/ 8 September 2009

Taking the trading challenge

This week I entered a two-week competition that will test my trading skills. This is part of Global Trader’s ‘What Is Stopping You?” campaign to educate people about investing directly in the market. In my case Global Trader will have its work cut out.

The reason I don’t actively trade is that I simply don’t have the time to watch the markets on a daily basis. I do have a share portfolio of blue chip shares that I have built over time, but that is a buy and hold strategy, very different from short-term trading.

For me trading is a lot like my vegetable garden. Every now and then (spring being one of the times) I get really excited about growing my own vegetables. I spend the weekend preparing the soil and planting the seeds. But that is usually about as far as it gets.

My automatic sprinkler system does ensure they are watered but, somehow, when it is time to thin out the carrots or transplant the onions I don’t have time.

The result is usually dead seedlings or stunted carrots that look more like earthworms than vegetables. The weeds also tend to get out of control and any vegetables that survive my neglect get eaten by the birds.

The roses in my vegetable garden, on the other hand, are much like my long-term share portfolio — they tend to get on with their own thing.

I feed them occasionally and I would probably be rewarded with more flowers if I tended them a bit better, but they are satisfactory and produce beautiful roses most of the year.

However, Global Trader believes that by using its support system I will be able to implement trading ideas.

These will then be managed by having a strategy in place that will sell out once I have made a certain profit or will automatically sell me out if I am making a significant loss.

As I am trading Contracts for Difference (CFDs) my losses are not limited to what I have invested, so it is important that I am able to stem my losses quickly, especially as I cannot watch the market all day.

In two weeks’ time I will have a better idea of whether this will actually work for me. If it is a great success then a charity of my choice will receive R25 000 and I may give up my day job to become a day trader.

Placing my trades
On Wednesday I placed my first trade. I discussed my views with my assigned sales trader. My overall view of the market is cautious.

It has rallied very strongly since July, up 14%. I agree that we have probably seen the worst of the economic crisis but my concern is that there is not going to be a quick recovery.

It will take a long time for company profits to recover and investors will start to become impatient. There has been some good news, but not enough to justify a sustainable 14% rally.

While I am negative about the market, the question is whether or not the investment will play out over the next two weeks.

Short-term trading is all about timing. Nevertheless, I have placed two trades according to my market view. I have gone short on one share that will make me money if the market falls.

I also believe that this particular share is overpriced so I expect it to fall faster than the rest of the market. And I have gone long on a share that will strengthen if the rand weakens.

Global Trader has set up alerts that will inform me when the price moves more than 2% on the day and I have a stop loss in place as well as a sell instruction once I have made a certain profit.

It is like having someone else thin out the carrots and pull out the weeds. I just have to hope I have chosen the right vegetable and the right spot to plant it.