Memoirs of a Stock Market Trader

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© Copyright FMRAnalysts, 2007. All rights reserved.

Memoirs of a Stock Market Trader

“Ever wondered why, after all your research, all the right indicators, all the right fundamentals, a position can still turn around and bite the holder? What mystical force is it that creates these swings that move markets and equities against all indicators, turning the best technical research to water at the speed of light.

The reality is no great mystery. However, the force that moves the markets in this way is a difficult, intangible, subjective and unreliable minefield.

That force is Politics, and the interrelationships of economies and the effect of those and internal factors and the reflection of those developments on the markets.

Secondly, markets are not about today or tomorrow. Markets reflect the longterm view of the economy that reflects itself on the Index and in the valuation of the individual stocks.

Markets move in different fashions, but always in relation to each other. How they move relevant to each other is a function of the dynamics of global politics.

This then becomes challenge number one; getting a handle on global politics and the economic inter relationship of the markets. A short sentence, but a big task. From here, and only here, can we then enter the market in a safe fashion.”

From: Memoirs of a Trader

Market Players: an Unlevel Playing Field

Investment in the markets is one of the most popular means of modern income generation. No matter where you go, whom you talk to, or what you read, material on what to invest in and who to invest with surrounds each and every one of us.

For decades Brokers and Institution investors have controlled our investment decisions. Since the advent of the Internet, everyone now has the ability to receive livestreamed data from the stock exchanges. The same information that was once only available to large corporations, is now accessible to us all.

But in today’s investment world, there are numerous players. Some better than others!

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Life, itself, evolves around where you as an individual fit in the food chain. The markets are no different. Shellfish eat plankton, small fish eat the shellfish and killer whales eat the fish. Some of the plankton survives without ever being eaten, same with the small fish. But there is very little that eats the killer whale!

Many investors have heard stories of those who make millions of dollars investing and this lures them to do the same. Books from such renowned investors as George Soros and Warren Buffett inspire many of us to follow their techniques. The fact is that they actually are on a different level of the food chain, thus the reason why we do not succeed using the same techniques as them.

For the plankton to become the killer whale requires an extreme metamorphosis that takes years of experience. The plankton, otherwise masquerading as the killer whale, would be found out and not survive.

Many Mum and Dad investors jump into the markets as plankton in a big world where there are many fish and killer whales waiting to be fed.

Market Makers

So who are these people? George Soros, Warren Buffett. These are two of the more publicised market makers. Market makers typically do not publicly promote their abilities to make money. If they did, when would they ever get the chance to actually trade?

Market Maker

Institutions

Mum and Dad Investors

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Market Makers live and breathe investment. Their lives evolve around watching stock prices, talking and reading politics, and keeping abreast of economic conditions. And just like a good mechanic who can listen to an engine and know what is wrong, the Market Maker has a sixth sense of changing conditions.

The thing about the Market Maker is that they almost always win. They can move share prices, influence market sentiment, and make a lot of money without even raising an eyebrow. They do not care whom they take their profits from, just that they are the ones taking the profits. Remember Gordon Gekko, the character played by Michael Douglas from the hit movie Wall Street? His philosophy was “Greed is Good”!

As a home investor/trader, there is no way of seeing this killer whale sneak up from behind. In one moment you will be in a trade with all intentions of making a profit, and the next your trade will disappear in one swift movement with the Market Maker the last one standing.

Institutions

Fund Management is now one of the largest industries in the world. Billions of dollars are moved through the markets daily, controlled by the banks, brokers, and superannuation funds.

Many institution traders are limited due to regulations set upon them by their very own establishment. But by trading millions of dollars, they are able to make small returns that appear to be large in dollar value to us.

The Broker is looked upon as being the governing person for the Mums and Dads to confer with. Unfortunately, this is not the case. Typically the broker that you speak to on the phone has other objectives that do not always suit your own. Institutions also must have certain stock in their portfolios invested in blue chip stocks.

Institutions must use different strategies and different markets because of the size of their portfolios and regulations placed upon them. For these reasons the Mums and Dads need to have more input into their own portfolios.

Mums and Dads

In Australia, 54% of all Australians own shares directly or indirectly. This is a staggering figure that is not surpassed by any other country. What it means is that Mums and Dads are more aware of their financial well being. We no longer expect the government nor our employer to care for us during retirement.

This phenomenal growth is also being reflected in many other large economies. The effect of the Baby Boomer generation is now being realized as more and more Mums and Dads look towards the stock markets as a means of increasing wealth.

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With more money streaming into the markets there is a multiplier effect back up the food chain. More food for the killer whales means the killer whales grow exponentially. Hence the meaning behind “ the rich keep getting richer!” We can view this as a chart overlaying the previous hierarchal chart:

Unfortunately, with Mums and Dads being at the bottom of the food chain, the probability of moving up the ladder is much less. It is more likely that the Mum and Dad investor/trader will lose on the markets than to succeed such as the Market Maker.

Statistics show that 85% of those trading on the markets (trading refers to buying and selling for shortterm capital gain) realize more loses than they do gains.

To successfully survive in this viscous world of fish eat fish, we must first look at what it is the Mum and Dad investor is currently doing before we can evaluate solutions.

The first point of consideration is the broker. Before the Internet, the Broker and the newspapers were the only means of information gathering from the stock market. It was common practice to call your broker to access market movements and the general “feel of the floor”. Today the information that we have flowing to our living rooms is equal, if not better, than that of the brokers. We can see the market depth (how many buyers and sellers are in the markets), watch the flow of price movement and read company announcements at the moment they are released.

Market Maker

Institutions

Mum and Dad Investors Mum and Dad investor s have very little capital in compar ison to professionals

Market Makers dictate much of the capital

= Money in the markets

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Our broker may be a professional in the industry, but we have the same information that is available to them. If we spend the time to learn how to analyse what information affects what and how to trade/invest, then we can come to the same decision as that of our broker. The broker may have undergone formal education on the markets, but not always. So unless you have a good relationship with the broker, why should you entrust your hard earned capital to them when you could make the same good, or bad, decisions?

The key to our education of the markets is to learn from the right people. There are numerous groups selling their education, some of it good education, and some of it bad. To be successful, it is better to learn from those who are good, who dictate how the market works, rather than those that follow like sheep. It may seem obvious that the Market Maker is this person, but it is very rare to find, let alone meet, a Market Maker who is willing to pass this hard earned education on.

Secondly, and most importantly, is strategy. What is the strategy of the broker? What is your strategy? Someone who says, “ to make money” , is not serious about investing for the longterm. They may as well just hand their money to the Market Makers. Look for a synergy between what you want to achieve, and what the broker is planning for your portfolio. If you cannot see this equilibrium in paths, then don’t use them. There are plenty of brokers looking for your business.

Or, maybe your use for the broker has changed. For instance, instead of using the broker to help you come to your decisions and offer advice, use the broker purely as a means of transacting your decisions. At the end of the day, it is your money and your decision.

Strategy for the personal investor is also a key to profitability and survival on the markets. FMR Analysts provides strategic evaluation that you conduct yourself. With professional market backgrounds, FMR Analysts also provides stock market evaluation.

Disclaimer

Trading involves risk of loss and may not be suitable for you. Past performance is no guarantee or reliable indication of future results. This advertisement is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please ensure you obtain and read the current offer documentation prior to acquiring the products advertised herein, so you are fully informed regarding the key risks and costs associated with these products.

Memoirs of a Stock Market Trader

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