Fundamental Analysis Workshop Series Trading Psychology ... · Fundamental Analysis Workshop Series Trading Psychology and Risk Management Session 14 ... Hypothetical Case Study ...

Fundamental Analysis Workshop Series

Trading Psychology and Risk Management

Session 14

6.15PM

NUS Students’ Investment Society

DISCLOSURES & DISCLAIMERSThis research material has been prepared by NUS Invest.

NUS Invest specifically prohibits the redistribution of this material in whole or in part without the

written permission of NUS Invest.

The research officer(s) primarily responsible for the content of this research material, in whole or

in part, certifies that their views are accurately expressed and they will not receive direct or

indirect compensation in exchange for expressing specific recommendations or views in this

research material.

REVERSALPATTERNS

Q & AINTRODUCTION PRACTICE

DISCLOSURES & DISCLAIMERSNothing in this research material constitutes a representation that any investment strategy or

recommendation contained herein is suitable or appropriate to a recipient’s individual

circumstances or otherwise constitutes a personal recommendation. It is published solely for

information purposes, it does not constitute an advertisement and is not to be construed as a

solicitation or an offer to buy or sell any securities or related financial instruments.

No representation or warranty, either expressed or implied, is provided in relation to the

accuracy, completeness or reliability of the information contained herein. The research material

should not be regarded by recipients as a substitute for the exercise of their own judgement. Any

opinions expressed in this research material are subject to change without notice.

CHARTCONSTRUCTION

SUPPORT &RESISTANCE

TRENDLINES &CHANNELS

Q & ACHART TYPES PIVOTPOINTSS

REVERSALPATTERNS

Q & AINTRODUCTION PRACTICE

Profile BBA1/ARS1

Investing since 2008 – Equities, Forex, In-Game Items

FA/TA and more recently Statistical and Psychological

Analysis

First official trade – HiP International, 2008/2009

Tactical Asset Management

REVERSALPATTERNS

Q & AINTRODUCTION PRACTICE

Agenda

• What is Trading Psychology?• Case Studies• “Live Analysis” (If there’s time)

Key Takeaways:1. Know Yourself2. Know the Crowd, and be Rational3. Plan and execute the trade well.

Trading Psychology

GREED FEAR

Can you ‘see’ the Psychology?

Super Group

USD/JPY

Hypothetical Case Study

• It has been a few months and you have had -$600 in your trading position (short term )

• Recently, a piece of good news related to yourstock occurred – You find yourself profiting by$250

• It is 11 am, Singapore time, the stock is acompany listed in SGX

Risk Management

• Stop Loss and Take Profit levels• The concept of RISK• Risk management strategies – 2% vs Fixed

Dollar method• Simulation and Excel modelling as a tool.

• Osim International Ltd (BUY)• Ticker: OSIM SP

Last Closed Price: 2.2612M TP: 2.7Upside/Downside Potential: 19.48%

• Entered at 2.22, exited at 2.42, then re-entered at 2.38…then…

• Bad news: On 17/2/14 around 8pm there wasa news release regarding one of the TWGfounders suing Osim and its directors for usingcorporate actions to dilute his stake in TWGTea.

The Plan - SHORT

Price SL TP Risk Reward Ratio CommsLotSize

DollarProfit

Dollarrisk

2.37 2.4 2.3 0.03 0.07 2.33 60 5000 290 210

Possible scenarios:1. The trade goes well. I gain $2902. The price goes up for some freak reason. I lose $2103. The price doesn’t move, I cover my shorts and lose thecommission of $90 ($30 for exiting my long position and$60 for initiating and exiting the short trade in the day

What Actually Happened

• The Short order only managed to clear 2 lots or2000 shares for me.

• Detrimental because it meant I would need asteeper price drop to overcome commissions andmake a profit.

• For SGX, short sells must be covered on the sameday with a corresponding buy order equal to orexceeding the short sell amount

• Basically meant I needed a substantial drop inprice in 1 day by 5pm

The Reality

Price SL TP Risk Reward Ratio Comms Lot SizeDollarProfit

Dollarrisk

2.37 2.4 2.33 0.03 0.04 1.33 60 2000 20 120

The Exit – 1530 hrs

Price SL TP Risk Reward RatioComms

LotSize

DollarProfit

Dollarrisk

2.37 2.4 2.34 0.03 0.03 1 60

BUY

3000 30 180

In one day:

Made $30

Repositioned my Previous Long Entry from 2.38 to 2.34 (higherupside potential)

Exited long entry upon testing of resistance at 2.51 (somewhereduring Finance Midterms)

• Know yourself – are you being greedy orfearful?

• Know the crowd – are THEY being greedy orfearful?

• Have a plan• Monitor your trading plan – adjustments to

plan should be made ONLY IF NECESSARYAND IN A RATIONAL, EMOTIONLESSMANNER.

The 2 Pillars for Consistent Profits

1. Your “Hit-Rate” – How often you makewinning trades. Depends on yourtrading skills. (FA, TA, SA, etc)

2. Your Trading Psychology and MoneyManagement – How much you earnwhen you make a winning trade andhow much you lose when you make alosing trade.

Thank You!

Session Fourteen

Money Management

Puah Yong KinNUS Invest, Research Analyst

DISCLOSURES & DISCLAIMERSThis research material has been prepared by NUS Invest.

NUS Invest specifically prohibits the redistribution of this material in whole or in part without thewritten permission of NUS Invest.

The research officer(s) primarily responsible for the content of this research material, in wholeor in part, certifies that their views are accurately expressed and they will not receive direct orindirect compensation in exchange for expressing specific recommendations or views in thisresearch material.

Nothing in this research material constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individualcircumstances or otherwise constitutes a personal recommendation. It is published solely forinformation purposes, it does not constitute an advertisement and is not to be construed as asolicitation or an offer to buy or sell any securities or related financial instruments.

No representation or warranty, either expressed or implied, is provided in relation to theaccuracy, completeness or reliability of the information contained herein. The research materialshould not be regarded by recipients as a substitute for the exercise of their own judgement.Any opinions expressed in this research material are subject to change without notice.

Agenda• Self Introduction

• What is Money Management

• Why Money Management

• Money Management for Investors and Traders

• Summary

Profile

• Year 1 Pharmacy Student

- 1 year plus trading experience

• Trade in both Singapore and US markets

• Focused on Technical Analysis

http://www.investmentmoats.com/budgeting/earn-6000-a-month-yet-broke-at-35-years-old/

What is Money Management

• The process of budgeting, saving, investing,spending or otherwise in overseeing the cashusage of an individual

Why Money Management

• Be the master of YOUR life– Control your own finance– Streamline on spending– Savings for rainy days– Investment

• Financial Freedom– Passive Income > Active Income

Getting Started

• Clear Objectives– I want to get my own house in 8 years time

• Get Organised– Money inflow and outflow– Tracking and streamlining your expenses

• Budgeting• Savings and Investment• Continue Tracking and Modify when necessary

ExampleItems Amount budgeted

Transport $100

Food $300

Shopping $100

Birthday Presents $100

Savings $200

Investment S200

Total $1000

Example of a pharmacy scholarunder MOHH not staying inschool

Investors and Traders

• Different kind of beliefs so different moneymanagement strategies

• One thing in common– Do not put all your money in one basket– Split into at least 3 portions

Investors

Investors

• Find ROI• Dollar Cost Averaging

Rate Of Investment(ROI)

• A performance measure used to evaluate theefficiency of an investment or to compare theefficiency of a number of differentinvestments.

Dollar Cost Averaging

• The technique of buying a fixed dollar amountof a particular investment on a regularschedule, regardless of the share price.

• More shares are purchased when prices arelow, and fewer shares are bought when pricesare high.

Class Part 1

Assuming that you want to invest in CompanyABC and you have $7200, by applying dollar costaveraging, you will split your money equally intobuying shares over 3 months• Jan – Price: $1.00• Feb – Price: $0.80• Mar – Price: $ 1.20Calculate how many shares you can buy eachmonth.

Class Part 1

• Jan – 2400 shares• Feb – 3000 shares• Mar – 2000 shares

Tedious right? However…..Price Per Share = (Total Amount Invested)/(Total Number Of Shares)

= $7200/7400= $0.97

Price now is $0.97 instead of $1.00 if you choose to invest all at the start

Traders

• Cut Loss• Risk Reward Ratio• Number of shares to buy• Profit-taking• Scaling In

Cut Loss

• Cut your losses short and let your winners run.• The objective, therefore, is not to avoid losses,

but to minimize the losses.• Realizing a capital loss before it gets out of

hand separates successful traders from therest.

• 5%-8%

Cut Loss

Assuming that you buy 1 share at $1.00• Cut Loss 8% = $0.92• To gain back your $1 in your next trade,

• $0.92 x 109% = $1

• Cut Loss 20% - $0.80 x 125% = $1• Cut Loss 50% - $0.50 x 200% = $1

Risk Reward Ratio(RRR)

• A ratio used by many investors to compare theexpected returns of an investment to theamount of risk undertaken to capture thesereturns.

• RRR 1:n, (n>2)

RRR = Amount Risked : Returns Expected

Number of Shares to Buy

• Calculate the number of shares you can buyusing the amount of money you are risking inthe trade and not by expected returns

Number of Shares to buy= Amount at risk/(Buy Price – Cut Loss Price)

Class Part 2

Price of ABC stock is at $1.20 per share now.Given that your risk is $300 and you practice 5%cut loss level, how many shares can you buy?

Number of Shares to buy = $300/(0.05 x $1.20)= 5000

Scaling In

• Art of increasing your profits

Risk Reward Ratio = 1:3

Assuming the amount you risk is $100,Number of Shares to buy = $100/$0.10

= 1000 shares

Total Cost of Investment = $1 x 1000= $1000

Target Price - $1.30

Current Price - $1.00

Cut Loss - $0.90

Profits = $1.30 x 1000 - $1000 = $300

Scaling In

Cut Loss - $0.90

Price Bought - $1.00

End of 1st Day Price - $1.10

Profits after end of 1st Day = $100

Scaling in,Number of Shares to buy = $100/$0.10

= 1000 shares

Cut Loss now set at $1.00=> Risk = $0

Scaling In

Cut Loss - $0.90

Price Bought - $1.00

Price Bought - $1.10

End of 2nd Day Price - $1.20

Profits after 2nd Day = $300

Scaling In,Number of Shares to Buy = $100/$0.10

= 1000 shares

Cut Loss now = $1.10=> Risk = $0

Scaling In

Target Price - $1.30

Price Bought - $1.00, 1000 shares

Cut Loss - $0.90

Price Bought - $1.10, 1000 shares

Price Bought - $1.20, 1000 shares

Profits on Day 3 = $300 + $200 + $100 = $600

Scaling In

• Advantages– Increase your profit margin– Risk is reduced

• Disadvantages– Need capital– Incur more brokerage commission

Summary

• Money Management– What and Why

• Getting Started• Money Management

– Investors– Traders

Compounding