In life we generally want to be right. This is why you may hear traders framing their trading success by saying they won nine out of the last 10 trades, or that they have a 90% success rate.
However, having lots of winning trades does not necessarily mean that you will be a profitable trader in the long run. This concept is Ray Downer, Senior Trader Coach at Learn to Trade, explores below as he talks Finance Monthly through trade expectancies.
Let’s take two traders: Sarah and Mike are both traders that have placed 100 trades and started with the same amount of money in their trading account:
- Mike wins 75 trades and loses 25 trades
- Sarah wins 30 trades and loses 70 trades
Who is the better trader?
Although we can see Mike is right more often than Sarah is when trading, to determine who is the better overall trader we are missing some key pieces of information.
Firstly, we need to know the amount of profit made when one of our traders is right, as well as the amount lost when wrong. Another way of putting this is that we need to know our traders’ average reward-to-risk over their 100 trades.
So let us look at both of our traders again, but this time take into consideration their reward-to-risk:
- When Mike is right he makes a profit on average of £100 per trade; when wrong he makes an average £300 loss. This means that his reward-to-risk is 1:3.
- When Sarah is right she makes £300 on average per trade and when she’s wrong she loses on average £100. This means she has reward-to-risk of 3:1.
This gives us a bit more insight into the traders. We can see that mike, for example, is willing to risk three times more than he stands to gain in any one trade. Sarah in contrast is looking for a bigger pay-off but not willing to risk as much as Mike per trade.
Neither of those approaches is inherently good or bad as a trading strategy.
To really understand how each of our traders’ strategies stack up against each other, we need to take into consideration the two things we have mentioned here: firstly how frequently our traders have winning trades and secondly how much is gained or lost with each trade.
In trading terms, what we are figuring out is Mike and Sarah’s trade expectancy. Trade expectancy essentially tells us how much we stand to gain or lose as a trader for every pound risked.
Expectancy = (average gain x probability of gain) – (average loss x probability of loss)
We can make this a bit clearer using Mike and Sarah’s results:
- Mike’s expectancy per trade = (£100 win x 0.75) - (£300 loss x 0.25) = £0
- Sarah’s expectancy per trade = (£300 win x 0.3) - (£100 x 0.70 loss) = £20
What this tells us is that over the long run Mike is breaking even with each trade despite winning 75% of the time. As a trader the long term goal is of course to make a profit rather than break-even or lose money. For Mike’s strategy to become profitable he either needs to win more often and/or reduce his risk per trade.
Sarah’s expectancy tells us that she is making an average £20 per trade in the long run, even though she is winning just 30% of her trades. Her reward-to-risk strategy means that she can be wrong much more frequently than Mike, but still make a profit overall.
Both Mike and Sarah’s expectancy can improve or worsen depending on trading conditions and whether they stick to their trading plans. Nevertheless, expectancy is a good benchmark to evaluate a trading strategy. You could also think of expectancy as how much you can theoretically expect to get paid for each trade you take over time.
As we all know, it’s impossible to always be right when trading forex. However, figuring out your expectancy helps shift focus away from being right per trade to instead how right you are overall.
Apple Inc. is planning to use its own chips in Mac computers beginning as early as 2020, replacing processors from Intel Corp., according to people familiar with the plans. Bloomberg's Ian King reports on "Bloomberg Markets."
What you might not know is that blockchain isn’t just a Bitcoin thing. Across the globe, from corporations to start ups, experts are formulating and implementing new ways of using blockchain technology to improve the way we do things; and the same goes for supply chains. Below Finance Monthly hears form Lee Pruitt, the CEO of InstaSupply, on the ways blockchain can likely better supply chains for your business.
Managing a supply chain is an operational and logistical challenge for many businesses, and the more parties involved, the more complicated it is. The ‘links’ in the average chain can sometimes span hundreds of stages and dozens of locations. Keeping everything running smoothly and effectively whilst tracking unusual or anomalous events can be very difficult.
Blockchain technology – essentially, a distributed, unchangeable cryptographically secured ledger in which transactional data is stored and updated – may provide a way to improve transparency and operational efficiency. But it has to be used effectively.
Here’s how you can use blockchain technology to improve trust, maximise efficiency, and foster better vendor relationships.
Stronger audit trails
Blockchain technology serves as a repository of transaction history. Every time a payment is made, every party is registered and recorded in exacting detail.
This effectively means that every stage of the supply chain has a strong audit trail – and this is good for your business on several different levels. From a legal and ethical standpoint, it means that you can be assured that your suppliers aren’t party to any child labour or money laundering related activity. From a logistical perspective, it means you have end-to-end visibility into how physical items are sourced, delivered and stored.
Any efficiency or productivity gaps can be quickly identified and dealt with. Any items that go missing can easily be found. Delays will become rare, if not a thing of the past.
Blockchain technology means transparent and more efficient supply chains.
Trust
When supply chains aren’t fully optimised, it’s the end customer that is ultimately let down. Elon Musk recently described supply chains as ‘tricky’ – and revealed that Tesla’s new vehicles routinely miss their delivery deadlines.
Blockchain will increase trust among consumers, and among all players in the supply chain. Using shared public IDs and ratings, a clear picture of everyone’s goods and services will be readily available: if you want to consistently deliver value to your customers, they will reward you for it; if you’re looking for trustworthy suppliers, you’ll be able to select them based on clear, real time data.
The technology will also help reduce the instances of fraud – meaning your reputation and finances will be protected.
Streamlined invoicing
Blockchain technology will make the traditional invoice redundant. All purchase orders will be recorded and rendered fundamentally unalterable as blocks on the chain: accordingly, when suppliers approve the purchase order, they have essentially made a commitment to deliver the items/services for the agreed cost and only the agreed cost. An invoice could never be issued to ask for more.
Blockchain will also improve operational performance and the bottom line. Many businesses are looking for ways to integrate these new tech solutions into their daily operations, and they are right to do so. Trust, transparency, and efficiency are qualities that are not only valuable, but in increasingly short supply in current models. Blockchain offers to provide them in abundance.
Blockchain will disrupt everything from Silicon Valley to the New York Stock Exchange.
19th October marks the 30th anniversary of Black Monday, when in October 1987 stock markets around the world experienced a flash crash. The FTSE 100 fell 11% on the day, and then fell a further 12% the next day, wiping out more than a fifth of the value of the UK stock market in just two trading sessions.
As terrifying as these sharp falls were, hindsight tells us that for investors who didn’t panic, even a badly timed investment made money in the long run.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “Stock market crashes are a bit like the Spanish Inquisition- no-one expects them. The 1987 crash is renowned for the speed and severity of the market decline, and undoubtedly when markets are plunging so sharply, it’s hard to keep a cool head.
“Hindsight clearly shows that the best strategy in these scenarios is to sit tight and not engage in panic selling. Time has a tremendous healing power when it comes to the stock market, and price falls are typically a buying opportunity. The stock market is an unusual trading venue, in that buyers tend to stay away when there’s a sale on.
“The Footsie has recently reached a new record high, which prompts the question of whether it’s heading for a fall. There are always reasons to worry about the stock market and now is no exception. The Chinese credit bubble is front and centre of concern, along with increasing global protectionism, and the disturbing prospect of World War Three being started on Twitter.
“However there are also reasons to be positive, with the global economy moving up a gear, borrowing costs remaining low, and stocks facing little competition from bonds and cash when it comes to offering a decent return.
“The market will of course take a tumble at some point, and it’s impossible to predict when. This makes being bearish an easy game, because you only have to wait so long before you are eventually proved right. The big question though, is how much you have lost out on in the meantime by sitting on your hands.
“It’s important to bear in mind that investing isn’t a one-time deal, savers typically invest at different times throughout their lives, and at different market levels, and sometimes they will be luckier with their timing than at others. To this end, a monthly savings plan takes the sting out of any market falls by buying shares at lower prices when the inevitable happens.
“The golden rule, of course, is to make sure you are investing money for the long term. In the short term the stock market is a capricious beast and can move sharply in either direction, but in the long run, it’s surprisingly consistent.”
After the crash
The table below shows stock market returns following the three big stock market falls of the last thirty years: 1987, 1999-2003 and 2007-2009.
The first column shows what you would have got by investing £10,000 on the eve of the crash, and pulling your money out at the bottom of the market. The remaining columns show what would have happened to your investment if you had held on to it. These numbers should be viewed as examples of what stock market returns have been if your timing is really pretty stinky, and you only happen to invest £10k once in your entire life, on the eve of a dramatic downdraft in the market.
In 1987 investors would have seen £10,000 reduced to £6,610 in a matter of weeks. However, if they had waited 5 years, their investment would have fully recovered, and 10 years later would be worth £32,690, with dividends reinvested. Today that investment would be worth £104,340.
Stock prices recovered pretty promptly after the 1987 crash, in contrast to the bursting of the tech bubble in 1999, which was compounded by the Enron scandal and the World Trade Centre attack, leading to a deep and prolonged bear market lasting until 2003. £10k invested in the stock market in 1999 would be worth £23,210 today, an annualised return of just over 5%.
Looking at these figures, it’s hard to dodge the conclusion that this was the worst of all three periods for stock market investors. It also contributed to the already declining fortunes of defined benefit schemes in the UK, and did huge reputational damage to insurance companies as the dreaded MVR (Market Value Reduction) became common parlance amongst hitherto happy With Profits policyholders.
The value of rolling up dividends shines through in the numbers below. Since the peak of the market in June 2007, £10,000 would only have grown to £11,890 based on stock price movements alone. But once dividends are counted and reinvested, that rises to £17,230, not a bad result given this money was invested at the peak of the market just before the global financial crisis took hold.
Is the Footsie about to crash?
The FTSE 100 reaching a new record high recently has of course prompted questions about whether it’s heading for a fall. However the level of the Footsie is not a measure of the value in UK stocks, seeing as it doesn’t take account of the level of earnings of companies in the index.
Below are two related measures of value of the UK stock market which take company earnings into account, but each give a slightly different picture of valuations in the UK stock market right now.
The headline historic P/E is elevated compared to its historic average, though still well short of the level seen in 1999.
The Cyclically Adjusted P/E Ratio, a valuation method championed by Nobel prize-winning economist Robert Shiller, takes a longer term view of earnings by looking over the last 10 year, which smooths out volatility in the one year P/E number.
On the cyclically adjusted measure, the UK stock market is trading below its historical average, and well below levels seen in both 1987 and 1999.
So which of these two measures should we believe? Well, we assign more weight to the Cyclically Adjusted P/E because it takes a longer term, more rounded view of stock market valuation. But if we simply take both measures into account in combination, together they suggest the market is somewhere in the middle of its historic range.
When thinking about the valuation of the stock market, it’s also worthwhile considering the valuation of alternative assets. The 10-year gilt is currently yielding 1.3%, and cash is yielding next to nothing with base rate at 0.25%. This contrasts sharply with 1987 when base rate was 9.9% and the 10-year gilt was yielding around 10%. So if you think the UK stock market’s expensive right now, then you have to take a really dim view of the value provided by bonds and cash.
(Source: Hargreaves Lansdown)
Interactive Investor, the online investment platform, recently released its clients’ most traded investments, by number of trades, in August 2017.
Commenting on the results, Lee Wild, Head of Equity Strategy at Interactive Investor said: “Following an exhausting 2,000-point rally between February 2016 and the record high in June this year, equity markets have extended their pause for breath, moving largely sideways over the summer months.
“Both the FTSE 100 and broader FTSE All-Share index rose less than 1% in August, though North Korean sabre-rattling tested investors’ nerves. Concerns that Kim Jong-un could nuke Guam, the US west coast or anywhere in between began a rollercoaster ride through the month, as enthusiastic buyers took advantage of each sell-off.
“Mopping up underperformers like Barclays proved a popular trade. After falling 6% in August, Barclays shares haven’t been this cheap since November 2016.
“Trading at a discount to most domestic peers on several key multiples, Barclays gatecrashed the top five most-traded large-caps on the Interactive Investor platform as buyers outnumbered sellers by more than two-to-one.
“AstraZeneca’s popularity proved fleeting as bargain hunting following July’s crash dried up. Investors who bought heavily last month below £43 are busy counting profits, currently a healthy 8%.
“Perhaps the biggest story to pass under the radar in August was the AIM market’s break above 1,000 for the first time since summer 2008. It’s easily outperformed the other domestic indices in 2017 so far, rising 20% in the past eight months.
“There were big moves in August by some of the junior market’s biggest companies, among them Frontier Developments (67%), Plus500 (45%), Blue Prism (33%) and IQE (29%).
“It was IQE that piqued interest among investors in August, almost toppling UK Oil & Gas from top spot as trading volume on the Interactive Investor platform more than doubled.
“A rally, given fresh momentum by a bullish update in July, spilled over into August, pushing IQE shares to new highs. There’s real excitement here as market watchers speculate about the possibility its chip components feature in Apple’s new iPhone 8, due to be launched next week (12 September).
“Internet of Things (IoT) hopeful Telit Communications came from nowhere in August following a profits warnings and shock departure of its CEO. A subsequent plunge in the share price and extreme volatility made it a trader’s favourite.
“Overseas, trading volume for Apple doubled as the shares surged by 10% in August. Apple shares typically nudge higher ahead of major product launches and the unveiling of the iPhone 8 next week has pushed the share price to a record high.”
(Source: Interactive Investor)
After Bitcoin fork, and a huge tech sell-off in July, Snap – the company behind Snapchat - has now joined the circus that is tech giant share prices. In one day in August, Snap Inc. dropped 4%, before bouncing back 6% 24 hours later. What is it about tech shares? Andrew Amy is Investment Manager at Cardiff-based digital wealth management service, Wealthify. Here he talks to Finance Monthly about this modern phenomenon.
One of the initial issues with Snap was, like many other tech companies, it was given a whopping price tag on the stock which, unluckily, was swiftly followed by two bad quarters of results. Despite currently sitting some 46% lower than at its peak in March, the company is still worth approximately $17 billion. That is a hefty price tag for a business that has yet to turn a profit.
Any company with an expensive valuation that fails to beat forecasts for two sets of results is going to struggle, especially as questions loom over the monetization of the business.
It’s not a whole world away from other tech companies. Facebook had a torrid time after its IPO, where its shares pretty much halved in value. Now, its shares are trading more than 300% higher than the IPO price, and its most recent financial updates were impressive. If Snap can replicate the same performance as Facebook, then shareholders may be able to breathe more easily.
So what is causing share volatility within the tech sector? It’s important to remember that, first off, there is volatility in every sector of every stock market, to varying degrees. For example, consumer staples are considered a low volatility sector, but that doesn’t mean there isn’t volatility there.
One way to analyse the tech sector is as two distinct sub-categories – the young guns and the old guard. Apple, Microsoft and Google have been around the block a few times, and so report fairly predictable earnings. They also have a proven track record of fending off competition and remaining at the top of their respective games.
The young guns, such as Netflix, Facebook and Snap, are equally recognisable brands, but are affected far more by volatility as a result of their valuations and competition.
Brand awareness is very powerful, and with some of these guys, especially Facebook, we’re seeing brand become monetised in the form of impressive earnings. However, these stocks don’t come cheap – you’re paying for exponential growth of future earnings.
When expensive stocks don’t deliver the returns that investors expect, the tendency can be to quickly dump them. Perhaps that’s what we’re seeing now, with Snap.
Competition in these fast-moving sectors is hard to predict. Many of the most innovative tech companies have little or zero competition at the outset, so their future earnings remain unchallenged. But, as with every type of business, where there is money to be made, eventually competitors will come.
Look at Netflix – it is currently under pressure from Amazon, but there are more challengers coming. The likes of Disney are set to go live with their own online TV offering, pulling content from Netflix in 2019, and traditional broadcasters are also not resting on their laurels.
Once these markets are more mature, perhaps we’ll see this area of tech become calmer.
While it’s easy to say there’s a tech bubble, it ignores that many stock prices and asset classes are following a similar suit at the moment. Global central banks have kept monetary policy ultra-loose with low interest rates and quantitative easing. This was seen as necessary to keep the economy afloat after the great recession of 07/08. However, when cash is earning you next to nothing, it pushes up the prices of other asset classes, as investors seek out higher returns.
Investment in tech companies such as Uber, AirBnB, or even Wealthify comes because of the innovation we bring to mature markets in terms of scalability, low cost to consumers, and easy access to services via apps and online. Not all startups will survive, but as we’ve experienced from our home in Cardiff, they can thrive, with the right investment and access to expertise and support.
The views above are personal opinions and not intended as financial advice or recommendations.
Following a 66% share drop, hundreds of thousands of families that lend off Provident Financial have been placed in limbo, as the firm collapses due to a glitch.
According to reports, a software bug made it impossible for Provident Financial, a blue-chip FTSE 100 company, to collect debts from clients. This resulted in a 66% drop in shares within a day, bleeding £1.7 billion out of the Bradford based company’s gross value.
It’s now considered to be the biggest ever one-day stock price fall for such a firm. The company CEO, Peter crook, immediately resigned. The whole ordeal has also resulted in several investigations and the axing of its dividends.
On top of this, the 137-year-old company’s customers, mostly vulnerable low class families with very little income, will be affected.
The software that created the bug was introduced following a £21.6 million overhaul of the firm’s doorstep collection business, which collects customer debts on loans with up to 535% annual interest. A rehiring of staff fell flat and failed the firm, then an appointment system software that was introduced also failed to improve efficiency, all in all letting the company down when it came to meetings with clients, and therefore slumping profits.
According to the Daily Mail, Chairman Manjit Wolstenholme, who has taken over the daily responsibility of the company after Crook resigned, said: “We’ve got people on the ground, but we have issues with the software being used by them. Agents are turning up at the wrong time when customers aren’t there.
“It’s not behaving because the data that’s in there isn’t good enough for what we need to do. This is something we should be able to do something about.”
The German stock market crash is a timely reminder of the need to broadly invest, affirms one of the world’s largest independent financial services organisations.
The comment from Tom Elliott, deVere Group’s International Investment Strategist, comes as the DAX, Germany’s top stock index, was nearing the red after shares in the country’s largest car makers dropped over a fresh probe into the diesel emission scandal.
Mr Elliott observes: “Eurozone stock markets have felt the pain of a strong currency in recent weeks, as investors think that improving economic data will force the ECB to curtail its bond-buying program prematurely and - if inflation picks up - lead to interest rate hikes.
“But the DAX 30, the key German stock market index, now has an additional problem that has contributed to recent falls. Its motor sector – led by BMW, Daimler and Volkswagen- is under a cloud as more jurisdictions line up to fine the companies over diesel emissions. Last week, the Mayor of London announced plans to seek compensation from Volkswagen after the true scale of the company’s diesel-fuelled cars’ contribution to the city’s air pollution became known. The sector is at risk of punitive fines across the world.”
He continues: “A further risk is that the ‘Made in Germany’ brand suffers more generally.
“However, while this is embarrassing for the German auto sector, and for German exporters more generally, it is likely to be a passing phase. The fines will be absorbed by shareholders, and meanwhile the German auto sector will return to the real long-term battle: is there a durable market for high quality, driver-driven, private cars?
Mr Elliott goes on to say: “German - and European autos’ biggest threat comes from technology from the US – in the form of driverless cars and battery cells, amongst other factors – as well as changing social habits, which include car pooling and young adults driving less in developed economies.
“The German stock market crash is a timely reminder of the need to broadly invest so that portfolios will have exposure to the young companies likely to benefit from driverless cars for example.”
He concludes: “Diversification of portfolios across sectors, asset classes and regions will ensure investors are best-placed to take full advantage of the present and future opportunities and to mitigate the risks.”
(Source: deVere Group)
