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Mistakes that rookie traders make

(BLOOMBERG) Ms Lena Birse is a stay-at-home mum who loves buying tech stocks during market crashes. Mr Jay Smith is a former professional gamer who switched from crypto-currencies to blue chips. Ms Heloise Greeff is a data scientist who uses machine learning to analyse trading patterns.

(BLOOMBERG) Ms Lena Birse is a stay-at-home mum who loves buying tech stocks during market crashes.

Mr Jay Smith is a former professional gamer who switched from crypto-currencies to blue chips.

Ms Heloise Greeff is a data scientist who uses machine learning to analyse trading patterns.

And Mr Mik Mullins is a retired hotel executive who is betting the market is about to plunge.

These four amateur traders use different approaches but have one thing in common: They are killing it in one of the wildest markets in memory, with returns ranging from 20 per cent to 60 per cent this year.

Playing the market is fraught with risks, of course, and stories abound of newcomers making rookie mistakes.

To learn how to avoid pitfalls, Bloomberg News picked the brains of these four top performers on eToro, a digital trading platform with 14 million users that is regulated by Britain’s Financial Conduct Authority.

EToro lets people copy the trades of investors with proven track records, like this quartet.

They all believe newcomers make mistakes by not investing for the long term and for failing to diversify their portfolios with at least 30 well-researched names.

Here are the other things they see people doing wrong, based on their experience:

JUMPING IN WITHOUT TESTING OUT TRADING STRATEGIES

Ms Greeff, 30, a research fellow in machine learning at Oxford University, used a “demo account” on eToro to execute simulated trades with US$100,000 (S$136,000) of fake money.

She discovered straight away that trying to time the market and trade in and out of positions every day was a bad idea.

When the S&P 500 Index and other benchmarks were hitting all-time highs late last year, the data was sending her a powerful signal: It was time to retreat.

“I am a conservative trader so I liquidated 60 per cent of the positions in my portfolio, and while I missed the highs of January, I had peace of mind,” she says.

Since then, she has waded back in, and two of the biggest holdings in her 60-stock portfolio are Mastercard and IBM.

She is up around 20 per cent this year.

CHASING HYPED STOCKS INSTEAD OF DOING RESEARCH

When the digital coin bubble popped in 2018, Mr Smith’s portfolio fell almost 54 per cent and he learnt a painful lesson on hype.

These days, the 32-year-old’s bets are a far less racy mix: Chipmaker AMD and Microsoft are long-time favourites, and this year he started buying shares in Home Depot and Lowe’s, the home improvement giants.

He feels comfortable with such tactics because he does his homework. “I spend a large amount of time reading product user manuals and watching launch events on YouTube.

“A solar company I follow recently held a training day online, so I watched to see how they install their equipment.” He is up about 50 per cent this year.

INVESTING MONEY YOU NEED IN FIVE YEARS

Mr Mullins advised friends to follow one primary rule: Never invest money that you are going to need for big-ticket items such as a house or college tuition. He is a true believer in investing for the long term. He does not even like to look at his portfolio more than once a week.

He is up almost 29 per cent for the year, thanks to his long positions.

GETTING YOURSELF INTO COMPLEX TRADES BEFORE YOU’RE READY

It has never been easier for retail investors to use leverage, options and short-selling, but amateurs should avoid complicated tactics until they understand how they can backfire, say both Mr Mullins and Mr Smith.

The rush of newbie traders into flashy equity-trading apps have already led to some grim consequences.

In June, Robinhood pledged to change elements of its options trading platform after the suicide of a 20-year-old user who had an account that showed a negative balance of more than US$700,000.

The company’s co-founders said they would consider additional eligibility requirements for users who wanted to tap more advanced options strategies.

OBSESSIVELY CHECKING YOUR PORTFOLIO

It can be tempting to keep looking at the daily swings in your stocks’ prices, but if you do this every day, it spurs panicky trades and losses.

Over time, Ms Birse said, she built a tolerance for risk. After the pandemic hit, she resisted the urge to panic. Instead, she bided her time and prepared to add to her positions in long-time “winners” such as Shopify, the Canadian e-commerce firm that has skyrocketed 148 per cent this year.

“I used to turn off the computer during sell-offs. But then I wanted to be more active, more aggressive, so in March, I steeled my nerves, waited three weeks, and then it was time to go shopping. It felt like the sale of the century.” Her portfolio is up 61 per cent. 

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Daily Financial News

Don’t Count On JPY Correction; Staying Long GBP/JPY

The path of the potential pace of the JPY decline may still be underestimated by markets, which continue trading the JPY long.

While the 10% USDJPY advance from September lows looks impressive from a momentum point of view, it may no thave been driven by Japan’s institutional investors reducing their hedging ratios or Japan’s household sector reestablishing carry trades.

Instead, investors seemed to have been caught on the wrong foot, concerned about a sudden decline of risk appetite or the incoming US administration being focused on trade issues and not on spending. Spending requires funding and indeed the President-elect Trump’s team appears to be focused on funding. Here are a few examples: Reducing corporate taxation may pave the way for US corporates repatriating some of their USD2.6trn accumulated foreign profits. Cutting bank regulation could increase the risk-absorbing capacity within bank balance sheets. Hence, funding conditions – including for the sovereign – might generally ease. De-regulating the oil sector would help the trade balance, slowing the anticipated increase in the US current account deficit. The US current account deficit presently runs at 2.6% of GDP, which is below worrisome levels. Should the incoming government push for early trade restrictions, reaction (including Asian sovereigns reducing their holdings) could increase US funding costs, which runs against the interest of the Trump team.

Instead of counting on risk aversion to stop the JPY depreciation, we expect nominal yield differentials and the Fed moderately hiking rates to unleash capital outflows from Japan.The yield differential argumenthas become more compelling with the BoJ turning into yield curve managers. Via this policy move, rising inflation rates push JPY real rates and yields lower, which will weaken the JPY. Exhibit 12 shows how much Japan’s labor market conditions have tightened. A minor surge in corporate profitability may now be sufficient, pushing Japan wages up and implicity real yields lower.

JPY dynamics are diametrical to last year . Last year, the JGB’s “exhausted”yield curve left the BoJ without a tool to push real yields low enough to adequately address the weakened nominal GDP outlook. JPY remained artificially high at a time when the US opted for sharply lower real yields. USDJPY had to decline, triggering JPY bullish secondround effects via JPY-based financial institutions increasing their FX hedge ratios and Japan’s retail sector cutting its carry trade exposures. Now the opposite seems to be happening. The managed JGB curve suggests rising inflation expectations are driving Japan’s real yield lower. The Fed reluctantly hiking rates may keep risk appetite supported but increase USD hedging costs.Financial institutions reducinghedge ratios and Japan’s household sector piling back into the carry trade could provide secondround JPY weakening effects

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Daily Financial News

Mexico raises interest rates, cites Trump as risk

The head of Mexico’s central bank says U.S. Republican candidate Donald Trump represents a “hurricane” sized threat to Mexico.

Banco de Mexico Gov. Agustin Carstens told the Radio Formula network Friday that a Trump presidency “would be a hurricane and a particularly intense one if he fulfills what he has been saying in his campaign.”

Trump has proposed building a wall along the border and re-negotiating the North American Free Trade Agreement.

Mexico’s central bank raised its prime lending rate by half a percent to 4.75 percent Thursday, citing “nervousness surrounding the possible consequences of the U.S. elections, whose implications for Mexico could be particularly significant.”

Mexico’s peso had lost about 6 percent in value against the dollar since mid-August. It recovered slightly after the rate hike

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Africa’s first Fairtrade certified gold co-operative offers hope to gold miners living in poverty

Syanyonja Artisan Miners’ Alliance (SAMA) has become the first artisanal small scale mining co-operative in Africa to become Fairtrade certified, bringing much needed hope to impoverished communities who risk their lives to mine the rich gold seam that runs around Lake Victoria.

SAMA is one of nine previously informal groups from Uganda, Kenya and Tanzania which has benefitted from a pilot project launched by Fairtrade in 2013. This innovative program aims to extend the benefits of Fairtrade gold to artisanal miners across East Africa.

In that short time, SAMA has undergone training in business and entrepreneurship, as well as safe use of mercury, internal control systems, labour rights and better working conditions, health and safety and more. Previously, daily contact with toxic chemicals used to process gold meant members risked disease, premature births and even death.  Fairtrade gold was first launched in 2011, and SAMA now joins Fairtrade certified gold mines MACDESA, AURELSA and SOTRAMI in Peru.

The co-operative produces just 5 kg gold per year, but nevertheless has the potential to significantly benefit many people in the local community through better conditions through certification. It is expected that Fairtrade and organizations like Cred Jewellery will support the miners, ensuring their gold can be refined and made available to jewellers in the UK and other markets.

Gonzaga Mungai, Gold Manager at Fairtrade Africa said: “This is a truly momentous and historical achievement and the realisation of a dream that is many years in the making. Gold production is an important source of income for people in rural economies. Congratulations to SAMA, it sets a precedent which shows that if groups like this can achieve certification, then it can work for others right across the African continent.”

The Fairtrade Gold Standard encourages better practice and changes to come in line with international regulation around the production and trade of so-called ‘conflict minerals’. Under the Standard, miners are required to:

  • Uphold a human rights policy preventing war crimes, bribery, money laundering and child labour
  • Clearly represent where the minerals were mined
  • Minimise the risks of conflict minerals through robust risk assessments and collaboration across supply chains
  • Report to buyers and trading partners regarding the risks of conflict minerals

Now in its second phase, the programme will focus on supporting other mining groups in the region to access affordable loans and explore a phased approach to accessing the Fairtrade market, allowing more mining co-operatives across Africa to participate in the programme.

Gonzaga added: “Sourcing African metals from smallscale miners in the Great Lakes Region is the responsible thing to do. For a long time companies have avoided buying gold from this region, with devastating consequences for impoverished communities who were already struggling. It has driven trade deeper underground, as unscrupulous buyers pay lower prices and launder illegal gold into legitimate supply chains. That’s why we have chosen to work with these groups to help them earn more from their gold within a robust compliance system that offers social, environmental, and economic protections.”

The Fairtrade gold programme offers a small but scalable solution to sustainable sourcing of gold from the region in line with Section 1502 of the Dodd-Frank Act in the US, OECD Due Diligence Guidance and recent EU Supply-Chain Due Diligence proposals which could come into effect in 2016. This means that up to 880,000 EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products could be obliged to provide information on steps they have taken to identify and address risks in their supply chains for so-called ‘conflict minerals’.

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