Markets, Real Estate and SME

We're back! Apologies for  yesterday but due to some technical difficulties Markets, Real Estate and SME could not be sent out to all you loyal readers... Please note that as of next week, Markets, Real Estate and SME will only be posted on Mondays and Fridays.

SME

Has leadership in the digital age changed?...

Globalisation and the digital age has changed how business leaders lead and manage people. Today we face the mobile revolution that has changed consumer buying patterns and shortens the life-cycle of many products. It has reshaped continue reading...

REAL ESTATE

Sitting on a Gold Mine!

IT'S been a 42-year wait but the decision to rezone Badgerys Creek land in Sydney's west would be like winning the lottery for Harry and Brigette Green.

The couple, in their 60s, bought their 11-acre property for $12,000 in 1970.

But with the land around what could be Sydney's second airport due to be rezoned continue reading...

Veteran weatherman David Brown to start real estate career...

VETERAN Channel 7 weatherman David Brown will be making forecasts of a different kind when he starts a new career in real estate next week.

The qualified meteorologist has signed on with Hoskins Real Estate in Melbourne's east and has been sharpening his skills at the team's Donvale office.

Brown - who spent almost 20 years as a weatherman - is sure to turn a few heads continue reading...

MARKETS

Some great insight from Murray Dawes:

Have I Just Done Myself Out of a Job? (Click here to open Port Phillip Publishing's home page)
Wednesday, 20 February 2013 – Melbourne, Australia
By Murray Dawes

Have I Just Done Myself Out of a Job?

Can Turkey Cause a Global Power Shift?

In today's Money Morning:...no one can predict the future...how a trader approaches the market...a short signal in Europe...a possible new alliance for Turkey...

Have I Just Done Myself Out of a Job?

The financial media makes a living discussing the machinations of the economy and markets. Talking heads yap away about this economic indicator pointing to better times and that statistic signalling a coming recession.

People pass themselves off as 'experts' on economic matters and the general public assumes that they must know the answers and can predict the future of the economy better than a layman.

But the fact is not one person on this earth can predict the future. Sure you can get it right every now and again, even a broken clock is right twice a day as the saying goes. And the more general and sweeping the statements that you make the harder it is for anyone to pin you down and say that you were wrong.

Professor William Sherden wrote a book called The Fortune Sellers: The Big Business of Buying and Selling Predictions. Sherden tested the accuracy of leading forecasters over many decades.

The Investment Watch blog said his research concluded that there's 'no way economic forecasting can improve since it is trying to do the impossible'.

I will repeat his 11 findings as revealed in the above blog here because I think it is important for us to dispel the myths that are continually propagated...

Dispelling Some Big Myths

Here they are:

1. Economists' predictions are no better than guesses

Forecasting skill of economists is no better than guesstimates by Main Street investors.

2. Government economists often worse than guesses

Sherden discovered that predictions made by the elite economists on the President's Council of Economic Advisors, the Federal Reserve Board, and even the non-partisan Congressional Budget Office were actually worse than guessing.

3. Long-term accuracy is impossible

The accuracy of forecasting declines the longer the lead times.

4. Turning points cannot be predicted

Economists cannot predict the crucial turning points in the economy, confirming Siegel's research. Worse, the vast majority of all long-term predictions fail.

5. No specific forecasters are better than the rest of pack

Sherden also learned that no particular forecasters were consistently more accurate.

6. No forecaster was more expert with specific statistics

No forecaster has consistently higher skills in predicting any one economic statistic.

7. No one ideological orientation was better

No ideology perspective consistently produced superior forecasts.

8. Consensus forecasts do not improve accuracy

But still, the press and their readers love those lists, averages and consensus forecasts.

9. Psychological bias distorts forecasters and their forecasts

Some economists are naturally optimistic and bullish. Others are naturally pessimistic bears. Some are conservative, some progressive. Why? Look inside their brains or at their DNA. Every economist has mental biases and political ideologies that distort their choice of research topics and data selection, and therefore skew their predictions.

10. Increased sophistication does not improve accuracy

Sorry folks, but all the new scientific methods, technologies, algorithms and computer models of the economy can make forecasts worse. At least give skilled Wall Street insiders an even better edge over naive retail investors.

11. No improvement over the years

Finally, Sherden says there's no evidence that economic forecasting has improved in recent decades, despite vast new technologies.

That's a pretty damning set of findings to say the least. And yet every single night on the news we wheel out someone to comment on that day's price action in the market. They come up with some reason why prices moved the way they did and they make a sweeping statement about what will come next. What a farce.

So, have I just done myself out of a job?

Not so fast.

How a Trader Approaches the Market

The job of the trader is not to tell the future. The job of the trader is to accept that they don't know the future and then structure their trading activity accordingly.

I think accepting that the future is unknowable is the first step in creating a sound trading strategy.

Your whole way of thinking about the market is transformed when you look at it in this way. The first question you ask yourself when you know you don't know the outcome is, 'When am I wrong?' Also you can withdraw your ego from proceedings because you aren't trying to predict the future to prove your self-worth.

The game of trading becomes one of probabilities.

My long term aim is to have a strike rate (percentage of winning trades) of at least 50% and a risk reward of 2:1, meaning that I will make twice as much on my winners as I lose on my losing trades.

The fact is that the long term results contain a lot of volatility. You can have periods of a 20% strike rate and then periods of an 80% strike rate which averages out to 50%. It can be pretty tough to keep your eyes on the long term figures when you have been trading with a 20% strike rate, I can assure you.

The psychological battles that a trader must engage in are immense. And it's usually this issue that brings most traders undone.

Anyone can repeat the top ten trading rules that are necessary to succeed, but actually adhering to them in the heat of battle is another thing entirely.

It is only through actual experience trading the markets with real money that we can learn about our own weaknesses.

And the market is determined to prod at our weaknesses at every opportunity.

Most of the price action these days is trading algorithms hunting for traders' stop losses. First they suck you into trading and then whip you out of your position. It really is a battle of man vs machine and at the moment I reckon the machines are winning.

The only way to survive in the current market as a trader is to start thinking like the trading algorithms. Where are traders stop losses? Once traders are stopped out the market will usually reverse.

It is this sort of thinking that lead me to focus on false breakouts rather than breakouts.

There is a far higher probability that a breakout will fail to follow through than continue. The risk that needs to be taken when fading (going against) a breakout is minimal because you are selling into strength or buying into weakness. Therefore you can place your stop loss above or below the most recent extremity in price.

With this method you can join longer term trends by, for example, buying the false break of the lows in an uptrend or selling the false break of the highs in a downtrend.

Analysing the German Index

With this in mind let's have a quick look at the current chart of the DAX, which is the index for the German stock market.

The DAX has broken out to new multi-year highs recently, but the momentum has shifted back to the downside over the past few weeks.

German DAX Daily Chart

Source: Slipstream Trader

My intermediate trend signal is now down (The 10 day EMA below the 35 day SMA) and prices are now resting on the high from April 2011 (see solid blue line in chart above).

If prices snap below the lows from last week of 7,537 I would expect to see some profit taking come out of the woodwork. I wouldn't be surprised to see a pretty sharp fall towards the 200 day moving average at 7,060 which is over 6% lower than current levels.

Also notice the indicator in the bottom half of the chart. It's a 10 day average true range as a percentage of the price and inverted on the scale. It basically shows rises and falls in volatility. As the line rises volatility is falling and vice versa.

You can see on the chart that whenever volatility has fallen to current levels over the past few years and then turned back up a top has formed and the market has sold off over the next few months.

Will history repeat? I think so.

But as I said at the start, I know that I don't know the future. All I know is that now is a good risk/reward moment to start looking at the German DAX as an opportunity to profit from the short side.

+Murray Dawes
Editor, Slipstream Trader

From the Port Phillip Publishing Library

Until next time dear readers...