specialist share education your entry to personal & economic freedom 25 february 2011

Specialist Share EducationSpecialist Share Education

Your Entry to Personal & Economic Freedom

25 February 2011

The Next 10 YearsThe Next 10 Years

• Developed world stock market indices will go broadly sideways

• Emerging world stock markets will do well• Commodities run countercyclical to stock markets• Inflation will spike significantly as liquidity filters out

into economies & interest rates rise– The 27 year bond market bubble is bursting now– US will be forced to print more & more money as creditors

stop buying Treasuries – US money printing made worse as it is mostly short term– US dollar will probably fall in half again

The Next 10 YearsThe Next 10 Years

• Markets work in cycles– The major cycles are secular (15 to 20 years)– Crashes occur in the early part of the cycle– Later markets are flat with inflation breakout

• Sounds easy enough!– Just buy & hold through 15 to 20 years– What about 1987 crash (just a blip on 1982 to 2000

secular bull market & only lasted 55 days)• So we need to know how to trade the cyclical

waves that last

Timing The CyclesTiming The Cycles

• There are less than 3 ideal times to enter the market per year & that is when sentiment is not positive

• There are maybe 3 high probability times per year to enter a breakout or trending stock

• There are 4 to 6 months of the year when it is just tougher to make money

IntroductionIntroduction

• The share market has the potential to change your lifestyle substantially BUT ………….

• You need– An effective game plan – Emotional discipline– Patience– Resilience– A supportive environment to develop these attributes– To give the process time

How The Program Is StructuredHow The Program Is Structured

• Critically important concepts • A realistic view of what can be achieved & how• The mechanics of trading• How to select high probability opportunities in

any type of market conditions• Developing a business trading plan for you• Commence at a low risk level for 20 trades• Practice, practice, practice effective processes

What Can You Achieve?What Can You Achieve?

• You will develop a business plan to put you on track to achieve your objectives

• Medium to longer term active investments– 20% to 30% per annum

• Trading without leverage– 40% to 70% per annum

• Trading with leverage– 100% + per annum

My Results Since June 30My Results Since June 30

Wins Losses Ratio Trades Open

Small Cap Buys

73 19 1.71 18 $125 profit for every $19 loss

Large Cap Buys


Short Sells 23 51 1.40 3 $32 profit for every $51 loss

Recent Example TradesRecent Example Trades

• Traders– MCE (Matrix Composite & Engineering)– FGE (Forge Engineering Group)– CCU (Cobar Consolidated)– BDR (Beadell Resources)– AYN(Alcyone Resources)

• Investors– MIN(Mineral Resources)– EQN (Equinox Minerals)– NCM (Newcrest Mining)

Specialist Share EducationSpecialist Share Education

IMPORTANT INFORMATION

Garry Davis is an authorised representative of Financial Services of Australia Pty Ltd which holds Australian Financial Services Licence No. 338 961. Garry Davis, working through Specialist Share Education is licensed to provide general securities advice only and this information which you will be taught has been assembled without regard to your particular investment objectives, financial situation and particular needs. Whilst you will be given education and guidance in how to develop a trading or investment plan which may fulfil your objectives, the decision to trade and the method of trading you choose is for you alone to decide.

Specialist Share Education expressly disclaims all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the information taught. Specialist Share Education will not accept liability for any loss, damage or expense incurred or suffered by you if you rely on any information provided in making trading or investment decisions.

A Touch of RealismA Touch of Realism

• You don’t win every time !• Trading can be an emotional roller coaster – be

patient• It takes practice to get good at it• You need to think differently to succeed• There is no magic formula – it is just about an edge • The price does not go up as soon as you buy it• We only deal in probabilities so that means plenty

of negative individual trade outcomes

A Touch of RealismA Touch of Realism

• It is absolutely worth the effort – the rewards will surprise you

• You can get off your treadmill and become free, but it takes time & application

• You can make it fun & enjoyable – it is all in how you approach it

• Why is the stock market challenging?

• You have to be contrarian at the extremes!– You need a trading environment where that is possible– You need tools that tell you where the market is situated

Why Most Traders FailWhy Most Traders Fail

• Follow emotions– A need to be right or control– Succumb to fear & greed

• Follow the crowd – This is a comfort zone reaction

• Fail to do the key basics- define an appropriate exit level if the trade doesn’t work- decide a dollar risk level that is very comfortable

• The aim is not to predict• The aim is not to be right• The aim is to make money consistently like any

other business– YOU MUST HAVE AN EDGE– Your edge needs to be simple & bullet-proof– Remove emotion with a clear game plan– Exit “failed” trades– Take profits regularly according to a pre-determined

plan

How Does This Work?How Does This Work?

• You need to think differently

• Focus on high probability, low risk opportunities

• Focus on an activity & financial targets structure instead of individual trade outcomes

• FOCUS ON THE PROCESS NOT THE MONEY!

Thinking DifferentlyThinking Differently

• What does this mean?– Trading is a business– You don’t need to know which way markets will go– Revenue & expenses concept– Look for contrarian opportunities– Be patient– Be disciplined– Trade what you see, not what you think

Successful TradingSuccessful Trading

• Method

• Mind

• Money management

Successful TradingSuccessful Trading

• Mind– Our mind filters most of the signals we receive

unconsciously– When you trade on the basis of fears & fantasies you

are responding to the content (bias) in your head and not what the market is telling you

– You have a great capacity to delude yourself but your success depends on seeing the truth

– So you need decision making system for processing information that is transparent & unbiased

Market RealityMarket Reality

• Over short periods markets are influenced by news & random events– This makes it harder to trade– Trading on a longer timeframe is easier

DefinitionsDefinitions

• Bear market– The market index is below its 150 day moving average

which is also pointing down and acting as resistance

• Bull market– The reverse is true

– This is clear, objective, easily determined– Where are we now?

How Markets OperateHow Markets Operate

• What does the “smart money” do?– We cannot know what they know ….– But we can follow their signals

• Main market phases– Phase 1 = consolidation after a big decline– Phase 2 = bull market rally– Phase 3 = topping distribution– Phase 4 = bear market decline

Market PhasesMarket Phases

Timing the MarketTiming the Market

• Key is to stay in alignment with the trend– Stay focused on the bigger picture trend– Trends are relatively easy to follow if you trade what you

see and not what you think– In bull markets buy the dips– In bear markets, short sell the rallies, don’t try and buy the

dips to make back losses thinking that is the bottom

• When the market is choppy sideways– Minimise exposure– Don’t try and make trades that are not there

Vital Big Picture ToolsVital Big Picture Tools

•Orientation of the moving averages•Chart patterns that indicate tops and breakouts from significant lows•Bullish Percent Index

BPSPXBPSPX

Key ConceptsKey Concepts

• Trending trades– Trading this way is an attitude or state of mind– Suited to certain types of markets & psychologies

• Capture trades– For different objectives and psychologies

Basic Charting ToolsBasic Charting Tools

• Charts are a psychological roadmap to the sentiment of the trading masses

• Candlesticks & patterns• Trends & trendlines• Volume• Momentum indicators• Fibonacci retracement levels• Bollinger Bands

Market PhasesMarket Phases

Sequence of ProcessSequence of Process

• Determine the market or sector phase– That sets the balance in your trading portfolio

• Bullish Percent Index charts to identify the extremes & set direction– I include other factors like VIX, media sentiment, advancing

vs declining volume

• Apply the strict rules for the chosen trading avenue• Enter on reversal candle pattern or breakout• Exit strictly according to the rules

Trading AvenuesTrading Avenues

• Small stocks– Phase 2 opportunities

• Larger stocks– Phase 2 opportunities– Range trading (both buying & selling)

• Short selling – Profit downgrades– Declining price patterns

Small Cap TradingSmall Cap Trading

• Phase 2 – positive green candle in either phase 1 or the breakout of phase is the flag– Determine your trade purpose

• Entry– No later than 2nd day after breakout & no further than 25%

from breakout price– ISL 2% under phase 1 low if trading the breakout– Enter after minor retrace or pause + evidence of volume

starting the increase again– ISL 10% under the recent low– Maximum 3 thrusts higher

Small Cap TradingSmall Cap Trading

• Capture trade exit– Two times risk gap– Move trailing exit to entry at halfway to profit target– OR classic reversal pattern

• Trending trade exit– Classic reversal pattern OR– Trail an exit under the swing low

Using Fundamental AnalysisUsing Fundamental Analysis

• Management skill in using assets– Return on shareholder equity (ROE)

• Growth in profits– Earnings/share averaged over 3 years

• Industry & company prospects• Manageable debt– Generally 50% of total equity or less

• Value – Price / earnings ratio (P/E ratio)

What About Emerging OpportunitiesWhat About Emerging Opportunities

There are higher risks pre-production.What gives us a large edge? proven management to deliver projects projects closer to production higher grades and lower impurities good infrastructure access blue sky expansion + worthwhile JORC resource

Emerging OpportunitiesEmerging Opportunities

What gives us a large edge? funding in place resource in global short supply Eg Sth American Ferro Metals (SFZ)

Sth American Ferro Metals (SFZ)Sth American Ferro Metals (SFZ)

• Junior iron ore producer in Brazil• Targeting 20 year mine life @ 3Mtpa• Further drilling needed to define the resource• Geology well understood next to Vale operation• Initial sales into local market• Stage 1 to produce $30 million O.P per year• Current market cap $62 million


• Stage 2 to produce 6Mtpa & $70 million O.P• Produce for export with rail & port facilities available• Vale likely to takeover at some point• Economics– Low cash costs $13 to $23/tonne– Simple processing– Capital already spent on stage 1– Stage 2 will need ~ $130 million– Fully funded for exploration & development


• JORC compliant resource expected H1, 2011• Current price very cheap

Short SellingShort Selling

• How does it work?– Short selling dampens excessive price swings– The opportunity - prices fall twice as fast as they rise– Plays out under a very different psychology– Market bottoms are built on fear– Market tops are built on greed– Shorting near the top is harder than buying near the

bottom (volatility)


• Opportunities– A false break to a new high (one of the strongest

signals)– What is the psychology around that pattern– Reversal at top of a range eg BEN– Strong downward trend – Big red candle profit warning eg BKN, TSE


• Some rules to observe– Use wider stop loss exits– Maybe a smaller risk per trade– Be prepared to get back in again if stopped out– Be happy with a quick profit and exit

Contracts for DifferenceContracts for Difference

• What is a CFD?

• How do they work?

• How to use them effectively– Trading stocks conservatively– Trading indexes– hedging

Large Cap Buying from OversoldLarge Cap Buying from Oversold

• An abrupt single day reversal• Double or triple bottom• Strong rise from a pause or brief consolidation


• An abrupt single day reversal• Entry rules– Ideally after price has declined to support– Significant reversal candle + big volume rise– Enter the day following the trigger day (2% of close)– ISL set 1% below the low of the trigger day– Eg BHP


• Double or triple bottom• Entry rules– Ideally off support level– Weak volume on the first rise, low volume on decline,

then volume strengthening on the second rise– Second leg low is inside Bollinger Bands– Trigger day is strong upward candle on rising volume– Entry the day after the trigger day (2% of close)– ISL set 1% below the low of the trigger day


• Strong rise from brief consolidation• Entry rules– Ideally off support level– Setup is a period of relatively small range trading in

tight band on lower volume– Trigger day is a candle 200%+ larger than the 3

previous days candles– Entry the day after the trigger day (2% of close)– ISL set 1% below the low of the pause period


• Exit rules• Capture trades– 2 times risk gap OR– Reversal outside Bollinger Bands– Move trailing exit to entry price once the price has

moved halfway to the profit target


• Exit rules• Trending trade– Reversal pattern outside Bollinger bands– Trailing exit under the most recent low– Execute whichever one occurs first

Large Cap Trading a RangeLarge Cap Trading a Range

• Rules for entry– Range needs to be defined by a minimum of 2 points

top & bottom (horizontal or inclined)– Buy in lower qtr and short sell in upper qtr– ISL set 2% outside the channel boundary

• Rules for exit– 1st profit target at midpoint of the range & move ISL to

entry– Exit remainder at the other side of the channel

Short Selling – Profit WarningsShort Selling – Profit Warnings

• Rules for entry– Large red candle (include the gap down on open)

400%+ larger tan previous candles– Close very close to the low of the day– Large volume increase (500%+ than previous 3 days)– Entry the day after the trigger day around the close– Not at the end of a large decline– ISL set 2% above the midpoint of the trigger candle– Eg BKN, DOW

Short Selling – Profit WarningsShort Selling – Profit Warnings

• Exit rules– Set a nominal target at major support – Take partial profit at the halfway point between the

entry price and the support level

Shorting - Break of SupportShorting - Break of Support

• Setup– Break of a well established support line– Existing evidence of lower highs & lower lows– Volume increase on the down days (not mandatory)– Ideally a weak rally back to break level

• Entry rules– Entry the day after the trigger day– ISL set 5% above the breakdown level– Add to positions on weak rallies (twice only)

Shorting - Break of SupportShorting - Break of Support

• Exit rules– Target a significant support level (nominal only)– Move ISL down to just above the previous rally high

OR– Reversal pattern outside the Bollinger bands

Your Trading ModelYour Trading Model

• Copy this model & put your own numbers to it

• Your plan – let’s do it now

My Results Since June 30My Results Since June 30

Wins Losses Ratio Trades Open

Small Cap Buys


Large Cap Buys


Short Sells 23 51 1.40 3 $32 profit for every $51 loss

Trading DiaryTrading Diary

• examples

Mindset ChangesMindset Changes

• Think like a business – revenue & expenses• Losses are necessary & quite acceptable• Think only in probabilities & risk / reward• Work to an activity plan• Focus on the process and not the money• Be patient• Recognise that ongoing education is essential

Mindset ChangesMindset Changes

• Overcome the fear of missing out• Believe in yourself – positive internal dialogue• Be passionate about your business & why you are

doing it• Don’t trade unless you are good shape physically and

mentally

The Next StepsThe Next Steps

• Construct your trading plan– Send it to me for comment

• Open trading accounts– For shares & for CFDs

• Take small steps & just focus on the process• Later – Live Trading Room – Trading Mastery

How To Use the ResourcesHow To Use the Resources

• Daily alerts• Weekend video updates• Must sessions (Market Update & Skills Training)• Special alerts• Live Trading Room

Key Principles of Effective TradingKey Principles of Effective Trading

• You need to get good at the process– You need to learn to trust the process and yourself– That means disciplined focus– It also means exercising some judgment and not just

lapsing into auto pilot– Start small & build from there– Trading over a 1 week timeframe is so much harder than 1

month, than 1 year– You cannot make the market do anything – you can only

make yourself available for high probability opportunities


• Consider the overall environment to determine a bias to your strategy that is appropriate for current conditions– Always work from the top down to gain a clear

perspective eg current gold setup– Identify current high probability areas– Some trading opportunities are constant through all

market conditions, some are not– How can you act in easy, low volatility conditions– How must you act in erratic more volatile markets


• Capital preservation first, profits second• Be crystal clear about your purpose• Cultivate a winning mindset– What does that mean?

• Learn sequentially– Don’ try and learn it all at once– Just step by step and build knowledge progressively

BrokersBrokers

• Types

• How they work

• What to be aware of

Market DepthMarket Depth

• Trading platforms

• Opening & closing auctions

Order typesOrder types

• Execute at the current market price

• Execute above the current price if buying to enter or selling for a profit

• Avoid a loss larger than you can accomodate

• Conditional orders

specialist share education your entry to personal & economic freedom 25 february 2011

Documents

year bond market bubble

secular bull market

investment plan

business plan

business trading plan

financial situation

stock marketsinflation

high probability times