G’day Traders,

Last night I watched a stockbroker on TV being so positive about the markets. I was thinking – wow – these guys really go on an emotional ride and if you are on TV you are probably pretty good right?

Well it saddened me that this industry is SO reactive to a point where their emotions are linked to whether or not the ASX goes up or down.

That was when I went to bed… I woke up and looked at the market and though…. Oh no!

This wasn’t for my trading, but for yours. I feel like I really need to give you guys confidence because I knew some of you would be down after Friday. I know that the probability of signals like yesterday’s turning out to be nice trends is high because they all turned at once. Therefore, you need to trade this with the correct risk rules.

In my trading I know that all this stuff on the economy is critical and that we are going to get something positive said and negative data. This is positive and I expect the markets to go choppy before they move. The best moves come out of this, and this is what I like to see because it tells me “the chances of a big move are high”.

Now when I look at the signals, they haven’t crossed again so nothing really changes, but from an emotional point of view some of you must feel a little battered, especially if you were looking for confidence after Friday.

I will talk about the markets later, but one thing that I now feel like I understated yesterday is risk management. Or did I? I am not sure, but once more if you are feeling battered then I believe it is a sign you have too much risk on the table.

If you asked me if we got new signals tomorrow – “Would you take these trades?” I would say yes. This movement in the market is what I expected. The market is at a critical level and there is a lot of bad economic news out there after good earnings (and I have talked about this before). Bernanke’s speech was a good one for the markets. The issue is that there is no follow through and I would I have expected to see this.

So based on this, what does it mean as a trader?

• The market is eager for positive news, but profits are quickly taken.
• Investors see high risk so they don’t want to be over exposed.
• Focus on risk management.
• You may get hurt a few times before a big move…

Ok – I have to expand on this point. Successful traders take hits and minimise the damage, but then when it happens they take advantage. Taking hits is part of what trading is about. The thing is, you can’t change your style just because of this. What you want to do is take the hits and make sure the damage isn’t major, so that when it breaks you are in and take advantage.

If you change now then you miss out – all the hard work of the last few days is undone. You also have to think with all the news out there that a big move is more likely than usual. The problem that works against us here is the time of year. It often starts a couple of weeks into September, but I don’t want to miss out.

The US S&P500 -1.47, Brazil -2.02, European top 500 flat and UK +0.89%. Nikkei +1.76, China +1.97 and ASX +1.89 (down 0.86 in early trade).

Sorry – no tweets last night. Nothing much happening – I thought about mentioning the data that was ‘negative’, but I didn’t think it was that bad – and nothing was happening. That is why I was shocked this morning. It is the market reaction to news that is important. I think the market was desperate for something positive and reality is setting in on the equities – but they never crossed.

On the bonds – have you seen how far they have gone? Check out the September weekly. Now remember the biggest buyer / owner of treasuries is China and the ‘intelligent’ people decided they didn’t want their money so now they are sellers.

Yes – the Fed can buy however much it likes and that puts Gold back up as the best investment right now. This is huge for Forex and Commodities. The USD should weaken, especially against Commodities (over the long term), but a crash may initially send Commodities lower.

As for the USD/JPY – the Japanese announced something to weaken the Yen as it is killing businesses, but it wasn’t what they wanted and it turned on a dime. I think it is a little bit silly because the Japanese debt level is dramatically larger than the US, and the US has a much bigger gun – in other words the Fed is more effective at devaluing the USD compared to the BOJ devaluing the Yen.

They should play smart and find another way to attack. Having said that the JPY is super strong so I wouldn’t be surprised if we get a rally here in the USD/JPY. If the markets fall though this should go down.

I think Forex traders should be trading a JPY pair as we could get some nice moves. There is more and more focus on its strength (look at the weekly), but the funny thing is – if there is a crash, where will the money go with both the JPY and Treasuries so high? I assume it would flow here initially, but I think we will see the end of some correlations early on.

ETFs – If you are long equity ETFs check your stops and make sure they are not ages away. If it breaks the lows of this year do you want to be in?

Options - I am net short on equities so I will look for some BUPS. If you only trade Options be very cautious doing this.

Today’s Top Tip

The 2010 Lifestyle Summit will be held from September 3-5 at Royal Pines Resort on the Gold Coast. It doesn’t matter whether you have limited time, a limited trading budget or just don’t know how to build momentum, the speakers and many of the attendees at The 2010 Lifestyle Summit have already slayed those very same dragons and will generously share their experiences with you.

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Information for Beginners – The fact is that at a time like this you are going to have some losses. This is part of trading, but you should never change your trading style because of this – you just need to adjust your risk. When the chance of a big move is high, so is the chance you are going to get into the wrong trade more than once. You’ve got to make it count when it goes.

Information for Intermediate – Patience is needed here. Diversification is important too. If you missed that short on T Bonds you may want to take it a day later – at a higher price with lower risk.

Information for Advanced – I believe the markets are trending generally, but you have the skills to determine that. Do not second guess this analysis because a couple of trades didn’t work.

Scott Goold

Head of Lifestyle R&D

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Trader Term of the Day – Back Testing

Testing or optimising a strategy based on historical data and then applying it to new data to see if the results are consistent.