Newbie Lessons - All your questions answered

[johenmo]

Nowadays it's all much more advanced. The paper system has been replaced with CHESS (Clearing House Electronic Subregister System) and transactions are handled electronically, no physical delivery of stock certificates needs to occur, the buyer and seller are represented by merely an order in a computer system.

SRN - Stands for Security Holder Reference Number and is a unique 10 digit number that starts with an I - (yes I know on your statements it looks like a 1 - trust me - it's an I) to designate an ISSUER Sponsored Security. EG I0001428793. If you have issuer sponsored stock it means your stock is not sponsored by a broker and is held on the ISSUER Sponsored Subregister. For each stock you have - you will have a different SRN.

HIN - Stands for Holder Identification Number and indicates your stock is held by a broker and is held on the CHESS subregister. Your HIN number will be the same across all stocks that you hold with that broker.

When a Transaction occurs CHESS will transmit the data to the registry - who will then issue you with a HOLDING STATEMENT - which merely indicates your holding in a company.
Sir O

Great thread sir O. This is yr post #43. I understand the above. What happens if you use a broker like IB or trade in US shares? CHESS doesn't apply. How does that work?

Tks

 

[Uncertain Times]

Great post.

Further discussion on FA and TA would be great to read. The way I see it is that as long as the information is correct and you believe the accountant telling the story FA is the way to go. However it has its limitations as has been proven in the last twelve months with profit downgrades, profit warnings, assets overvalued, misleading or hidden numbers. I realise that annual reports are signed off by CPA's but things can be hidden.
TA seems like watching the baccarat players at the casino using their scorecard to follow the run or betting against it. You will have good days and bad days but the only people making money consistently will be your broker. Just like the casino taking 5% or just betting against you.

I realise I am very much a newbie to all of this but at the moment the balance as always seems to be somewhere in the middle. You need to be able to understand the FA and follow the TA to make money or stop you from losing to much.

 

[Julia]

Great post.

Further discussion on FA and TA would be great to read. The way I see it is that as long as the information is correct and you believe the accountant telling the story FA is the way to go.

Might be good not to limit yourself to such a conclusion just yet.

A company can have a great fundamentals and still not appeal to market sentiment. Market sentiment is what will make the share price rise or fall.

In another thread Tyson suggests that BBI 's savaging has probably been at least in part because of the negative sentiment of Babcock and Brown Ltd.
Undoubtedly true. He also points out that BBI still has some good assets. True also. But as long as there is a widespread belief that BBI is a dog, its share price will reflect that.

 

[Mr J]

Great post.
TA seems like watching the baccarat players at the casino using their scorecard to follow the run or betting against it. You will have good days and bad days but the only people making money consistently will be your broker. Just like the casino taking 5% or just betting against you.

I realise I am very much a newbie to all of this but at the moment the balance as always seems to be somewhere in the middle. You need to be able to understand the FA and follow the TA to make money or stop you from losing to much.

People who write off TA don't understand its use. Economists are generally not traders, so take their opinions on trading with a grain of salt. It's argued by many that TA is simply the flawed idea of studying the past and using it to try and predict the future. The problem with the criticism there is that history does repeat itself. Human behaviour is largely predictable and forms patterns. Technical analysis is the study of the behaviour of price. The price doesn't move at random, it moves for a reason, and a chart basically tells a story. As capturing movement in price is how a trader profits, knowing how and why the price moves is quite important.

One common criticism of technical analysis is the hypothesis of the efficient market. This is a load of rubbish, as everyone is doing their own thing in the market. Many different actions are being taken for many different reasons, causing the price to fluctuate. The value of a company surely doesn't fluctuate so precisely and quickly, so the logical conclusion is that all of this shorterm movement is noise, and therefore inefficient.

Technical analysis and systems to exploit the results of that analysis with consistent results takes years to accomplish

I don't believe so. I believe it's reasonably simple, and a matter of just getting your mind in tune with it. The time taken to have competent knowledge will vary greatly, but the same goes for any activity. The most pure technicians also don't use systems, they use price action alone, and this is highly discretionary.

The ultimate aim of Technical Analysis is to accurately predict the movement of a share price based solely upon the price and volume data that has already happened.

There can be no informed prediction (predicting probabilities of the outcome, not the outcome itself) if there is no knowledge of the past. The past must be studied to identify relationships that are significant.

If someone finds a consistent and predictable way to use analysis (either technical or fundamental) the moment that the market becomes widely aware of this methodology, system or indicator, it will be incorporated by the market and the advantage will disappear.

I don't believe that is true. The market uses many different ways to aim to profit, and many discard and ignore many of those methods. Many participants will not consider a certain strategy because it is not logical to them.

Also consider that action takes place on many different timescales and different timescales need moves of various sizes. The larger the participant, the larger the move they need and the greater their inefficiency. A move and timeframe that isn't worthwhile for one can be worthwhile for another. Much of the market isn't competing against each other, but competing against a very specific group in that market. For example, as a small independent trader I will never be threatened by institutions. I can make a great living off of the crumbs they leave on the table.

It will also not certainly be incorporated into the market and disappear. Many methods, often the most simple, have existed and been profitable for decades.

In all likelihood in my opinion since we are dealing with complex chaotic system analysis, no one will ever find a methodology or indicator that will get it right every time.

It's both simple and chaotic, it's just a matter of perspective. We're not trying to be right every time, we're just looking for methodology that works over time.

not because I want to discourage you from using technical analysis but because I want to express how difficult it is to achieve a consistent and profitable system

Like any other activity, people learn at different rates and have varying levels of success. It may be tough for some, but easy for others. It's a matter of perspective.

 

[Uncertain Times]

Julia - I think you missed my "however". There are limitations to just focusing on the FA that being do you actually trust what is being said by the company and that is where market sentiment comes into it. If the story teller is leading people on sooner or later it will be discovered and then the TA will show that in that sellers are exiting.
--
The thing I am trying to understand is what limitations does either side have so that I can be more aware of what to look out for. My casino example is not a great one and perhaps was a little simplistic in view. Yet when I read about all the different charting methods and the "names" that different patterns create I am reminded of the baccarat players who have done nothing but fill Crown's coffers over the years.
--

 

[Mr J]

Forget the name, the fact that is a pattern etc. Think "why does this formation develop?". Life consists of routine, and the market is no different. Patterns don't always work, they're really just a signal of what may be happening. Also consider that we have to pick points, that humans as a whole think alike, that we like reasoning and order. Much of this is self-fulfilling, but that doesn't make it any less true.

Patterns shouldn't be blindly traded and I don't pay much attention to them at all. You really need to understand why that pattern/action may be occuring.

As for the casino analogy, games in casino's are independent events (except for card counting with decent penetration, but that's an exception). One hand/spin doesn't impact another, so the patterns are quite pointless. However, all movements are connected in a market. Trades are made for many different reasons, but they're all connected as they participate in the same market.

Technical analysis (I don't like that term) is simply the study of price movement. Since trades are placed with reason (no matter how poor the reasoning), movement cannot be random. It can seem random, but it is not.

 

[Sir Osisofliver]

Hi All - I had this nice long reply written...and then my computer crashed. Here it is in brief..

1) I've got three months worth of work to do in four weeks...don't expect new lessons until I get more than four hours sleep a night.
2) Tech/A - I don't think anyone has cracked it yet - I like some of the work I've seen from Mandlebrot on this issue but think that it needs experience and an awareness of cycles in our market to protect against these events.
3)Johnemo - It varies - check ASX worldlink and with your broker as to what the arrangements are.
4) Mr J - I don't believe in EMH either - but I'm not quite ready to label the work of Nobel Prize winning Academics as "a load of rubbish" and felt that the newbs should know about it. After all it does work most of the time, just not ALL of the time. As for the pace of learning, my experience tells me that MOST people find this sort of stuff daunting and confusing - maybe you're just smarter than the average bear.

Feel free to talk amongst yourselves for now class..and no throwing paper planes whilst I'm gone.

Cheers

Sir O

 

[kincella]

my 2 cents worth to newbies..

read these 3 books....in this order
first 'A fortunate life' by A.B. Facey..

2nd 'the 7 habits of highly effective people' by stephen covey,
3rd '36 strategies of the chinese for financial traders'....by darryl guppy..............................................................................
Born in 1894, Facey lived the rough frontier life of a sheep farmer, survived the gore of Gallipoli, raised a family through the Depression and spent sixty years with his beloved wife, Evelyn. Despite enduring hardships we can barely imagine today, Facey always saw his life as a 'fortunate' one.
......................................................................................


http://shop.abc.net.au/browse/product.asp?productid=513141

 

[Mr J]

I don't believe in EMH either - but I'm not quite ready to label the work of Nobel Prize winning Academics as "a load of rubbish" and felt that the newbs should know about it.

It's a blunt and arrogant statement coming from a wannabe trader, but I don't consider it any more so than an economist stating that the markets are perfectly efficient. Anyone who suggests that cannot possibly be familiar with the market, and the logic is just absurd. Even intelligent people can be foolish, so I don't have any trouble challenging the opinion of someone who would be held in much higher regard than myself .

As for the pace of learning, my experience tells me that MOST people find this sort of stuff daunting and confusing - maybe you're just smarter than the average bear.

Sure, but I think it's more about frame of mind than the "knowledge". It's easy to learn, but it's hard to change how one thinks. I believe trading and similar activities are suited to a certain thought-process that is usually only gained with experience. As for me, I might be being defensive since I've had top become a profitable trader within a month or two, and I'd like to believe I have and that it won't actually take six months or a few years .

 

[Sir Osisofliver]

It's a blunt and arrogant statement coming from a wannabe trader, but I don't consider it any more so than an economist stating that the markets are perfectly efficient. Anyone who suggests that cannot possibly be familiar with the market, and the logic is just absurd. Even intelligent people can be foolish, so I don't have any trouble challenging the opinion of someone who would be held in much higher regard than myself .

But the academics don't say 'perfectly efficient" - they say weak or strong efficiencies. Shades of grey - with some perceived perfectly efficient market up one end, and a perceived highly inefficient market at the other end with reality falling somewhere in between in weak or strong forms.

During outlying probabilistic events (EG market corrections) EMH tends to be less meaningful because all stocks exhibit some degree of correlation with each other (even if they normally would not) due primarily to market sentiment and other factors affecting the market as a whole. Despite this weakness (which as I've said before is due to the incorrect use of Variance and Standard Deviation as a proxy for risk) the central lessons of EMH and modern portfolio theory - that we diversify a portfolio to lower the overall risk, that we use borrowings to increase our level of return etc etc still hold up as activities that are beneficial - especially during times that are NOT outlying probabilistic events. Remember it does work - most of the time - which is why it's still taught and used widely in the industry.

Sure, but I think it's more about frame of mind than the "knowledge". It's easy to learn, but it's hard to change how one thinks. I believe trading and similar activities are suited to a certain thought-process that is usually only gained with experience. As for me, I might be being defensive since I've had top become a profitable trader within a month or two, and I'd like to believe I have and that it won't actually take six months or a few years .

You've only been trading for two months? Um okay well I don't want to sound patronising but I don't think a couple of months counts as "Consistant" yet. I've been investing and trading for a while now...and I'm still learning - I don't think I'll ever be done.

Cheers

Sir O

 

[Basilica]

Risk Management Techniques and Optimisation. (Part 1)

I'm going to try and keep this pretty simplistic - This IS a newbie thread after all.

Ok so Bank secret number 2 told you one of the ways in which banks make money from you. By using the security value of your assets and lending against those assets (and keeping a small reserve).

If you look at the example I gave you above where you go to the bank with $1M property for a $100,000 loan. They would then on-lend about $812,000 (even though the maximum capacity for them to on-lend is....$900,000). They reserve the remaining security.

Hi Sir O, You should be knighted for your contribution to newbees like me.
Then we could call you Sir Sir O

It is going back a few pages but i think i have lost the plot.
Customer A provides $1 million security to borrow $100,000
Lets say Customer B and C borrow $406,000 each with no security. (the $812,000)
If Customer B and C default the security Customer A provided will not help the bank???? Or does that mean if the liquidator takes over Customer A will loose the full $1 million security?

Cheers,
Basilica

 

[Sir Osisofliver]

Hi Sir O, You should be knighted for your contribution to newbees like me.
Then we could call you Sir Sir O

It is going back a few pages but i think i have lost the plot.
Customer A provides $1 million security to borrow $100,000

Yup with you so far

Lets say Customer B and C borrow $406,000 each with no security. (the $812,000)

Whoa stop there...which bank lends out $812,000 with no security? Ok aside from American Banks to unemployed people to buy houses and inflate the propery market...causing economic downturns, credit crisis and toxic debt? Ahem - anyhow there are very few banks that will lend money out unsecured, if they do lend it unsecured it's generally it's done via credit cards where they get extremely high interest rates.

If Customer B and C default the security Customer A provided will not help the bank???? Or does that mean if the liquidator takes over Customer A will loose the full $1 million security?

Cheers,
Basilica

Banks also have more than 3 customers, so it's only when a AGGREGATE level of customers default on their loans that banks get into trouble. They have this slush fund that they use to cover shortfalls in the interum.

Hope that ends your confusion.

Cheers

Sir O

 

[Basilica]

Yup with you so far
Whoa stop there...which bank lends out $812,000 with no security? Ok aside from American Banks to unemployed people to buy houses and inflate the propery market...causing economic downturns, credit crisis and toxic debt? Ahem - anyhow there are very few banks that will lend money out unsecured, if they do lend it unsecured it's generally it's done via credit cards where they get extremely high interest rates.


Banks also have more than 3 customers, so it's only when a AGGREGATE level of customers default on their loans that banks get into trouble. They have this slush fund that they use to cover shortfalls in the interum.

Hope that ends your confusion.

Cheers

Sir O

Yes that does help. So the bank can only ever use the million security for the 100k loan. Would a liquidator have access to the full million in a wind up of the company?

Cheers

 

[Kez180]

Yes that does help. So the bank can only ever use the million security for the 100k loan. Would a liquidator have access to the full million in a wind up of the company?

Cheers

The bank can only take the $1mill security property if the $100,000 loan is defaulted on....

EDIT: and even then in Australia they have to give $900,000 back...

Not so in the UK and USA....

EDIT EDIT: Sorry for jumping in Sir O!

 

[Mr J]

Sir Osisofliver:

Efficiency is subjective anyway. It can be measured, but as always it's a matter of perspective. An academic might label a market as quite efficient, while a shorterm trader might see as inefficient. The participants obviously make the market, but they are also what makes a market more efficient. I think how efficient a market is viewed will often depend on the timeframe of the participant. Shorterm traders will probably view it as far more inefficient than investors or academics.

Excuse the quote from wikipedia:

The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.

That was my general understanding of the efficient market hypothesis, and I viewed it as the suggestion of academics that participants are basically flipping coins.

You've only been trading for two months? Um okay well I don't want to sound patronising but I don't think a couple of months counts as "Consistant" yet. I've been investing and trading for a while now...and I'm still learning - I don't think I'll ever be done.

When someone says they don't want to sound xxxx, it means they're about to sound just that :. I never said I was consistent, I just stated that I wanted to be profitable within two months. However, I will say that I'm consistent, in terms of applying my methodology, and that I feel I've achieved my goal of being profitable. The latter is just my opinion, as whether I'm profitable or not is obviously an unknown.

After going through this process several times (card counting, sportsbetting and poker), I do have reasonable experience in being able to gauge roughly where I am. In my experience, it doesn't take much to become profitable. It's just the first step of many on the path to becoming skillful.

In summary, I have no disillusions on where I currently am in terms of skill.

 

[Uncertain Times]

SirO,

When flicking throught the annual report looking at FA which section do you always look at first? I realise that possibly you study many things before coming to a conclusion but I am just curious as to which number interests you the most?
The reason that I ask is that cash may decrease to pay a dividend so the dividend is not always the best indicator. They may have also increased borrowings to pay dividend.
Cheers.

 

[AllTheWay]

I'm reading this with great interest and am esp keen to learn how to use the different technical indicators ie how to read and interprete them. There are so many indicators out there ie momentum, oscillating etc etc I feel I can't quite see the wood for the trees. Which ones are the most widely used and are fairly easy to understand. Are there are blogs where traders are willing to share their recent trade and share their thoughts as to what was the reason why they decided to enter the trade and then why they exited.

For eg there's some recent trades:
21/04/2009 B NWH 5,000 0.655
23/04/2009 S NWH 5,000 0.715 they are now below the 15days SMA but still showing a little uptrend and much higher than what I sold for. I'm still a little hesitant to go back in.


I bought becoz stocks like AAX,ALS,BKN were moving up strongly but when I saw those same stocks trending down in the last week, I got cold feet and decided to get out quick.

The same reasoning went for IIF in the A-Reit sector.
19/03/2009 B IIF 10,000 0.165
19/03/2009 B IIF 10,000 0.175 this was a mistake. I hit buy instead of sell which I was going to put in Sell 4 19.5c!!
23/04/2009 S IIF 20,000 0.18 it went to 21c on 8 Apr, I was too greedy, didn't take a profit and when the price started to fall, I thought stuff this, I got to get out.


With AWC, I thought the price was trading above the SMA 15days but after I bought they annouced poor results, so I thought it was time to get out.
7/04/2009 B AWC 2,500 1.475
14/04/2009 S AWC 2,500 1.485


Should I be using a few more indicators, wait a few more days, or maybe pick better trending stocks? I got a feeling I'm rather haphazard in my approach.



Hoping some out there are willing to bare their trading souls/thoughts.

 

[Mr J]

Volume and stochastics are probably the most widely used. I know MACD, CCI and RSI or whatever are popular. There's no rule that says you need indicators. I don't use them as they don't suit my trading style, and most indicators are lagging and formed from price action, so it's better to just get it from the price action directly. Experiment, see what seems to work for you.

share their thoughts as to what was the reason why they decided to enter the trade and then why they exited

I enter because I believe I've identified a pivot. I exit because I believe I've identified the next pivot. Repeat . Not much more to it. Just identifying pivots and riding that move, provided there seems to be enough potential profit in it. That's what I do and it seems to work for me. Many others will do things differently.

 

[Sir Osisofliver]

Sir Osisofliver:

Efficiency is subjective anyway. It can be measured, but as always it's a matter of perspective.

True. You may also hear the excuse that it's merely because they lack enough infomration and have to make guesses, just like a meteorologist predicting the weather. If they had enough data they could accurately predict the weather all the time.

An academic might label a market as quite efficient, while a shorterm trader might see as inefficient. The participants obviously make the market, but they are also what makes a market more efficient. I think how efficient a market is viewed will often depend on the timeframe of the participant. Shorterm traders will probably view it as far more inefficient than investors or academics.


When someone says they don't want to sound xxxx, it means they're about to sound just that :.

I know, but it's still valid. I don't want to discourage a newbie or sound patronising in this thread, I'm sure however that you'll look back in a couple of years and marvel at your new knowledge.

SirO,

When flicking throught the annual report looking at FA which section do you always look at first? I realise that possibly you study many things before coming to a conclusion but I am just curious as to which number interests you the most?
The reason that I ask is that cash may decrease to pay a dividend so the dividend is not always the best indicator. They may have also increased borrowings to pay dividend.
Cheers.

I must admit I don't spend a lot of time reading Annual Reports. It also depends on whether I am investing long-term, or looking at a trading position as to whether I will bother looking at a stock in that level of detail. Going through annual reports is time consuming and boring. I'd reserve that for looking at a stock I'd intend to hold for 5+ years.

That stock I would purchase ideally at the bottom of the economic cycle whilst many investors are running around like chickens with their heads cut off screaming the sky is falling, and it would be within the ASX 200 index (or more likely the ASX 100). With a minimum 10 year history I can look back on, because I want to see the robustness of their business model and consistency of their cash flows. The first thing I would do however is make sure that the share price consistantly matches or outperforms the ASX200 Index over that period of time. So In effect I use price data (simple technical analysis) to filter what I'm going to spend time on doing fundamental analysis.

Anything that is in a trading position I'll be looking at Dividend and price data, might do a PEG ratio or two, but mainly be looking at the technical factors of the stock to massage my entry and exit.

Cheers

Sir O

 

[Ashsaege]

Re: Newbie Lessons - Chapter Two - How to manage your Bank Manager (secrets from the

Chapter 2 - How to manage your bank manager... secrets from the inside.​

This is gonna sound a little like bank bashing - and there is a reason for that. Simply put...when you go and see your bank manager does he have YOUR best interest at the front of his mind or THE BANKS' best interest? We know the answer to that one it's the Banks best interest - otherwise your bank manager is out of a job. Yet the bank manager as an employee of the bank will do his or her best to appear to be your best friend and trusted banking professional who saves you money.

So when your bank manager appears all friendly and uses sales techniques against you - just remember - he or she works for the bank - not for you.

Ok so what are the sorts of things that they do to ensure that they work in the banks best interests?

Bank Secret number 1.

Ok this is something that EVERY bank will do and by doing this will save you THOUSANDS. When you get a mortgage, they will ask how frequently you want to make payments. If you say monthly...
they'll say 'No Problems" and continue.

If you say Fortnightly.... they'll say "no problems" and continue.

If you decide to pay fortnightly (AND YOU SHOULD), when you get your mortgage documents, if you are paying attention and haven't gone glassy-eyed from reading all the legalese, you will see that they will amortise your fortnightly payments across the year so that you pay exactly the same as someone paying monthly. You pay exactly the same over the course of a year.

Now ask yourself why would they do that? Go ahead - ask your bank manager (and remember that he'll use sales techniques against you) you probably won't get the REAL answer.... Here it is.

There is 52 weeks a year, 26 fortnights a year...but only 12 months. So by choosing to pay fortnightly (AND NOT AMORTISING THE PAYMENTS) you are in effect making 13 months of payments in a year. You are making EXTRA payments (even though the difference to you is about the cost of a cup of coffee every fortnight).

By not amortising the fortnightly payments, over the course of a 30 year mortgage, you will make an additional 19 payments earlier than you would normally have done so, and save yourself...72 mortgage payments.

Wait 72??? How is that possible I hear you cry? Because when you start paying your mortgage - for the first decade or so when you make a payment, the largest portion of that payment is paying off the interest - not the principle. Extra payments reduce both the principle and interest portion of the loan - and hence you pay it off that much faster. Don't believe me? Go ahead ask your bank manager. I haven't found one yet who'll give me a straight answer - but they will all blush when they realize they have been caught out.


Sir O

Sounds brilliant, but you still maybe better off paying your loan monthly.
The Time Value of Money concept needs to be taken into account - $100 now is worth more than $100 in the future.
In order to fully analyse the financial merit of one repayment scheme versus another, you really need to know what 'alternative uses' are available for your funds.
What opportunity do you lose by undertaking a particular course of action?