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This information is based on technical analysis of historical data and does not take developments since writing into account, which should be considered before acting on the advice. The advice included in this report is general advice, based solely on technical analysis of the securities alone without taking into account the investment objectives, financial situation and particular needs ("financial circumstances") of any particular person. Before making a trading decision based on the advice presented in this report, the subscriber must consider whether the advice is appropriate in light of his or her financial circumstances or seek further advice on its appropriateness. Please check with your Stockbroker regarding availability of short selling services and placement of "stop loss" orders and extra potential transaction costs. Figures in this report do not include transaction and financing costs for CFDs. 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Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 2 Content Introduction 3 Trading In All Market Conditions 4 "This GFC surely it can't get any worse!" 5 ASX Share Ownership Survey - Where investors get their information 7 What is good investing all about? 10 Winning and Losing Investors 11 Protecting What You've Got - Understand your exposure 13 Protecting What You've Got - Diversify, diversify, diversify 16 Protecting What You've Got - Always use a stop loss 20 Profiting From A Falling Market 22 Think Outside the Square 26 Step 1. Technical Analysis - Always follow the trend 29 Step 2. Identify high impact trading opportunities 31 Technical Analysis - Japanese Candlesticks 34 Step 3. Attend an Education Workshop with Australian Stock Report 37 Conclusion: What Winning Investors Do 37 Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 3 Introduction In the last 30 months we have seen the financial markets hit their highest levels during an unprecedented bull market. In the same way, during this time we have also seen unprecedented global market corrections and government intervention to impede the advent of a global recession, better known to us all as the GFC – the Global Financial Crisis. Only weeks ago a new financial crisis began to emerge, that of the European Foreign Debt Crisis. This crisis has caused recovering markets to further give up. This report is a transcript of a lecture given by Carl Capolingua, Head of Education for the Australian Stock Report, at a conference held during May 2010, in Sydney, Australia, where he explains how to better trade the financial markets under all conditions. For more information on trading the financial markets, stocks, index, FOREX, commodities and bonds visit our website at www.australianstockreport.com.au Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 4 Trading In All Market Conditions Let’s start by talking about the current market situation: is it good or bad right now? What’s the biggest problem that the world is facing at this point in time? Debt. The debts of who? Europe, or specifically the “PIIGS”. This term has come to refer to those countries worst affected by the current debt crisis: Portugal, Italy, Ireland, Greece and Spain. For those who remember the last “GFC” we had, what does GFC stand for? Geelong Football Club? No. The Global Financial Crisis. These three letters – GFC - are synonymous with people losing money and horrible things happening in the global markets. The last GFC was caused predominately by companies taking on too much debt, getting into trouble with that debt and eventually going bankrupt. That was the last GFC. But this apparently recent GFC, starting just a couple of weeks ago -what is this one been caused by? Not by companies going bankrupt, but by countries going bankrupt. So I need to put to you: which one is worse? It’s a big deal now, and certainly the markets have taken a big hit over the last few weeks. I guess a lot of people might be sitting there, looking at their portfolios, thinking, “Gee that’s not looking too good anymore, but hopefully” –(there’s that word ‘hopefully’, not a good word to use when you are investing)– “hopefully it can’t get any worse”. Can it get worse? Of course it can. The problem with the chart (above) is that it’s not a depiction of the market now - I’ve tricked you. That’s the share market back when it fell from the high in November 2007 down to about 5,000 and a bit. That is what it looked like last time when the last GFC just started and everything was going gangbusters. Then the market fell down and people thought ‘that’s okay, it will go back up’. Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 5 "This GFC surely it can't get any worse!" Surely it can’t get any worse. Here is a chart of the market now (on right). The two charts we’ve looked at so far are almost identical, aren’t they? So I think there’s a lot of people in the same situation right now going, “Gee, I hope it can’t get any worse”, and you know what? It’s not so bad because you only lose if you sell. A lot of people say “It’s okay, I only lose if I sell - when it goes back up I will be alright” and we have seen how poorly that strategy worked last time. Now the question is, from where we are right now, how low can it go? If we are indeed in a GFC, we could be in big trouble. Through the last GFC the markets fell about 55% and a lot of peoples’ self-managed superfunds fell by probably close to that amount. On the way back up, though, quite interestingly it rallied at about 63% to go from that bottom to back up the recent high. It doesn’t make much sense, does it? For something to go down 55% and go back up 63% and still not be anywhere near where it started. Why is that? How can something go down 55% and back up 63% and not be back where it was? The reason is that on the bounce the price is coming from a different base, isn’t it? Let’s just use round numbers here. If you started with 100% and you lose 50%, you’ve got 50% left, don’t you? How much do you need to make on that 50% to get back to 100%? 100% don’t you? You need to double; if you halve, you need to double to get back to where you were and we certainly did not double. There is a major problem with this because how often does the market go up 63% in about 12 - 13 months? Not very often! So you really need to question the sustainability of this rally to get all the way back up to those old highs, especially now with what we are seeing in Europe. Now, I’m not trying to scare you about that, I’m just trying to put the reality of this situation in front of us as investors; I say ‘us’ because it’s an issue for all of us. And the performance of that squiggly line on that computer screen actually affects Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 6 everybody, whether they like it or not. It can affect you directly because you are holding shares, it can affect you because you’ve got a superannuation fund, or it can affect you because general wealth levels and the share market value of those companies can affect you keeping a job. A lot of people lost a lot of their personal wealth in that last GFC, and unfortunately a lot of people have already started to lose in this correction, too. The question I’ve got for you right now is: If you have lost some money, what are you going to do about it? Are you going to get bitter about it and say the market is crazy or this is stupid, or question why this is happening? Do we get bitter about it? Don’t get bitter, get what? Who said ‘even’? Get even! That’s like a Clint Eastwood movie! Not “get even” -who are you going to get even with? Get better! Don’t get bitter about the money you’ve lost, get better so that it doesn’t happen to you again. If you have lost some money in the past and you’re still enacting the same sort of processes that caused you to lose that money, you can expect to lose money again when the next GFC rolls around. What is it going to take for you to get from bitter to better? There’s one word I’m looking for; I’ll give you a hint. Knowledge? Learning? I think the one key factor to help get you from bitter to better is education. Education on how to protect yourself from what happened last time to ensure that it does not happen again. The ASX do a Share Ownership Survey 1 every two years where they survey literally thousands of investors just like you and ask various questions about investors investing habits. The response which had the most impact on me was this one basically asking “where investors get their information to make their decisions on how they put their hard earned money in the market”. And those two words are really important for me, “hard earned”. 1 http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 7 Has anybody ever tripped over a crack in the pavement or fallen face first into a pile of money? Or have you worked hard for your money? I’m sure you did. Your money is important to you and we would all like to have more of it, of course. We hate to have less of it and therefore we need to take very seriously how we put that money at risk. Don’t we? When you make an investment, you take on risk. I’m not sure if enough people fully understand how they put their money at risk. The reason I’m saying this is because of the following results from the last ASX Share Ownership Survey. The survey found that 34% of people said, “My primary influence for investing my hard earned money comes from a financial professional”. 2 Now I don’t mind this concept because what you are really saying here is ‘I don’t really know a lot about investing, so I need to find someone who does. I’m going to pay them a little bit of money for them to improve my returns. As long as they improve my returns by an amount greater than what I pay them – I have a good deal’. It makes a lot of sense. How have your thoughts changed regarding financial professionals over the last few years? Have these so-called professionals increased the value of your wealth or are they simply riding the whole roller coaster all the way down and back up? I think a lot of people out there who engage these financial professionals - like a financial planner or financial advisor - have probably been paying them to lose money. I’ve got some news for you: you don’t have to pay someone to lose your money. You can do that by yourself! ASX Share Ownership Survey - Where investors get their information 34% of people said, “My primarily influence for investing comes from a financial professional” I want you to be very, very, very vigorous in the way you scrutinise the performance of financial professionals. Now should you judge the performance of these financial professionals by how they do in a rising market? Who makes money in a rising market? 2 http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 8 That’s right, everyone does. Or should you judge the performance of these people in a falling market? If they are able to maintain and even grow your wealth in a falling market - as well as in a rising market - they are doing a great job. If they are not doing that for you, I would suggest that you could do just as well by yourself and save your own money. I think it’s important for us to scrutinise financial professionals a whole lot more. After financial professions, the next major source people get their information from is (and this was no surprise to me) the media. This includes newspapers, TV and magazine. Almost one in five people said, “The decision to put (their) hard earned money at risk in the market came from reading the newspaper”. 3 That was interesting to me. When a newspaper hits your door step, how old is the information in that paper? Around 24 hours, isn’t it? You can’t really call this news. At that rate, it is “information” but it’s not news – in fact, as far as the share market is concerned, it’s ancient history. What is the value in using information which was news yesterday? Is there any value at all? You’ve got to remember that markets work pretty quickly these days. Any information in the newspaper is already embedded into the prices on the market. So if you are acting on such information now, you’ve got no advantage; in fact, if you act on what you read in the newspaper, you’re actually helping those people who got in yesterday. So the value of the information is - and I’m being quite serious here - zero. There is no value in that information. The other problem with newspapers of course is that they are written by journalists. Some journalists won’t just report the cold hard facts - they exaggerate the story a bit, sensationalise it. Why are they encouraged to do that? To sell newspapers, so we get excited, we want to buy that newspaper, read why the world is coming to an end, or why the world is fantastic. Newspapers, correct me if I’m wrong, are designed to make us emotional and we are emotional beings. Most of us get emotional easily. Do we make good investing decisions when we are emotional? No, we don’t. So there are two important points here about 3 http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 9 newspapers; number one, the information is ancient history and of no value to you for that exact reason and number two, such newspaper reports are designed to make you emotional - and you don’t make good investment decisions when you’re emotional. So it is not surprising for me that people do ride emotional roller coasters because of where they are getting their information. The third place where people get their investing information from is friends, family, colleagues, etc. I won’t harp on about why that’s quite crazy. However, 13% of people said this is the primary sources of where they get their information from. The final category was company reports. This one really worries me the most. For example, the National Australia Bank produces its annual report and it comes to you in the post. Two things are of concern here, the first being currency - how old is this report? Very old! Secondly, with what vision does National Australia Bank produce the report? Does it come from accounts? Or rather does it come from marketing, sales and public relations? Certainly the information there is very glossy and if there were anything bad it would be buried where you wouldn’t be able to find it, in a font so small you wouldn’t be able to read it without trying very hard. Is that a fair comment, or am I just making stuff up? I think that’s fair. So you really need to question the value of the top four responses to the last ASX Share Ownership Survey. I would say that if your money is important to you and you didn’t fall into a pile of it recently but worked hard for it, you’ll want more of it and will hate to see it go away unnecessarily. If this is the case, I think you need to do something a little different with your approach. If you do the same as most people, you’re probably going to struggle to beat the markets. That means when the markets go up we do okay, but we don’t beat the markets. When the markets go down, we get wiped out. It’s all about beating the market returns. If the four ways that most people get their information is the wrong way, what’s the right way? Learn More and Earn More. The CFD Trading Revolution. Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report 10 What is good investing all about? I will give you two options here. Is good investing about: 1) making money, or is it 2) about protecting what you’ve got? We’ve got a couple of responses, so let’s do a survey and you can only answer once and I want to see all hands go up. How many people think number one is the most important – that is, making money? I think that’s about two thirds of you. How many people think you need to protect what you’ve got? There’s the rest - and this lady has put her hand up for each one so she thinks they are equally important. I guess in many ways they’re both important, aren’t they? But for me, personally, I think the one which is most important is protecting what you’ve got. However, most investors are only thinking about number one. These investors go into the market thinking it’s some giant pool of money that they are going to fall face into and they’re going to have untold wealth because it can’t be too hard. How hard can it be? You just buy a bunch of blue chip stocks; hold onto them and they go up in the long run. Don’t they? Yet we have seen that the market goes up in the long run, but in the long run it also goes down a few times, doesn’t it? What do you think is more plausible? The market goes up in the long run or the market goes up and down in the long run? The so-called investment professionals don’t talk to you about this, do they? People want to make as much money as possible in the shortest space of time and they forget number two. There is a relationship between risk and reward. If you want greater reward, what happens to risk? You need to take more risk, don’t you? If you want less risk you need to accept less reward. So we know that relationship. Now the importance of protecting what you’ve got can be summed up in really just one little analogy. If you lose 50% of your capital, you need to make 100% of what you’ve got left to get back to just break even. How easy is it for you to make 100% on your capital? [...]... Report Learn More and Earn More The CFD Trading Revolution I’ve got a news flash for you: it doesn’t matter what you think, does it? It matters what the market thinks So, start to learn about how the market is thinking Ok let’s look at another one, what’s this stock? ABC Learning centres And what’s ABC Learning Centres trading at now? Zero! What will it be trading at in 12 months time? Zero! What is the. .. Australian Stock Report Learn More and Earn More The CFD Trading Revolution keeping the price at that level When the price moves above that level, it must be because there is more demand there The price needs to move rapidly The alternative is that supply doubles and demand decreases and what happens to the price? It comes back down again, doesn’t it? We don’t want that to happen So the question is: What... © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution So the question becomes if the CFD is exactly like a share, why would you bother trading a CFD? You’d bother because it costs you less In the aforementioned chart we can see that BHP is trading at about $40 on the ASX and if you were to buy 100 shares, it would cost you $4000 By using a CFD however we only need to use... Report Learn More and Earn More The CFD Trading Revolution Candlesticks charts include a simple coloured box for each day of the week Monday gets a box, Tuesday gets a box, Wednesday gets a box, and so on The difference is that on the up days (when the price went up) we are going to make them a white box On a day when the price went down we are going to make them a black box Why do we do this? Because these... 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution to do Right now we have a bunch of black candles there (points to far bottom left-hand side of chart); what does that mean? More demand or supply? More supply For those in the room wanting to go long at this point in time, you might have just missed the point More supply means people are selling and we don’t want to be involved... because they will tell you 32 Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution the same story I have just explained to you Lots of demand, then supply increased for a while, and now you are just waiting for the supply to dissipate and the price to go up You just want to find that chart 100,000 times now, don’t you, and. .. than this in the next 18 months” 11 Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution The second is “I’m a bear, I reckon that GFC2 has just started and in 18 months time we are going to be down to the lows again” The third is “I’ve got no idea; I’m just going to stick my head in the sand and hope for the best on this... great gadgets and sell them to Gen X’s and Gen Y’s And they go nuts for them, they line up around the block to buy these things How much free advertising did Apple get yesterday? Do you realise now that Apple is a bigger company than Microsoft? Amazing stuff 26 Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution Let’s... comes to shares it is exactly the same concept Effectively you can borrow shares in a company whose price you believe will fall, sell them at a high price and when they come down you buy them back and the difference is your profit 22 Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution Let’s use the BHP example again: we... little bit more work to produce every day than the Investors Report 25 Australian Financial Services Licence Number 301682 © 2010 Australian Stock Report Learn More and Earn More The CFD Trading Revolution Then we’ve got the deluxe version, the CFD Traders Report Now this is not just Australian shares, this is Australian shares, US shares, foreign exchange, indices and commodities like gold and oil This . them, the CFD is going to do exactly the same thing. The CFD is designed to replicate the securities transaction. Learn More and Earn More. The CFD Trading. Professional investors use the power of leverage all the time and certainly when it Learn More and Earn More. The CFD Trading Revolution. Australian