The Trader’s Handbook Ep3

The Trader’s Handbook is brought to you by IG Markets South Africa in collaboration with The Finance Ghost. This podcast series is designed to help you take your first step from investing into trading. Open a demo account at this link to start learning how the IG platform works.

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The Finance Ghost: Welcome to episode three of The Trader’s Handbook. I must say, I am really, really enjoying these podcasts with the team from IG Markets South Africa and Shaun Murison, as always my guest on this podcast. We really hope that you’ve enjoyed these first two episodes that we’ve put together. This is now episode three as mentioned, and hopefully you’ve started to learn about the differences between trading and investing.

And if you have joined us from the start in these podcasts, you should certainly have your demo account open by now. If you haven’t done that yet, go off and do it, get that demo open. There really is no replacement for having an on-screen view of the IG platform and how it all works. And I must say, I’ve been having quite a lot of fun with mine, particularly trading those Mr Price attempts to break above a resistance level, but we’ll maybe talk about that during the show. But Shaun, thanks as always for making time for this podcast and sharing your knowledge with the listeners. Lots of fun stuff for us to talk about today.

Shaun Murison: Great. Thanks for having me.

The Finance Ghost: I’m keen to start with this Mr Price trade, actually, and again, the idea is that this podcast is evergreen. If you’re listening to this long after we’ve recorded it, going and looking at a Mr Price chart probably won’t make a whole lot of sense to you. But the point is to also bring real-world examples to the podcast, because the idea, as I mentioned, is to open up a demo account to actually be out there trading. Yes, it’s monopoly money, but treat it as real money and learn from it.

What I’ve done with that Mr Price trade, it’s something we mentioned on the last podcast as well, is I’ve used the strategy now of taking smaller positions on the short, and when that share price does bounce a bit, just adding to the short, I think I closed one leg of it as well that was solidly in the green. I guess what I’ve learned from this is that throwing everything at a single price point is maybe not the best way to go. I’m keen to get your views on that. I’ve sort of taken smaller positions and tried to just not be a hero on that chart and try and pick exactly the right place.

Source: IG Markets platform, 30 July 2024

It seems so far, so good. But what is quite interesting is if I look at a chart of Mr Price on the platform, it’s been trading between roughly 200 bucks and 210 rand a share. Now, if I had timed my short perfectly at 210 rand and closed at 200 rand, if you work it out, that’s a return of about 4.8%. Now, that might not sound spectacular. That’s money market stuff.

But here are two things to remember. The first is that that is money market stuff in twelve months, not money market stuff in the space of a week or a few days. And that’s one of the key differences with trading, right, is you lock in these returns over a short time period. And of course the second point is leverage, something we spoke about in episode two. Go back to episode two if you want to hear more about it. But let’s touch on it here again, Shaun, because the point is, on a ten times leverage basis, that is a return of 48% on the margin that I had to post for the trade, right? I mean, that’s my understanding of it. It’s worth confirming that I understand it correctly. And that’s because when you are trading CFDs, you only put down a portion of your exposure as cash, so your returns are magnified accordingly.

Shaun Murison: Yeah, that’s exactly it. Let’s break down that trade. Essentially, you bought it for R200 and you sold it for R210, and you took a short position, so you did it the other way. But the fact remains the same is that you bought it for less than you sold it for. You essentially did well, you made some money. We talk about contract for difference. What is a contract for difference – it’s a contract for the difference in that price. In this case, it’s that share price of Mr Price. The difference between R200 and R210 is R10 per share. If you had 500 shares, you’d have made R10 for each share. 500 times ten, you would have made R5,000.

Now, when we talk about the leverage and that now, what is the value of that position? If you had 500 shares at R210 a share, you multiply those two together and you get position size of – what’s  that – R105,000. That would be your exposure in the market. And that’s what you’re generating your profit or your loss from. Now, you didn’t have to outlay that full amount of money. You only had to outlay a deposit, which would be 10% of that.

You are generating a profit and loss from that full exposure, from that full value of that number of shares multiplied by that share price, but you’re only putting a 10% deposit down. Like you correctly said, instead of making 4.8% on the actual capital you’ve outlaid, you’ve made 48%.

That’s great when it goes for you, but obviously you just need to manage your risk on the downside. If that moved against you, your losses would be magnified by the same amount.

The Finance Ghost: I was just about to say it looks great when it goes right and it looks quite ugly when it doesn’t. I guess that’s part of why I took that approach. And again, it’s only a demo account and it’s monopoly money, but there’s no point in having a demo account if you’re not going to use it like you would your own money. Otherwise, what are you doing? I would never take my own money and go and “Hail Mary” it into a single point on that chart and say, okay, there’s my full possible Mr Price exposure on this trade idea.

Just to recap from the last show, the trade idea here is that Mr Price is having a bit of a tough time in the South African market. Clothing retail is not easy. There’s lots of competition. There’s a fundamental thesis underneath this. And interestingly enough, since the last show, they actually released an update which shows that their sales, if you reverse out acquisitions, are under pressure. Yes, they might be winning a bit of market share because everyone is struggling, but they are also struggling, and that share price is struggling to break above that kind of R210 level. It really is straining to get there.

That’s kind of where I took the approach of these smaller positions, but then I need to be careful of trading fees. I think that’s maybe a good opportunity to talk about that, because if you do lots and lots of small trades, then you do need to be careful of how the trading fees are affecting your net return. This is the dark side of my I-like-small-positions coin, and that’s because the trading fees do have a minimum charge per trade. It’s not just a percentage fee, right, so I think let’s maybe run through that in terms of how these fees work and what you would suggest to people using the platform just to kind of take this into account and manage it.

Shaun Murison: Firstly, that’s where we make our money, obviously, on the transactional fees. We’re not charging you to have an account with us, but that is your barrier to making a profit, essentially your cost of getting in, getting out. If you look at those trades, entry level brokerage rates or your commission charge for a trade like that, you’re looking at 0.2% of the value of your trade when you buy, and then 0.2% of that value of the trade when you sell. For example, if you were trading R100,000 worth of shares at 0.2%, that transaction cost would be R200. It is relatively small. We charge a minimum charge and that’s R50 per trade. But I think it’s important to realize that R50 is not over and above that 0.2%; it’s either/or. You’re paying 0.2% or R50 for the trade, whichever of those figures is greater. And then obviously it’s on the buy leg and it’s on the sell leg.

If you’re looking at the position size on JSE equities, so trading CFDs on local shares, then where does R50 equal 0.2% in terms of the size of your position or your exposure? What we also call notional value would be about R25,000, if you had a R25,000 position. But remember that you’re not outlaying that R25,000 when you’re putting a refundable deposit down for that trade, which would be in this case or that case with Mr Price was 10%. It would be R2,500.

The Finance Ghost: Okay, perfect. This is where you do need to be careful with trying to make a couple of 100 bucks on a trade. Unfortunately, you’re going to eat a lot of that up as fees.

Shaun Murison: If you trade those shares during the course of a day, in and out the same day, then there are no further costs. If you’re holding positions overnight, you do pay interest on a long position and you receive interest on a short position. And that’s set to JIBAR rate -2.5% for the short position where you receive, and for the long position, it’s at plus 2.5%. That is divided by 365, so it’s a daily rate on a yearly interest rate.

I think – especially if you’re going long in the market – I think that’s one of the reasons why you’re not going to hold your positions for extended periods of time. A couple of days, a couple of weeks, even a couple of months is fine, but you start holding it for years and stuff, then that interest calculation would obviously catch up with you. Obviously on the short side, you would be receiving interest, so that wouldn’t be a factor. I just want to just take note that that’s entry level fees if you’re trading local shares, the JSE listed shares as CFDs. International markets, if you’re trading e.g. US shares and that it’s a different fee structure we trade, it’s a cent or two for a share. For each share in UK shares, for example, that entry level rate is 0.1% transactional fee or commission charge.

The Finance Ghost: And I guess the way to think about it, or maybe remember it is when you’re buying a loan position, I need to put down some margin, but I would have had to put down everything if I was just investing normally. Yes, I’m incurring interest, but to be fair, I’ve also only put down 10% of the capital than would otherwise be the case. The idea is there’s 90% of my money still sitting somewhere earning a return, right?

Shaun Murison: Earn interest on your cash balance. Yes.

The Finance Ghost: Okay, perfect. Another example of a position that I decided to put on in my account is Richemont. You can see that I’m loving the shorts here because, of course, that for me is one of the big differences between investing and trading. It really is quite fun to be able to actually take a short view on this thing. And Richemont – well, the broader luxury industry at the moment – is having a pretty tough time of things, actually.

Look, again, I’m no technical analyst, but I’ve learned a little bit, I guess, from doing Magic Markets and from reading and everything else. And I’m keen to get your views on this thing. And I want to give people, again, good examples of the kind of thing you can look at, because I come at it with this fundamental thesis to say, luxury at the moment is struggling in China. You can see it in Richemont’s numbers, we’ve seen it in LVMH, we’ve seen it elsewhere, we’ve even seen it in Porsche, actually, we’ve seen it in a bunch of places right now. And that’s not good for the luxury sector, which typically trades on pretty high ugly multiples. And high ugly multiples have a way of hurting you if something goes a little bit wrong.

I’m looking at my short now on Richemont, and I’ve made R1,098 before fees. Yay me. I will try not to spend it all at once, but it is pretty cool. It’s definitely a whole lot better than losing R1,098. R1,122 now, Shaun, the longer this podcast goes on, the richer I am becoming! It’s very fun to see it on the screen. I guess what I wanted to run past you though, or get your views on, is that double top pattern, if you kind of draw Richemont share price. I mean, do you see that there? Is that something that you would potentially look at getting involved in? I’m just curious, how would you look at that chart and actually have a view on it and some of the technical things that, again, you would look at, some of the indicators you might draw to just assist that fundamental thesis.

Source: IG Markets platform, 30 July 2024

Shaun Murison: I think we definitely need to have a one of these podcasts just on technical analysis and just the do’s and don’ts and understanding the concept. Double top, interesting formation. I think maybe a little bit early on there, but I can see what you’re talking about. For the listeners, a double top is just that m-shaped price pattern. And what does it mean or what does it suggest? It’s saying that a market that’s been an uptrend, you see that pattern in an uptrend is higher highs and higher lows. When you see that pattern, the market stopped making higher highs. And then it’s when it breaks the bottom parts or that support level, we say it’s making lower lows and could be the building blocks of a new downtrend. Changing in market direction from up to down.

When you look at Richemont, I can see why you’d say that we do have the start of that m-shaped formation, that double top reversal pattern. But I would say that maybe, technically speaking, from a technicals point of view, might be a little bit early on that.

The market has some way to go lower before it actually confirms that pattern. For me, in the longer term, I think that trend is still actually up, but we’re having a shorter-term correction of that trend. I’d rather be waiting for that weakness to play out and see where it lands. If it finds support, then maybe look at picking it up. If it breaks support, then I’d be on your side of the market with Richemont.

The Finance Ghost: I think there’s a really important point coming through there, which is to say that most of these large companies on the market are actually great businesses, and long term, they make money. Let’s not pretend otherwise. If you go and draw a chart over a long enough time period, these things tend to go up. It’s got to go pretty badly for that to not be the case. Maybe that’s an important point to cover. A lot of these shorts, or most shorts, are very, very tactical. It’s short-term timing discrepancies and a share price that’s run too hard and everything else, as opposed to saying, oh, long term, Richemont doesn’t go up. No, I don’t think that’s a smart trade. Short term, is Richemont under pressure? Maybe. So far so good. And I think that’s an important point for us to maybe cover off and get your views on.

Shaun Murison: Yeah, that’s exactly. I mean, remember, there’s a bias to the upside. Generally in markets, most of the money that comes in is long-only investment. And you do need to distinguish between timeframes. A lot of when you look at technical analysis, a lot of the themes there are trading with the trend, so trading with the general direction of that market, but recognizing that markets don’t move in a straight line. With the example of Mr Price, which we chatted about, and Richemont, both of those principles seem to be, well, those longer-term direction is up. But I recognize what you’re seeing is that maybe they’re looking a little bit overbought in the near term, so maybe they’ve run a little bit too far and needing of a correction.

Just from my point of view and following a trend-following type perspective, it’s not to try and pick the tops, but rather to wait those bits of weakness out and see where I can join that longer term uptrend. But it really is relative to the timeframe that you are trading. I think if you’re trading against a trend, it can be done, but you just need to be a lot more nimble and quicker in and out of that market. And of course, you always just need to manage your trades and manage that downside risk with things like your management tools like stop losses and things like that. There’s a bit of a saying that it’s better to be long and wrong in the market than short and caught. You’re doing well at the moment, so just be nimble.

The Finance Ghost: Absolutely. No, for sure. And look, to be clear, I think at the moment I’m really experimenting with the shorts because as I said, that really is the key difference for me at the moment between the trading and the investing side in my life, and that’s why I’m playing with that the most on the demo account. I haven’t only done shorts, though, there are a couple of longs. Prosus is one example which has now taken a bit of a knock from a general sell-off in tech, but I actually added to the position this morning, so we’ll see what happens. Prosus is one of those that I’m really liking what management is doing at the moment. Maybe it’ll keep dropping, I’ll keep adding to it. There’s maybe an example of something I would typically invest in rather than trade in because it is a bit of a longer-term view now.

Having said all of that, of course the underlying thing to think about in Prosus as well is China. I’m not blind to that. That’s not something that I would go and throw a whole lot of money at. For all the reasons that Richemont and friends are struggling right now, Prosus carries that risk in China as well. But that all comes down to portfolio strategy, the amount of exposure you take to an individual company.

Source: IG Markets platform, 30 July 2024

My style generally is to have a lot of smaller exposures. I’ve never been a high concentration kind of guy. And Shaun, you’ve pointed out to me when we’ve been chatting offline a bit the past couple of weeks that it’s quite a contrarian style, some of those trades that I’ve put on, and maybe that talks to the position sizing as well. I think you can be contrarian, but then I think you have to be careful. You can’t be taking 20% or 30% of your portfolio and taking a risky bet. There’s just too much variability in the market. There really is. And it can literally wipe you out. It can be short and caught, as you said, and that’s not where you want to be.

Shaun Murison: When to get out seems to be a big focus for traders, timing the market, and we use technical analysis tools to try assist us with that. But the success of trading is really about how you manage that risk. If you’re taking a longer-term view, and you can do that in trading – just control the position size and we talk about position sizes, how many contracts or how many shares you’re going to be buying.

If you want to hold it for a longer period of time, the suggestion is maybe having a smaller position with a wider stop loss, because you do need to manage that downside risk. If you’re going to be in the market a little bit quicker, well, then maybe the suggestion is to have a larger position with the tighter stock.

Every trade is different, but it’s really about understanding: what is your intention? And what is your view. Are you in it for a couple of minutes or a couple of days or in for a couple of weeks or a couple of months?

The Finance Ghost: Of course, none of this is possible unless you actually have a brokerage account. You can’t have any of this fun whatsoever if you don’t have a brokerage account that can do this for you. This is obviously where IG comes in. And I think let’s start with the absolute basics here, Shaun, what is a brokerage account? It sounds like such a fundamental, basic question, but it’s quite an important one.

Shaun Murison: Look, I mean, when you trading financial markets, you need a link to those markets, and essentially a brokerage account is an account that links you to that market. We talked earlier on about, you have commission fees and that, and I suppose it’s in principle similar to having a bank account. You’d have a trading account or a brokerage account, same thing. And obviously that account will allow you to buy and sell different financial assets. With IG, everything is in a CFD form, but it would be things like shares, forex, commodities, gold, oil, exchanges around the world, lots of different things.

The Finance Ghost: And how should a trader go about actually comparing these different brokerage accounts and then choosing one that works for them? Because of course there are various providers in the markets and IG certainly has a great reputation. I must say, I’ve had quite a few people reach out to me since we actually started this collaboration saying, hey, I’m a big fan of the platform, really cool to see you guys working together. That’s been nice, I must say. And in your view, obviously biased view, but also not a biased view because it’s objectively, how should a trader actually look at these different accounts and say, hey, this is who I want to trade with or not. What are some of the characteristics that you think a trader should actually look at before choosing a brokerage account?

Shaun Murison: Look, I think the most important thing when choosing a broker is making sure that the broker you’re choosing is regulated in all the jurisdictions in which they are offering their services.

If you add to that, you want a competitive cost structure, as we’ve said, that is your barrier to making a profit, but you want that balanced with access to research, trading tools, things like technical analysis tools, live news feeds, broker ratings, mobile access. And another important feature would be just make sure that that platform or the trading platform is reliable. You don’t want to get stuck or let down when you’re trying to get in out of a trade. Then if you, you know… I know a guy!

The Finance Ghost: Yes, exactly. And that guy’s waiting for you to open a demo account and play around on IG. Definitely. Let’s just talk about IG for a moment. The focus here is CFDs. This is something we’ve covered in previous shows, that is ultimately the IG model. As we think about these different types of brokerage accounts, that’s how you operate.

Shaun Murison: Yes. Because of exchange control, we separate local products with offshore products. But if you’d open a brokering account with IG from a local account, you’d be able to trade everything in a form of a CFD obviously.

Shares, indices, exchange traded funds. If you had the offshore account with us, which would be supported from the South African office as well, you could trade anything around the world. Like we said, forex, commodities, global indices, shares on different exchanges around the world.

The Finance Ghost: Another point I just want to touch on as we learn more about the platform: I noticed in my demo account that there’s a section called deal and there’s another one called order, and within both then there’s an OTC option and a DMA option. I’m keen to understand a little bit more about these concepts. Deal versus order, and then OTC versus DMA as we just learn more and more about this platform and how all the CFD trading actually works.

Shaun Murison: Okay, so deal is if you wanted to buy or sell at the available price in the market right now, you don’t want to wait, you just want to get in – use the deal function. If you have a particular price in mind though, that you prepare to buy or sell whichever market, then you use the order function. You put your order in at the price that you like and you’d wait for the market to get there. Obviously it doesn’t have to get there. Anything can happen in the market. You do run the risk of not getting into the trade if you use the order.

But then obviously the positive side of that is you get the price that you want if it does move to your order. Deal, I want to get in the market right now. An order is, well, I’d like to get into the market if it gets to this price. I think that would be a simplified version of that.

When you talk about OTC, OTC means over the counter. That is a trade that you’re looking at the market prices, but it doesn’t go through the exchange. When you look at DMA, that means direct market access. You’re looking at the price of those underlying exchanges, but your trade does go through that exchange through our order book.

The Finance Ghost: Okay, and then last question for this show for listeners who really just can’t wait to get stuck in. How should they go about opening an account with IG Markets South Africa? Not just a demo account, but a full-blown account. What does that process actually look like?

Shaun Murison: Very, very simple process. You just need to go to that ig.com website, fill out the application, and you’d be assisted by one of the client support services in terms of getting it open and funding that account. But if you are new to this, make use of that demo account first, I think. Iron out your mistakes, get used to the platform. But certainly IG is here to support you through that whole process.

The Finance Ghost: Great, Shaun, well, thank you so much. I think it’s been another excellent episode, and to the listeners, I would go back, listen to the previous two, make sure you’ve caught up with the full season thus far. There’s still lots more of this to come. Nice combination of looking at practical trades and examples of the thinking behind them, but also how the platform works and a lot of the other concepts. And there’s still lots, lots more to come in the episodes ahead. Shaun, thank you so much for your time again this morning. And to the listeners, go and get that demo account open and go and play around. Thank you very much.

Shaun Murison: Thanks.

The Finance Ghost: CFD losses can exceed your deposits. In our gorgeously diverse country, there really is a new reason to trade every day. Current affairs to political news can make the markets move and cause volatility, which can be advantageous to a trader. Diversify your portfolio by opening a trading account with IG and explore the possibilities of CFD trading, or practice your trading skills on an IG demo account.