logically, a decision matrix is defined and
used. This is set out at the end of this chapter. In fact, the only time to
move a stop during a trade is when youre using a trailing stop. The aim
of a trailing stop is to move your protection up with a continued long-term
investment or to move it down with a continued short position.
Example: Analysis indicates that Share is a BUY at R20. Technical
and fundamental forecasts predict a price of R32 in six months. The trader
2012/10/19 8:36 AM
68
buys the share, and places a stop loss at 18. The stock, as predicted, moves
quickly to R26 a share, and buying interest remains strong. Based on the
buying momentum, you decide to sell 50% of the shares, but keep the
remaining shares to sell at R32 a share.
In this scenario, you would move your protective stop up to R20 or even
R22 a share. At R20 a share, if your stop was hit, you would have breakeven.
At R22, your stop would lock in a profit for the remaining positions. Trailing
stops are always moved in the direction of the trade. You must never lower
a sell stop or raise a buy stop while youre in a trade.
No
Question
You enter a short position in an Index at 1 310. You see

support at 1 304.501 305 and below that at 1 2991 300. You
place your exit target at 1 305.20. You see key resistance at 1
311. Where would you place your protective buy stop?
The market moves downward quickly from 1 310 to 1 306.

Selling momentum remains strong and you decide to sell 50%
of your position at 1 305.20. You decide to cover the rest at 1
301; above the next support area.
To protect yourself, however, you move your protective buy
stop downward. Where would you reposition this trailing
stop?
One of the reasons to use a trailing stop is to prevent a
winning trade from becoming a loser. For example, lets say
you scale out of half of your position at the original target of 1
305.20 in the belief that the market will eventually trade to the
1 2991 300 support level.
But instead, buyers step into the market at 1 304.50, the lower
end of the first support zone, and the market is quickly bid up
to the 1 311 level. If your protective buy stop is still at 1 311.20
or 1 311.40 youll be stopped out at a higher price for a loser
on the remaining portion of the trade. But by moving your
protective stop downward in the direction of the market
you would limit your loss potential and even end up with a
profit.
Be brief
2012/10/19 8:36 AM
69
Measuring risk
When it comes to taking on risk, there is a point at which every trader has had
enough. For experienced, well-capitalised traders, the amount of risk may
be far greater than the risk that can be handled by a less experienced trader
who is trading smaller positions. Typically, as experience and proficiency in
making trades rise, youll increase trade sizes. With that, profit potential
and loss potential will also rise. The key to determining when to increase
your trade size rests in your knowledge and comfort level.
No
Question
Trading 10 futures contracts or 1 000 shares is as easy

as trading one contract or 100 shares
When you trade, you need to disassociate yourself from

funds used to trade. Think of contracts or shares as
casino chips
If youre a buy the dip trader, you must learn other

methods of trading as well
Your goal as a trader must be to trade as large a

position as possible at all times
If you have a stop in place, there is no way that youll

face more risk than youve determined in advance
True
False
Capitalisation and well-executed trades

When losses mount, there is undeniably something wrong with your trading
system: research, trading plan or execution something is not right. The
trader must dissect each of the trades made to find out exactly what went
wrong. Capitalisation and risk management are inextricably linked. The
size of a trade is dictated by the capital you have. To preserve that capital,
stops must be placed to limit potential losses. Exit points for a profitable
trade must also be realistic.
2012/10/19 8:36 AM
70
Risk and Trading Psychology

No
Question
When trading, its good to have a daily profit goal
Based on daily profit goals, I can extrapolate what I

stand to make for the month and the year
Long-term profit targets allow me to look ahead,

without putting
too much daily attention on the money involved
Trading is a great profession because you only have to

work a
few hours a day
I should set a limit for my maximum loss per day
True
False
Trading style
For day traders, the learning curve usually starts out with long-term
investments, but there is a point at which they become comfortable going
short. There is also a belief among traders that the market goes down faster
than it goes up. But, if youve ever been caught short on a rally, youll know
that the market can skyrocket as quickly as it can plummet.
No
Question
Successful traders typically have one style of trading
To trade effectively, you must increase trading variety
Successful trading is knowing when to trade and when

not to trade
Buy after the bottom has been made and sell after the
top has been made. Dont try to pick tops and bottoms
In trading, trend is more important than timing
True
False
2012/10/19 8:36 AM
Overtrading is not a problem
Adding to a position, when the market is moving

against you, is a good idea.
71
Trade execution
The well-executed trade can be broken down into three steps:

Pre-market preparation: Start with clearing your mind of distractions,
as you mentally prepare to trade. Study price charts, review your
technical analysis, and determine price levels, support, resistance and
retracements.
Trading preparation: Watch the market for entry points.
Execution: This is where it all comes together and you execute a trade
at the price you previously identified, with a protective stop and a first
profit target.
No
Question
In the beginning, the three steps will be methodical and

deliberate
As an experienced trader, you can skip the first two

steps
The three-step process slows trading down too much,

and you may miss out on too many opportunities
True
False
THE DECISION MATRIX

A decision matrix is also known as: decision-making matrix, solutions
prioritisation matrix, problem/solution matrix, options/criteria matrix,
cost/benefit analysis matrix and criteria/alternatives matrix.
Lets start by making the following statement: trading decisions in the

market are made under either certain or uncertain conditions.
Decision-making under certainty means that for each decision there is
only one event and, therefore, only one outcome for each action.
Decision-making under uncertainty, which applies more commonly to
2012/10/19 8:36 AM
72
day trading, involves several events for each action together with its
probability of occurrence.
When decisions are made in a world of uncertainty, such as the stock

market, it is often helpful to make calculations of:
Expected value
Standard deviation
Coefficient of variation
Although statistics, such as expected value and standard deviation, are
essential for choosing the best course of action during times of uncertainty,
the decision problem can best be approached using what is called Decision
Theory: using a decision matrix to systematically approach making a
decision, particularly under conditions of uncertainty. Designing a decision
matrix is therefore important for day traders. If you wish to download a free
decision matrix excel template, go to www.magliolo.com.
In the stock market, where day traders have to weigh up options between
shares, Single Stock Futures, warrants, commodities and other securities,
having a decision matrix provides the trader with a mathematical means
to logically answer questions and make choices. Remember that this does
not replace analysis, but provides a means to choose between analysed
securities.
Decision Matrix Definition
A decision matrix allows decision makers to structure and then solve their
problem by:
2012/10/19 8:36 AM
73
A decision matrix is effectively an array presenting:

On one axis a list of alternatives, also called options or solutions.
On the other axis, the above alternatives are evaluated regarding
a list of criteria. These are weighted depending on their respective
importance in the final decision to be taken. The decision matrix is,
therefore, a variation of the two-dimensional, L-shaped matrix.
The decision matrix is just an elaborate technique to choose between various
options, which have a set of criteria. These have satisfactory points up to a
maximum (usually from 0 to 100), which the trader predefines. These may
vary depending on their relative importance in the final decision.
Decision Matrix Activity
Should you be involved in creating a decision matrix, here is the activity you
will be engaged in. Use the Cows method, shown below, that describes the
information you need in order to make an impartial decision:
C: Criteria
Develop a hierarchy of decision criteria, also known as a decision

model
O: Options
Identify options, also called solutions or alternatives
W: Weights
Assign a weight to each criterion, based on its importance in the

final decision
S: Scores
Rate each option on a ratio scale, by assigning it a score or rating

against each criterion.
Example: Decision Matrix

For this decision matrix example, lets assume the day trader has
identified that criteria C1, C2, and C3 will play a role in the final decision,
with a respective weight of 1, 2, and 3. Moreover, the trader has found
three prospective providers A, B, and C, whose offer may constitute a
good solution.
For instance, C can be cost, quantity available and volume traded.
The trader will weigh cost above quantity and volume traded, as follows:
cost (weight = 1), quantity (weight = 2) and volume (weight = 3). The
A, B and C are shares priced above R10 (A), shares priced below R10
(B) and single stock futures (C).
2012/10/19 8:36 AM
74
Creating a decision matrix

It is critical to rate solutions based on a ratio scale. For instance, the ratio
scale could be 0-5, 0-10, or 0-100. I have laid out the information into a twodimensional, L-shaped decision matrix as shown below, and then calculated
the scores for each solution regarding the criteria with the formulas below:
Score = Rating Weight
Total Score = SUM (Scores)
and then
The result is the following:

Scenario 1
ALTERNATIVES
Option A
Option B
Option C
CRITERIA
Weight
Rating
Score(1)
Rating
Score(1)
Rating
Score(1)
Criteria C1
Criteria C2
Criteria C3
Total
10
14
13
For a better interpretation, look at the data in histogram form. To do

so, lets consider, as the data source, the ratings and scores of evaluated
solutions. Here is the result:
WEIGHTS:
W1 = 1
W2 = 2
W3 = 3
Solution ratings
When the ratings are added up, both solutions B and C are equivalent and
outperforming solution A. While similar globally, options B and C present
different intrinsic strengths and weaknesses. Indeed, option B is better than
option C for the criterion C3, but weaker on C2, while option C distributes
more evenly its forces.
Therefore, Option B is usually called a best-of-breed solution, while
2012/10/19 8:36 AM
75
Option C is a typical suite or integrated solution.

Solution scores
While both options B and C were initially equivalently rated, weights

applied to their ratings exacerbate the strength of option B in criteria
C3. Indeed, a higher weight was applied to its strength and a lesser to its
weakness, resulting in a first place. In this particular context, the better the
solution breed, the higher rank the solution gets.
We have here an interesting example of a battle opposing two alternatives
at first sight equivalent, but one showing an explicit, differentiated strength
against other solutions.
Extrapolated, this battle is also called:
The One versus The Best
All-in-One versus Best-of-Breed
Suite versus Best-of-Breed
Best-of-Breed versus Integrated solutions
Depending on the contextual needs, one kind may be selected over the
other. But, whatever the path chosen, the decision matrix wont be of any
help in this matter except in raising the concern.
In order to discuss relative importance or effectiveness of weights
(coupled with ratings) in the final decision, lets use the same example, but
change the weights.
In the first scenario, the weights were distributed as 1, 2, and 3
respectively for criterion C1, C2, and C3. Lets increase the second weight
from 2 to 3. Here is the result:
Scenario 2
ALTERNATIVES
Option A
Option B
Option C
CRITERIA
Weight
Rating
Score(1)
Rating
Score(1)
Rating
Score(1)
Criteria C1
Criteria C2
Criteria C3
Total
12
15
15
Score = Rating * Weight
2012/10/19 8:36 AM
76
WEIGHTS:
W1 = 1
W2 = 3 (+1)
W3 = 3
Solution ratings
Based on an initial, fair and impartial evaluation, the ratings dont change,
since solution capabilities remain the same. In some cases, traders may be
tempted to change the ratings to favour one option over the other. This is
simply illogical and defeats the purpose of using a decision matrix.
Solution scores
Because they are globally equivalent in their ratings, and given identical
weights, options B and C provide the same answer, but with internal
differences. Now, lets keep the second weight at 3, and decrease the third
from 3 to 2. Here is the result:
Scenario 3
ALTERNATIVES
Option A
Option B
Option C
CRITERIA
Weight
Rating
Score(1)
Rating
Score(1)
Rating
Score(1)
Criteria C1
Criteria C2
Criteria C3
Total
11
12
13
Score = Rating * Weight
2012/10/19 8:36 AM
77
WEIGHTS:
W1 = 1
W2 = 3 (+1)
W3 = 2 (-1)
Solution ratings
Ratings still dont change, since the solution features and benefits are the
same. Now, lets keep the second weight at 3 and decrease the third from
3 to 2.
Solution scores
While both options B and C were initially equivalently rated, the new
weights applied to their ratings inhibit what appeared to be a strength for
option B in criteria C3. Indeed, a lesser weight was applied to its strength
and a higher to its weakness, resulting in losing the first place in favour of
option C. In this particular context, the more integrated the solution, the
better its rank is.
Conclusion
Here is a recapitulation of the three scenarios with their respective weights:
2012/10/19 8:36 AM
78
The trader must be careful in his or her interpretation of results gathered

when using a decision matrix. The trader has to question the validity of the
path he or she took to reach the conclusion.
USING MATHEMATICS IN THE DECISION MATRIX
Decision theory (matrix) utilises an organised and logical approach to

working out answers to a pre-determined question. These are characterised
by:
The row representing a set of alternative courses of action available to
the decision maker
The column representing market conditions that are likely to occur and
over which the decision maker has no control
The entries in the body of the table representing the outcome of the
decision, known as payoffs. These may be in the form of price, costs,
revenues, profits, cash flows, volatility, etc
By calculating the expected value of each action, the best one can be
selected
2012/10/19 8:36 AM
79
Assume the following probability distribution of daily demand for a share:

Number of demand possibilities:
n=3
d = 0.n
Daily demand
Probability
0.2
0.3
0.3
0.2
Assume that trader Miller has analysed a number of sectors and has now
determined that one of three companies listed in Sector has to be bought.
The matrix used in the following example would be used for all three
companies. Also assume that in Company ABC, the unit cost of goods sold
is R3, the selling price is R5 and the salvage value on unsold units is R2.
Thus, the profit on each unit sold is R2 and the loss on each unsold unit is
R1.
Either 0, 1, 2 or 3 units can be stocked.
The question is: How many units should be stocked each day? Assume
that units from one day cannot be sold the next day. Then the payoff can be
constructed as follows:
Demand
Actions
Stock
0.2
0.3
0.3
0.2
1.40
1.90
1.50
Expected value (Rand)
Profit for stock 2, demand 1 = (number of units sold)(profit per unit) (no
if units unsold)(loss per unit)
Therefore, profit = (1)*(5 3) (1)*(3 2) = 1
However, the expected value for stock 2 = -2(0.2) + 1(0.3) + 4(0.3) +
3(0.2) = 1.90
Conclusion: The optimum stock action is the one with the highest expected
monetary value.
2012/10/19 8:36 AM
80
Expected Value of Perfect Information

Suppose the decision maker can obtain a perfect prediction of which
event will occur. The expected value with perfect information is the total
expected value of actions selected on the assumption of a perfect forecast.
The expected value of perfect information can then be computed as:
Expected value with perfect information expected value with existing
information
Example:
From the example in the above text, the following analysis yields the
expected value with perfect information:
Demand
Actions
Stock
0.2
0.3
0.3
0.2
1
2
3
Expected value (Rand)

0
0.60
4
1.20
6
1.20
R3.00
Calculation = 0*0.2 + 2*0.3 + 4*0.3 + 6*0.2 = 3.00

With existing information, the best the decision maker can obtain is to
select stock 2 and obtain R1.90. With perfect information (forecast),
the decision maker could make as much as R3.00. Therefore, the
expected value of perfect information is R3.00 R1.90 = R1.10. This
is the maximum price the decision maker is willing to pay for additional
information.
How is it used and applied?
Whenever decisions are made under conditions of uncertainty, it means that
they involve several events for each action together with its probability of
occurrence. The decision situation can best be approached using a decision
matrix. This approach is unique in that it answers a critical question such as
How much am I willing to pay for additional information?
The additional information can be costly, however, particularly if it
2012/10/19 8:36 AM
81
involves use of a computer and research staff. Therefore, the cost of the
additional information must be weighed against the benefit to be derived
from it. For day traders, however, making informed decisions is critical to
their short-term success and long-term mental health.
2012/10/19 8:36 AM
82
Chapter 4: Technical Analysis an Introduction

Technical analysis is a hot topic for investors right now and offers
powerful, objective tools for picking stocks and making money but
most explanations of the subject simply confuse investors instead of
enlightening them. Kahn, Michael: Technical Analysis Plain and Simple:
Charting the Markets in Your Language, 2nd Edition, Financial Times
Prentice Hall, 2006.
Kahn is chief technical analyst for BridgeNews, a division of Bridge
Information Systems, a leading source of global financial information,
transaction, and network services.
I dont know where to start?
This was the widespread question asked across South Africa during my
2011 lecture tours. The aim of the tours was to advise day traders and longterm investors on the use of technical analysis as a decision-making tool.
The easiest way to explain technical analysis is to split the explanation
into two sections:
Introduction
Understanding the use of charts
INTRODUCTION
The simple truth is that technical analysis and related triggers are
indispensable tools for day traders, especially if they play in the Futures
arena. So, lets start by stating the obvious:
The objective of day trading is to increase capital at a greater rate than
losses incurred. As such, it can be stated that a trader must maximise profits
gained from analysed market moves, while ensuring that losses suffered on
unfavourable moves are minimised.
In essence, technical analysis is used to identify, via technical triggers (as set
out in this book), investor sentiment towards a specific or group of shares
before they occur. Technical triggers are generally derived from a single
or group of shares prices. To put all this technical jargon into perspective,
2012/10/19 8:36 AM
83
what it all really means is that by using a number of share trading tools,
share price graphs are analysed and if done correctly many traders
believe these can be used to predict the future movement of that share
price.
If you can do this, then you can buy shares before their prices rise.
The above statement may seem ridiculously obvious, but why then arent
all technical analysts richer than Buffett? It is a truism that many novice
traders fail because they expend too much effort on attempting to establish
a perfect forecasting system to maximise profits, but they ignore strategies
needed to minimise losses.
Be Better than Other Traders
I know that the following statement is not what you want to hear: Professional
traders use a combination of fundamental analysis and technical triggers to
trade in any market:
Fundamental analysis involves the investigation of both macro
environmental factors (economic growth and business trends) and the
more micro characteristics of a company. They use these analytical
tools to place an estimate of a companys value within the environment
in which that company trades.
Question: How do you know what price to pay for a companys share if
you dont know what its inherent value is?
Technical analysis assumes that all the fundamental variables stated
above are already accounted for in the share price.
It effectively is only interested in the price movements in the market.
So, technical analysis really just attempts to understand shareholders
sentiment by assessing market movements.
Question: How do you know when to buy a companys share, even if
that companys inherent value is higher than its share price?
This is one reason why I started this book with the psychology of trading. If
you understand that technical analysis is a sound tool to determine timing
for trades, then you start to develop skills that will enable you to be a better
trader as you will be buying and selling shares within the broader macro
environment. Always be aware that the macro variables have a resounding
influence over share prices. Therefore, the professional trader uses both
fundamental analysis and charting to develop a competitive edge over other
traders.
2012/10/19 8:36 AM
84
Experience shows that, in developing such an edge, two technically

related ratios need to be used to assess your performance as a trader:
Frequency of profits divided by frequency of losses
Average profit divided by average loss
As a general Rule of Thumb: The traders aim must be to achieve a minimum
of three profitable trades to every one losing trade, i.e. 3:1 average profit to
average loss ratio. This ratio enables the trader to leverage profits against
losses particularly while he or she is gathering experience.
The next basic aspect of trading is to always trade in the same amount
and to ensure that trades cover at least three different sectors. So, before
determining the monetary size of positions to be taken, lets take a look at
the basics of technical analysis necessary to determine whether to buy, sell,
hold or stay out; and when to take action.
The next basic lesson is that technical analysis tends to concentrate on
volume, trends and patterns.
UNDERSTANDING THE USE OF CHARTS
To sum up the above text: technical analysis assumes that a company, general
or overall markets historic patterns can help traders to determine the likely
path that share, sector or general market will take in the near, medium or
long term. I recommend that you do not rush through the explanations of
technical jargon or triggers that are set out hereunder as these are designed
to help you to recognise and interpret chart patterns and indicators. The
explanations may seem simplistic, but be patient as these get rapidly more
complex in later chapters.
After almost two decades of discussing market movements and
individuals preferred trading techniques, I have come to the conclusion
that trader, whether novice or professional, should limit the use of technical
indicators to a maximum of five.
I have seen day traders with 30 indicators, labour through a myriad of
possible combinations only to lose the opportunity of timeously executing
a trade.
While discussed at great length in Jungle Tactics, it is sufficient to state
in this book that technical analysts argue that existing share prices and
market indices reflect all available information about the stock or sector,
and that future price or index movements will follow a predictable path that
2012/10/19 8:36 AM
85
will adjust to new information as it emerges. The theory is that all traders
have the same information that might affect stocks at their fingertips.
These analysts believe that, by analysing stock and market price
and index histories, they can accurately determine investor sentiment
(psychology) to anticipate future price or index movements.
The basic techniques they use are highlighted in the following text.
Chartist and Basic Techniques
One of the main reasons for my initial attraction to using charts to determine
share price movements was simply the jargon used to name specific trends,
like head and shoulders or Dead Cat Bounce. My second attraction to
technical analysis was the probability of determining price action by simply
studying the patterns. The best way to initiate a discussion about charts is
to show you how I started; looking at basic techniques and patterns, but
starting with an outline of what a beta is.
Beta
The beta of a share is a correlation between a share and that shares index.
Note: not all shares in a sector form part of that sectors index.
Beta
Share vs. index
>1
The share is forecast to rise or fall at a greater rate than the index.
<1
The share price movement is independent of the movement of the index.
Stated without jargon, analysts want to see whether a specific share will
move up or down if the index moves. Remember that the index is made
up of a host of companies, having different divisions and products. For
instance, the retail sector is made up of companies selling computer parts,
wholesalers and furniture companies. The chartist will look to see whether
Retail Comp Ltd moves when the Retail Index moves and how and by how
much. This way, he or she can predict that shares movement in relation
to its index.
I would quickly realise that technical analysis is really just an alternative
way of assessing securities; this time by looking at market activity, such
as past prices and volume. There is one overwhelming fact that seems to
confuse many novice traders: just as there are many investment styles on the
2012/10/19 8:36 AM
86
fundamental side, there are also many different styles of technical traders
(see Lore of the Global Trader). Stated differently, the use of historical
price and volume data is what really separates technical from fundamental
analysts.
From a number of decades experience, I suggest the use of both styles
of analysis to truly become a professional trader (See Master Trader).
The Chartists Three Fundamental Assumptions
The field of technical analysis is based on three basic assumptions:

The market always discounts all news
Prices move in trends
Historically, the market tends to repeat trends
Assumption 1: The market always discounts all news
Expert criticism of technical analysis is that it concentrates only on price

and related movements, ignoring all fundamental variables of the company.
As such, technical analysis assumes that, at any given time, a securitys price
will reflect all news about a company, including those fundamental factors
hailed as crucial to a companys share price. Consequently, it can be stated
that technical analysts believe that the following are all included in a share
price movement:
The company's micro and macro fundamentals
The wider environmental factors of economic, technical, business and
political factors
Market psychology
As such, there is no need to assess or even consider these factors as part
of a trading strategy. Therefore, the conclusion by technical analysts is that
you only have to assess price movement, which is a product of supply and
demand variables for a specific stock or industry in the market.
Assumption 2: Prices move in trends
The simple assumption in technical analysis is that the price of securities
or the indices of markets move in trends, which is why the adage The trend
is your friend has developed into a much hyped slogan and war cry for day
traders or those marketing the concept of using technical analysis to make
2012/10/19 8:36 AM
87
money in the market.

This means that, when prices or indices move, they invariably create a
trend. After such a trend has been identified, the next movement can be
estimated or forecast. Most technical trading strategies are based on this
assumption.
Assumption 3: Historically, the market tends to repeat trends
Another critical assumption of chartists is that prices tend to move in
historic patterns, which is another way of saying that a shares price history
will repeat itself. The logic is that investors will have certain sentiment
towards a company or market and, as such, when that price or index moves
up or down the buying and selling psychology will ultimately dominate such
sentiment.
Stated differently, traders tend to react in similar way to similar market
conditions over time. These price movements create a trend, whether in
stocks, futures, commodities, bonds or Forex.
The first basic explanation is over. So, lets see how these technical
triggers really work.
Trends
The simple explanation of a trend is the general direction that a share is
moving. The following chart is an obvious example of a trend moving
upwards (Line 1-2) and downwards (Line 2-3).
2012/10/19 8:36 AM
88
However, its not always this easy to see a trend.
The conclusion to the above chart is that there is no clear price direction
or trend.
Unfortunately, defining a trend is not obvious as prices do not tend
to move in a straight line in any obvious up or down direction. The norm
is that such prices tend to move in a series of highs and lows. In technical
analysis, it is such movement that constitutes a trend.
A trend that is up: classified as a series of higher highs and higher lows
A trend that is down: classified as lower lows and lower highs
Example: Upward trend
The first high is reached at

Point 2. This is determined
after the price falls from this
point.
Point 3 is the first low that is
created after the share falls
from the high at Point 2.
Note that the low of Point 3 is
higher than the low of Point
1. This is defined as a Higher
Low and, for this to remain an
upward trend, each successive
low must not fall below the
previous lowest point.
2012/10/19 8:36 AM
89
Types of trend
There are three basic (obvious) types of trends, namely upward, downward
and sideways (also called horizontal) trends. The latter is not, in my opinion,
a trend, but lets assume, for the purposes of technical analysis theory, that
a share with a price that remains unchanged is a share in a horizontal trend.
How long can a trend be?
In addition to being in an upward, downward or sideways movement, a
trend is also classified as being long (major), medium (intermediate) or
short. Time frames are set out in the following table:
Types of Trends
Time Frames
Major trends (long-term)
+ 1 year
Intermediate trends (medium-term)
1 to 3 months
Short-term trends
< 1 month
In addition, it must be understood that there are trends within these trends.
So, a long-term trend will have several intermediate trends, which often
move against the direction of the major trend. For instance, if a major trend
is upward (see next diagram) you will note that the movement is not in
a straight line. It seldom is. In fact, the norm is for a share to retract as
investors take profits when they perceive that a share has risen enough for
them to sell.
Note that the uptrend then resumes. The correction is considered to be
an intermediate trend within the long-term trend. To complicate matters
even more, short-term trends are also components of both major and
intermediate trends.
The following graph highlights the three time frames within the same
trend.
2012/10/19 8:36 AM
90
THE BASICS OF TECHNICAL INDICATORS

From the outset, it is stressed that technical analysis can be extremely simple
or complicated in the extreme, using massive mathematical systems. After
extensive research in writing books during the past decade, I have surmised
that a simple and effective system is always better for a more informed
decision-making process.
For that reason, the technical analysis I recommend is very simple and
it is based on the concepts of trading around trend lines, channels, and
support and resistance patterns.
These are outlined in the following text.
Technical Concepts
Basic concept 1: trend lines
Definition: A simple technique that uses straight lines to identify

trends.
How it is drawn: Identify three or more points on a graph and join
these up. In the following example, four points represent a downward
trend.
Consequently, these lines are used to clearly show the shares trend, but
it also represents the resistance level the stock has reached every time
it moves from a lower point to the trend line. Notice how the share price
falls every time it hits the resistance level.
This type of trend line helps traders to anticipate the point at which a
stocks price could begin moving upwards again. Similarly, an upward trend
line is drawn as follows:
2012/10/19 8:36 AM
91
This line represents the support level that a stock faces every time the price
moves from a high point to a low point, also called the support level. It can be
stated that, at the four points above, buying pressure overtakes the amount
of sellers and the stock bounces upwards.
The essence of identifying trends is to enable you to place trade orders
based on the correct assumptions. For instance, if a trend is downward,
then your trading strategy would be one of shorting the market and not
buying for the long term.
So, the aim is to identify trends to trade with a trend, rather than
against such a trend. Two important sayings in technical analysis are:
The trend is your friend
Use the trend to your advantage
Depending on the type of trader you are, you will look at graphs with
different time frames. For instance, a long-term trader uses a three-year
time frame, while an intraday trader looks at a chart of the current trading
day, known as an intraday chart.
Basic concept 2: channels
Definition: the use of straight lines to define a channel within which a

share will trade. The upper line connects a number of high points that
a share has reached, while the lower line connects a series of low points
that a share has reached. A channel can slope up, down or be sideways;
see following graph.
2012/10/19 8:36 AM
92
How it is drawn: It is the use of two lines, namely one above the share
price and one below the price. In the following graph, two channels are
displayed.
Upward channel: LINES: AB AND CD
Horizontal channel: EF AND GH
The assumption is that a share will bounce between AB and CD (or EF

and GH).
Traders can expect a given share to trade between the two channel lines
until it breaks beyond one of the levels, in which case traders can expect
a sharp move in the direction of the break. Channels are mainly used to
highlight important support and resistance levels.
Basic concept 3: round numbers and exit strategies
Definition: A set of numbers (share prices) that are repeatedly used by

traders (particularly novices) when buying or selling shares; such a 0,
5 and 10). These are psychological points and traders tend to sell or
buy at these points without thinking. For instance, if a share falls from
100 cents, the majority of traders will have a Sell Order at 95 cents or at
90 cents.
How it is drawn: A straight line below the share price, i.e. if the share
price is 100 cents, place a line at 95 cents and at 90 cents. Using the
same example, place a line at 105 cents and at 110 cents.
These will be psychological buy or sell points. As such, it can be
2012/10/19 8:36 AM
93
stated that these points are also support or resistance trend lines as
traders will purchase large quantities of shares once the price starts
to fall toward a round number and sell large quantities of shares
when these shares climb to above such round numbers.
Stated differently, it can be said that these points are psychological
triggers because of increased trading volumes.
Basic concept 4: when a support trend becomes a resistance trend
Definition: Once a resistance or support level is broken, its role is

reversed. Alternatively, if a share price rises above its resistance level,
it will often become support.
How it is drawn: A straight line as highlighted by the following graph.
The logic is that a share will move out of a support-resistance trend when
economic levels of supply and demand have changed. Many novice traders
make the mistake of believing that a trend has changed the first time that a
resistance or support level is broken. This is not true. For a reversal to be
permanent, a share price movement through the trend line must be strong
and supported by high volumes.
In the above graph, the line A-C shows both a level of resistance and a
level of support. At points 1 and 2 the line displays resistance, but strong
upward movement sees point 3 and 4 become the support rather than the
resistance. Many novice traders, who use technical triggers to identify entry
and exit levels, find the above concept difficult to understand and, as such,
miss too many trades.
2012/10/19 8:36 AM
94
Note that strong upward movement is usually characterised by a

significant event, either economic or market related, and is accompanied
by trading volumes that equal at least the weekly average of the sectors
index within which the stock trades.
Basic concept 5: support and resistance
Definition: Support and resistance lines that signify both investor

support for a share and a resistance to hold a share. As long as a price
stays between these levels of support and resistance, the trend is likely
to continue.
How it is drawn: Two lines that touch maximum and minimum points
on a graph that form an upper and lower band: AB-CD and EF-GH.
Technical trigger point advice: Novice traders should avoid entry points that
are close to these major points, as high volatility is the norm and unless
you use additional technical indicators you could be guessing whether the
trend will hold or the resistance-support lines will be traversed.
Those who dare to be brave, use the following simple rules:
Never enter the market directly at the support or resistance line.
Bullish traders: place order above the support level.
Bearish traders: place sell order below the resistance level.
TRADING STRATEGIES
Trading Strategy 1: Share price tests resistance level
The strategy is to immediately place a stop loss just below the support level.
If you have a system that enables you to place a trailing stop loss, then your
2012/10/19 8:36 AM
95
position in the market will be protected and your profits locked in as the
share moves upwards. As stated in earlier parts of the book, ensure that
you have a stop loss that is two cents below the expected market bounce
(resistance level). This stop protects against serious loss in the event that
the market continues straight down, but if the market does turn at the
support, you do not want to be sold out. A profit could happen if it goes
back up.
Next step: Watch and see which of the following occurs:

If the market takes out your stop (2 cents below), place a small short
position (these will be explained in greater depth later on in the book).
Essentially, taking a short position means betting that the market will
go down. Available securities are called PUT warrants or PUT Futures
etc. You are investing in a derivative that expects the underlying stock
to fall. Under these conditions, place an initial stop above the recent
high and await developments:
If the market turns back up towards the high:
You will be glad that the short position is only small.
You will watch the market carefully, to determine whether to add to the
short position as the market approaches the high.
If the market the market carries on down, making you money on
your new short position. You can then:
Lower the sell signal to just above the jagged horizontal lines.
Or, plan to increase the short position.
2012/10/19 8:36 AM
96
Technical analysts often talk about the ongoing battle between the bulls and
the bears, or the struggle between buyers (demand) and sellers (supply).
This is revealed by the prices a security seldom moves above (resistance)
or below (support). The concept of resistance and support is simple.
Understand it and move on to the importance of volume.
Trading Strategy 2: The importance of volume
Volume is defined as the number of shares that trade over a given period of
time, usually a day.
The simple explanation is that the higher the volume, the more active
the security is. Note that volume equates to both the amount of share
bought and sold. In the following graph, the grey shaded area represents
the volume of share traded every day.
2012/10/19 8:36 AM
97
Many technical analysts use volume as a measure to confirm whether a share

movement is a trend or not. Any share price movement that is accompanied
by high volume is perceived to be a relevant move, or change in the current
trend.
Example: In the above graph, the share price suddenly moves strongly
(line E-F) and is accompanied by a significant rise in trading volumes
(line G-H). Note that the result is that the share forms a new support
line C-D from the previous support line A-B.
Question: Will the share price fall back to line A-B?

This is where volume steps in to provide an answer. If total volume of
trades made during the day is high relative to the average daily volume,
the norm is that the trend would fall back to line A-B, but rather will
continue along line C-D.
The rules are:

Volume should move with the trend.
If prices are upward, volume should increase.
If prices are downward, volume should fall.
Shares with weak volume are often easy to buy, but usually
impossible to sell.

No
Question
A long-term investor uses day charts to buy securities
A short-term trader uses intraday charts to establish

entry levels
An intraday trader will use only intraday charts
True
False
THE CRITICAL USE OF SELL-STOPS

Since April 2005, after the launch of Become Your Own Stockbroker, I have
repeatedly called for discipline in trading securities. Please place stop
losses, but more importantly, adhere to them. I have noticed that most
2012/10/19 8:36 AM
98
traders will eagerly place stop losses on all their positions, but when the
security falls and hits that position, few actually sell.
This phenomenon leads to panic and fear. Once again, when your
position hits stop loss, sell.
Obviously, the goal of all trading is to make money, but remember there
is an underlying rule that must not be violated: Protect your capital to come
back and trade another day. That is the purpose of using a stop loss. A stop
is the exit point for a losing trade. This stop is placed at a predetermined
level at the same time you execute your trade.
Example: You buy a share at R10 and place a 10% trailing stop loss (i.e.
you sell if the share falls to R9). The share quickly rises to R20, so your
stop loss is now 10% of R20, which is R2. Despite the potential for the
loss to have doubled (from R1 to R2), your stop loss is now R18. You have
effectively protected your capital and R8 of your income.
Unlike the long-term investor, the day trader also has a STOP-SELL
position. I would prefer to call this type of stop a STOP-PROFIT. He or
she will predetermine a price at which he or she will sell the security. In this
example, if the Stop-Sell is R25, then the share will be sold when it reaches
that level. Remember, when trading there are two possible points at which
to exit your trade.
Your profit target: Sell and take profits when the security reaches the
target.
Your stop placement: A predetermined loss level, should the market
turn against you.
There are day-trader clients who are probably screaming that you should
never cut your profits. Granted, if a stop-sell is reached, but if the market/
share is still rising, then do the following:
Sell the security to recoup your original cost.
Set a new stop-sell target.
Stops act like a safety net, preventing a fall beyond a danger point.
Where you place your stop will depend on many factors, including:
The duration of your trade
Your risk tolerance
For day trading, specifically, the objective is to exit a losing trade quickly,
before losses mount. After exiting the trade, you can then reassess your
trading strategy and re-enter the market when opportunities are presented.
2012/10/19 8:36 AM
99

No
Question
While its important to trade with stops, you do not

really have to implement them. They are simply a
warning system.
The problem with stops is that you always get stopped

out before the market turns to go your way
Stops can also be used to enter the market, not just to

exit positions
True
False
It is pertinent at this juncture, to highlight how an old colleague made the

mistake of not using stop losses. Lets call him Chris. This highly successful
entrepreneur decided that day trading had to be easy. After all, making
money just by looking at graphs? He had attended a number of my lectures,
where I warned attendees that day trading does take time to master. Like
so many new day traders, he didnt want to go through the inevitable oneyear learning curve.
His impatience encouraged him to trade with too much risk and too
little discipline.
Without any fundamental analysis or technical indicator, Chris bought
two major Single Stock Futures contracts on an Index. Lets say that the
Index level was 1 373. No sooner had Chris bought the contracts than the
Index immediately fell to 1 363; he had lost R50 000 in 60 seconds. Instead
of selling and taking the pain, he hoped to make up for that loss by buying
two more contracts. Instead of going up, the Index fell to 1 353.
At that point, he had lost R100 000 on the first two contracts and R50
000 on the second two contracts. To make matters worse, the market was
locked limit. This means that the market had fallen so fast that the exchange
halted trading. The aim is to temporarily halt trading to stem the fall. Chris
couldnt sell those contracts even if he did want to take the R150 000 loss.
When the market reopened after the limit expired, he figured this had to be
the bottom. You will never believe what Chris then did.
Instead of selling, he bought another contract. The market traded
higher momentarily, but then fell to 1343. With a total loss at this point
of R270 500, he was too stunned to move. A hard lesson to have learnt,
especially after a mere three hours as a day trader.
All I wanted to do, Chris said, after I had stared disbelievingly at him,
2012/10/19 8:36 AM
100
was find the computer room at the exchange and pull the plug on the
market quotes to keep it from going down any further!
Be warned. If you trade without stops or if you cancel stops because you
dont want to be stopped out of a trade yet again, you may face mounting
losses. And in the end, you may not be as lucky as Chris was. For him,
money meant little. It could have just as easily have been R2.7 million. Or
even worse!
Moving Averages
This form of buy-sell trigger is extremely popular with chartists around the
world. The reason is that this tool is easy to implement and effective in its
ability to define changing investor sentiment towards a specific share or
market.
The definition of moving averages is the simple addition of a number of
share prices and its resultant average.
So, if you take two sets of averages for two different time frames,
then you can determine whether investor sentiment is changing and how
it is changing, e.g. is investor sentiment getting more favourable or more
negative?
So, if you use a 9-day moving average, the divisor would be the number
nine. At the close of business on the 10th day, you would recalculate the
average by dropping of the first day and adding the 10th to the calculation.
Assume that the following are the closing prices for the last 9 days of
trading for the January Crude Oil:
Your calculation for a nine-day moving average would be:
DAY
Price(US$/b)
1 020
1 039
1 040
1 023
1 019
1 009
980
2012/10/19 8:36 AM
1 020
1 011
AVERAGE
1 017.889
101
Assume that on the 10th day the market falls radically and the new price is
US$700/barrel. The new average would then be:
DAY
Price(US$/b)
1 039
1 040
1 023
1 019
1 009
980
1 020
1 011
700
AVERAGE
982.3333
The 9DMA has fallen from US$1 017.89/barrel to US$982/barrel.

Moving averages are simple and excellent trend indicators. The market
is in a downtrend when its last price is below the moving average and rising
when the last price is above the moving average.
When you use two moving average calculations such as a 9- & 21-day
combination, an uptrend is detected when the shorter moving average
crosses over the longer average. The 9- & 21-day combination is a common
combination of moving averages. The reason for this popularity is the
assumption of 20 trading days in a month and a fortnightly assessment of
investor sentiment.
2012/10/19 8:36 AM
102
Example
In the following graph, the moving averages indicate an upward trend
is in progress and a BUY signal is highlighted between October and
November, climbing from 1 000 cents a share to 1 100 cents before a
warning signal is given by the two averages.
In the following graph, the reverse is highlighted. A SELL signal is given

at 1 320 cents before the share falls 1 260 cents. The following graph
displays a SELL signal when the nine-day moving average (9DMA)
breaks through the 21-day moving average (21DMA) downwards.
2012/10/19 8:37 AM
103
Another application of moving averages is to confirm a trend is

taking place. Under such conditions, the averages move closer towards
each other, but do not cross.
Correlation
Correlation is a measurement of the correlation of the price of a given

share, compared to an index. The value lies between 1 and -1.
1 means that the price is totally in step with the index. If a share has a
high correlation, say over 0.6, it means it is more likely to be marked up
(or down) just because the index moves up (or down).
Notice the correlation between the market and the 200-day moving average?
What do you notice about the 200-day moving average?

Examine the relationship between the 200-day moving average and the
market. What happens when the market touches or crosses the moving
average? Observing what the market has done in these circumstances
will help you recognise probable patterns and market behaviour in the
future.
Look at the following market, with a 20-day moving average. What
stands out the most as you look at this chart and the 20-day moving
average?
2012/10/19 8:37 AM
104
For day traders, their goals are to find a moving average that most closely
matches their trading style. One rule of thumb is that the longer your time
frame, the longer the time frame for the moving average that youll use; the
shorter your time frame, the shorter the moving average youll use. But all
moving averages potentially have something to tell you about the markets
dynamics.
If youre day trading, the 200-day moving average lags the market too
much to be meaningful for any day trading strategy. I recommend that you
should not use any more than three moving averages as part of your strategy
Finding the right moving averages to use is a process of trial and error:
The most prominent feature is that the 200-day moving average does
not follow the pattern of the price line. Because of its duration, the
200-day moving average is far smoother than a chart of the real-time
prices. However, looking at the 200-day moving average on the chart
you can see that it is curving downward, while the market price line is
also trending downward, despite market gyrations.
When the market is trending downward, it is above the 200-day moving
average. As that distance narrows, however, the market found support
at that level, as shown by the market activity roughly on that moving
average line. As downward pressure increased, the market broke below
the 200-day moving average, which accelerated the down move. Finding
support, the market traded up to the moving average line in early
November, but could not break above it, which added to the negative
pressure on the market.
The most prominent feature is that the 20-day moving average more
closely follows the pattern of the price line until roughly January, but
then lags the uptrend until the lines cross in mid-February. Because it
has a shorter duration, the 20-day moving average has more peaks and
valleys than the smoother 200-day moving average.
When you look at a chart with moving averages, its fairly easy to see
2012/10/19 8:37 AM
105
which ones track the market closely. However, this is not the aim of using
moving averages. The day trader should be looking for the moving average
that will cross the price line at the day traders key buy and sell points.
Therefore, the goal is to find a moving average that helps the day trader to
predict when the market will make a significant move. In other words, the
trader is looking for a moving average that presents key resistance to the
market (if the price line is below) or key support (if the price line is above).
Conventional Wisdom
It is crucial to completely understand the basics of trends, moving averages
and support/resistance levels before looking at the more complex indicators
outlined in the following chapters.
I have to point out that, although moving averages are easy and effective
to use to determine a combination of trends and investor sentiment, these
in isolation do lack the precision day traders need to buy and sell in small
amounts; getting into the market easily and selling quickly.
Day traders need to assess current trends to determine when such a
trend may change significantly.
No
Question
Possible answers
Be brief
What is the purpose of a trend line?
Trend lines that connect three or more significant

high or low
points are more important than those that connect
only two
No
3
True
False
Question
Define a range-bound
market
A quiet, slow
market with
little activity
A market
in which
there are no
significant
new highs and
no significant
new lows
A market that
stays between
the 10-day
and 50-day
moving
averages
2012/10/19 8:37 AM
106
What happens when

the market is making
lower highs and
higher lows?
Trending
Contraction
Reversal
What typically
happens after a
formation described
in the preceding
question?
Breakout
Reversal
Followthrough
Final warning note:

The market never stays in one trend forever.
The shorter time frames may display their own trends.
A market could trend higher one day and lower then next, but still have
an upward (or downward) bias for the longer term.
A period of contraction (lower highs and higher lows) is the transition
time before a breakout into a new trend.
One way to analyse a contracting market:
Draw a line connecting the lower highs, touching two or more of the
high points.
Draw a line connecting the higher lows, touching two or more of the
high points.
The line formed by the highs will slope downward. The line formed
by the lows will slope upward.
Extend these lines out into the future until they cross.
This will form a triangle pattern.
About 75% of the way along that triangle is the typical breakout
point from the contraction.
Often the direction that the market takes after the breakout is the
same as the one it had before the contraction began.
Remember, technical analysis, like trading, is not an exact science. There
is no formula that can be applied every time, and there are many variables,
that go into market dynamics. The most important thing is to look at what
each feature and indicator is telling you and apply that to the broader
picture.
2012/10/19 8:37 AM
107
Chapter 5: Essential Technical Analysis

The trading rules I live by are: 1. Cut losses. 2. Ride winners.
3. Keep bets small. 4. Follow the rules without question. 5.
Know when to break the rules. Be sensitive to subtle differences
between intuition and into wishing. Ed Seykota, US Futures
Trader.
In the early 1970s, while working for a major US brokerage
firm, Seykota conceived and developed the first commercial
computerised futures trading system for client.
Another premise of technical analysis is that the future can be found in the
past. If prices are based on investor expectations, then knowing at what
price the trader should sell his or her security (i.e. fundamental analysis)
becomes less important than knowing what other investors expect it to sell
for. Take heed.
This is not a reason to abandon fundamental analysis, but there is
usually a fairly strong market consensus of a stocks future price movement.
The problem is that ignoring fundamental factors could lead to failure in
the market. Let me explain.
In June 2005, I was commissioned to research the IT industry and, more
specifically, the business software market. Global analysis immediately
highlighted a number of extremely interesting issues, including that
conglomerates around the world were moving strongly to buying business
software, but also buying companies that produced such software.
Analysis of the South African market highlighted that there were few
such listed companies in South Africa. These would, in the short term, start
to benefit from higher demand. This was a trend that had not yet been
priced into the market. Secondly, industry and market analysis of two of
such JSE Securities Exchange listed companies highlighted one that could
become a target for a buyout.
2012/10/19 8:37 AM
108
Enterprise Outsourcing
Holdings (JSE Code: EOH)
Business Connexion Group

(JSE Code: BCX)
Share price at date of research being

commissioned:
June 2005: 410 cents
Share price at date of research being

commissioned:
June 2005: 495 cents
Note:
Price history could not have indicated that EOH would rise by more
than 70% and BCX by more than 80%.
Demand for business products had entered the South African market
and boosted earnings.
A takeover of BCX was also announced by South African
telecommunications giant Telkom.
Both predicted fundamental trends had occurred.
So, while technical analysis is the process of analysing a securitys historical
prices in an effort to determine probable future prices, do not ignore
fundamentals; do so at your own risk. In my experience, only a minority of
technical analysts can consistently and accurately determine future prices.
However, even if you are unable to accurately forecast prices, technical
analysis can be used to consistently reduce your risks and improve your
profits. This latter definition is by far the best way of looking at technical
analysis. Put differently:
Use charts to confirm fundamental analysis. When these are in conflict,
use the opportunity to take advantage of market anomalies and volatility,
while a more defined trend takes shape.
2012/10/19 8:37 AM
109
Contrary to popular belief, you do not need to know what a securitys price
will be in the future to make money. Your goal should simply be to improve
the odds of making profitable trades. Even if your analysis is as simple as
determining the long, intermediate and short-term trends of the security,
you will have gained an edge that you would not have without technical
analysis.
One example of this premise is a trend line. To recap, a trend line is
drawn between significant highs or significant lows. The resulting trend
lines, when extended, delineate support and resistance based on price
patterns. To build upon this concept, a trader can use support and resistance
lines to form a trend channel, as discussed below.
MOVING AVERAGE ENVELOPE
Day traders use moving average envelopes to establish boundaries, i.e. if a
share price falls below a moving average, at what point will it turn? The way
to plot a moving average envelope is to set a percentage level below and
above the share price. So, if you have 5% as your average envelope, and the
share price doesnt go as low as that, then change the envelope percentage
to 2.5%.
There is no mathematical way to determine what the envelope
percentage should be. The best fit for the envelope is usually established
after trial and error to see what best fits the current trading conditions of
the share being analysed.
There are two main problems with using envelopes. Firstly, the band
is better and more effectively established if you use Bollinger Bands (set
out in later chapters) and if envelopes are used to indicate whether a
security is overbought or oversold there are easier ways to establish such
conditions.
Consequently, the above can be summarised as technical analysis being
a tool to determine current trends and, more importantly, pending changes
in such trends.
No
1
Question
Be brief
Define an upward moving trend
2012/10/19 8:37 AM
110
Define a downward moving trend
What is the name given to a trend that suddenly changes

direction?
Signals of a Trend Reversal

To find signs that a current trend might change directions (called a trend
reversal), professional traders look for common patterns known as a U or
V pattern that normally signals a reversal. Essentially, the U and the V are
the same formation, but the V formation is more severe, i.e. the change in
pattern is quicker.
V-Formation
U-Formation
It must be noted that the above formations are not the norm. Markets and
shares tend to move in symmetrical patterns. Therefore, if a share is in
a slow downturn, then the next upturn should also be slow. In addition,
trends are not secular, meaning that there could be shorter-term trends
within longer share price patterns.
More Patterns: the M & W Formation
In addition to the U and V chart formations, two fairly easily recognised
shapes are Ms and W share price formations. These are also known,
respectively, as double tops and double bottoms.
2012/10/19 8:37 AM
111
An M is formed when the market reaches a high point, followed by a

sell-off and the share falls, before recovering to a second high point at
or near the first level. This is known as a Double Top formation.
A W is the opposite of the M formation. This is when a share fall to a

low point, then bounces before falling back to near the first level. This
is known as a Double Bottom.

The following graph shows both an M and a V formation. While it is difficult
to identify formations when you are a novice, dont give up; practice and
experience does take time to enable you to recognise these patterns. In the
2012/10/19 8:37 AM
112
following chart, the V formation (A) is easier to see than the M Chart (B).
Remember that technical analysis is in essence the identification of chart
formations.
No
Question
What features stand out in the above graph?
What are the main differences between the A and B charts in

terms of share price movements?
What would your forecast be for the share after May?
Be brief
2012/10/19 8:37 AM
113
ADDITIONAL INDICATORS
Lets move on to more complex indicators.
Stochastic
Company XYZ
The stochastic oscillator is one of the few technical triggers that compares
the share price to itself. In essence, the indicator assesses the closing price
with the shares high and low of the day. This means that the indicator is
used to assess whether a share is strengthening or weakening. The premise
is that in an upward trend the shares tend to close (at the end of day trading)
near the high of the day. In a downward trend the opposite is true, with the
closing price near the days low. The stochastic oscillator is plotted on a
chart with values from zero to 100 for a specific time frame.
A bull market or strong uptrend should see the closing price near
the high of the day.
A bear market or strong downtrend should see the closing price
near the days lows.
2012/10/19 8:37 AM
114
Therefore, stochastic triggers (readings) are as follows:

At above 80 are strong and indicate that the price is closing near its
high. As such, a sell signal is generated when the line crosses above
the 75% mark; the share is overbought.
At below 20 are weak and indicate that the price is closing near its low.
As such, a buy signal is generated when the line falls below the 25%;
the share is oversold.
Another way of looking at this trigger is one to assess whether investors

have overbought or oversold the share.
What does the stochastic indicator of Company XYZ tell you?
Calculation: For those who are mathematically inclined: The stochastic
indicator is based on two lines called %K and %D. The main indicator line
is the %K, and is an indication of where the share lies in relation to the
highest and lowest prices in the given time period.
The %D is the signal line, and is a moving average of the %K line.
Its calculated as follows: %K = (Todays close lowest low in %K
periods) (highest high in %K periods lowest low in %K periods) )
100
In reality, software packages calculate these for you.
Relative Strength Index (RSI)
Company XXX
2012/10/19 8:37 AM
115
The RSI indicator measures a shares performance against itself. It is

often used in identifying buying opportunities in market dips, and selling
opportunities in market rallies. This indicator helps to gauge the strength
of the price of a stock or index compared to its past performance. For day
traders, this signal forewarns them that the share or market will reach a
top or bottom. Thus, the RSI is watched by many traders for a signal that a
reversal could be developing.
The value of the RSI is always a number between zero and 100.
RSI readings above 70 are usually interpreted as overbought.
Readings below 30 indicate that the share or market is oversold.
What does the RSI of Company XXX tell you?
RSI, like moving averages, can be applied to various time frames. In general,
the shorter the time frame the more volatile the RSI. The higher and lower
horizontal lines on a RSI graph are usually set at 30 and 70, which are the
levels at which shares are often regarded as overbought or oversold.
Calculation: Use the following formula for RSI: RSI = 100 (100 (1
+ ( U D )))
Where
U = Average upwards price movement over the period
D = Average downwards price movement over the period
The exponential setting applies an exponential moving average to the line;
the time period of the average being the same as that of the RSI setting.
Bollinger Bands
Bollinger Bands are bands displayed on top of the share price. The width
between the bands varies depending on the volatility of the share price:
The greater the width, the more volatile the share price.
The narrower the width, the less volatile the share price.
Calculation: Bollinger Bands are calculated as follows:
Middle Band = Simple Moving Average of the closing price over n time
periods
Upper Band = Middle Band + X
Lower Band = Middle Band X
Where = D * SQRT (SUM (Closing Price Middle Band) / n )
2012/10/19 8:37 AM
116
Where ... n is the number of time periods, D is the number of standard

deviations, SUM is the sum over n days of the moving average, and SQRT
is the square root.
Again, computer systems do all this for you.
The bands typically widen during volatile markets and contract during
calmer periods. With Bollinger Bands, the assumption is that prices tend
to stay within the upper and lower bands. When a price breaks a boundary,
it may signal that the move is strong enough to continue. When the bands
are closer together, it is considered more likely that there will be a price
breakout. The bands can be used with any moving average.
Remember, the objective of technical analysis is to find and confirm
trading signals using more than one indicator.
Example:
A trader may see an M formation, which highlights significant resistance
areas. In addition, a short-term moving average may cross the real-time
price line above or at the first or second top of that M. Connecting the
tops of the M with a trend line, he or she can project the resistance line
going forward.
Using those signals in real time, and based on the traders buying
or selling parameters and time frame, he or she may determine, for
example, a price at which to buy a PUT security (discussed in later
chapters) at or near the resistance level. Essentially, this means that the
trader believes that a specific security will fall when it hits the resistance
level, making money on the fall.
At all times, however, the trader must remember to look for signs
that the market could correct. No trend will continue forever. At some
point and price level the dynamics among the buyers and sellers will
change, and so will the trend. A true breakout is a move that is sustained,
with traders continuing to buy or sell. This pushes the market higher or
lower. A move that cannot be sustained is known as a fake-out.
2012/10/19 8:37 AM
117
PUTTING IT TOGETHER
No
Question
A market that appears to be

breaking out to the upside,
but buyers retreat at higher
price levels. What is the
result called?
Is it easy to see when a

breakout is going to be
sustained?
No
Breakout
Fake-out
Shakeout
Usually
Sometimes
Rarely
Question
There are certain times when false breakouts or fakeouts are more common than others
The best way to determine whether a breakout is real is

after the move is over
True
False
Remember David Owen? Negative as he may be, he reiterates that, while

the purpose of technical analysis is to look for indications, you cannot
rely on one indicator alone. The market is dynamic and multi-faceted and
made up of many stupid people, all clamouring for profits, all using the same
indicators. It is possible for an indicator to be right, but the timing of that
indicator may not fit your trading time frame. For example, a trend line may
be indicating a sell that might not materialise in the market for another
week, which would be too late for the day traders strategy.
2012/10/19 8:37 AM
118
Example:
The following graph displays the share price of Company RT, with 50day and 200-day moving average lines plotted on the chart. Using this
chart, plot the following indicators.
Company RT
Draw a trend line between two major highs and one between two
lows. Extend the lines into the future. What do the lines show?
Do these trend lines relate to the moving average lines?
Can you see any formations on this graph and does it outline various
market levels?
How would you use this information to help you form a real-time
opinion on the market, based on the indicators?
Trend lines can be drawn between any two highs or lows. For this
example, draw a line from the highest point on the chart to the next
significant high. Extending that line, you delineate resistance that
caps this market all the way through mid-December, when it finally
crosses that line and breaks out to the upside.
Connecting the low to the next low, a share yields a support line that
acts as a floor for this market.
Interestingly, the point at which this market breaks that support
line is also confirmed by the 50-day moving average line, which the
market also breaches at about the same point. Also, the 200-day
moving average contains much of the markets moves.
Looking at the chart, can you identify a U and a V formation?
Watching the markets behaviour as it trades at or near key price
levels (moving average lines and/or support and resistance levels)
can help you to determine your trading strategy.
2012/10/19 8:37 AM
119

No
Question
What is a moving average?
What are trend lines?
How are moving average envelopes used?
What are trend channels?
How is using more than one technical indicator helpful?
Be brief
Keep it Easy
For the novice day trader, there is unlimited wisdom in keeping technical
analysis easy. New traders often rush into more complicated technical
analytical indicators without understanding the basics. Even if you
subscribe to a service that provides you with technical analysis, be careful
that misinterpretation does not occur, as trading can be very subjective.
Two traders can look at the same scenario and derive two entirely different
opinions. To complicate matters, both could be correct, despite choosing
different securities, based on different opinions, strategies and time frames.
In this discussion of technical analysis, Ive purposely focused on the
basics. Too often traders gloss over basic information, because they want to
get to the good stuff. The problem is, without a solid basic understanding
of technical analysis, the more complex indicators and methodologies
will not be as useful. In fact, you could end up confusing yourself because
indicators can be conflicting.
You must take into account the fuller picture of the market. There are
many other indicators, in addition to the ones discussed thus far, that you
may eventually incorporate into your analysis. Many software programmes
include these and other indicators. Each time you add an indicator to your
trading methodology, the same practice applies:
Start with a just a chart. No trend lines, moving averages or other
indicators. And just observe. What do you see? Train your eye and your
mind to pick out the basic patterns discussed thus far, such as Vs, Us,
Ms and Ws.
Now apply the indicator to your chart. See how it applies to the
previous price activity. For example, does the indicator match up
with the high of the M pattern or the low of the V or U? Adjust the
2012/10/19 8:37 AM
120
parameters of the indicator, taking in more or less time. Now, how does
it match up with the real-time price line?
One by one, add the indicators that youve been using: the trend lines,
trend channels, moving averages, and so forth. Is there a consensus of
opinion among the indicators?
Understand the indicators discussed in Chapters 4 and 5, before looking at
Fibonacci and Elliot Wave.
Both are more complex and need complete focus.
2012/10/19 8:37 AM
121
Chapter 6: Simplicity & Trading Profits

Dont call it a mistake, call it an education.
Thomas Edison (1847-1941)
Yesterday I made a fortune, said an old friend and trader called Chris,
quickly adding, but today I lost it all.
So what went wrong with Chris trading? How can you make a fortune
in one day and loose it all the next?
And do you care?
Knowing Chris well, I asked him the obvious: How can you be so foolish
and ignore the absolute basics of trading?
I got carried away, he said. I left invincible and, when I reached a
R1m in profits, I knew that I should sell and walk away, but I got greedy. I
thought that maybe I can make R2m. So, I was stupid and ignored all the
analytical tools you taught me.
Sorry, he said and walked away, defeated. I havent seeing him since
that day, but I believe that Chris is resilient enough to make a comeback.
As such, I want to use this chapter to accomplish two things, namely set out
a number of critical rules that must never be broken and, secondly, set out
how to assess the future of a company within minutes. The latter actually
asks the question as to whether you should even bother with further analysis.
If you are feeling lazy and dont want to read all the following rules and
simply want a single excellent low risk advice, look at the following:
For long-term investors: Use suitably sized stop-loss positions and

set a sensible profit target
For short-term traders: Use tight stop losses and shorter profit
targets
Trading to extreme will usually result in a loss.
THE BASIC SECRET TO TRADING PROFITS
One of the key principles to becoming a successful day trader is simplicity.
If the aim is to buy securities and to sell them at a higher price, then
you make money. Every fundamental strategy and technical trigger is
2012/10/19 8:37 AM
122
consequently simply a means to make more money, while protecting your

gains. Stated differently, these rules are also aimed at limiting losses.
I know that when you look at all the available strategies, the whole
process of making money suddenly becomes much harder. I have seeing
traders with five monitors, tracking every possible indicator that was ever
invented, with television screens tuned in to global business news.
And you know what?
I have witnessed these same traders ignoring basic rules and losing a
fortune in a few minutes.
I believe that the best day traders start with simple principles: Keep it
simple, plan and keep to your plan.
Consequently, lets look at rules which I call: Profit Target Rules. By
understanding the rules below, you will have a much better chance of
keeping your own trading style simple and therefore your trading profits
should increase in the long term,
Ten Rules to Increase Trading Profits
Rule 1: Have a strategy
The best day traders specialise in a small amount of indices or stocks and
get to know them inside and out. This way, you will gain knowledge and skill
in trading these sectors and, over time, you will learn when to trade and
when to stay out of such markets.
y
Rule 2: Prepare for the da

While it may sound boring and against the mantra of technical analysts
that the market takes everything into account, I suggest that this is not the
case. You need to do assessment of companies you are about to buy or sell,
determine at what level you will acquire the security and establish an exit
plan. It is also crucial to have a plan for your day trading, including how
many stocks you will acquire and sell, time of day and at what point do you
abandon your trades and walk away from the market?
Rule 3: Never trade for the sake of trading
While it may seem like an obvious statement to make, many traders
(professional and novice) often change strategy in mid-stream. Once you
have decided and developed a certain strategy, stick to it. If the strategy is
sound, based on your planning, then you should make money. If you churn
your portfolio you will, eventually, fail.
2012/10/19 8:37 AM
123
It must be noted that a good strategy is objective and based on

fundamentals and technicals (see Master Trader, Penguin 2012). It must be
undertaken after trading hours, so that emotions do not form a part of your
established trading rules. Remember that if you panic or get greedy, you
will become your own worst enemy.
Experienced traders know that markets and shares are cyclical and that
there will be good times to trade and times when the best action is to take
no action.
Rule 4: Only trade when fundamentals and technicals align
Fundamentals tell you what to concentrate on, i.e. what to buy, while
technical triggers tell you when to buy the stock.
So, if I am well versed in a company, and I believe that the company will
make additional profits, then I know that the company is well positioned
from a financial standpoint. The next step is to make sure that the company
analysis matches the charts. If the technical triggers of volume, moving
averages and stochastic show a buy signal, then I buy.
Rule 5: Welcome unsuccessful trades
The rule is simple. Traders who have made mistakes will avoid these like
the plague so listen to their war stories. If I make a mistake, I am bound to
repeat it if I dont note it in my journal and learn from the error.
Rule 6: Trade small but use a larger stop loss
One trader told me that his secret to trading was to have fewer small open
positions with larger stop losses. So, instead of having four positions of R10
000 each in the market with a stop loss of 3%, have two positions of R20 000
each with stop loss of 15%. The intention is to allow the trade to develop
and it also gives you breathing space to allow the market to get back into
profit at some stage.
Rule 7: Dont overtrade
Similar to previous rules, dont trade unless you are sure. Do not trade is
if you are bored or feel obliged to be in the market. Rather spend your
time researching the market or share before you trade. If you dont see
an opportunity to buy a security, look at your analysis again. Conduct
additional fundamental and technical analysis, but do not I stress trade
because you feel obliged to.
Remember that there are always opportunities in the market. If you
2012/10/19 8:37 AM
124
miss one, relax another one is around the corner.

Rule 8: Trade with the trend
We have stated this at length in this book, so keep to the trend, but
remember that the market can be perverse; it can always go higher, but
similarly, it can fall lower. The logic is that sticking with the trend does
place you on the right side from the start.
Rule 9: Be an extraordinary trader
To be successful in trading, there is no need to do anything exceptional.
Outstanding stock traders are consistent, disciplined and experienced.
It does take a lot of develop a disciplined approach to trading, but when
you have achieved this, you should reap huge profits and achieve your
objective of becoming a trading success.
Rule 10: Master one style
Develop a trading style that is unique to you. Feel comfortable in that style,
master it and then stick to it. Never jump from one trading style to another.
Follow this rule for successful stock trading.
BUFFET HAS HIS SAY
Stated more simply, Warren Buffett is on record as saying:

Spending: If you buy things you dont need, youll soon sell things you
need.
Savings: Dont save what is left after spending; spend what is left after
saving.
Hard work: All hard work brings profit; but mere talk leads only to
poverty.
Laziness: A sleeping lobster is carried away by the water current.
Earnings: Never depend on a single source of income.
Borrowings: The borrower becomes the lenders slave.
Accounting: Its no use carrying an umbrella if your shoes are leaking.
Auditing: Beware of little expenses; a small leak can sink a large ship.
Risk-taking: Never test the depth of the river with both feet.
Investment: Dont put all your eggs in one basket.
2012/10/19 8:37 AM
125
A SIMPLE WAY TO FORECAST SHARE PRICE

There is a simplistic correlation between share price, price earnings per
share and earnings per share. If you can decipher them, then you are well
away in understanding how share prices move.
Day trading requires fast entry and exit from the trade so it is obvious
that you need to make rapid decisions when you trade. Imagine having R1
million in the market and not knowing when to sell or even worse when
to enter the trade. Ultimately, it all depends on the individual traders study
and logic, which share should be chosen for day trading.
So, it is very important to enter and exit rapidly from the trade because
no one knows what is going to happen in the next movement of the share
market.
But if you understand the relationship between share price, price
earnings and earnings per share, then you can make rapid decisions as you
would have a solid understanding of investor sentiment (PE ratio), earnings
and share price.
A Co-relationship
Follow these steps:

The formula is: Share price (SP) = Price earnings (PE) Earnings per
share (EPS)
If the assumption is that trading is intraday, then PE can be considered
as unchanged, i.e. use the current PE ratio. The logic is that investor
sentiment towards a share, as expressed in a PE ratio, cannot
significantly change within a day.
Earnings per share is calculated: In the companys Income Statement
look for Attributable Income. This figure is divided by Shares in Issue,
which equals EPS. If we assume that technical analysts are correct in
their belief that everything is already in the share price then lets assume
that the company will achieve similar growth in the next financial year
to that achieved in the past three years. This enables us to calculate
a new EPS for the coming year. If you are somewhat sceptical, then
glance over the JSEs SENS (Stock Exchange News) for any corporate
event that could change the companys average EPS growth.
Now: you have the PE and the forecast EPS, which means that you can
forecast the share price for the next 12 months.
Example:
A companys PE Ratio is 10 x
2012/10/19 8:37 AM
126
It has an EPS growth average of 15% a year.

Its current EPS is 100 cents.
The current share price is 850 cents.
Can you calculate the forecast share price?
The answer is simple as you use the formula: SP = PE EPS
In the above example, the PE is 10 and the forecast EPS is 115 cents
(current EPS of 100 cents multiplied by the 15% average). This gives you a
forecast share price of 1 150 cents, which is a forecast growth of 35.3% (SP
is expected to move from 850 cents to 1 150 cents).
So, if the current share price is sitting at 850 cents and the technical
indicators all point to an upward trend, then entry rules are simple and exit
rules rest around the 1 150 cents level.
The characteristics described in the above buy rule could find a market
that was experiencing a short-term pullback in a long-term bull market.
Trading the share would have to be based on technical indicators, which
would be used as a when to buy system.
Buy rules, and sell rules, should be grounded in logic. While the
above formula is simplistic, it does make sense and, as simple as it is, does
incorporate investor sentiment and financial results.
To enhance the above example, traders could take the three-year
average PE ratio to achieve a high and a low point for entry. For instance,
if the three-year average PE is 8x, then the SP forecast is:
Original forecast
Three-year
average
FORMULA
CALCULATION
SP FORECAST
SP = PE EPS
SP = 10 115 cents
1 150 cents
SP = 8 115 cents
920 cents
In essence, we have now calculated a price range of 920 cents to 1 150 cents
from the current price of 850 cents.
Day-traders often forget or fail to think about how theyll exit a winning
trade.
Instead of using a simple stop loss, use a trailing stop loss, which is
effective. Once a trade is entered, a stop is placed 15% under the entry to
sell if the trade turns out be a catastrophe. If the price moves up as forecast,
the trader can just keep moving the stop up, even reducing the stop to 10%
to lock in profits.
2012/10/19 8:37 AM
127
The Rule of Trading Only Twice per Day
There are professional traders who refuse to trade more than twice day.
I am not sure whether this is merely superstition or whether there are
benefits, as set out hereunder:
Since you are a novice, it is understandable that you could be losing or
breaking even. Taking a lesser number of trades per day merely means
a slower loss ratio to profit. This enables you to gain experience before
your capital falls to dangerous levels.
Fewer trades mean that you have time to analyse and be more
professional in the trades that you do make.
Being limited to taking only two trades per day means that you will
learn to sit and to wait for opportunities that match your strategy. In
addition, it teaches patience and ultimately should result in a higher
quality of trades.
2012/10/19 8:37 AM
128
Chapter 7: Turning Professional The Intraday

Trader
My advice for new traders is to question, question, question everything
they read and hear about markets. Many times, common wisdom
is uncommonly misleading. Steenbarger, Brett, 2003. Psychology of
Trading, Wiley.
Investors are often told to buy and hold. After all, if it is good enough
for Buffett, surely it must be good enough for you? Numerous sources and
trading seminars have expounded this theory over the last few decades,
including impressive statistics that suggest buying shares and hanging on to
them will make you rich. The aim, say many experts, is to double your funds
within a decade. For the serious investor, that is simply not good enough.
With the power of compounding, all you need is a 7.2% annual return to
double your funds.
Interest
7.2%
Years
Invested amount
(Rands)
1 000 000.00
72 000.00
1 072 000.00
1 072 000.00
77 184.00
1 149 184.00
1 149 184.00
82 741.25
1231 925.25
1 231 925.25
88 698.62
1 320 623.87
1 320 623.87
95 084.92
1 415 708.78
1 415 708.78
101 931.03
1 517 639.82
1 517 639.82
109 270.07
1 626 909.88
1 626 909.88
117 137.51
1 744 047.40
1 744 047.40
125 571.41
1 869 618.81
10
1 869 618.81
134 612.55
2 004 231.36
Interest
(Rands)
Total funds
(Rands)
2012/10/19 8:37 AM
129
If this is what you are looking for, then day trading is just not for you. You
can achieve the above in both bull or bear markets, in an environment of
high or low interest rates, inflation or not. It can be achieved under extreme
market conditions or risk-free trading. It is easy to buy and hold, but the
launch of online brokerages and the growing popularity of derivative
trading has raised serious doubts about this buy and hold strategy. Besides,
7.2% is not serious money and not a single investor will today be prepared
to invest and hold until they are near retirement. As a strategy, therefore, it
is not suitable for the day trader.
This is also not an invitation to be reckless. On the contrary, day
trading takes skill, experience and broad-based knowledge to become
truly successful. You need to understand how political issues influence the
markets, and obviously how business and economic cycles and trends move
shares and sectors. Yet, there is no secret formula to day trading either;
anybody with patience and discipline can become a day trader. One of the
crucial key principles to day trading is, strangely, simplicity. There are many
experts, who love to complicate issues by using what I can ultra-technical
jargon, reciting Fibonacci or Elliot Wave with poetic fervour. We have
covered these indicators, demystified the jargon. The day trader does not
need 30 indicators to trade successfully. In fact, this chapter looks at the day
trader, who intends to trade as a professional, taking on intraday market
indicators.
I believe that the best day traders start with one main principle: to keep
it simple. By following the intraday trading rules below, the new trader will
have a much better chance of keeping his or her own trading style simple,
and thus enhancing the rate of long-term success. Before amplifying the
above statements and defining rules for intraday traders, the following key
differences need to be emphasised:
An investor buys and holds shares for the long term. In monitoring his
or her investments, the investor looks at and reviews long-term charts,
which are yearly, monthly and weekly.
A day trader attempts to profit from major market swings that last
several days or weeks. In monitoring their trades, they also generally
review monthly, weekly and daily charts with greater emphasis on the
daily charts.
An intraday trader attempts to profit from major market swings that
last from minutes to hours, and always closes his positions overnight. In
monitoring his or her trades, the intraday trader should review hourly
and to the minute charts.
2012/10/19 8:37 AM
130
Finally, note that there is absolutely no difference in the methods of

industry and company analysis and decision-making. The following rules
apply to the day trader who has decided that he or she want to run a
professional trading desk.
THE 13 RULES OF INTRADAY TRADING
The following has, to some extent, already been covered in previous
chapters, but with a slight difference in emphasis. Once the day trader
becomes professional, he or she needs to apply principles learnt in previous
chapters for trading daily. The first three rules apply specifically to intraday
trading. This is the trader who buys and sells securities several times every
day.
Rule 1: Never hold a position overnight. Day traders trade frequently and,
as a rule of thumb, always close all trading positions before the end of day.
By doing so, risk exposure to after-market surprises is limited. It also lets
them start the next trading day worry free, with a fresh mind.
Rule 2: Only trade securities that have prices of over R10 and average
daily volume larger than 300 000 shares. Experience shows that it is better
to trade securities priced at over R20. This rule ensures that risk is less
speculative and that the day trader can always get in or out of any trading
positions.
Rule 3: Cut loss promptly. By sticking to this caution, day traders ensure
preservation of trading capital.
Rule 4: Know the market. Become an expert in a few sectors. In this manner,
the trader will gain in-depth knowledge of the shareholders, directors,
cycles and so on of each company within these sectors. Getting to know a
sector does not mean a JSE Securities Exchange designated sector. Traders
become experts in, for instance, telecommunications, which can be in any
sector; whether in telecoms, diversified, industrial, services or IT.
Rule 5: Prepare for the day. You need to have done your homework, and
have decided where you will be looking to get in and out of the market.
Have boundaries set for that days trading.
2012/10/19 8:37 AM
131
Rule 6: Stick to the plan. Once you have decided to follow a certain strategy,
stick to it. If the strategy is sound, then over time, you will make money.
If you continuously change, to try and ride trend up and down, you will
most likely fail. A good strategy is objective, leaving little room for human
emotions. Be objective and harshly cold in decision making. Over time, it
works phenomenally well.
Rule 7: Dont be greedy. An old trader once told me: Leave something on
the table for someone else. Essentially, dont try to squeeze the last cent
out of each day trade. You can lose everything in the process, suffering the
pain of seeing a winning trade turn into a losing one.
Rule 8: Cut losses without hesitation. Many day traders fail do so due to
not stemming the flow of a falling security. Knowing when to take a loss is
the one of the most important lesson any day trader ever learns. Experience
shows that, if you have three losers in a row, it is best to take the rest of the
day off. Sometimes you are obviously out of tune with the markets and your
area of expertise.
Rule 9: Never chase markets. If you miss a trade that suddenly looks like
it would have made you a fortune, do not try to jump in late. The market
has run and could be at the top. Simply, there will always be opportunities
in the market; today, tomorrow and the day after. Understand this many
successful day traders only trade for a few hours a day. They miss plenty of
action, but dont care.
Rule 10: Dont overtrade. Stay detached from the market. Use these times
to gather information.
Rule 11: Trade with the trend. Sticking with the trend does place you on
the right side from the start. My concern is that you are capturing the large
powerful trend moves beyond the narrow channel that sometimes defines
a typical day.
Rule 12: Protect capital. The same as cutting losses set out above. The
root of any sound money management strategy is to control costs. Intraday
traders often commit only 5% of working capital to any individual trade.
Rule 13: News. It is a bad idea to be holding a position just before a major
2012/10/19 8:37 AM
132
news announcement, i.e. company or economic releases. Markets do react

strangely and at times move in the opposite direction than predicted. For
instance, if poor company results are expected, but these are less poor than
expected, the share price could move upwards.
THE INTRADAY TRADERS NEED FOR INSTANT ACTION
In addition to real-time charts, the intraday trader needs to have a solid
grasp of market momentum, volatility and liquidity. This trader must know
that decisions can be carried out quickly.
Direction
During any given time frame a market can do one of three things: go up,
down or sideways. Persistent moves in the same direction are generally
referred to as Trends.
Momentum
Up and down moves can be impulsive (moving fast) or corrective (slow).

The latter is also called drifting. The intraday trader asks key questions:
Is the current price move accelerating? Under such conditions, you
want to stay with the security or get into it. Is the price slowing down?
If so, should you take a position against it?
Is the current price move faster or slower than the immediately
preceding move in the opposite direction? Can you expect the ongoing
trend to be in the direction of the faster of the two?
Volatility
Low volatility. This is when the price deviates only slightly from the
main trend.
High volatility. This occurs when there are wide and erratic price
swings in both directions from the main trend.
Changes in volatility are a signal to intraday traders that a change in
trend is possible. This can be I the form of:
A sharp move against the direction of the current trend.
A reduction in activity and size of short-term price swings.
2012/10/19 8:37 AM
133
Liquidity
When liquidity is high, thousands of share/security transactions are being
carried out. When liquidity is low, few buyers and sellers are showing
interest in the share/security. In general, intraday trading is best suited to
highly liquid markets, because decision making and trade execution are fast
and usually without delay.
Decision Making
Intraday traders take important decisions and often risk their own capital
on flimsy evidence. In addition to fundamental analysis and technical know
how, successful intraday trading is based on the traders ability to efficiently
and quickly make basic observations as follows:
The current trend (up, down or flat) is more likely to persist than
reverse.
The trend will be interrupted by corrections (counter-trend price
moves).
An accelerating price move is likely to continue.
A decelerating price move is likely to reverse.
The direction of the next significant price swing will probably be in the
same direction as the stronger of the last two.
Minor supports and resistances to the current trend are more likely to
break than hold, but major supports and resistances are more likely to
turn the market back than break.
Trend reversals are usually signalled by a clear change in volatility.
Intraday traders use of charts: important observation:

Long-term charts: review to observe major support and resistance
levels.
Medium-term charts: determine the trend and intermediate support
and resistance levels.
Short-term charts: evaluate current (and observe changes in)
volatility and momentum.
INTRADAY FUTURES TRADING
When it comes to trading futures, the pre-market activity is often expressed
as being above or below fair value, which is the theoretical premium that
the futures market should have over the equity or cash markets. Even if
2012/10/19 8:37 AM
134
the intraday trader is dealing in shares, an understanding of how the Stock

Index Futures relate to fair value will give him or her an early indication of
broader market sentiment.
Example:
The following is an excerpt from an old Morning Meeting commentary
carried out when I was working for a local stockbroker. In this case, the
commentary related to the US-based Index, the S&P-500.
The S&P-500 is trading at 1293, up ... We are well above fair value, so
expect institutional buying on the open.
What this tells the intraday trader is that the market is out of balance.
This should provide some potential opportunities for large players in the
market to trade. They do this based on the difference between the S&P
cash market and the S&P futures market. Historically, such opportunities
are usually short-lived. Fair value usually returns quickly to the market,
once arbitragers take action. These are traders who search for price
discrepancies not just in the domestic market, but globally.
For the average intraday trader, fair value can be used as a speculative
sentiment indicator. So, when futures are below fair value, its a bearish
indicator, and when futures are above fair value its a bullish sign.

No
Question
Fair value is the mathematical difference between the

value of a stock index futures contract and the cash
market
Fair value fluctuates during the day based on market

sentiment
If a stock index futures contract trades significantly

above or below fair value during the day, it often sets
up programme trading aimed at taking advantage of
this arbitrage opportunity
True
False
2012/10/19 8:37 AM
135
Opening Range
When trading begins, the first action is to assess the opening range of the
indices, shares or securities that you have selected for that days trading.
This range is often pivotal for the morning trading session and often remains
in force for the entire trading day. Opening range means the difference
between opening price, the offer and bid. This range may be more volatile
and bearish, or more stable or bullish. It may also be flat. Whatever the
trend, it often sets the tone for the day.
Example:
The following is a scenario of James Hu, an intraday trader.
As part of Hus pre-market preparation, he identified resistance (based
on trend lines) for JSE Industrial 40 Futures at 1 306 to 1 307. When
trading begins, the opening range is between 1 305 to 1 307. The market
trades higher up to 1 308, but that day cannot maintain an upward
momentum. It trades lower to the opening range and is unable to move
any higher. Given this scenario, how would the opening range factor into
Hus intraday analysis?
Hu already identified 1 3061 307 as resistance for the market.
The opening range of 1 3051 307 confirmed Hus resistance area.
After the market tried unsuccessfully to break out above the range,
Hus trend was confirmed.
With the market now below the opening range, the resistance area
at 1 306 all the way up to 1 308 has been established and confirmed
as intraday resistance.
Take this scenario further. Assume that Hu has assessed a support level of
1 299 to 1 300. The market trades down to 1 299.50, and bounces slightly up
to 1 301. It then trades between 1 299 and 1 301 for a half hour. Buyers step
in above 1 301. At this point, what should Hu do?
With support confirmed at 1 2991 300 and buyers stepping in above
this level, Hu can buy securities with knowledge that the market should
support shares/securities above the 1 300 level.
What would Hus profit target(s) be on this trade?
Hus initial profit target would be 50% of the daily range thus far. With
a high at 1 308 and a low at 1 299, the midway point would be at 1
303.50, at which Hu would sell out at least half of his shares/securities.
If buying momentum remained strong, Hu might wish to sell half of his
shares/securities at 1 303.50 and carry the rest toward the resistance
2012/10/19 8:37 AM
136
area at 1 306 to 1 308 depending on buying activity, Hu may also decide

to sell the remainder from a level of 1 305.
Question: If Hu missed buying at the 1 300 mark and the market rose to 1
303.50. What should he do?
Hu should stay out of the market. At 1 303.50, the market is between
support at 1 299.50 and resistance that begins at 1 306 and extends up
to the high at 1 308. This is known as a 50/50 trade, meaning that from
1 303.50 the market could go either way: down to 1 299.50 support level
or up to the 1 3061 308 resistance.
Assume the market was able to cross the opening range and traded through
1308. What setup would Hu look for? How would he view the opening
range at this point?
If the market traded up to and through the resistance level to get to 1
308, it has shown significant upside strength. At this point, Hu would
be assessing the market to determine whether the upward trend would
continue. Some indicators would include buyer strength (demand over
supply) or a trend line that indicates support above 1 308. He would
also look at basic moving averages, such as the 9-and 21-day moving
averages. If Hu confirms the upward trend, as an intraday trader, he
would be buying short-term securities with the aim of selling at the next
determined resistance level. The opening range would then become
support.
Price Levels
As part of the intraday analysis, key support and resistance levels have
to be identified, such as chart patterns, trend lines and moving averages.
Moreover, there is also a need to look at the market relative to significant
price levels from previous trading sessions.
No
1
Question
Be brief
Name some of the significant price levels that you would look
for
2012/10/19 8:37 AM
137
How would you factor those price levels into your trading
strategy?
Retracements
The intraday trader also makes use of Fibonacci retracements, outlined
in previous chapter. In the Fibonacci series, two percentages that are
commonly used are 61.8% and 38.2%. Global intraday traders seem to like
to watch 88% retracements. These traders find that, over time, the 88%
retracement level often marks the end of a significant move. At the 88%
point, the move is likely to run out of steam. It may go further, making it
to 90% or even 91% retracement. But at that point, the risk of a reversal is
usually too great.
No
Question
Retracement levels are found at specific

percentage points along the course of a previous
market move
Retracements are based only on upward

movements and not on downward movements
(breaks)
Retracements are important if for no other reason

than these points are commonly watched by
traders and therefore tend to act like magnets for
trading activity
Assume you have a long-term investment in a

share that has risen from R30 to R35.75. You have
previously sold out of most of your long position,
with half sold at R34.50 and 25% at R35. You kept
a quarter positions because of continued buying
momentum in the stock. However, there is an 88%
retracement, based on a previous down move, at
R36.25. What would you do?
True
False
Be brief
2012/10/19 8:37 AM
138
Gaps
Another potential price target is a gap.
Gaps are created when the market opens significantly
higher or lower than the previous trading days close. On
a chart, the price line literally has a gap.
That gap then becomes a target, making one of the most popular day trades:
The filling of the gap. Markets fill open gaps about 90% of the time.
This usually happens the day they are created, but it can take up to two
days.
The few times that gaps are not filled usually result in strong, significant
moves in the same direction as the gap.
Hourly Price Watch
Another factor in intraday trading is the hourly price watch.
These intervals are watched closely to see how the market relates to
certain key support/resistance levels, retracements and other price targets.
Typically, prices at the close of each 60-minute interval are charted. The
easiest way to see this is with candlestick charts. The pattern of the chart
then gives an indication of the trend in the market; upward, downward or
range bound. Based on these hourly closes, the intraday trader may adjust
or confirm his or her trading strategy for the day. Hourly closes are easily
analysed using a candlestick chart. The price activity for each bar or time
interval on the chart is reflected in the formation of the candlestick.
Example:
Candlestick Chart
2012/10/19 8:37 AM
139
The candlesticks have thick, vertical bodies that are formed by the
difference between the open of that bar or time interval and the
close.
The candles may have needles or tops that are spikes above the
candlesticks, which trace the high of that time interval.
The candles may have tails or bottoms that are spikes below the
candlesticks, which indicate the low of that interval.
Out of all the different types of candlesticks, the most important
is the doji. On a daily chart, the doji often marks the beginning of
a minor or intermediate trend reversal. Fail to recognise the dojis
implications and the day trader runs the risk of buying at the top
or staying too long in a trade and thus negating profits. There are
different types of dojis, which are outlined in www.magliolo.com.

No
Question
On a candlestick chart of hourly closes in a given stock or

futures contract, the candles show a progressively higher
pattern, like steps in a staircase. What does that tell you?
A doji is a particular kind of candlestick formation that has

no body at all, but is all needle and/or tail. How would this
formation be made? What might it signal?
Your technical analysis indicates that the market needs to

get above a particular price for an uptrend to remain intact.
The market does trade above this level, which it manages to
sustain on an hourly close basis. What does that tell you?
Conversely, the market closes below a certain level on an

hourly basis. What does this tell you?
Be brief

No
1
Question
Be brief
How would an M formation be made intraday, and what

would the significance be?
2012/10/19 8:37 AM
140
You notice a V formation intraday, with the bottom touching

a 10-minute moving average. What does this tell you?
A stock has gapped at the open and traded higher. Now it is

forming a W above the gap. What does this tell you?
Limits
This is more pertinent to overseas intraday traders. These are the prices at
which trading would potentially be halted, if the market moves by a certain
percentage. Limits are based on percentage moves downward. When those
levels are hit, if offers are not made about the limit, trading is halted for 10
minutes.
No
Question
True
Limits are designed to act as safety valves to prevent a

market meltdown.
The positions of price limits must be taken into

consideration in your technical analysis and trading
strategy
If a futures market is locked limit down, what would

the S&P cash market tell you?
How would you potentially use the cash market activity

as part of your trading strategy when the futures limit
expires?
False
Fade Trade
There will be times that the intraday trader believes that his or her indicators
are not correct. For instance, if a trend is up, but the trader assesses that
there is significant resistance to the share moving up, he will sell the share,
despite its upward movement. In day trading the Fade Trade is used in a
higher-risk way. For instance, if the trader believes that a share is not going
to sustain an upward movement, he or she would take out a PUT derivative.
Contrarian investment strategy is used to trade against the prevailing trend.
2012/10/19 8:37 AM
141
Fading the market is very high risk, as the trader is going against the current
trend. This strategy is also known as Fading.
Intraday Influences
A variety of intraday factors affect prices and perception of the buyers
and sellers. For example, if buyers believe that the supply of low-priced
shares of a particular stock is going to be depleted, theyll buy aggressively.
Conversely, if sellers believe that demand for high-priced shares of a
particular stock is going to ease, theyll increase selling pressure. Therefore,
equity traders should always know where and how the stock indices are
trading.
If you trade JSE resource shares, for instance, you must have the shares
of all resource stocks, index of the Top 20 Resources and Resource Futures,
on the monitor. In addition, it would be crucial to monitor the individual
resource indicators, such as the platinum and gold prices. You may also
want to track other global indices.
Focus on current bids and offers, as well as time and sales. The bids
and offers show you what players are active in a stock and at what price.
The time and sales data will show you what prices have traded and in
what quantity. If the current price is lower than the previous transaction,
it is often displayed in red. If the price is higher, it is displayed in green.
Whatever you trade, you must remember that the market is dynamic and
not static. In South Africa, these tickers are easily available.
Each of these events must be added to your real-time analysis of the
market. Think of it as a map thats laid out one step at a time. You cant
just assume the path will be a straight line. Its the same with the market.
At any given time the market may be acting and/or reacting to certain
dynamics in the marketplace. You may not be aware of every nuance, news
announcement, and/or rumours, but if you study the charts in real time and
engage in ongoing analysis, youll see the impact of those events on the
market.
No
1
Question
True
False
Once the trend is set for the day bullish or bearish it

rarely changes intraday
2012/10/19 8:37 AM
142
Its possible to have a short-term negative trend, but a

longer-term positive or neutral trend
Two traders can conceivably make money in the same

market from opposite ends of key price levels
You can be right about the market trend but still have a
losing trade
2012/10/19 8:37 AM
143
Chapter 8: Tools in the Traders War Chest

The equity derivatives markets are likely to explode in the near future.
Individual stock futures are coming soon to an exchange near you, and
that will only be the start of a massive sea of change in equity trading
leading to huge quantities of new equity derivative products. Patrick
Young, The New Capital Market Revolution, Texere, 2003
Young is an independent trader and advisor to exchanges and

intermediaries throughout the world. He is the founder of global
online publishing company derivatives.com, and a founding
director of the worlds first sports spread trading exchange,
Intrade. Young is also a regular guest on CNBC Europe.
In November 2005, I recommended JSE Securities Exchange listed company

Reunert Ltd to private clients. This came after a year-long commissioned
analysis on electronics, communications and defence systems. Part of that
analysis involved competitor profiles and this led me to investigating this
listed company. At the time the price was trading at R50 a share, which was
assessed to be undervalued and certainly more than 10% below fair value.
I sent two newsletters out to clients the first to equity clients telling
them to buy R10 000 worth of Reunert Ltd. This meant that clients would
buy 200 shares at R50 a share. The second newsletter went to derivative
trading clients, recommending buying R10 000 worth of Reunert Ltd Single
Stock Futures; the computation will be explained later on in this chapter. It
is sufficient to say that R10 000 in the futures market equates to R100 000
in exposure.
As predicted, the share rose by 10% within the first week and a sell
signal went to these private clients. Here is what the two types of clients
made:
Equity clients: 200 shares at R55 meant that their R10 000 investment
had risen to R11 000.
Derivative traders: Their R100 000 exposure meant that a 10% rise
in the underlying share (Reunert) meant that clients had made R10
000 on their investment. This, of course, means that their R10 000 had
grown to R20 000, a 100% return on investment.
So, what are we waiting for? Surely, the way to trade is to drop equities and
2012/10/19 8:37 AM
144
concentrate on futures? The novice jumps at the opportunity to make very

large amounts of cash very quickly. My answer is always with a question.
What if Reunert had fallen by 10%? The aim of investing is to make money
now, with the long-term objective of growing wealth. The use of futures and
other derivatives takes skill, patience and extreme discipline.
THE MARKET DEFINED
Derivatives are financial instruments that derive their value from the values
of an underlying variable. These variables can be underlying instruments in
the cash market (equity, money, bond, foreign exchange and commodities
markets) as well as the derivatives market. For example:
A currency option is linked to a particular currency pair in the foreign
exchange market.
A bond futures is linked to a certain bond in the bond market.
An agricultural futures is linked to maize or wheat in the commodities
market.
An option on a bond futures is linked to a bond futures trading in the
derivatives market.
A Single Stock Futures is linked to indices or specific shares.
A Warrant is linked to indices or specific shares.
Characteristics
Derivatives are mainly traded through organised exchanges, such as
SAFEX (South African Futures Exchange a division of the JSE Securities
Exchange), LIFFE (London International Financial Futures and Options
Exchange) and the Chicago Board of Trade. They can also be privately
issued. All trades executed on the exchange are processed by a clearing
house, which is responsible for determining the profit and loss on all open
positions by revaluing them at the end of each day. This is done at the
closing contract prices traded on the exchange, which is referred to as
marking-to-market.
Dealing with Volatility
Day and intraday traders need to make decisions quickly and decisively;
even in volatile times. The uncertainty of the global marketplace, following
the 2001 US terror attacks, has changed the way traders see the world
2012/10/19 8:37 AM
145
markets. Before volatility became the norm, trading emerging markets was
considered high risk. Today, high risk is the norm for the day trader. With
instruments to play markets up or down, there is always opportunity to
make money.
However, volatility will always affect trading strategy. For instance,
Futures securities require traders to use wider stop losses than they
normally would. Long-term investors generally have broader stop losses
(10% to 15%), while day traders would place 3% to 5% stop losses on their
securities. The problem with futures is that the market can move quickly
and fall through the stop loss if it is not broad enough. Only the day trader
can determine his or her level of discomfort, i.e. what are they willing (in
percentage terms) to lose before they feel uncomfortable.
No
Question
Your normal stop placement is not working in your trades.

You notice that, given the market volatility, you are getting
stopped out on the majority of your trades. How can you
prevent this?
How will this decision affect your overall risk?
What should you do to maintain your risk level?
Be brief
Shares
Remember that, if derivatives are linked to shares, there is a need to
determine whether a share is expensive, cheap or fairly valued. In addition
to technical graphs and indicators, there are two ways to quickly see whether
a share offers derivative traders an opportunity to make a profit.
Method 1: Price earnings of the share relative to its average price earnings
The aim is to assess the company relative to its own average. The way to do
this is to calculate an average according to whether you are an investor, day
trader or intraday trader. Time scales have been discussed in the previous
chapter. The following graph can be calculated using technical analysis
systems. For assistance, contact me on mentor@magliolo.com.
The graph displays a company with an average price earnings of 15.1
2012/10/19 8:37 AM
146
times. For four months the companys share has been trading at above the
average and, in the last week, touched the 15.1 times level, but bounded
back upwards. The trader can deduce that the company is expensive at
present, when compared to its two-year average. However, he can also
assume that the company tends to trade at higher ratios during a bull
market. It becomes his or her call to decide when to trade the share, its
derivative or move on to the next potential profit call.
PE
18
P E Ave
17
16
15
14
13
27-07-06
27-05-06
27-03-06
27-01-06
27-11-05
27-09-05
27-07-05
27-05-05
27-03-05
27-01-05
27-11-04
27-09-04
12
Method 2: The price earnings ratio relative value curve

The formula is a lot more complex, as follows:
PE MODEL =
[p1(1+ge1)/(1 +k)] + [p2(1+p1)(1+ge2)/(1+k)(1+k)] + {p3(1+p1)(1+ge2)
(1+ge3)/(k-g)[(1+k)(1+k)]}
The above formula has been placed in a spreadsheet, which can be obtained
from www.magliolo.com.
It is important to determine the right price for shares that you are about
to use as underlying security for your derivative. The most popular stock
valuation model is to estimate the stocks earnings per share over a period
of time to determine the fair value of the stock. That is, calculate the stocks
normal price earnings ratio. The above formula goes a step further than
Method 1, by including the amount of dividends that the investor could get
over the next year.
The above formula is best explained using an example.
2012/10/19 8:37 AM
147
Example:
Assume: the price earnings ratio is 18.4997.

To determine the fair value of the stock multiply the price earnings ratio
by the current annual dividend amount. In the example below, the price
earnings ratio is 18.4997 R6.00 for a fair value of R110.9982. In other
words, R110 is the current fair market value of the stock.
Example legend:
The Price Earnings Model represents what the price earnings ratio should
be if the stock were fairly priced
d1 = Expected dividend for 2000 = R6.50
ge1 = Expected growth rate of earnings for 2000 = 0.15
p1 = Estimated payout projected for 2000 = 0.56
p2 = Estimated payout projected for 2001 = 0.60 (rounded)
p3 = Estimated payout projected for 2002 = 0.60 (rounded)
g = Expected growth rate = 0.10
k = Investors required rate of return = 0.15
do = Current dividend = R6.00

Therefore:
PE
Model
[p1(1+ge1)/(1 +k)] + [p2(1+p1)(1+ge2)/(1+k)(1+k)] +

{p3(1+p1)(1+ge2)(1+ge3)/(k-g)[(1+k)(1+k)]}
[0.56(1 + 0.15) / (1 + 0.15)] + [0.60(1 + 0.56)(1 + 0.10) / (1 +

0.15)(1 + 0.15)] + {0.60(1 + 0.56)(1 + 0.10)(1+0.10) / (0.150.10)[(1+0.15)(1+0.15)]}
0.644/1.15 + 1.03 /1.322 + 1.1326/ 0.066
5600 + 0.7791 + 17.1606
18.4997
2012/10/19 8:37 AM
148
Fair value formula:

Fair value = PE Model do
Fair value = Price Earnings Ratio if fairly valued Current Dividend
Fair value = 18.4997 R6.00 = R110.998
Split into three parts to simplify the excel spreadsheet:
Part 1: [p1(1+ge1)/(1 +k)]
Part 2: [p2(1+p1)(1+ge2)/(1+k)(1+k)]
Part 3: spilt into two parts:

p3(1+p1)(1+ge2)(1+ge3)

(k-g)[(1+k)(1+k)]
The spreadsheet is therefore as follows:
1
2
3
PART 1
0.56
SUM((E11*(1+E12)/(1+E13)))
PART 2
0.78
SUM((E14*(1+E11)*(1+E15))/
PART
3i
((1+E13)*(1+E13)))
SUM((E16*(1+E11)*(1+E15)*(1
1.13
+E17)))
3 ii
0.07
SUM(((E13-E18)*((1+E13)*(1+E13))))
PART 3
17.13
SUM(C5/C6)
Model
18.47
SUM(C3+C4+C7)
PART
6
7
8
9
10
11
INPUT
p1
Estimated payout projected for 2000
0.56
Expected growth rate of earnings for
12
13
14
Ge1
2000
0.15
Investors required rate of return
0.15
p2
0.6
15
16
Ge2
2001
0.1
p3
0.6
17
18
19
Ge3
2002
0.1
Expected growth rate
0.1
Do
Current dividend
2012/10/19 8:37 AM
149
Conclusion: The fair value amount of R110 is then compared to the

current sales price, of say R109. The difference between the two stock
prices is R1.9982. This analysis indicates that the stock is selling close to
the price earnings ratio and can be viewed as fairly valued.
WARRANTS
Definition: A warrant is a right but not an obligation to buy a specific
amount of securities at a specific price, usually above the current market
price at the time of issuance, for an extended period. In the case that the
price of the security rises to above that of the warrants exercise price,
then the investor can buy the security at the warrants exercise price (also
called the strike price) and resell it for a profit. Otherwise, the warrant
will simply expire or remain unused. Warrants are listed on the JSE
equities exchange.
Terms Explained
Call warrants: A call warrant gives the holder the right, but not the
obligation, to buy the underlying share for a fixed price known as the
exercise or strike price at a future date. Taking up this right is known
as exercising the warrant. The price of call warrants will generally rise
if the price of the underlying share rises, and fall if the share price falls,
all other things being equal.
Put warrants: A put warrant gives the holder the right, but not the
obligation, to sell the underlying share to the warrant issuer for the
exercise price at a future date (also referred to as exercising the
warrant). The price of put warrants will generally rise if the price of the
underlying share falls, and fall if the share price rises, all other things
being equal.
Expiry date: Both call and put warrants have an expiry date. There are
two types, as follows:
American style: This type of warrant can be exercised at any time up
to and including the expiry date.
European style: This type of warrant can be exercised only on the
expiry date. The Terms of Issue of a particular warrant will specify
the style of exercise.
Gearing:
Simple: One common measure of gearing is to determine how many
2012/10/19 8:37 AM
150
warrants can be purchased for the cost of one share. For example,
if the share costs R20 and the warrant R2, then the simple gearing
equals 10.
Effective: Another measure takes the simple gearing and multiplies
it by the warrant delta (explained below). Investors thus account for
the possibility that the warrants will not equal the shares movement.
An effective gearing of five means that the investor only has to
invest 1/5 as much capital in warrants to gain effective exposure to
the same number of shares.
Expiry date: Warrants can be expected to gradually decline to zero
over the life of the warrants. This gradual decline in the time value is
effectively part of the daily cost of holding a warrant.
Delta: A Delta of one means that the value of the warrant will change
one cent for every one cent change in the underlying share price. A
Delta of 0.5 means that the value of the warrant will change by 0.5
cents for every one cent change in the underlying share price.
Example: Assume the SHARE SBs share price is R20 and the call
warrant price is R2. If the Delta of the Call Warrant is 0.50 and the
share price increases R2 to R22, the value of the warrant will move
by about R1, that is: R2 0.50 = R1.
Conversion ratio: This is the number of warrants that must be exercised
to buy (in the case of calls, or sell, in the case of puts) one share or (an
underlying parcel of shares).
Benefits of Trading Warrants
Leveraged trading: In call warrants leverage means that for a given

increase in the share price, warrant holders will potentially make a
greater profit as a percentage of capital invested. Conversely, for a
given decrease in the share price, holders will be exposed to a greater
potential loss for a decrease in the share price as a percentage of
capital invested.
However, an investor is never obliged to pay anything more than
the initial price of the warrant, so the maximum amount that he can
lose is limited to the price paid. This is an important difference to
other derivatives, which require additional funds to be placed in the
investment if the market moves against you.
Hedging a portfolio: An investor with a diversified portfolio of
shares that tends to move in line with the index may use an index put
2012/10/19 8:37 AM
151
warrant to protect the value of that portfolio against negative market

movements.
For a more comprehensive discussion on warrants, see Jungle Tactics. As
day traders are more interested in making money, the following example
explains how warrants work.
Example:
Warren Louw buys 10 000 warrants in SHARE SB, with the following
specs.
The warrant price: R1
The conversion ratio: 100 times
Expiry date: June 30, 2007
Current share price: R100
Strike price: R120
Gearing: 7.5 times

This means that Louw has until June 30, 2007 to trade the warrant in the
market or convert at that date. If he wishes to convert the warrant into
the share he must do the following:
Convert 10 000 warrants that he has into the SHARE SB. The ratio is
100 to one, which means that Louw is entitled to buy 100 shares (10
000 100).
He will have to pay the strike price per share, which is R12 000 (R120
100 shares).
He will then receive the 100 shares, which he can sell into the market.
Louws strategy is twofold:
Strategy 1: Trade the warrant. The aim is to buy a long dated warrant
and one that is close to strike (explained later on). The reason for
buying one that expires in six or more months is to have a warrant
in a company that will release at least one set of results. If Louws
research is sound, company results should be positive. A rise in share
price will be met with a gearing-related rise in the warrant, i.e. during
the early stages a rise in SHARE SBs share price of 10%, equals a
75% rise in the warrant. Remember that the closer you get to the
expiry date, the more decay sets in. This means that the gearing will
have less effect on the warrant over time.
2012/10/19 8:37 AM
152
Strategy 2: Convert at expiry. Warrants that are trading close to strike

and in an upward trend should (given research) prove to be profitable
at expiry. If the share keeps rising, the difference between the share
price and strike will be the traders profit. Of course, you have to
account for the cost of the warrant as well. Assume that the price of
SHARE SB rose to R160. The calculation would be as follows:
Cost of warrant
10 000 R1 = R1 000
At conversion, cost of share
R120 (Strike) 100 shares = R12,000
TOTAL COST
R13 000
VALUE OF SHARES
R160 100 = R16 000
Profit (Rands)
R3 000
Profit (%)
23%
CONTRACTS FOR DIFFERENCE

Contracts for difference, also known as CFD trading, is an agreement
between two parties to exchange the difference between the opening price
and the closing price of the contract, at the close of the contract. This is
multiplied by the number of units of the underlying commodity specified
within the contract.
One of the major benefits of CFD trading is the ability of traders to
buy and sell commodities without tying up large amounts of capital.
Clients usually pay a deposit, which is anything between 4% and 15% of
the underlying contract value. This margin guarantees that clients will be
able to cover their losses (if any) that may result from their trades. I need
to stress, again, that new traders must realise that margin trading does
dramatically increase potential profits, but it also dramatically increases
risk. In South Africa, CFD trading is considered alternative trading and is
not offered by all institutions.
CFD Terms
These are:
Trade position opening: A position is opened by buying or selling
a CFD. For instance, if a trader decides that gold is an investment
worth having, instead of buying physical gold, he or she could buy a
2012/10/19 8:37 AM
153
CFD on the gold price. To make a profit, the price of gold would have
to rise.
Trade position closing: Closing a CFD position will result in a profit
or loss being realised on the traders account. A closing of an open
position can also be partial. This is done by executing an opposite trade
of a lesser amount than the previously open trade.
Margin: This is a cash deposit provided by the trader as collateral to
cover losses (if any) that may result from his or her trade. The level of
margin depends on various parameters, including volatility, nominal
value of contracts, etc. A Variation Margin is the change in current
balance, caused by price changes of open positions.
Equity balances: The equity (or balance) on a customers account will
fluctuate according to the money he or she has deposited in his or
her account, according to the trading conducted on the account and
positions held. Therefore, the equity balance is constantly calculated in
line with market movements.
Margin call: This is a demand for more funds to be deposited up to
a required minimum to cover an adverse movement in price in the
market.
Stop-out level: Stop losses can be made with CFDs.
Tick: Minimal price fluctuation of the contract.
Spread: Current difference between current bid and ask price of the
contract.
CFD Advantages
The most important advantages of CFDs are:

Low level of the initial deposit.
Low commission rates.
Elimination of the underlying commodities physical delivery risks.
Leverage.
Immediate trading.
CFDs introduce significant flexibility to trading and open up a host of
trading techniques, which is crucial for traders in a continually volatile
global environment. The following strategies can be used for CFD
trading.
2012/10/19 8:37 AM
154
CFD Trading Strategies
Once the novice trader has opened up a CFD trading account, he or she is
often left wondering: What should I do next? Should they simply buy into
long positions, just as he or she did when trading shares? The following are
some CFD trading strategies for new traders to peruse.
The simplest tool in the CFD trading strategies tool chest is simply going
long. Using the long strategy with CFDs benefits the trader if the share
moves up. Technical and fundamental analysis is used to analyse markets
and specific shares before buying the CFD; linked to the underlying stock.
The benefit is to have a leveraging effect on a share over the long term.
Going short: This is a useful tool in the CFD trading war chest. If the
trader believes that a share or index is about to be negatively affected by
market conditions, using CFDs will allow him or her to easily benefit from
the fall of the underlying share price. So, when the share or index falls, the
dealer makes a profit.
Hedging strategies: CFDs enable the trader to change the risk profile of
any of their holdings. For instance, if a trader decides that the market could
temporarily fall, he or she could buy a Short CFD to offset any fall in his or
her portfolio, thus reducing market risk. Doing this will reduce the traders
exposure temporarily to stock price movements, without the full sale of the
underlying stock.
Trading index CFDs: Traders can take advantage of changes in Indices,
by either shorting or going long on the underlying index, especially
when the companies included in an index are being affected by market
movements.
To finish off, the following are some CFD trading strategies that are a
little off the beaten track. They probably wont be used often by traders,
but they form a part of the CFD trading strategies arsenal that is available
to any CFD trader.
Trade on news or anticipation of news of some event: News about a
companys dealings or any news of directors share dealings could
influence the share price. CFDs offer leverage as well as a low entry
cost, thus enabling traders to act upon news stories with greater
leverage than simply buying a share. This is a short-term strategy.
Using arbitrage: The dealer can profit by taking advantage of a price
discrepancy by simultaneously buying into a position, while shorting
another.
2012/10/19 8:37 AM
155
Pairs trading: Some traders may trade pairs of stocks, where the
trader buys into one stock, while selling another competitive stock.
This is also called Market Neutral Strategies, and is outlined later in
this chapter.
CFDs can also be used for speculating.
SINGLE STOCK FUTURES
Single Stock Futures Trading, also called SSF Trading, takes the trader
into the realm of futures contracts. SSFs are futures contracts, where the
underlying security is a share listed on an exchange. Therefore, an SSF
contract is a legally binding commitment made through a futures exchange
to buy or sell a single equity in the future.
The easiest way to look at an SSF is to re-look at the Reunert Ltd
example set out at the beginning of this chapter. If you invest R10 000 in an
SSF, then your market exposure is 10 times that, or (in rand terms) R100
000. If the underlying share price rises by 10%, you will make 10% on the
market exposure, or (in cash terms) R10 000 on your R10 000; a 100%
growth. Another way to look at SSFs is to say that your exposure is 100
times the share price.
Each SSFs contract is standardised with regard to size, expiration and
tick movement. Each SSFs contract has to be settled on expiry, i.e. the
buyer of a futures contract takes delivery of the actual scrip from the seller.
SSFs are quoted as follows: MAR07 SOLQ
The quote has the month and year of expiry (March 2007), followed by
a three-letter code of the share (SOL for SASOL) and a Q.
Some Terms
Short selling: Investors are now able to easily short the market, which
means that he or she is investing in a security that is expected to fall.
Gearing: Futures offer gearing, with investors only needing to deposit
10% of the total exposure in the spot market. This frees up capital
for other investments. Can also be used as an effective tool to hedge
existing portfolios as well as loading portfolios.
Transparency: The pricing of single stock futures is totally transparent,
with the movement of a SSF contract mirroring the movement in the
spot market.
In assessing the value of SSFs, traders often only look at the positives. This
is the fact that a 10% rise in an underlying security equates to a doubling
2012/10/19 8:37 AM
156
of your investment. Little is said about the risk of buying SSFs. Remember
that a negative market movement will affect your investment 10 times faster
than equities, i.e. 10% negative movement equates to a 100% fall in your
investment.
MARKET NEUTRAL STRATEGIES
A market neutral strategy is one where an investor takes a long position and
a short position at the same time. There are many ways of implementing
this strategy, but the basic premise is always that, at any given time,
some securities are overvalued and others are undervalued. Essentially,
an investor takes advantage of this temporary disequilibrium by buying
undervalued securities and taking an equal, short position in a different
and overvalued security.
Why Does the Strategy Work?
The strategy has evolved directly from the well-known major Wall Street
brokerages. The strategy focuses on price signals that are strongly
correlated. For instance, Ken Hill buys R10 000 worth of SHARE Z,
which sells umbrellas, and sells SHARE X, which sells suntan lotion. The
following chart explains the basic idea of this type of trading.
Divergence Strategy
While there are different ways to apply market neutral strategies, the
Divergence Pair Trade Strategy is often used by professional traders. The
idea is to find two diverging stocks, one a relatively strong performer and
the other a weak performer. Then the trader goes long on the strong stock
and short on the weak stock, so that he or she can realise a profit as the two
stocks continue to diverge, while the long/short structure keeps the overall
trading position hedged against uncertain market movements.
You will need advanced technical analysis software to find such pairs
of stronger/weaker stocks, with search engines that can study all possible
combinations of stocks to find those showing a smooth and steady trend
over a long period of time. A pair is considered an attractive candidate if it
shows a stable and strong diverging trend.
An important rule to remember for Divergence Pair trades is to never
let a winner turn into a loser. A trader can hold on to a divergence pair
2012/10/19 8:37 AM
157
trade as long as the two stocks continue to diverge. The best way to exercise
sensible trading judgment is to incorporate fundamental analysis of the two
stocks into the pair trade strategy. Divergence pair trade is a combination of
technical and fundamental trading strategies. Always confirm that the long
stock position is a likely strong performer and that on the short position is
a weaker or under-performer.
FOREIGN EXCHANGE TRADING
Foreign exchange generally refers to trading in foreign exchange currency.

Margin foreign exchange products can be differentiated from foreign
currency as they allow the investor an opportunity to trade foreign exchange
on a margined basis, as opposed to paying for the full value of the currency.
In other words, investors are required to lodge funds as security (initial
margins) and to cover all net debit adverse market movement (variation
margins). When clients are making a loss to an extent that they no longer
meet the margin requirements they are required to top up their accounts
or to close out their position. This is the same as CFDs and SSFs outlined
in an earlier part of this chapter.
Foreign exchange is about exchanging one currency for another at an
agreed rate. Therefore, in every exchange-rate quotation, there are two
currencies. The exchange rate is the price of one currency (the base
currency) in terms of another currency (the terms currency) such as the
price of the Australian dollar in terms of the US dollar.
Foreign exchange exposures may arise from a number of different
activities.
Companies or individuals, that are dependent on overseas trade, are
exposed to currency risk. This can be to purchase (or sell) physical
commodities (such as machinery).
Exporters, who sell products priced in foreign currency, run the risk
that if the value of that foreign currency falls, then the revenues in the
exporters home currency will be lower.
Importer, who buy goods priced in foreign currency, run the risk that
the foreign currency will appreciate, thereby making the cost, in local
currency terms, greater than expected.
In each of the above examples, the person or the company is exposed to
currency risk, which is the risk that arises from international business that
may be adversely affected by fluctuations in exchange rates. The Forex
2012/10/19 8:37 AM
158
market allows individuals and corporations to buy or sell foreign exchange

products to manage these risks.
Key Features of Forex Contracts
Currency pairs
The first currency in the pair is the base currency and the second currency
is the counter or quote currency. The US Dollar, as the worlds currently
dominant currency, is usually considered the base currency for quotes.
This means that quotes are usually expressed as a unit of US$1 per the
other currency quoted in the pair. The exceptions are the Euro, Great
Britain Pound and Australian dollar. These currencies are quoted as dollars
per foreign currency.
The four major currency pairs are EUR/USD, GBP/USD, USD/CHF
AND USD/JPY. Other currency pairs you may consider include USD/
CAD, AUD/USD, NZD/USD as well as the cross rates such as EUR/GBP,
EUR/CHF, EUR/JPY, GBP/JPY etc.
Points (Pips)
It is arbitrary how many significant figures are used in an exchange-rate
quotation. The last decimal place to which a particular exchange rate is
usually quoted is referred to as a point or pip. For example:
In the quotation USD 1=AUD 0.7250, one point or one pip means
AUD 0.0001.
In the quotation USD 1=JPY 102.50, one point or one pip means JPY
0.01.
Note that not all points (or pips) are of equal value.
As will be explained later, the spread between the bid and ask price is
generally 3-5 pips. Therefore, on entering a Forex position, you are down 3-5
pips. So, to break even, the currency must move 3-5 pips in your direction,
and then profit is earned after that. In order to earn a 10 pip profit from
trading long, the EUR/USD (assuming a spread of 3 pips), would need to
move from 0.8977 to 0.8990 on the chart price.
Margin
Trading Forex contracts involves trading on margin. Margin allows you
to purchase a contract without the need to provide the full value of the
contract. Margin requirements vary between market makers, but typically
2012/10/19 8:37 AM
159
range from 1% to 4%. For example, for $100 000 position on 1% margin,
you would be required to offer $1 000 per as margin. This dollar amount is
expressed in the base currency. Remember that to trade these currencies,
you would have to pay in US dollars.
Spread
Forex market makers quote foreign exchange rates by taking into
consideration the current spot interbank exchange rates. The price that
you may deal at is presented to you as a bid and an offer. This is the same
as in the equities markets. The difference in price between the quoted bid
and offer will include a spread in favour of the market maker. Forex market
makers make their earnings from the spreads that are embedded in the
currency rates, as the rates they deal in are more favourable.
The target bid/ask spreads are the best possible target spreads used in
normal market conditions. In quiet market conditions, the spread may be
narrower, but in periods of volatile markets, the spread may be increased.
What Moves the Forex Market?
The main factors that have an effect on exchange rates include balance of
payments, economic (inflation and interest rates), political and psychological
factors. Purchasing Power Parity is the flow of capital between nations and
it is the central factor that determines market momentum. Governments
may also try to control their currencys exchange rate by intervening in
the market. This type of intervention rarely alters market direction in the
longer term, but it can have dramatic short-term relevance.
As with all markets, it is often the anticipation of a change in a market
condition that moves the market, rather than the condition itself. As the
market approaches key levels of support and resistance, its behaviour
becomes more technically orientated and the reactions of these managers
are often predictable and similar.
Key Benefits of Forex
The Forex market is becoming more attractive to traders, main due to
liquidity. Globally, US$1.8 trillion worth of currencies are traded daily.
Thus, there will always be a buyer and a seller. Forex markets are open 24
hours. The market follows the sun around the world, with New Zealand
being one of the first countries to open.
Forex trading is a serious option for intraday traders. For instance, if
2012/10/19 8:37 AM
160
Cost of Forex
you were to open a position with five contracts, you would be exposed to
$500 000 of the base currency. For this exposure, assuming a 1% margin
requirement, you would need $5 000. This leverage gives gearing of 100:1
for 1% margin or 50:1 for 2% margin accounts. It is this gearing that allows
traders to make large percentage returns on there capital. Assume that
the base currency strengthens by 10% overnight, you will have made the
following profit:
US$5 000
In SA Rands (US$/1R = R7)
R35 000
Exposure
US$500 000 or R3 500 000
10% strengthening of the US$
10% = US$50 000
Profit (Rands)
R350 000
This is a long-term strategy for the day trader. Start with equities, move
onto warrants, followed by Single Stock Futures, CFDs, Market Neutral
Strategies and then Forex.
Final Word
Always trade with discipline, have a plan and keep to it. Try and automate as
much as possible, thus removing greed and fear from the trading equation.
For information on a share and alternative market trading mentoring
programmes, go to www.magliolo.com.
2012/10/19 8:37 AM
161
Chapter 9: Preparing for the Next Decade

We are in a new super-cycle, driven by the industrialisation and
urbanisation of emerging markets, and global trade, Gerard Lyons,
Chief Economist and Group Head of Global Research, Standard
Chartered Bank, United Kingdom
Imagine if you as a trader knew how the market would move?
The obvious answer is that you could place your orders before such a
move took place and then you could just sit back and reap the benefits of a
well-placed order. The real issue is, actually, not whether market direction
can be assessed, but how strong such direction will be in the future.
As an analyst and researcher, I have good news for you. In-depth
economic investigations during the past five years for a number of
stockbroking firms in South Africa and overseas highlight one critical fact:
In the past +100 years, the world has enjoyed a super-cycle only twice.
Many economists are today predicting that we are experiencing the
start of a third super-cycle.
The first such economic and market super-cycle took place from 1870 until
1913. Despite WWI (or maybe because of it?) the world saw a major rise
in growth rates: from 1.7% to 2.7% with the US having the largest gain in
world growth. In fact, the US moved from the fourth-largest economy to
the largest economy.
The second super-cycle was after WWII until the early 1970s, when
growth doubled to over 5%. Japan and other Asian countries saw the
biggest gains during this period. Japan had a staggering growth rate, from
3% to 10% of the world economy.
It is important to note that such growth was initiated and then driven
by new technologies that had emerged during the Industrial Revolution,
while the second super-cycle was created by post World War reconstruction,
investment and infrastructure rebuilding.
Before we move on, let me give you the economic definition of a supercycle.
2012/10/19 8:37 AM
162
A super-cycle is defined as a period of between 30 and 40 years where

economic and market growth is double that of the previous period.
Such growth is usually driven by trade, investment, demographic and
technological change.
Here is where trading gets really interesting. The new super-cycle is forecast
to be driven by Emerging Markets with most of the growth coming from
China and India. These will be key business and economic drivers. Some
economists believe that Chinas percentage of global GDP will rise to 35%
from the 10% average currently being achieved.
So, three main questions:
What are the benefits to day traders of understanding a super-cycle?
What are the implications for long-term investors, i.e. should they
change portfolio weighting?
How do traders position themselves to take advantage of this expected
super-sycle?
The research undertaken by Business Consultants International during the
past seven years nearly always has one conclusion: Emerging markets will
lead the next super-cycle.
This book is dedicated to trading and, consequently, much of the
research is not relevant. However, factors that are important point to
economic, business, political and technological advancements in emerging
markets. For local traders it is thus important to remember that South
Africa has only recently joined BRIC (Brazil, Russia, India and China), and
so the benefits of being part of the largest emerging market powerhouse
have yet to be felt by both private and listed companies and, in turn, share
prices.
So, emerging markets should also be attractive to First World economies
which mean that local shares will be acquired in greater numbers and
returns should therefore be attractive enough to compensate for the level
of risk of investing in these economies.
In the next 20 years, emerging markets are expected to yield higher
capital growth from listed shares on the back of better fundamentals of
corporate governance and transparency. A number of overseas institutions
are starting to see the benefit of increasing their exposure of emerging
markets, saying that they have no choice. After all, how can they ignore
forecasts that state that global equity market capitalisation will rise from
the current US$50 trillion to US$ 322 trillion by 2030?
2012/10/19 8:37 AM
163
As if in unison, these experts all point to Asia as market capitalisation

for China alone is forecast to balloon from US$4 trillion to US$80 trillion
by 2030. The question is, then, how will this influence share prices and will
trading be more or less volatile?
Volatility is here to stay
Here is a truism often mistaken even by professional traders: an economic

super-cycle does not obviate the existence of normal business and other
environmental cycles. To put it differently, a long-term cycle does not occur
in a straight line, but the general direction is up or down with short and
medium cyclers interspersed.
In a super long-term bull cycle, long-term investors benefit from
compound growth and capital appreciation. If youre a day trader, even
better as volatility is the cornerstone of creating ultra-wealth.
The question still remains: How will portfolio management change
under a super-cycle scenario? The answer is simple:
Traders who concentrate only on South African stocks, ensure that your
portfolio contains 50% shares either rand-hedges or companies that
are expected to become global players or those with emerging market
contracts.
Traders with international portfolios need to be 50% directly invested
in global shares with emerging market exposure or 50% directly
invested in emerging market securities.
FINAL COMMENT
The world economic engine has changed gear during the past decade.
Ignoring changing environmental factors of politics, economics,
business and technology will not help your trading strategy.
There are major opportunities for emerging market-based traders to
outperform developed markets.
Fundamental shifts in technology and the means of production always
change the way the economy operates.
Opportunities exist in companies affected directly or indirectly
by high growth, increased trade, urbanisation and high rates of
investment.
However, it is critical to note that there will be extreme cases (times)
when volatility in emerging markets will be caused by fluctuating
demand for commodities. Ensure that your portfolio allocations are
diversified to offset any major up or downturn in demand.
Investors who are conservative should hedge their portfolios with
2012/10/19 8:37 AM
164
bonds or gilts.
While growth prospects in emerging economies will be the main driving
force of global trade, it is important for investors to understand and
accept that all economies will ultimately be driven by global capitalists.
Those left behind will suffer.
I HOPE THAT THIS BOOK HAS BEEN USEFUL IN GETTING
YOU ON THE ROAD TO TRADING.
I recommend that you follow up this book with Master Trader (Penguin)
to develop a strategy and style to trade in all markets and then Lore of
the Global Trader (Penguin) to create an international portfolio.
As always, if you have problems understanding this book send me an
email to mentor@magliolo.com.
2012/10/19 8:37 AM
165
Appendices
BROKERAGE FEES AS @ JULY 2012
The following are examples and need to be discussed with individual

stockbrokers, who may have different pricing structures:
Clients with funds of more than R500 000 are able to negotiate
brokerage rates.
Brokerage rate of 0.4% is general, but in some instances may be
negotiated.
Costs
Shares
A main brokerage fee rate of 0.5% of trade

A R50 minimum applies
Excludes VAT and statutory taxes
Contracts for difference

(CFD)
A fixed brokerage fee of R50 is the norm, but

may differ according to brokers
A market-makers commission of 0.35% per
transaction.
Positions opened and closed daily incur a
reduced commission of 0.20%
Index futures
R12.50 per contract

Vat
Commodity futures
0.1% of the value of the underlying contract

Vat
Currency futures
A minimum fee of R50

A R15 fee per contract
Warrants and share

instalments
A flat brokerage rate of R50 per deal

Applies no matter how large your warrants deal
is
NO STT is charged on warrant trades
No additional monthly account maintenance fee
is charged provided your accounts are linked
to the same login
Clients need a warrants account to trade such
securities
Product
2012/10/19 8:37 AM
166
Single stock futures

(SSF)
A brokerage fee of 0.4% will be incurred per

transaction with a minimum of R50.
OTHER COSTS
14%
Securities Transfer Tax
0.25% on purchases
Investor Protection Levy
0.0002%
Strate
less than R200 000 @ R11.25

R200 000 to R1 million @ 0.005623%,
Greater than R1 million @ R56.23
VAT
STATUTORY FEES AND TAXES

Fee type
Costs
Internetplaced trades
Brokerage
A 0.5% flat rate

A minimum of R50
VAT
Securities
Transfer Tax
(STT)
0.25%
Applies to share purchases only
Strate
0.005459% (including VAT) based on the

value of the share transaction:
The minimum is R10.92 for trades with a
value up to R200 000
The maximum is R54.59 for trades with a
value over R1 million
This fee covers the electronic settlement of
your share transactions through Strate, the
electronic settlement authority
FSB Investor
Protection
Levy
0.0002% on all trades
Service
2012/10/19 8:37 AM
167
EXAMPLE: LOG BOOK
If you want to get the best possible results from trading, you need a business
plan to state how you will trade, when you will place orders and what you
will buy and sell.
This is, in the parlance, of trading, called a Trading Plan. Within this
Plan, a disciplined trader records all his or her trades.
This Trading Journal covers the following general issues:
How much you earn every week, month and year. Is this month better
than last month? Why?
Have you made a profit? Overall? On average?
The above enables you to assess trading efficiencies.
Have you kept the portfolio balanced and diversified?
Do you keep to the amount of trades set out in your Trading Plan? If
not, why?
Do you make more profitable trades than losing ones? What is your
average loss-to-profit ratio?
Do you keep track of your performance?
Do you assess whether your strategy does work?
When you make losses, do you assess why?
2012/10/19 8:37 AM
168
EXAMPLE: HOW TO ENTER YOUR TRADES

Many old school professionals prefer to have an actual paper log book.
Newer traders tend to have electronic forms of the journal.
So, the following should help you decide what you could enter into your
log book:
Explanation
Date of entry
Date and time of purchase
Share code
This is a three-letter code that represents the

companys listing
Name
Long name for company
Entry type
Did you go long or short?
Number of shares
Number of shares you bought
Price of shares
What did you pay for the number of shares?

What were the extra costs, i.e. Strate and
brokerage?
What was the total value of shares bought in rands?
What was the total value of share bought per share?
Exit price & date
When did you sell the security?

What time did you sell?
Reason
Why did you sell the security?
Price per share
What price did you sell the share for?
Profit or loss
Profit or loss you made

State this as a percentage
Reason for the

trade
Why did you buy that specific stock?
Entry
2012/10/19 8:37 AM
169
REFERENCES
Anuff, Joey and Gary Wolf: Dumb Monday: Adventures of a Day Trader.
New York: Random House, 2000.
Armen, A and Allan, WR: University Economics, 3rd ed., Wadsworth
Publishing Company, 1972.
Associated Press: World Currencies Roiled by China Currency Talk.
Peoples Daily Newspaper, May 11, 2005
Basso, Thomas: Panic-Proof Investing. John Wiley & Sons Inc, 1994
Bergen, K: New Opportunities, but Dangers Still Lurk for Many Investors.
Chicago Tribune, 1999.
Brett, M: How to Read the Financial Pages. Random House Business
Books, 2003.
Brigham, E: Essentials of Management Finance, 3rd ed. Chicago
Dryden Press, 1983.
Browne, Andrew: How a News Story, Translated Badly, Caused Trading
Panic. The Wall Street Journal, May 12, 2005, p. A1.
Buckman, R: These Days, Online Trading Can Become an Addiction. The
Wall Street Journal, 1999.
Cambridge University Economic Department: Ricardo, D, Principles of
Political Economy and Taxation. Cambridge University Press, 1962.
Carter, John: Mastering the Trade. McGraw-Hill, 2005
Costello, M: Day-Trading Gurus Tell All. CNNFN The Financial
Network, 1998.
Emshwiller, J: Inside the Wild & Wooly World of Internet Stock Trading.
HarperBusiness, 2000.
Farrell, Christopher A: Day Trade Online. John Wiley & Sons Inc, 2001
Gordon, M: Day-Trader Misled. The Detroit News, 1999.
Hamilton, W: The Day-Trading Craze: Whose Crisis is This? Los Angeles
Times, 1999.
Helmkamp, John: Principles of Accounting, John Wiley & Sons, 1982.
Hyuga, Takahiko: UBS to Return Money from Tokyo Trading Error.
Bloomberg News, International Herald Tribune, Thursday, December
15, 2005.
IMF Research Department: World Economic Outlook, IMF, 2010.
Jurik, M: Computerized Trading: Maximizing Day Trading and Overnight
Profits. USA: Penguin, 1999
2012/10/19 8:37 AM
170
Kahn, Michael: Technical Analysis Plain and Simple: Charting the

Markets in Your Language. 2nd Edition. Financial Times Prentice Hall,
2006.
Magliolo, J. Become Your Own Stockbroker. Penguin, 2012
Magliolo, J. Jungle Tactics: Global Research, Investment & Portfolio
Strategy. Heinemann, 2002
Magliolo, J. Share Analysis And Company Forecasting. Struik Zebra
Press, 1995.
Magliolo, J. The Millionaire Portfolio. Struik Zebra Press, 2002.
Millman, Gregory J: The Day Traders: The Untold Story of the Extreme
Investors and How They Changed Wall Street Forever. New York: Times
Business, 1999.
Moffett, Sebastian: Japanese Economic Growth May Not Translate to
Stocks. The Wall Street Journal, January 6, 2006, p. C14.
MoneyWeek: What Was Your Worst Day at Work? Not as Bad as This...
December 9, 2005.
Orley, MA, Jr: A Pedestrians Guide to Economics. Oklahoma State
University Press, 1994.
Owen, F: Understanding Exchange Rates. Federal Reserve Bank of
Cleveland, 1998.
Peters, E: Chaos and Order in the Capital Markets. John Wiley & Sons,
1992.
Peters, E: Fractal Market Analysis. John Wiley & Sons, 1994.
Richardson, P: Globalisation and Linkages: Macro-Structural Challenges
and Opportunities. OECD Economic Studies, 1997.
Robinson, G: Strategic Management Techniques. Butterworths, Canada,
1986.
Samuelson, Paul: Is Real-World Price a Tale Told by the Idiot of Chance?
Review of Economics and Statistics, 58(1), 1976, pp. 120-123.
Schwager, Jack: Market Wizards: Interviews with Top Traders.
HarperCollins Publishers, 1990
Sexton, D & Kasarda, J: The State of the Art of Entrepreneurship, KWSKent, 1992.
Silver, David: A Venture Capital: The Complete Guide for Investors.
John Wiley & Sons1985.
The Tokyo Stock Exchange: Japan Securities Clearing Corporation.
Settlement of Shares of J-Com Co., Ltd. December 12, 2005
The Tokyo Stock Exchange: Recent IPOs on Mothers 2005. March 7,
2006
2012/10/19 8:37 AM
171
The Tokyo Stock Exchange: Summary of Report on Service Improvements

and Report on the Overall System Inspection. January 31, 2006
Weiss, J: A Framework for Strategic Planning to Support Strategic
Management. Chase Manhattan Bank, 1980.
Young, Patrick. The New Capital Market Revolution. Texere, 2003
GLOSSARY
Acceptance date: Time limit given to a prospective shareholder to
accept an offer of shares in a rights issue.
Account: A trading period whose dates are fixed by the stock exchange
authorities.
Accounts payable: Bills that have to be paid as part of the normal
course of business.
Accounts receivable: Debt owed to your company from credit sales.
Aftermarket performance: A term typically referring to the difference
between a stocks offering price and its current market price.
Agent: Where a member acts on behalf of a client and has no personal
interest in the order.
AIM: The UK-based AltX version, called the Alternative Investment
Market.
All or nothing: Means the full order must be executed immediately or,
if it is not possible to do so, the order must be routed to the special
terms order book.
Allotment letter: Formal letter sent by a company to investors to
confirm that it will allocate them shares in a new issue.
AltX: The new Alternative Exchange launched in South Africa in
October 2003.
American depositary receipts (ADRs): Non-US companies who want
to list on a US exchange offer these. Rather than constituting an actual
share, ADRs represent a certain number of a companys regular shares.
Annuity: A contract sold to an individual by an insurance company that
is designed to provide payments to the holder at specified intervals,
generally after retirement.
Arbitrage: A purchase or sale by a member on his or her own account
of securities on one stock exchange, with the intent to sell or buy
those securities on another stock exchange, in order to profit from
the difference between the prices of those securities on such stock
exchanges.
Arbitrageur: Someone who practices arbitrage.
Asset allocation: The process of dividing investments into different
2012/10/19 8:37 AM
172
categories, such as stocks, bonds, cash and real estate.

Asset swap: A transaction which complies with all the requirements of
the South African Reserve Bank in respect of an asset swap.
Asset turnover: Sales divided by total assets. Important for comparison
over time and to other companies of the same industry.
At best: Orders to be transacted in a manner that will, in the discretion
of the member executing the order, achieve the best price for the client.
At market: An order to be transacted immediately against the best
opposite order in the order book at the time of making such entry.
At the close order: An order which is to be executed as close to the end
of the trading day as possible.
At the money option: An option with an exercise price equal to that of
the underlying security.
At the opening order: An order to buy or sell at a limited price on the
initial transaction of the day.
Authorised/issued share capital: While the authorised share capital is
the maximum number of shares a company is permitted to issue over
time, the issued share capital is the actual number of shares in issue.
Average: A select sampling of stocks used to reflect the basic trends
of the market or a specific portion of the market, for example, the All
Share Index. The average is derived by taking the sum of the market
value of the selected stocks and dividing that number by the number
of issues or by a divisor that allows for stock splits or other changes in
capitalisation.
Bad debts: An amount payable by debtors, which the firm determines is
irrecoverable.
Balance order: The pairing off of buy and sell orders of the same
security to determine the net balance of securities to receive or deliver.
This information allows the market to be opened appropriately.
Balance sheet: A statement that shows a companys financial position
on a particular date.
Bar chart: A chart used to plot stock movements using vertical bars to
indicate prices.
Bear sales: The sale of listed securities of which the seller is not the
owner at the date of sale.
Bear trend: When supply of shares outstrips demand and prices start
to fall. If this trend continues for a number of weeks, the general
sentiment becomes bearish and prices continue to fall.
Bearish: Used to voice an opinion in the belief that the stock market or
2012/10/19 8:37 AM
173
some aspect of it is going to decline in price.

Bid (buyers price): Offer to buy a number of securities at a certain
stated price.
Bid, not offered: When shares are sought, but none are available. The
opposite would be offered, not bid.
Big Blue: Nickname for the IBM Corporation. Derived from the colour
of their logo.
Big Board: Nickname for the New York Stock Exchange.
Black Monday: A name given to October 19, 1987, when the Dow Jones
Industrial Average dropped a record 508 points which represented a
decline of almost 23%.
Block: A large amount of securities bought or sold.
Blue chip stock: A stock that is from a well-known, stable, prestigious
company with a long and successful track record of profit growth and
dividend sharing.
Book value: The net amount of an asset shown in the books of a
company, i.e. the cost of purchasing a fixed asset less the depreciation
on that asset.
Bottom fishing: Investing in stocks whose prices have dropped
dramatically based on the belief that the stock has reached bottom and
will now rebound.
Breakout: Used to describe when a security rises above or falls below a
particular level, generally its previous high or low point.
Broker: The name given to a natural person recognised by the official
stock exchange. Institutions have, since 1995, been able to become
corporate members.
Brokerage: Commission charged by a member for the purchase or sale
of securities.
Brokers note: A note that a member is required to send to a client
recording the details of a purchase or sale of securities.
Bull market: A market where the dominating trend is one of rising
prices.
Bull trend: When demand for shares outstrips supply and prices start
to rise. If this trend continues for a number of weeks, the general
sentiment becomes bullish and prices continue to rise.
Bullish: Used to voice an opinion in the belief that the stock market or
some aspect of it is going to rise in price.
Buy stop order: A buy order that is not to be executed until the market
price reaches the customers defined price, known as the stop price.
2012/10/19 8:37 AM
174
When this occurs, it becomes a market order.

Buying power: The amount of additional securities that a customer may
purchase using the existing equity in his account.
Call option: A call option establishes the right to buy a specified
quantity of the underlying security at a specified price any time during
the duration of the option. You would buy a call option if you expect
prices to rise. In South Africa, these are called warrants.
Called away: Describes a stock option that was sold, because the stock
was at or above the strike price.
Capital expenditure: Spending on capital asset (also called plant and
equipment, or fixed asset).
Capital input: New money being invested in the business. New capital
will increase your cash, as well as the total amount of paid-in capital.
Capital structure: Usually refers to the structure of ordinary and
preference shares and long-term liabilities.
Capital: This is also known as total shares in issue, owners equity or
shareholders funds.
Cash flow: A statement that shows the net difference between cash
received and paid during the companys operating cycle.
Cash: The bank balance, or checking account balance, or real cash in
bills and coins.
Churning: When a broker processes excessive trades, regardless of the
clients best interest, in an attempt to maximise commissions.
Circuit breaker: When a halt to trading is implemented for one
hour by a major stock or commodity exchange when an index falls a
predetermined amount in a session. This is done to prevent further
losses.
Closing period: The last hour or two of trading before the stock market
closes at the end of the day.
Closing price: The last sale price or a higher bid or lower offer price for
a particular security.
Collection days: See collection period.
Collection period (days): The average number of days that pass
between delivering an invoice and receiving the money.
Commission percentage: An assumed percentage used to calculate
commissions expense as the product of this percentage multiplied by
gross margin.
Commission: The brokers charge a fee for buying and selling shares,
which is brokerage or commission earned on a deal.
2012/10/19 8:37 AM
175
Commodity futures: A contract to buy or sell a commodity at a specific

price and on a specific delivery date.
Common stock: A securities holding that affords the possessor to have
ownership in the company which provides benefits such as voting rights
and dividend sharing.
Consumer Price Index: An inflationary indicator that measures the
change in the cost of goods and service that the average consumer
purchases.
Convertible and redeemable preference shares: An alternative
mechanism to ordinary shares. It enables companies to issue other
shares, which can either be bought back from investors or converted
into ordinary shares at a later date.
Corporate finance transaction: A transaction that is entered into in
writing and requires public notification in the press in terms of the
listing requirements of the JSE.
CPI: Abbreviation for Consumer Price Index.
Creditors: People or companies that you owe money to. This is the old
name for accounts payable.
Crossed market: Where a bid price is higher than the offer price for a
security.
Cum or ex-dividend: After a company has declared a dividend, it would
close its books to start paying dividends. The share will be marked exdiv, which means that any new shareholder will be omitted from the
past years dividend payout. Before the company declares a dividend
payout, the share will be assumed to include possible dividends, or to
be cum-div.
Current assets: Those assets that can be quickly converted into cash,
including accounts receivable, stock and debtors book. These are often
called liquid assets.
Current debt: Short-term debt, short-term liabilities.
Current liabilities: A companys short-term debt, which must be paid
within the firms operating cycle, i.e. in less than one year.
Day order: A transaction order that is valid only for the day on which it
was entered.
Day trading: The practice of buying and selling a security on the same
day.
Dead Cat Bounce: A quick, moderate rise in the price of a stock
following a major decline.
Debentures: A bond that is not secured by fixed assets.
2012/10/19 8:37 AM
176
Debt and equity: The sum of liabilities and capital. This should always
be equal to total asset.
Debtors: People or companies that owe your company money. It is the
old name for accounts receivable.
Deep in the money option: A call option with a strike price that is
significantly below the market price or a put option with a strike price
that is significantly above the market price.
Delayed opening: An intentional delay in the start of trading in a stock
until a large imbalance in buy and sell orders is eliminated.
Deleted or delisted: A security that has been removed from public
trading.
Delta: The change in price of a call option in relation to the change in
price of the underlying security.
Depreciation: An accounting and tax concept used to estimate the loss
of value of assets over time. For example, cars depreciate with use.
Descending tops: A chart pattern where each new high price for a
security is lower than the previous high.
Dip: A small temporary drop in price during an overall upward trend.
Divergence in charting: When two charting lines are heading in
opposite directions, generally after a cross-over point.
Diversification: Investing in a wide variety of investments so as to
reduce overall risk.
Dividend yield: Ratio of the latest dividend to the cost or market price
of a security expressed as a percentage.
Dividends: Money distributed to the owners of a business as profits.
Double bottom: When a security has twice declined to its support level.
Double top: This technical assessment is formed when a stock advances
to a certain price level only to retreat from that level, and then rallies
again back to that level. The up moves are accompanied by high
volume, and the recession from the top comes on receding volume.
Dow Jones Averages: The most widely used averages to track overall
market conditions. There are four Dow Jones Averages: Industrial,
Transportation, Utilities, and Composite. The Composite is simply the
previous three combined.
Dow Theory: A theory which is based on the belief that the fluctuations
in the stock market are both a reflection of current business trends as
well as a predictor of future business trends.
Downtick: A transaction where the stock price is lower than the
previous transaction.
2012/10/19 8:37 AM
177
Earnings per share: Total earnings divided by the number of shares

outstanding.
Earnings yield: Ratio of net earnings per security to the market price
expressed as a percentage.
Earnings: Also called income or profits, earnings are the famous
bottom line: sales less costs of sales and expenses.
EBIT: Earnings before interest and taxes.
ECN: Electronic Communication Networks used by day traders and
institutions to post bids in the NASDAQ market.
Elliott Wave: A theory of price movement cycles identified by Ralph
Elliott. This theory claims that the stock markets follow a pattern of
five waves up and three waves down.
EPS: Abbreviation for Earnings per Share.
Equity: Business ownership; capital. Equity can be calculated as the
difference between assets and liabilities.
Ex-dividend date: The date at which the Ex-Dividend period begins.
Exercise date: The date when the sale or purchase of an option occurs
as agreed upon in the contract.
Exercise or expiration date: The date when the sale or purchase of an
option occurs as agreed upon in the contract.
Expiration date: The date on which an option becomes worthless if not
exercised.
Fair market value: A price that both the seller and buyer agree
represents a valid price based on current market conditions.
Fill or kill (FOK): The full order must be executed immediately or
otherwise cancelled.
Financial notes: Information explaining financial figures (balance
sheet, income statement and cash flow).
Fixed assets: Includes all fixed (immovable) assets, namely property,
vehicles, machinery and equipment. It cannot usually be converted into
cash within the firms operating cycle.
Flipping: This is when an investor has acquired an IPO at its offering
price and sells it immediately for a quick gain soon after it starts
trading on the open market. A practice discouraged by underwriters,
it can lead such investors to unfavourable relationships with their
underwriters with future IPOs.
Float: The number of shares of a common stock that are outstanding
and therefore available for trading by the public.
FOK order: Abbreviation for Fill or Kill Order.
2012/10/19 8:37 AM
178
Fundamental analysis: A method of determining a securitys value

based on the analysis of several factors, such as a companys earnings,
sales, assets and growth potential.
Futures: A contract which requires the delivery of a commodity at a
specific price on a particular date in the future.
Gap and trap: The price of stock gaps, buyers purchase the stock.
Market makers bring the stock price down, thus trapping the buyers
who bought at the higher gap price.
Gap: When the range of a stock price on two successive days does not
overlap.
Going concern: A company that is operating i.e. has not stopped
producing goods or providing a service, and one which has not been
placed under liquidation or curatorship.
Going public: When a private company first offers shares to the public.
Good till cancelled order (GTC): An order which remains valid until
executed or cancelled by the customer.
Goodwill: An intangible asset reflected in balance sheets, which
indicates an excess over market value for assets paid by the firm.
Gross margin percent: Gross margin divided by sales, displayed as a
percentage. Acceptable levels depend on the nature of the business.
Gross margin: Sales less cost of sales.
GTC order: Abbreviation for Good till Cancelled Order.
Hammering the market: Excessive sale of stocks which drives the
market down.
Head and shoulders: This technical pattern is typically characterised
by one intermediate top, followed by a second top higher than the
previous top and a third rally that fails to exceed the head.
Hedge: Taking an investment position in which some investments are
designed to offset the risk of others.
Hit the bid: Immediate sell to the current bid price.
Hit the offer: Immediate buy from the current ask price.
Immediate deal: A transaction in a listed security where settlement is
to take place the next business day.
In the money option: A call option where the strike price is less than
the market price or a put option where the strike price is greater than
the market price.
Income statement: A statement showing net income or loss for a
specified period.
Index fund: A mutual fund that tries to mirror the performance of a
2012/10/19 8:37 AM
179
specific index.
Index: A select sampling of stocks used to reflect the basic trends of
the market. Indexes are derived from a broader number of stocks than
Averages.
Indicator: Statistics which provide an indication of the trends of the
financial world or the economy in general.
Initial public offering: The first issue and sale of stock by a company to
the public.
Insider: A person who is privy to corporate information that is not
available to the general public.
Institution: A large organisation which is in the business of investing in
securities.
Institutional investors: An entity with a considerable amount of money
to invest.
Interest expense: Interest is paid on debts, and interest expense is
deducted from profit as expenses.
Intraday: Within a single day.
Intrinsic value: The amount of money that an option is worth if it was
exercised.
Inventory turnover: Sales divided by inventory. Usually calculated
using the average inventory over an accounting period, not an endinginventory value.
Inventory turns: Inventory turnover (see Inventory turnover).
Inventory: This is another name for stock. Goods in stock, either
finished goods or materials to be used to manufacture goods.
Investment banker: An individual or institution which provides
services, such as underwriting and counselling, but does not accept
deposits or make loans.
IPO: Abbreviation for Initial Public Offering.
Jobbers: These are the markets share merchants. They deal only
with brokers and other jobbers (i.e. not with dealers), and their main
function is to maintain a market by quoting a price.
Last sale: The most recent stock trade.
Letter of acceptance: The investor may receive such a letter if the
company accepts his or her application for shares.
Leveraged buyout: Taking over a controlling interest in a company,
using primarily borrowed money.
Liabilities: Debts; money that must be paid. Usually debt on terms of
less than five years is called short-term liabilities and debt for longer
2012/10/19 8:37 AM
180
than five years, long-term liabilities.

Limit order: An order that may only be affected at prices equal to or
better than the price on the order.
Limit price: The price specified in a limit order.
Liquidity: A companys ability to pay short-term debt with short-term
assets.
Listed stock: A stock that is traded on a major exchange.
Listing: Official granting of a listing of a companys shares on the JSE.
Local counterparty transaction: A transaction where a member trades
as a principal with a person in South Africa other than a member.
Locked market: A highly competitive market in which the bids and
prices are the same.
Lockup period: A period of time when a company first goes public
during which major shareholders are prevented from selling their
shares.
Long position: When the stock owner waits for a price move in order
to sell at a higher price.
Long-term assets: Assets such as plant and equipment that are
depreciated over terms of more than five years, and are also likely to
last that long.
Long-term interest rate: The interest rate charged on long-term debt.
This is usually higher than the rate on short-term debt.
Long-term liabilities: This is the same as long-term loans. Most
companies call a debt long term when it is on terms of five years or
more.
MA: Moving Average.
Margin call: A call from the brokerage to the customer requesting that
the customer deposit additional funds into their account in order to
return the balance to its required level.
Margin: The amount of money that a customer must deposit with a
broker to secure a loan from that broker. In the case of futures, the
amount of money that must be deposited to protect the buyer and
seller from default.
Market capitalisation: Used to denote a companys size, and is
calculated by multiplying a companys issued share capital by its current
share price.
Market indicators: Statistics that give an overall picture of how the
market is performing.
Market maker spread: The difference between prices of the market
2012/10/19 8:37 AM
181
maker closest to the Inside Bid and the market maker closest to the
Inside Ask, excluding ECNs.
Market maker: A member who negotiates dealings in blocks of
securities.
Market makers: A brokerage or bank that maintains a bid and ask
price in a given common stock by always being available to buy or sell
at publicly quoted prices.
Market on close order: An order to buy or sell that is to be executed
during the closing period of the market at the best price available.
Market on the open order: An order to buy or sell that is to be
executed during the opening period of the market at the best price
available.
Market order: An order to buy or sell stock at the markets current
price.
Market value: The latest trading price.
Marketable securities tax (MST): The tax imposed in terms of the
Marketable Securities Act of 1948 in respect of every purchase of
marketable securities through the agency of or from a member at
the rate of 0.25% of the consideration for which the securities are
purchased.
Materials: Included in the cost of sales. These are not just any
materials, but materials involved in the assembly or manufacturing of
goods for sale.
Midday period: The hours between 11:30 am and 1:30 pm for any
trading day. Trade during this time generally slows down as people
break for lunch.
Momentum trading: Short- to moderate-length investments that are
made to capitalise on the sudden rise or drop in a stock price that
follows certain technical indicators.
Monopoly: When one company controls and dominates a particular
market sector or product.
Most active: Stocks with the days highest trading volume.
NASD: National Association of Securities Dealers, an organisation
responsible for regulating the Nasdaq stock market.
NASDAQ: Abbreviation for National Association of Securities Dealers
Automated Quotations.
Net cash flow: This is the projected change in cash position, an increase
or decrease in cash balance.
Net profit: The operating income less taxes and interest. The same as
2012/10/19 8:37 AM
182
earnings, or net income.

Net worth: This is the same as assets minus liabilities, and the same as
total equity.
NYSE Composite Index: An index that measures the market value of
all NYSE traded stocks.
NYSE: The New York Stock Exchange where stocks are traded in an
open-floor market.
Odd lot: Any quantity of securities that is less than a round lot
(krugerrands do not have odd lots).
Offer (sellers price): Price at which a dealer is prepared to sell
securities on the market.
Offering price: This is the price set by the sponsor, at which the
companys stock is sold to the first round of investors.
Offering range: This is the price range in which the company expects to
sell its stock. This can be found on the front page of the prospectus. As
with everything traded, market conditions and demand dictate the final
offering price.
Oligopoly: When a few companies control and dominate a particular
market.
Open interest: The number of contracts outstanding at the end of the
trading day.
Open order: An order which remains valid until executed or cancelled
by the customer.
Opening price: This is the initial trading price of the companys stock
on its first day of trading.
Order: An instruction to buy or sell a specified quantity of a security.
Ordinary shares: Commercial paper issued to investors to raise capital.
Investors hold these shares as part owners in the firm.
OTC: Abbreviation for Over the Counter.
Other short-term assets: These are securities and business equipment.
Other ST liabilities: These are short-term debts that dont cause
interest expenses. For example, they might be loans from founders or
accrued taxes (taxes owed, already incurred, but not yet paid).
Out of the money: A call option where the strike price is greater than
the market price or a put option where the strike price is less than the
market price.
Overheads: Running expenses not directly associated with specific
goods or services sold, but with the general running of the business.
Over-the-counter market (OTC): A market made up of dealers who
2012/10/19 8:37 AM
183
make a market for those securities not listed on an exchange. The

over-the-counter market is made between buyers and sellers over the
telephone, rather than the electronic market found on the JSE.
Paid-in capital: Real money paid into the company as investments. This
is not to be confused with par value of stock, or market value of stock.
This is actual money paid into the company as equity investments by
owners.
Paper profit: A surplus income over expense, which has not yet been
released, i.e. share prices that have increased above the price at which
they were bought, but have not yet been sold.
Paper trade: Trading stocks for pretend with no real money, to practise
or test theories.
Par value: The nominal value of a share. It is an arbitrary amount
placed on the share by the company.
Partial fill: An order that has been implemented for only part of the
requested share size.
Payment days: The average number of days that passes between
receiving an invoice and paying it.
Payroll burden: Payroll burden includes payroll taxes and benefits. It is
calculated using a percentage assumption that is applied to payroll. For
example, if payroll is R1 000 and the burden rate 10 percent, and then
the burden is an extra R100. Acceptable payroll burden rates vary by
market, by industry and by company.
PE ratio: Abbreviation for price-earnings ratio.
Penny stocks: Low priced, high-risk stocks, usually with a price of less
than a dollar per share.
Point and figure chart: A chart which shows price movements of a
security, without measuring the passage of time.
Poison pill: Any action taken by a company designed to avoid a hostile
takeover. For example, issuing preferred stock that can be redeemed at
a premium if a takeover does occur.
Portfolio: A schedule, normally computer-generated, listing the
relevant details in respect of the securities held by an investor.
Preferred stock: A stock holding which provides a specific dividend that
is paid before any dividends are paid to common stock holders. In the
event of liquidation, their rights come before common stock holders,
but after other holders, such as bond and debt.
Previous close: The last reported price from the previous trading day.
Prints: A price and size report of actual trades in real-time.
2012/10/19 8:37 AM
184
Price-earnings ratio: The market price of securities divided by its

earnings. It expresses the number of years earnings (at the current
rate) that a buyer is prepared to pay for a security.
Primary market: Where shares are distributed at the offering price to
investors.
Principal transaction: A member trades with a counterparty or another
member.
Principals: The major investors in a corporation. They, generally, have
equity interest, voting privileges, access to management records as well
as receiving dividends.
Private placement: An offering of a limited amount of shares or units,
in which the recipients receive restricted stock from the issuer.
Product development: Expenses incurred in development of new
products: salaries, laboratory equipment, test equipment, prototypes,
research and development, etc.
Profit before interest and taxes: This is also called EBIT, for earnings
before interest and taxes. It is gross margin minus operating expenses.
Profit taking: Action by short-term securities traders to cash in on
gains created by a sharp market rise. This results in a temporary drop
in market prices.
Program trading: A computerised trading system that allows for largevolume securities trading.
Prospectus: This document is an integral part of a documentation
that must be filed with the JSE. It defines, among many things, the
companys type of business, use of proceeds, competitive landscape,
financial information, risk factors, strategy for future growth, and lists
its directors and executive officers.
Proxy: A person who is authorised to represent another person. For
example, a person who is authorised to vote on behalf of another
stockholder at a stockholders meeting.
Rally: A substantial rise in the price level of the overall market,
following a decline.
Range: The difference between the highest and lowest prices that are
traded during a specific given time frame.
Real time trade reporting: When all transactions are instantly
requested.
Receivable turnover: Sales on credit for an accounting period divided
by the average accounts receivable balance.
Registration: A new shareholder is registered when his or her name is
2012/10/19 8:37 AM
185
placed on the role of shareholders for that specific company.

Renunciation date: The company sets a date by which the shareholder
has to decide whether he or she will take up the rights issue.
Resistance: Inability of a stock to rise above a certain price. This is
generally due to an abundance of stock being available at that price.
Retained earnings: A figure that shows the sum of a companys net
profit less dividends paid to shareholders.
Return on assets: Net profit divided by total assets. A measure of
profitability.
Return on investment: Net profits divided by net worth or total equity,
yet another measure of profitability. Also called ROI.
Return on sales: Net profits divided by sales, another measure of
profitability.
Reversal: When the overall market changes direction after a trend in
the other direction has occurred.
Reverse head and shoulders: This is the same pattern as a head and
shoulders, except that it has turned upside down and indicates a trend
change from down to up. A buy signal is given when prices carry up
through the neckline.
Rights issues: There are a number of methods that a company can use
to increase the size of its share capital. If it decides to offer its existing
shareholders first option on the issue, it is called a rights issue. The
dealers would note that such an issue is in progress, as it would be
quoted as cum-capitalisation, and after completion of the issue it would
be noted as ex-capitalisation.
ROI: Return on investment; net profits dividend by net worth or total
equity, yet another measure of profitability.
Rolling option: Buying options on a stock that shows a consistent
pattern of travelling up and down between two levels.
Round lot: The standard unit of trade in all equities: 100 shares.
Round trip: The completion of a transaction, which includes both entry
into the market and exit.
Rounding bottom: A chart pattern in the shape of a saucer, suggesting
a new trend upward.
Rounding top: A chart pattern in the shape of an inverted saucer,
suggesting a new trend downward.
S&P 500: The Standard & Poor index that represents the top 500 valuemeasured companies.
Scrape value: An amount left after an asset has been fully depreciated,
2012/10/19 8:37 AM
186
i.e. if an asset of R115 is depreciated by R10 per month over 11

months, the scrape value would be R5.
SEC: Abbreviation for Securities and Exchange Commission (the USA
official stock exchange body).
Secondary market: Better known as the stock market, where shares are
openly traded.
Securities: Includes stocks, shares, debentures (issued by a company
having a share capital), notes, units of stock issued in place of shares,
options on stocks or shares or on such debentures, notes or units, and
rights thereto, and options on indices of information as issued by a
stock exchange on prices of any of the aforementioned instruments.
Sell-stop order: A sell order which is not to be executed until the
market price reaches the customers defined price, known as the stop
price. When this occurs, it becomes a market order.
Selling off: Selling securities to prevent losses from continued price
declines.
Selling on the good news: Selling a stock right after good news has
driven the price very high.
Settlement: Procedure for brokers to close off their books on a
particular transaction. The client is expected to pay for his or her new
shares on or before the settlement date and he or she, in turn, can
expect to be paid (on selling shares) within the same period (also called
the settlement period).
Short Interest: The total number of shares of a security that have been
sold short and not yet repurchased.
Short position: The position that results from short selling that has not
yet been covered. Often defined in terms of the number of stocks that
are sold short.
Short sale: Borrowing a security from a broker and selling it, with the
understanding that it must later be bought back and returned to the
broker.
Short term: Normally used to distinguish between short term and long
term when referring to assets or liabilities. Definitions vary because
different companies and accountants handle this in different ways.
Accounts payable is always short-term assets. Most companies call
any debt of less than five-year terms, short-term debt. Assets that
depreciate over more than five years (e.g. plant and equipment) are
usually long-term assets.
Short-term assets: Cash, securities, bank accounts, accounts receivable,
2012/10/19 8:37 AM
187
inventory, business equipment, assets that last less than five years or
are depreciated over terms of less than five years.
Short-term gain: A capital gain on an investment which was held for
less than six months.
Short-term notes: This is the same as short-term loans. These are debts
on terms of five years or less.
Slippage: The difference in price from when an order is placed to when
it is actually carried out.
Specialist: A stock exchange member who specialises in particular
securities. The specialist must maintain an inventory of those securities
and be available to buy and sell shares as necessary to equalise trends
and provide an orderly market for those securities.
Splitting of shares: Sometimes a share could become too expensive for
the private investor, at which time the company may decide to split or
subdivide the shares into smaller denominations. The aim is often to
make the shares more tradable and, at times, this increases the share
price on positive sentiment.
Spread: The differential between a bid and an offer price.
Stag: An investor who buys shares in a pre-listing or rights offer with
the intention of selling those shares at a profit as soon as trading starts.
Standard deviation: A statistical measure of the volatility of a mutual
fund or portfolio.
Starting year: A term to denote the year that a company started
operations.
Stock Exchanges Control Act of 1985 (as amended): An Act of
Parliament in terms of which stock exchanges in South Africa are
governed. The Financial Services Board administers the Act.
Stocks: A certificate that signifies an ownership position in a company.
Stop limit order: An order to buy or sell which is not to be executed
until the market price reaches the customers defined price, known as
the stop price. When this occurs, it becomes a limit order.
Stop-loss order: A sell-stop order for which the specified price is below
the current market price. Done to prevent further losses or to lock in
profits.
Stop order: A buy or sell order which is not to be executed until the
market price reaches the customers defined price, known as the stop
price. When this occurs, it becomes a market order.
Straddle: The simultaneous purchase of an equal number of puts and
calls, with the same strike price and expiration dates.
2012/10/19 8:37 AM
188
Strike price: The specified price at which a call option buyer can buy
the underlying security or a put option buyer can sell the underlying
security.
Subsidiary: A company in which a majority of the voting shares are
owned by another company.
Support: Over time, a stock tends to become attractive to investors at
specific prices. When a stock starts to decline to one of these prices,
investors tend to come in and purchase the stock, thereby halting its
decline. When buyers outnumber sellers, the price of the stock tends to
go up. This point at which buyers enter the market is called support.
Surprise: The price difference between what a trader expects to earn
and what they actually earn.
Switch order: An order to sell one security and buy another. Generally,
the proceeds from the sale of the first security are used to finance the
purchase of the second.
Tax rate percent: An assumed percentage applied against pre-tax
income to determine taxes.
Taxes incurred: Taxes owed but not yet paid.
Technical analysis: Analysing previous market trends and stock prices
in the belief that done properly it can be an indicator of future trends.
Tender offer: A public invitation to stock holders to sell their stock,
generally, at a price above the market price. This is done primarily in
relation to a takeover.
Tick size: The specified parameter or its multiple by which the price of
a security may vary when trading at a different price from the last price,
whether the movement is up or down from the last price.
Ticker symbol: A system of letters used to uniquely identify a stock.
Time of sales: The actual time and price of transactions as they occur.
This information is present on a Level II screen.
Time value: The difference between an options intrinsic value and the
current market price, the hope being that the intrinsic value over time
will go above the market value.
Trading halt: An interim stop on the trading of a particular stock
because of news that might affect either the price of stock, the flow of
orders, or even regulatory rule violations.
Trailing stops: A stop-loss order that is to be executed when a stock
being followed up, dips down below a specified amount or when a stock
being followed down, goes up above a specified amount.
Triple bottom: A chart pattern that shows that a stock has attempted to
2012/10/19 8:37 AM
189
penetrate a lower price level on three different occasions.

Two-sided market: The NASD and NASDAQ requirement that
appropriate bids and offers are made on each security.
Underwriter: An individual or institution which acts as a middleman
between corporations issuing securities and the investing public.
Unit variable cost: The specific labour and materials associated with a
single unit of goods sold. Does not include general overhead.
Units break-even: The unit sales volume at which the fixed and variable
costs are exactly equal to sales.
Uptick: A transaction where the stock price is higher than the previous
transaction.
Volume: The number of shares traded during a defined period.
White Knight: An investor who prevents a hostile takeover by taking
over the target company himself.
2012/10/19 8:37 AM

tmp5015 TMP

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

tmp5015 TMP

Uploaded by

Copyright:

Available Formats

BUFFETT

Bestselling author and stockbroker extraordinaire Jacques Magliolo

RICHER THAN BUFFETT

FULLY REVISED AND UPDATED

By The Same Author

Published by the Penguin Group

Bull markets are born on pessimism, grow on scepticism, mature

To my brothers Thierry and Phillip

trade Single Stock Futures, Shares or Warrants, preparation begins with

importance of experience, both in extracting extra value from trading ideas

Preface: Warren Buffett & Mentoring

not suggesting that you do this. I am simply saying that, to be a day or

Buffetts philosophy on business investing is based on the value-investing

Chapter 1: Psychology & the Traders Mental

Be aware of two equally devastating kinds of fear:

This is simple common scene.

Rate your answers: Be honest

I am always right when I

Long trends tend to

You have too many negative perceptions

You are more

If you insist on being a trader, rather look

The profile suggests that you are

If you really want to be a trader, you will

You may need to work on analysis and

You are too

Professional traders have eliminated risk from their

Novice traders dont have to understand risk

Novice traders need to be egoists to enable them to

Every trader must have a fail-safe method of trading,

Always let profits run and cut losses

Novice traders should have multiple trades in the

To become professional in the trading arena, you

The only motivation for becoming a trader is to make

When you make a loss, you should immediately place

Professional traders always use a combination of

Losing trades should be a learning experience

Why is this story so important?

Trading with stop losses is a waste of time

Stop losses reduce your chances of making a profit

Traders can make profit on all trades

Even professional traders struggle to exit a losing trade

Can you handle becoming rich?

When you make a profit, reward

When you make a profit,

If you are making consistent

PSYCHOLOGY LESSONS: LEARNT FROM DAY TRADERS

Chapter 2: The Road to Ultra-Wealth

Short-term traders, who only concentrate on the what (what to buy)

Youre ready to trade but how do you start?

Professional traders know WHY they entered the

The act of writing down goals (short, medium and

To be successful, you need more knowledge.

Too many advisors will tell you to buy property before

If you are not serious enough to be persistent, consistent

Your planning must be organised. Success only comes

Once analysis has been conducted, dont hesitate. Take

All financial plans should be reviewed twice annually.

WHAT are your

News provides a significant number of opportunities for day traders to

South African Futures

JSE Securities Exchange

South African Bond