FIND YOUR STYLE

Successful traders have learnt that the key to their own success was to find a trading style that suited their own personality. Deciding on which one of these styles is suitable for you is a matter of experimentation. As with any business, principles of risk control must be applied to prevent large losses. This is known as your trading system, the rules, the aim, the considerations and the application of how you are going to achieve your trading goals.

Here are some popular styles that should give you an idea of what to look for.

POSITION TRADING

This is where you hold your trades from a few weeks to a few months. This is ideal if you cannot watch the markets all day and want to avoid entering and exiting markets frequently. However, as markets become more volatile this is considered to be more risky as you are also open to adverse overnight movements and unpredictable events.

SWING TRADING

This is becoming increasingly popular as traders look to capture short term movements lasting from two to five days. Although this has more frequent trading activity than position trading, one can also look to profit from both the up and down movements of the market within a short period of time.

DAY TRADING

Very popular during the Dot com era and is considered to be dangerous. But on the other hand, because you are not holding positions overnight, you eliminate the risk of large overnight movements which could go against you and also has less margin requirements compared to Position and Swing Trading.

SCALPING

Involves essentially capturing very small moves during the Day Trading timeframe but holding trades from as little as seconds to minutes. This would be suitable for professional traders rather than beginners.

BUY AND HOLD

A long term investing, you are creating a blue chip investment portfolio or a retirement scheme.

TIPS & GUIDES

There is an endless array of information available for technical analysis. You should be clear on what your trading system is striving to achieve then use these tools to fine tune your target trades. I find I am constantly challenging the way I do things and searching for new ways to juggle and analyze the results.

Use quantitative tools.

Market prices are determined by the interaction of groups of investors trading on very different time scales. The actual impact of fundamental factors depends on the market dynamics. Typically, market observers take a far too simplistic view of the interaction between market dynamics and fundamental events. Only sophisticated quantitative models, that are similar to weather forecasting models, can systematically analyse market conditions and generate forecasts of consistent quality.

Trade in liquid markets.

Markets are not continuous and it is dangerous to assume that positions can be liquidated at any time. For this reason, investors should stay away from liquid markets, except if their investment horizons are very long term.

Follow a top down approach.

In establishing an investment strategy, it is important to take a top down approach starting with defining the investment philosophy, formulating the decision process and allocating the assets to the markets and underlying instruments.

Build up positions over time.

A major pitfall to any investment strategy is the discrete start of the investment program. If all funds are committed at the start of the program, the overall performance of the investment program will depend significantly on the specific entry point. If the investor is lucky, his performance will have a positive bias, otherwise, he will be negatively impacted by the start of the program.

Stick to your time scale of trading.

Another major pitfall is that investors change their trading horizons depending on the profits and losses of their positions. If an investor accumulates losses, he tends to extend his trading horizon in the hope of recouping his losses. He should not do so. He should stick to his initial strategy and close out his position. There are many other investment opportunities waiting for him provided he has not lost his money.

Watch out for transaction costs.

Transaction costs are far more important in the overall performance of an investment strategy than typically understood. The reason is simple: Transaction costs are ‘certain’ costs, whereas trading returns are uncertain. It is easy to control transaction costs, whereas it is difficult to enhance the success of your trading decisions.

Tactical tricks, such as limit orders, stop losses.

Performance of any investment strategy is increased by setting limit orders in opening positions and maintaining a strict stop loss regime. In this way, the investor can turn to his advantage the short-term overshooting of markets. Quantitative forecasts are an ideal tool to set limit orders and position stop losses.

Tax implications for buying US shares

From a tax perspective, there’s no restrictions on any country buying US shares. However, there are 2 key pieces of information you’ll need.

Firstly, Australians can avoid double taxation on their income in about 40 jurisdictions due to various trade terms between countries. The US is one of these countries.

Secondly, Aussies are required to have an up-to-date W-8BEN-E (W-8) form. Your broker should register you for one when you sign up. If not you will pay a higher rate of tax. The US Internal Revenue Services (IRS) will withhold 30% of dividends and 30% of sales proceeds. The W-8 drops this to 15% of all dividends and 0% of sales proceeds, with this money instead being taxed in Australia.

To read more, please see the ATO’s website.