Newsletter: 7 August 2023
What’s Going On:
US Downgraded, Stocks Slip
It was a surprise move last week by the ratings agency Fitch to downgrade the credit rating of the USA. The immediate reaction was for the dollar to slip - although it did later recover.
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But stock markets have remained under some pressure with the S&P and NASDAQ indices slipping to their lowest levels since mid-July. After a great 2023 so far for US stocks, is this finally the start of a deeper slide for stock markets?
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I think some people have been expecting a sell-off in stock markets for a few months and have been surprised at the ongoing strength seen in US indices. Even with the slides seen in recent weeks, the S&P500 is still up more than 16% for the year and the NASDAQ100 is up a staggering 40%.
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August has not been a good month so far with markets still under pressure – but does this mean that we have seen a major peak since the US credit rating downgrade? I would not be too sure. Let’s take a look at the daily S&P chart.
S&P500: Daily Candles
The S&P500 index has been in a solid uptrend since around March of this year, and it made a major low last October.
Obviously, markets do not move in a straight line up or down. During the course of this year there has been weakness within this uptrend that ultimately has just ended up being a buying opportunity, before the market moves higher.
My expectation at the moment is this is what is going on – just another correction before sentiment turns positive and the market swings back up. Let’s see.
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Assuming this trend is going to continue then I would not expect to see the lows from late June through to early July get broken (4325 to 4375). As long as these continue to hold then I am happy to buy the dip.
Trading Tip:
How One Trade Can Make Or Break Your Month
One of the many mistakes that new traders make is closing winning trades too early. Plenty of us are familiar with the saying “let your profits run” but so few of us manage to do it in reality.
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Traders get scared their profits will disappear and do not let a trade develop. It’s crucial for successful trading, let me show you why.
Trading is hard.
I think plenty of us come into it thinking that we are going to be right an awful lot of the time and the money is just going to flow into our trading account. But the reality is usually different.
In my own trading, I am right on about six trades out of ten. But what makes the difference is one or two big winners a month. As mentioned above, oil was the big winner for me last month. If you have a trade that makes a multiple of your risk, it can have such a big impact on your overall profit or loss.
If you watch the YouTube live streams you will know that I have been “publicly trading” an account with £5,000 opening balance. Here is a snapshot of my three worst and three best trades from the period from 1 May through to the end of July.
Top & Bottom 3: May To July
You can see my three biggest losers were capped at £250. But the biggest winners are a multiple of those losses. During the three-month period the biggest winner was a NASDAQ trade that made £877.
At that point my risk per trade in this account was £250. So this trade made more than 3.5x my initial risk. As I have said, just one trade like this can make your month when trading.
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What we need to learn to do, as hard as it is, is let winning trades develop. When we have a profitable trade, we have to try and sit with that trade to make as much from it as possible.
What most people do is snatch at profits and then run their losing trades.
Typically, the new trader's losses are almost double the size of their profits. You need to be right an awful lot of the time just to break even on those numbers, never mind growing your trading account. It is hard to escape the reality of that maths.
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This shows there is much more to trading than “where do I buy or sell?” I would argue that this is actually the least important part of the trade. What is far more important is risk control and managing the trade.
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When I am planning a trade the very first thing I think about is “where does the market need to go to prove my opinion wrong?” This is my stop loss and governs my risk control.
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If I am in a winning trade, then at some point that stop-loss gets changed to a trailing stop loss to try and keep me in the trade for as long as that trend continues.
I would never say trading is easy – but just having one trade really run in your favour can make so much difference to your own P&L.
But it is easier said than done.
What Am I Trading:
Oil Near A Major Barrier
July was quite a volatile month for my own trading - but one of the clearest and smoothest trends was in crude oil. This market ran from a low of $67 a barrel in late June to $82 by the end of the month – a sizeable move.
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I did three trades in oil during July, and I am still in one of them – but are we about to see the direction of oil take a major turn?
I’ll start off with a chart of oil from late June through to today – these are four-hour candles where each candle represents – you guessed it – four hours of trading. What a great trend that has been so far, a true “buy the dip” market throughout July.
US Crude Oil: 4 Hour Candles
Ive already talked about the importance of big winners later in this week’s newsletter – oil was my biggest winning trade of the month, and I bought back in last week on the sell-off below $80.
But is the trend in oil perhaps vulnerable to a reversal as August continues?
For this we need to look at the bigger picture.
US Crude Oil: Daily Candles
If we take a step back from the excitement of the shorter term, it is clear that oil has been a sideways market this year.
When the price of a barrel has been knocked back below $70, the buyers have come in.
When it has rallied much above $80 then it has not managed to stay up there very long.
And of course, this is where we are now.
The trend for oil is now up – but is there enough optimism in this market to push it through the highs for the year around $83.50? It’s a wait and see market for me.
I am still in the trade expecting it to move higher but will get out if we have a steeper turnaround for oil.
If it does manage to move to new highs for the year, some would see this as a very positive sign – the classic chart break out – and possibly the start of a new trend. If that was the case, then a possible next target would be the November 2022 highs around $94 a barrel.
It should be an interesting month.
WhatsApp Group:
Open To All
Earlier this year I started a WhatsApp group for those who had attended my trading course. This was designed to be a channel where I would update my thoughts on the markets every day and answer any questions. This is now available for all to join.
Here’s a screenshot of a typical update from me – this was a previous update. I talk about trades I have open; trades I am thinking about and other interesting markets.
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If you would like to try the WhatsApp group for a month to see how it could help your trading approach, then follow this link, select WhatsApp Group and use the code EMAIL for a 20% discount off the first month’s subscription.
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That's it for this week.
Good luck with your trading.​
​David