The Way to Trade

I have come to terms with the way to trade certain financial instruments lately - Learn from the Experts! I think I might have paid way too much money for this lesson, and hopefully this post can help you save that money.

Stocks - Do it like Warren Buffett. The tested and proven way is value-based investing for stocks. Read up on the company, their prospectus and balance sheet. You can't miss too far when a guy already became one of the richest in the world using this strategy.

Options - Use these as steroids for stocks to speculate on short-term momentum. Can be used for hedging purposes too. By all means go for those cheap calls or puts and remember to be on the buy side. The sell side has unlimited loss potential and needs even more sophistication to handle the risk.

Futures/Forex - System-based trading hands down. Do it like most market wizards, for instance, Ed Seykota. You have to be extremely skilled to be able to control your emotions in a higly volatile market. Formulate a strategy, back-test it and leave it all to the computer. The computer can't be too emotional.

My advice is to treat these as the core and add in your own devices and deviations, so that you won't have to waste too much time and money. These should form the material for your trading, for example, value-based investing can be referred as lego blocks and system-based trading play-doh. With the right material, you can figure out how to form a skyscraper like what Warren Buffett did or something more magnificent.

FXCM Automated Trading Challenge

By now, I think everyone would have watched "Wall Street", so I'll just skip my review and critic on that. Anyways, to excite aspiring traders out there (like me), FXCM is hosting a trading contest that starts middle of this month, 17th of October. Prizes for the top 3 spots total an amount of $20,000. On top of that, the entry fee is $0! Check it out here. The demo account that generates the most money in the contest wins.

With favorable conditions like this, there are bound to be catches. So please take note if you are entering. Firstly and most importantly, if you win their prizes, FXCM will have the right to use, copy, modify and make available to the public your winning trading strategy. This means that FXCM will co-own your code. If they release it, everybody will know of your strategy and maybe trade it too. This will surely dilute further winnings with your strategy after the contest (if you still want to carry on with the strategy).

Secondly, you cannot make manual trades for this contest. Trading will have to be purely automated using FXCM Strategy Trader. This means that you have to learn or know programming if you are going to enter. Trading will be mechanical, akin to robotics competition, which you design the robots and they are on their own once the contest starts.

Thirdly, winnings will be credited into your FXCM account (you will be forced to open one if you do not have), where you can withdraw later on or trade with. This is not much of a problem, but worth taking note.

Well, with a cost of nothing for a potential return of $10,000. I am sure the above three catches are reasonable enough. The first catch is the most detrimental one, but if you edit and optimise your code to perform from 17th October to 3rd December exclusively, this would not affect you too much in your general strategy even if they do own your code later on.

Also, the contest allows multiple entries, so you can just send in as many as you want (just that you will need time to code them). This also means that you can send in two strategies that are opposites of each other, so that you will definitely have a winner.

FXCM promises that there will be a bigger scale contest early next year with prizes totalling $100,000. So I recommend that you test your luck in this October one, and try again next year.

A simple evaluation of the new SIA bond

How good is the new SIA bond? Here is the article from Business Times:

SIA flies the flag for retail bond buyers
In a pioneering move, the carrier is offering retail investors $50m of its $300m bond issue
By JAMIE LEE

(SINGAPORE) Singapore Airlines (SIA) has set aside part of its latest corporate bond offering for retail investors - the first listed company to do so.

The move also marks a coup for the Singapore Exchange (SGX), which has been eager to build interest in the fixed-income market, and comes against the backdrop of the Singapore bond market touching new highs.

Funds raised through Singapore-dollar bonds stand at $17.7 billion to date - a record in the debt issuance market, Bloomberg data shows.

SIA will issue $300 million of five-year bonds, of which $250 million will be placed out to institutional and other investors, and the remaining $50 million offered to retail investors, SIA said yesterday.

The fund-raising exercise - meant for capital expenditure and working capital - comes after SIA sold $500 million of 10-year bonds in June this year. The bonds to be issued, which are un-rated, will pay interest of 2.15 per cent per annum.

One difference with bonds tailored for retail investors is the size of the minimum subscription.

Under the public tranche, or retail bond portion, offered by SIA, the minimum subscription is $10,000 of bonds.

Based on the $1,000 value of each lot of bonds this means that retail investors need to hold at least 10 lots. Trading will be done per lot at $1,000 as well.

However, the minimum subscription for institutional and other investors of the SIA bond is $100,000 - 10 times that for retail investors.

In comparison, bonds from statutory boards such as the Land Transport Authority trade in lot sizes of $10,000 each, the SGX website shows.

And while Singapore government bonds can be bought with a minimum of $1,000, these instruments are currently not listed.

SGX has said investors will soon be allowed to trade government bonds.

Another difference is the level of disclosure required by SIA.

Companies that issue bonds to institutional and sophisticated investors - as traditionally done - do not need to submit a type of prospectus to the authorities.

This, known as the 'offer information statement', is a 113-page document in SIA's case that discloses information on the bond issue, including risk factors associated with investing in bonds.

Companies have always been able to offer bonds to retail investors but have been reluctant to do so, given the extra paperwork required by regulators to protect such investors.

'It is a more time-consuming process,' said George Lee, OCBC's head of group investment banking, adding that there are also higher distribution costs involved with the retail offer.

But bringing in retail investors can help companies diversify their investor base, Mr Lee added.

'SIA is a well-recognised brand. Tapping the retail investor base does create a lot more goodwill,' he said.

'Clearly, they could have just tapped the institutional investor base and easily closed off the issue, but they are testing the retail market. This will also help develop the retail bond market, and probably SIA sees it as its national agenda.'

Mr Lee said other companies will take a wait-and-see approach before deciding whether to offer bonds to retail investors.

Ling Peng Meng, regional head of capital markets in South-east Asia at Standard Chartered Bank, told BT: 'Conditions are favourable for potentially good take-up from retail investors, given robust retail liquidity generally and the limited availability of suitable investment alternatives for these investors.'

One remisier said there has been some interest from retail clients in the SIA bond issue, adding that clients in general are looking for yields of about 6 per cent.

Investors can apply for the SIA bonds from today until Sept 28.

The bonds are expected to be issued around Sept 30. DBS Bank, OCBC, and UOB are the underwriters of the retail offer. The three banks and Standard Chartered Bank are also involved in the placement.

Let's get right down to the specifications of the bond. The SIA bond has S$1000 par value, yield is at 2.15% p.a. disbursed semi-annually (S$21.50), maturity is 5 years.


We can immediately do the maths for the value of the bond using the formula:

If we call the maturity T and the discount rate r = 0.80 (There is no explicit discount rate in Singapore, so I will use the next best alternative, which is a money market fund, which contains mostly cash and government bills anyways), we will come up with a value of 21.33 + 960.98 = 982.31.

The bond value is actually $17.69 less than its face value or at 98.23%, and hopefully we can find a price close to this in the secondary market in October. If you buy before the issuance, take note that you have to cough up with the full face value of the bond which is S$1000 for a non-compounded 2.15% return for 5 years. In terms of company reputation, I really think that SIA is a good company and the chance of default within these 5 years is minimal, so is the risk that you are going to take upon with this bond. Another risk is that the discount rate might increase, thereby decreasing the price of your bond if you choose to sell before maturity.

To draw a personal conclusion, the bond may be more attractive if it becomes cheaper in the secondary market, and it might be a good alternative to put your S$10,000 besides in a savings account, or fixed-deposit, taking on a wee bit more risk. Interested investors can still ballot for these bonds at ATMs before 28th September 2010.

The beginning of a hedge fund, well, not quite yet

Alright. For the first post, I shall divulge a bit about myself. Yea, I plan to start off anonymous and secretly, so you guys can call me Arc (I use this alias all the time, so I am actually giving my identity away to those who know me). Next, I have a passion in trading, and I am one of those people who want to make it big in trading, start a hedge fund, and make it bigger.

So here I am, and coincidentally I happen to be starting from scratch again. Well, not really back to nothing and penniless, but close enough. So, it might as well be a good time to blog down the process this time and investigate what really went wrong and also find out what ticked.

And I thought it will be fun to share this experience with everyone who finds my blog. Hopefully, those who are new to trading and investing can learn something here, while the rest can either cheer me on or laugh at my pathetic attempt. Or maybe I can receive some help or advice from the investment and trading veterans out there.

So for a start, I think I will be sharing how I fare in my trading account (I am thinking of putting up a screenshot of my account balance later on, hmm). And also, how I am going to trade, strategies or just on pure spider sense-like intuition. And also, my thoughts on some trading or investment phenomena, or anything relevant to the financial world that I think might interest somebody out there, for example, the evaluation of the SIA bond (Hopefully I can come up with this before they stop accepting applications which is like on the 28th), and the movie "Wall Street" that is out like this week. And last and also the least, various random stuff, which may range from an unforgettable wierd person I saw that day, to about how comfortable or tough life is in Singapore. Well, I promise I will try to curb myself and not post too much of these various random stuff. Just to let you know those might appear as well.

Feel free to comment if you feel like it, but I have turned on comment moderation, so it might not turn up immediately. I feel that I just have to filter those comments and provide readers a spam-free and insult-free environment to exchange their views, if any (I may be hoping for too much).

I wish myself good luck on my endeavours!