Basic information on Indices

I decided to do a post on the general information on some of the world’s global indices as I have recently completed a futures trading course, and it has piqued my  interest in futures trading, and I might decide to go down this path in the near future. Thus, I think it necessary to start compiling some information on indices as this is a potential type of futures to trade. I will try to include some general information about them, the way they are computed, the composite of them and hopefully any further useful information. I might be wrong, so please don’t take my word for it, and the post is mainly for my own benefit and ease of use.

ASX 200

It is recognized as the benchmark index in Australia, and it covers approximately 80% of Australian equity market capitalization. It is reviewed quarterly. It is weighted by float-adjusted market cap, which means its components are weighted by the market value of the outstanding shares held by public. Index calculation is the quotient of total available market capitalization of the constituents and its divisor. The weight of the top 10 constituents is approximately 48.7%. The ASX 200 is made up of mainly financials ~ 38.8% and materials ~ 15.7%.

Nikkei 225

It tracks the performance of the top rated 225 companies listed in the First Section of the Tokyo Stock Exchange. It is reviewed once yearly by the liquidity in the market and sector balance. It is a price weighted index, which means that price movements of highly priced stock will have significant influence on the index value.

Adjusted stock price = stock price x 50(yen) / presumed par value (yen)

Nikkei Stock Average = sum of Adjusted stock price / Divisor

The index is mainly made up of companies from technology ~ 43.51% and consumer goods ~ 22.56%.

Base on personal experience, the companies in the index are export oriented and the value of the Nikkei 225 is inversely related to the strength of the yen.

HSI

It tracks 50 of the largest and most liquid companies of the Hong Kong stock market. It is weighted by float-adjusted market cap, which means its components are weighted by the market value of the outstanding shares held by public, and also has a 10% on individual securities. It is reviewed quarterly. The index is mainly made up of financials ~ 47.57% and Information technology ~ 11.48%.

DAX

It is a blue chip stock market index tracking 30 of German’s top companies based on book volume and market capitalization. It is free float capitalization weighted, calculated as both price and total return index and has a cap of 10% on individual securities. It is reviewed on a quarterly basis. It is diversified of some sorts, with chemical companies at ~ 20.2%, automobile ~ 14.7% and others ~ 21.9%.

FTSE 100

It is a share index of 100 companies listed on the London stock exchange with the largest capitalization. It is capitalization weighted and reviewed quarterly. It appears to be well diversified with Oil & Gas ~ 11.92%, Personal & Household Goods ~ 11.77%, banks ~ 10.80% and Healthcare ~ 9.52%. It consists mainly of internationally focused companies as seen from its reaction to sterling rates, and is not a good indicator of UK economy.

S&P 500

It measures 500 large companies listed on the NYSE or NASDAQ. It is free float capitalization weighted. It is made up of approximately IT ~ 20.29%, Financials ~ 14.47%, 13.32%, Consumer Discretionary ~ 11.76% and Industrials ~10%.

DJIA

It measures 30 companies listed in USA, and is price- weighted. Its top sectors are industrials ~ 19.69%, financials ~ 18.09%, IT ~ 16.92% and Consumer Discretionary ~ 14.23%.

NASDAQ Composite

It measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq stock exchange. It is market capitalization weighted. It consists of over 3000 companies and is heavily skewed towards Technology firms at 41.52%.

Further links for more information

https://www.msci.com/documents/1296102/1339060/GICSSectorDefinitions.pdf/fd3a7bc2-c733-4308-8b27-9880dd0a766f

 

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Top 3 trading mistakes to work on for 2017

I have just attended a trading club meeting in early January and the Organizer/founder/leader has just given a glimpse into how he plans his trades and also a reminder to work on eradicating bad trading habits. In this post, I will touch on both. Hopefully this is not going to be a long post.

Trade planning

Basically there are some components to executing a trade. They are as follows:

  • Fundamental Analysis
  • Technical Analysis
  • Risk to Reward
  • Stick to the Plan
  • Respect the Markets
  • Review the Trade
  • Recalibrate if needed

What he recommended to start on a trade was to take a fresh sheet of paper, and write down what he thinks is the general trend for at least 3 months, like which currencies are bullish, bearish, neutral, pair up the currencies accordingly, and use technical analysis to enter positions, set profits and loss. So basically starting with fundamental analysis, than use the rest to complement it.

Also, he mentioned to reflect on the past trading year, and name 3 trading bad habits or recurring mistakes  made and aim to work on improving them this coming year. So, I decided to take his advise, and record them down and hopefully at the end of the year, when I look back at this, I hoped to have eradicated my bad habits. Here goes my top 3 mistakes in no particular order.

Stick to the plan

I suppose this is a common issue among novice traders like myself. Things such as closing positions before profit or loss targets are hit, not doing proper position sizing, not having a good risk to reward ratio etc. There are many many more. To counter this, I plan to come out with a trading checklist before I enter any positions. This will help me have greater discipline and not to have a massive drawdown as well. My accounts are nearly close to 0 but I do not wish to top up for now and will attempt to fight back to my original amount. Hope that trading will be better for me this year.

Trade review

This is something that I have done at the beginning when I first started to trade, but I did not know what I was doing. Now, I still do not know what I am doing entirely and I am not doing reviews on my trade. I need to get back into the habit of reviewing my trades but it is quite troublesome to do it due to the number of trades I execute. At the very least, I need to make a record of the reasons why I enter the trade, and what is the end result of the trade. Also need to take note that a trade that is profitable or a loss is not necessarily a good or bad trade. It depends on variables which cannot be quantified as well. There is another problem to this aspect with regards to how to review the trade. There have been times when I tried to review, but to end up in frustration only as I did not know where went wrong. I need to learn to utilize my resources more. Perhaps I can look to people in the trading club for advise.

Emotion/Pyschology

This is an issue which plagues many traders and especially for myself, this is a difficult area to manage. People are into trading to make money and I myself am no exception. However, the thing which I really need to take note of is that I just started trading and I should not be aiming to make profits but actually to learn and figure out a way to trade profitably in the long term. This links back to the point above on trade review, which I should be doing and I have not. The desire to make money has gone to my head, and with each losing trade, the frustration sets in and I will tend to make more losing trades and the cycle repeats. For now, I suppose the way is to reduce my trading position size drastically so that each loss is not that painful and is more manageable. Furthermore, I need to take rests and not trade so frequently so that each trade is thought through better so that I can make better trading decisions.

 

So there it is, my 3 issues which I need to work on. It is a tall order, but in order to progress and improve on my trading, these are things which need to be done. That’s all for now and happy Chinese New Year everybody!

Reflection on CFD/FX trading around and after Brexit

As the title suggests, this post is going to be about my reflection on 2 weeks of trading around and post the Brexit. Yup, I have decided to venture into trading to build up my income. Perhaps I do feel inpatient and feel the need to increase my monetary net worth at a fast pace as I feel that my share portfolio moves at a slow pace. Moreover, I do not have the vast amount of cash as Warren Buffet does to make a sizeable profit on. 20% of $1 billion is $200 million while 20% of $1k is only $200. For investing in shares, I think that size does matter, and it does works in the long run, but it needs to be scaled upwards. For now in the short run, I think that trading is the way to go to scale up. Of course, everybody knows that trading is difficult and depending on who you ask, 95%-99% of traders lose money. It is difficult to trade and I understand it at least intellectually until I started trading and experienced it personally. I have only read like 1-2 books on trading and got started as Brexit is a once in a life time event, and hard to come by. So my trading basis was mainly on my ideas of how events could unfold and rudimentary technical analysis of support and resistance based on what I read. To cut the long story short, I funded my account with $5k and within the span of 1 week, I made $1k+ with it and in the following week, within 2-3 days, I lost most of it. Quite a humbling experience frankly, and I realize the need to really study the various techniques out there before committing into trading further. It was an exhilarating experience to trade too. Felt like I was on a high when my trading thesis was correct and it was quite exciting. The highlight for the month of June for me actually, the only thing that kept me looking forward to each day. At the same time, I knew it was difficult to preserve capital and little did I know that losses could mount up so quickly as well. Guess I need to work on my risk management on trading. So in short, to summarize the learning points from this trading session:

  • Forex trading is too volatile. Best is to start by scalping and to initiate positions of 10,000 denominated currency. I don’t quite have the stomach to take swing or position trades base on my own analysis yet. Many a times, I took a position, see it go against me and hours or a day later to an ITM position after I close out at a loss.
  • Limit margin usage to approximately $500 per trade with an account of $5k or limit to maximum $1k per trading position
  • Start out with CFD share trading to practise reading the charts and indicators
  • For Forex, using clean charts and learn about flow order trading first
  • For Forex, take note of the release timings of economic data as it causes forex trading to be volatile. Forex definitely need to monitor closely, and not open the position for long
  • It is okay to trade on news or especially massive events, but on a day to day basis, need to stick to good old technical analysis
  • Keep in mind the risk-reward ratio, however it seems for forex scalping, the risk-reward ratio is skewed towards higher risk and volatility

Going forward, I will really read up and try to understand more first before entering trades. It is going to be difficult as I have a gambler’s mentality and my fingers always itching to enter trades but I need to build up discipline to do so and to strive for capital preservation as much as possible. Hopefully I will be able to start trading soon and earn some profits by the end of 2016. Will need to prepare to top up my account with another $5k in the near future. Of course, there is no guarantee that I will make money but I will see this as a learning points in life as I see this as necessary to build an alternative cash-flow apart from my monthly income and investing capital gains/dividends. This is a dream but part of me still hope that I can do well in trading and maybe become a full-time retail trader, but the eventual hope is not to trade forever, but to use the profit to invest into shares or some other worthy ventures.