In this 7-part series we summarise the common mistakes and omissions that prevent traders from remaining successful over time. We will be publishing each week.
So, you have decided to make that short-term trade. You’re pretty sure you’ve done the technical analysis to identify the high probability opportunity or you’re pretty convinced about the integrity of the entity that gave you that hot tip.
The successful outcome of a trade is dependent on seven major factors and you should tick off each of these on a “checklist” before pressing the trade execute button:
STEP-1 : Correct Long-term Macro
Its amazing how little attention most traders pay to the "macro":
- Is the overall market in an up-trend or down trend?
- Are we near a major market top or bottom?
- Are we in an overall bull or bear market?
- Are conditions prevalent for positive overall JSE gains in the future?
The long-term and short-term "macro" has a significant impact on probabilities of trading outcomes. Trading near significant market bottoms when we are in a young bull market with broad positive breadth can significantly raise your odds of success as the odds of you making a poor share selection are minimized. The term "a rising tide floats all boats" comes to mind. In fact, under favorable conditions you can throw darts on the stock market section of a newspaper and still come out ahead.
Things to look for that are signs of a favorable LONG-TERM macro are:
- Interest rates and inflation are falling (incredibly powerful, see here)
- The Rand is strengthening
- Annual purchases by foreigners of SA stocks and bonds are positive (see here)
- The JSE’s earning yields are greater than inflation (see here)
- The SA bond yield curve is positive
- The SA leading economic indicator has positive annual growth (see here)
- The JSE TOP40 has positive year-on-year growth
- Market breadth is expanding and confirming highs with the JSE (see here)
Sharenet Analytics clients have access to all of this and more, in real-time, with SMS/email alerts on their Macro Dashboard (see video demonstration here). They also have access to a real-time composite indicator that encompasses all of the above factors into one bull/bear market signal, which is demonstrated and discussed here.
In the next section we will examaine short-term macro.
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.