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Content
Introduction ...............................................................................................................................3

Trading In All Market Conditions................................................................................................4

"This GFC...surely it can't get any worse!" .................................................................................5

ASX Share Ownership Survey - Where investors get their information.....................................7

What is good investing all about? ............................................................................................10

Winning and Losing Investors ..................................................................................................11

Protecting What You've Got - Understand your exposure ......................................................13

Protecting What You've Got - Diversify, diversify, diversify ....................................................16

Protecting What You've Got - Always use a stop loss ..............................................................20

Profiting From A Falling Market ...............................................................................................22

Think Outside the Square .........................................................................................................26

Step 1. Technical Analysis - Always follow the trend ...............................................................29

Step 2. Identify high impact trading opportunities ..................................................................31

Technical Analysis - Japanese Candlesticks ..............................................................................34

Step 3. Attend an Education Workshop with Australian Stock Report ....................................37

Conclusion: What Winning Investors Do..................................................................................37

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Introduction
In the last 30 months we have seen the financial markets hit their highest levels
during an unprecedented bull market. In the same way, during this time we have also seen
unprecedented global market corrections and government intervention to impede the
advent of a global recession, better known to us all as the GFC – the Global Financial Crisis.

Only weeks ago a new


financial crisis began to emerge,
that of the European Foreign Debt
Crisis. This crisis has caused
recovering markets to further give
up.

This report is a transcript


of a lecture given by Carl
Capolingua, Head of Education for
the Australian Stock Report, at a
conference held during May 2010, in Sydney, Australia, where he explains how to better
trade the financial markets under all conditions.

For more information on trading the financial markets, stocks, index, FOREX,
commodities and bonds visit our website at www.australianstockreport.com.au

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Trading In All Market Conditions

Let’s start by talking about


the current market situation: is it
good or bad right now? What’s the
biggest problem that the world is
facing at this point in time? Debt.
The debts of who? Europe, or
specifically the “PIIGS”. This term has come to refer to those countries worst affected by the
current debt crisis: Portugal, Italy, Ireland, Greece and Spain.

For those who remember the last “GFC” we had, what does GFC stand for? Geelong
Football Club? No. The Global Financial Crisis. These three letters – GFC - are synonymous
with people losing money and horrible things happening in the global markets. The last GFC
was caused predominately by companies taking on too much debt, getting into trouble with
that debt and eventually going bankrupt. That was the last GFC. But this apparently recent
GFC, starting just a couple of weeks ago -what is this one been caused by? Not by
companies going bankrupt, but by countries going bankrupt. So I need to put to you: which
one is worse?

It’s a big deal now, and certainly the markets have taken a big hit over the last few
weeks. I guess a lot of people might be sitting there, looking at their portfolios, thinking,
“Gee that’s not looking too good anymore, but hopefully” –(there’s that word ‘hopefully’,
not a good word to use when you are investing)– “hopefully it can’t get any worse”. Can it
get worse? Of course it can. The problem with the chart (above) is that it’s not a depiction
of the market now - I’ve tricked you. That’s the share market back when it fell from the high
in November 2007 down to about 5,000 and a bit. That is what it looked like last time when
the last GFC just started and everything was going gangbusters. Then the market fell down
and people thought ‘that’s okay, it will go back up’.

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"This GFC...surely it can't get any worse!"

Surely it can’t get any


worse. Here is a chart of the
market now (on right). The two
charts we’ve looked at so far are
almost identical, aren’t they? So
I think there’s a lot of people in
the same situation right now
going, “Gee, I hope it can’t get any worse”, and you know what? It’s not so bad because you
only lose if you sell. A lot of people say “It’s okay, I only lose if I sell - when it goes back up I
will be alright” and we have seen how poorly that strategy worked last time. Now the
question is, from where we are right now, how low can it go? If we are indeed in a GFC, we
could be in big trouble.

Through the last GFC the markets fell about 55% and a lot of peoples’ self-managed
superfunds fell by probably close to that amount. On the way back up, though, quite
interestingly it rallied at about 63% to go from that bottom to back up the recent high. It
doesn’t make much sense, does it? For something to go down 55% and go back up 63% and
still not be anywhere near where it started. Why is that? How can something go down 55%
and back up 63% and not be back where it was? The reason is that on the bounce the price
is coming from a different base, isn’t it? Let’s just use round numbers here. If you started
with 100% and you lose 50%, you’ve got 50% left, don’t you? How much do you need to
make on that 50% to get back to 100%? 100% don’t you? You need to double; if you halve,
you need to double to get back to where you were and we certainly did not double.

There is a major problem with this because how often does the market go up 63% in
about 12 - 13 months? Not very often! So you really need to question the sustainability of
this rally to get all the way back up to those old highs, especially now with what we are
seeing in Europe. Now, I’m not trying to scare you about that, I’m just trying to put the
reality of this situation in front of us as investors; I say ‘us’ because it’s an issue for all of us.
And the performance of that squiggly line on that computer screen actually affects

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everybody, whether they like it or not. It can affect you directly because you are holding
shares, it can affect you because you’ve got a superannuation fund, or it can affect you
because general wealth levels and the share market value of those companies can affect
you keeping a job. A lot of people lost a lot of their personal wealth in that last GFC, and
unfortunately a lot of people have already started to lose in this correction, too.

The question I’ve got for you right now is: If you have lost some money, what are you
going to do about it? Are you going to get bitter about it and say the market is crazy or this
is stupid, or question why this is
happening? Do we get bitter about it?
Don’t get bitter, get what? Who said
‘even’? Get even! That’s like a Clint
Eastwood movie! Not “get even” -who
are you going to get even with? Get
better! Don’t get bitter about the
money you’ve lost, get better so that it
doesn’t happen to you again. If you have lost some money in the past and you’re still
enacting the same sort of processes that caused you to lose that money, you can expect to
lose money again when the next GFC rolls around.

What is it going to take for you to get from bitter to better? There’s one word I’m
looking for; I’ll give you a hint. Knowledge? Learning? I think the one key factor to help get
you from bitter to better is education. Education on how to protect yourself from what
happened last time to ensure that it does not happen again.

The ASX do a Share Ownership Survey1 every two years where they survey literally
thousands of investors just like you and ask various questions about investors investing
habits. The response which had the most impact on me was this one basically asking “where
investors get their information to make their decisions on how they put their hard earned
money in the market”. And those two words are really important for me, “hard earned”.

1
http://www.asx.com.au/about/pdf/2008_australian_share_ownership_study.pdf
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Has anybody ever tripped over a crack in the pavement or fallen face first into a pile of
money? Or have you worked hard for your money? I’m sure you did. Your money is
important to you and we would all like to have more of it, of course. We hate to have less
of it and therefore we need to take very seriously how we put that money at risk. Don’t we?

When you make an investment, you take on risk. I’m not sure if enough people fully
understand how they put their money at risk. The reason I’m saying this is because of the
following results from the last ASX Share Ownership Survey. The survey found that 34% of
people said, “My primary influence for investing my hard earned money comes from a
financial professional”.2 Now I don’t mind this concept because what you are really saying
here is ‘I don’t really know a lot about investing, so I need to find someone who does. I’m
going to pay them a little bit of money for them to improve my returns. As long as they
improve my returns by an amount greater than what I pay them – I have a good deal’. It
makes a lot of sense.

How have your thoughts changed regarding financial professionals over the last few
years? Have these so-called professionals increased the value of your wealth or are they
simply riding the whole roller coaster all the way down and back up? I think a lot of people
out there who engage these financial professionals - like a financial planner or financial
advisor - have probably been paying them to lose money. I’ve got some news for you: you
don’t have to pay someone to lose your money. You can do that by yourself!

ASX Share Ownership Survey - Where investors get their information

34% of people said,


“My primarily influence for investing
comes from a financial professional”

I want you to be very, very, very vigorous in the way you scrutinise the performance
of financial professionals. Now should you judge the performance of these financial
professionals by how they do in a rising market? Who makes money in a rising market?

2
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That’s right, everyone does. Or should you judge the performance of these people in a
falling market? If they are able to maintain and even grow your wealth in a falling market -
as well as in a rising market - they are doing a great job. If they are not doing that for you, I
would suggest that you could do just as well by yourself and save your own money. I think
it’s important for us to scrutinise financial professionals a whole lot more.

After financial professions, the next major source people get their information from
is (and this was no surprise to me) the media. This includes newspapers, TV and magazine.
Almost one in five people said, “The decision to put (their) hard earned money at risk in the
market came from reading the newspaper”.3 That was interesting to me. When a
newspaper hits your door step, how old is the information in that paper? Around 24 hours,
isn’t it? You can’t really call this news. At that rate, it is “information” but it’s not news – in
fact, as far as the share market is concerned, it’s ancient history.

What is the value in using information which was news yesterday? Is there any value
at all? You’ve got to remember that markets work pretty quickly these days. Any
information in the newspaper is already embedded into the prices on the market. So if you
are acting on such information now, you’ve got no advantage; in fact, if you act on what you
read in the newspaper, you’re actually helping those people who got in yesterday. So the
value of the information is - and I’m being quite serious here - zero. There is no value in that
information.

The other problem with newspapers of course is that they are written by journalists.
Some journalists won’t just report the cold hard facts - they exaggerate the story a bit,
sensationalise it. Why are they encouraged to do that? To sell newspapers, so we get
excited, we want to buy that newspaper, read why the world is coming to an end, or why
the world is fantastic.

Newspapers, correct me if I’m wrong, are designed to make us emotional and we are
emotional beings. Most of us get emotional easily. Do we make good investing decisions
when we are emotional? No, we don’t. So there are two important points here about

3
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newspapers; number one, the information is ancient history and of no value to you for that
exact reason and number two, such newspaper reports are designed to make you emotional
- and you don’t make good investment decisions when you’re emotional. So it is not
surprising for me that people do ride emotional roller coasters because of where they are
getting their information.

The third place where people get their investing information from is friends, family,
colleagues, etc. I won’t harp on about why that’s quite crazy. However, 13% of people said
this is the primary sources of where they get their information from.

The final category was company reports. This one really worries me the most. For
example, the National Australia Bank produces its annual report and it comes to you in the
post. Two things are of concern here, the first being currency - how old is this report? Very
old! Secondly, with what vision does National Australia Bank produce the report? Does it
come from accounts? Or rather does it come from marketing, sales and public relations?
Certainly the information there is very glossy and if there were anything bad it would be
buried where you wouldn’t be able to find it, in a font so small you wouldn’t be able to read
it without trying very hard. Is that a fair comment, or am I just making stuff up? I think
that’s fair.

So you really need to question the value of the top four responses to the last ASX
Share Ownership Survey. I would say that if your money is important to you and you didn’t
fall into a pile of it recently but worked hard for it, you’ll want more of it and will hate to see
it go away unnecessarily. If this is the case, I think you need to do something a little different
with your approach. If you do the same as most people, you’re probably going to struggle to
beat the markets. That means when the markets go up we do okay, but we don’t beat the
markets. When the markets go down, we get wiped out. It’s all about beating the market
returns. If the four ways that most people get their information is the wrong way, what’s
the right way?

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What is good investing all about?

I will give you two options here. Is good investing about:

1) making money, or is it

2) about protecting what you’ve got?

We’ve got a couple of responses, so let’s do a survey and you can only answer once
and I want to see all hands go up. How many people think number one is the most
important – that is, making money? I think that’s about two thirds of you. How many
people think you need to protect what you’ve got? There’s the rest - and this lady has put
her hand up for each one so she thinks they are equally important. I guess in many ways
they’re both important, aren’t they?

But for me, personally, I think the one which is most important is protecting what
you’ve got. However, most investors are only thinking about number one. These investors
go into the market thinking it’s some giant pool of money that they are going to fall face
into and they’re going to have untold wealth because it can’t be too hard. How hard can it
be? You just buy a bunch of blue chip stocks; hold onto them and they go up in the long run.
Don’t they? Yet we have seen that the market goes up in the long run, but in the long run it
also goes down a few times, doesn’t it? What do you think is more plausible? The market
goes up in the long run or the market goes up and down in the long run? The so-called
investment professionals don’t talk to you about this, do they?

People want to make as much money as possible in the


shortest space of time and they forget number two. There is a
relationship between risk and reward. If you want greater
reward, what happens to risk? You need to take more risk,
don’t you? If you want less risk you need to accept less reward.
So we know that relationship. Now the importance of
protecting what you’ve got can be summed up in really just one
little analogy. If you lose 50% of your capital, you need to make 100% of what you’ve got
left to get back to just break even. How easy is it for you to make 100% on your capital?
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Not easy. How easy is it to lose 50%? Very easy, yet most people, as we just saw in that
response, think about making the money and they don’t think about protecting what
they’ve got.

Winning and Losing Investors


Another thing I want to discuss before I move on is an equally important
relationship, which I think also most investors take for granted and it’s this idea of effort and
reward. If we want more reward, what do we need to do to achieve this? We need to put
more effort in. Absolutely, and that’s not just with your investing, it goes for anything you
do in life. If you want more reward, you need to put in more effort. If you want to make less
of an effort, then you need to accept less reward. I think a lot people here think, ‘It’s so
easy, I will be able to make all this money myself’ and before they know it they are in over
their heads and they have lost too much. This brings me to the definition of two types of
investors. I think most people in the room are going to fall into one of two categories.
Winning investors make money in a bull market, which is when the market goes up. Now
remind me: in a bull market, who makes money? Everybody makes money, so there is
nothing special about winning
investors there. But where winning
investors really prove their worth is
when they also make money in a
bear market. And what’s the bear
market? It’s the one that goes
down. But are we in a bear market
right now?

I’m feeling another survey coming on. I will give you three responses and please only
answer once.

The first response is “I’m a bull, and I think this is just a correction and the market is
going to be much higher than this in the next 18 months”.

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The second is “I’m a bear, I reckon that GFC2 has just started and in 18 months time
we are going to be down to the lows again”.

The third is “I’ve got no idea; I’m just going to stick my head in the sand and hope for
the best on this one”.

Ok, who are my bulls? I’ve got a couple of bulls. My bears - it looks like probably
just as many. And finally who is happy to admit that they have no idea? Hmmm, most
people. Most people have got no idea, and that’s kind of the response I get more often
than not. So we’ve got the bulls, we’ve got the bears; do you know what I call the third
group, the ones with their heads in the sand just hoping that it’s going to blow over? I call
them the ostriches. The bulls, the bears and the ostriches.

Winning investors make money in all types of markets. Losing investors make money
in the bull market because everybody does, but unfortunately they give a great deal back in
the bear market. Which is a real shame. What I want is to get every single person in this
room into that group of winning investors.

To do that I need to show you how to do two things: I need to show you how to
protect what you’ve got, and then I need to show you how to profit from a falling market.
You need to protect what you’ve got because the top of the market comes suddenly and
you won’t see it coming. You want to keep your losses very small so you don’t lose 50% of
your capital, because once that market has turned from bull correction, what does it turn
into after that? That’s right: A bear market. We then need to be able to profit from that
bear market. If you can get these two things right, you are going to be a winning investor.

In terms of protecting what you’ve


got, I’ve got a three step process for you.
Step number one is understanding your
exposure to the market and again, it’s
another thing that most investors don’t do.
I’m going to break down your exposure

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(which really is another word for your risk) into the simplest way you can look at it. What
we are saying here is ‘what is your risk’? What is your loss or profit if the price moves by
just one cent, for whatever share you are investing in? BHP Billiton, Rio Tinto; whatever it
is. If the price moves by just one cent, what do I stand to make or what do I stand to lose?
To work this value out it’s actually quite easy: all we are going to do is divide the number of
shares we happen to be trading by 100.

Let’s take a hypothetical example. We are looking to invest in 100 shares of BHP. Say
it looks pretty good and it’s about $40 and we want to buy 100 shares. This is a typical
transaction. Isn’t it? The question is how much are we risking if BHP moves in our favour by
one cent, and if BHP moves against us by one cent, what are we going to lose? Now, what
we are going to do is divide that number of 100 shares by 100. I need everyone in the room
to divide 100 by 100. How are we going on that? One. Thank you. If you divide 100 by 100,
you get one.

Ok, now there is another rule we can use: if you divide anything by 100 you knock off
two zeros or move the decimal point two places. So let’s say we move the decimal point a
couple of places. For every 100 shares I’m going to invest in, on any share, if it moves by
one cent, I make or lose $1. That’s as simple as it gets. For every 100 shares I invest in,
every one cent movement equals $1 to me in profit and loss. So if I buy 100 BHP shares that
group one cent, I make how much? One dollar. If I buy 200 shares of BHP and it goes up one
cent, I make $2 and so on.

Protecting What You've Got - Understand your exposure

How quickly can BHP move one cent? Bang. How quickly can it move $1? Bang.
Prices can move pretty quickly. So you need to be aware of the number of shares you’ve
got and that relationship to determine how much you lose if things go very quickly against
you. Now be honest here - how many people in the room have exactly 5,000 Telstra shares?
Anyone? About 6 or 7 people. Back when buying Telstra shares was in vogue, many years
ago, it was usual to buy $1,000 for ourselves, $1,000 for the wife, $1,000 for the husband,
$1,000 for each of the kids, $1,000 for the dog, $1,000 for the canary, etc., until we ended
up with $5,000 worth of Telstra shares. Does that resemble anyone’s situation? Do you
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remember when these shares came out? Yes, of course you do. So let’s use Telstra as an
example.

If you have 5,000 Telstra shares, what is a one cent movement in Telstra worth to
you? Knock two zeros off $5,000 and you’ve got $50. If you’ve got 5,000 Telstra shares,
every cent Telstra goes down costs you $50. How many cents has Telstra gone down in the
last year? Well, if every cent is worth $50 to you and if you’re holding 5000 shares in Telstra
right now, every cent Telstra goes down is like taking $50 out of your wallet. And I don’t
think many people think of their investment like that, do they? This is what I’m trying to
say; to help you understand the importance of your exposure. You’re probably not always
going to just have 5,000 Telstra, you might have 2,000 Westpac, 3,000 ANZ shares, 1,000
NAB shares and so forth - and each of those have an exposure. And if the market moves by
x% in a hurry we need to ask ourselves: how much of my portfolio am I going to lose? And if
that number gets closer and closer to 50% you are getting closer and closer to needing to
make 100% to get back and break even.

What I want you to do is keep your portfolio risk to less than 10%. You see, if you
lose 10% of your portfolio in one big wack because you didn’t see that top coming (and you
never will) do you know how much you need to make to get back to break even? If you lose
10%, you need to make 11% to get back to where you were. If you lose 20% you now need
to make about 33%? If you lose 33%, you need to make 50%. If you lose 50% you need to
make 100% and it goes up exponentially from there. So if you can keep your portfolio risk
within 10% it’s not the end of the world, is it? You can get back to where you were
reasonably easily. I wonder how many people are doing this. How many people have
actually sat down and worked out the exposure of all their stocks and then determined if
the market moved by x%, I could lose “this much”. Has anyone done that? Nobody? Well
that’s a big problem, isn’t it? You need to start doing this.

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Step number two is


diversify, diversify, diversify.
What is diversification all
about? Not putting all your
eggs into one basket; it’s about
spreading your risk around the
market. Now, this is where I’m
going to talk about CFDs and if you haven’t ever heard of a CFD it stands for Contracts for
Difference. They are very popular at the moment, for the major reason that CFDs help us
manage our risk. They also profit from a falling market, which I will talk about later.

CFDs are very simple to explain. A CFD is designed to replicate a securities


transaction. Give me an example of a security. We’ve talked about one already here today -
the security BHP Billiton (BHP).

So a CFD on BHP is designed to do everything that BHP does. Above is a picture of


BHP trading on the ASX (left) and there’s also BHP as a CFD (right). Let’s say BHP goes up 10
cents - what does the CFD do? It also goes up 10 cents. If BHP is down $1 then the BHP CFD
is going to go down $1, too. If BHP pays a 34 cent dividend, the CFD is also going to pay a 34
cent dividend. If I split my BHP shares or consolidate them, the CFD is going to do exactly
the same thing. The CFD is designed to replicate the securities transaction.

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So the question becomes if the CFD is exactly like a share, why would you bother
trading a CFD? You’d bother because it costs you less. In the aforementioned chart we can
see that BHP is trading at about $40 on the ASX and if you were to buy 100 shares, it would
cost you $4000. By using a CFD
however we only need to use $200
of our capital to perform the same
transaction. Because a CFD is not a
share, it is just designed to replicate
a share trade. So there is no need
to put up all the money. With
CFDs, all we are interested in is the difference between where we get in and where we get
out, plus any dividends we can get in the meantime. A CFD deposit of $200 represents the
money you need to put down to secure that BHP transaction for your contract for
difference.

Protecting What You've Got - Diversify, diversify, diversify


What other common transaction might be part of our investing lives that requires us
to put down a deposit to buy something? A house. Now, let’s say we are looking at a
property worth half a million dollars. Do we go to the vendor and say, “Here is half a million
bucks”? No, we go to the bank first and we put down about a 10% deposit. Ten percent of
$500,000 is $50,000. So we put down a $50,000 deposit and we borrow the balance, which
is $450,000.

Now, what would


happen if the price of that
house increased to $550,000?
Let’s imagine a perfect world
where there is no stamp duty
or real estate fees. If the price
went up by 10% -which is

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$50,000 - and you sold out, what would your profit on the transaction be? It would be
$50,000; or rather you would make 100%.

For the people who can’t follow this, let’s start again. You bought a house for
$500,000 dollars and it went up in value to $550,000. You have made a $50,000 profit but
you only used the initial $50,000 deposit to do this. You have doubled your money, haven’t
you?

That’s what happens in property and I tell you what, that’s exactly what happens in
shares, too. CFDs are basically property investing for shares. Rather than having to put up
all the money for BHP, CFDs enable you to put down a deposit on BHP. You are effectively
borrowing the rest, but now you don’t need BHP to go up so much to get a higher return, do
you?

And this is what people are doing all the time. Some people have one, two, three or
four investment properties using this method, and they probably don’t realise that this is
what they are actually doing. Because if you have $500,000, would you buy one house?
More likely you would buy a few houses, and it’s the same thing with shares. What we’re
doing with CFDs is instead of having a small amount of money to put on one share, we are
going to take that money and get a few shares using this methodology of putting down a
deposit and borrowing the rest.

Let’s apply this to the BHP example. It’s trading at $40 per share and you want to
buy 100 shares or $4,000 worth. The deposit on a BHP CFD is only 5%, so you would have to
put up $200 and would control $4,000 of BHP. Now, if BHP goes up to $42.00 per share
meaning your investment is now worth $4,200 in value you’ve just doubled your $200.The
flip side is if BHP goes down to $38.00 per share your investment is now only worth $3,800
and your $200 investment is gone.

It’s the same as with property. If you put $50,000 into property worth $500,000 and
that property went down to $450,000, you’ve now got zero equity left in that property. The
act of using a deposit and borrowing the balance to secure an investment is known as using
leverage. Professional investors use the power of leverage all the time and certainly when it
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comes to shares. That’s why CFDs are becoming so popular right now; because of their
ability to allow investors to utilise leverage to control so many shares using a small amount
of money.

CFDs are particularly


useful if you have a limited
amount of capital. How many
people in the room would say
they fall into the category of
having a limited amount of
capital? Of course! Everybody
has a limited amount of capital,
so CFDs can be useful to everyone.

Let’s say we have $5,000 to get started with our investing. If we were going to do
this with normal shares and we bought $4,000 of BHP, we’ve only got a small amount of
money to keep diversifying ($1,000 less costs). Now let’s say the next trade that came along
was Rio Tinto. How many Rio Tinto shares can we get with roughly $1,000 right now? About
12. So we’ve got 100 BHP and 12 RIO shares - that’s it. We’ve used up all our money. Is that
diversified? No, not at all, you’ve got all your money in the resource sector via just two
stocks.

If you are using CFDs, however, you will put down $200 on BHP instead of $4,000.
Then put down $200 on RIO to get $4,000 worth of stock there, and you’ve pretty much got
the resource sector covered. Where do we go after that? You tell me, you’re investing right
now! Commonwealth Bank? OK, you’ve got $200 on CBA. Are there any other banks you
would like to invest in or should we keep going? OK, $200 on Westpac.

We’ve got four stocks now: two resources and two banks. I think that’s enough
banks, where to now? Healthcare, give me an example. Resmed, a $200 deposit there.
Great, we have five stocks now. How about some utilities like AGL Energy? Another $200

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down. And another $200 on Wesfarmers - we could keep going, in fact we could get 10
investments at $200 each and only use up $2,000 our capital.

Now we’ve got diversification. We have spread our risk across the market. This is
how you can use CFDs to reduce
your risk in the market.

Step number three is always


use a stop loss. This is important
because when you get a little crazy
and put down too many deposits
you’ve got a much bigger exposure.
Stop losses are the difference between property investing and share investing; you don’t
have a stop loss when it comes to property, but you do with shares. You can protect
yourself and limit your risk on the deposit you’ve put down.

For the people that don’t know what a stop loss is, it is just an automated order with
your broker to get you out of the market when you have lost a specified amount. So you
can set up a stop with every investment essentially stating, “I don’t want to lose more than
$200”. It is as simple as that. An amount of $200 is probably acceptable for most people in
the room and you can certainly lay down just that amount for CFDs – it’s very easy to do,
and the stop loss will just take you out of the market when you have lost that amount.

The important thing about a stop loss is they don’t just protect your capital, they
protect you from hurting yourself and no one’s good at taking losses. It’s actually quite
ironic as to why some people lose: People lose a lot of money in the market because they
can’t take a loss. I want you to think right now about one investment which is in a big losing
position and it is going to hurt a little bit. Think about one investment you have got right
now that is losing more money than you initially believed could happen. That loss you’ve
got right now started out as a small loss somewhere down the track. And a small loss is
easier to take than a big loss.

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Protecting What You've Got - Always use a stop loss

A strong point about stop losses is that they help you to take a small loss rather than
a big loss. The computer does the work of executing the stop loss - and the computer
doesn’t ask any questions like, is this still a good blue chip stock, what’s the dividend yield,
maybe I should hold on, maybe the market is going to bounce? The computer just gets you
out, and you can then ask all the questions you like after that.

Essentially, the stop loss protects you from hurting yourself in the market. It’s really
important stuff and separates
the winners and the losers. The
winners are good at taking
losses and the losers, ironically,
are bad at taking losses. They
let small losses become big
losses and then they lose too
much of their capital and it
makes it too hard to get back to breakeven. At Australian Stock Report we certainly use a
stop loss for every single investment we do. We don’t leave anything to chance; we let the
computer take us out.

So that’s a three-step process for protecting what you’ve got. If you put this process
in place, you are going to go a long way to limiting your losses when the market turns
suddenly.

Step number one: understand your exposure and try to keep it to a certain amount.
Don’t risk more than 10%.

Step number two: diversify, diversify, diversify – don’t have all your eggs in one
basket. Spread your capital across the market as much as you can.

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Step number three: always use a stop loss because if you are going to use the power
of CFDs to get more trades in, you need to protect yourself.

So what we have done here is found protection from a sudden turn in the market,
which actually occurred only a few weeks ago. If you had understood your exposure,
diversified, and had stop losses on everything, you’d probably be in a better position right
now. But after the market turns suddenly we find ourselves in a bear market. More often
than not, the prices are going to go down than up, so we need to know how to profit from
that move.

Most people will just sit there and hope the market goes back up. I want you to be
in a group of investors - a leading group of investors - that say, “You know what, I’m so
happy that prices are going down because I am making so much money”.

I’m going to use a little bit of jargon here. When you go ‘long’, you want the share
price to go up. If it goes up you make a profit; if it goes down, you make a loss. What most
people want from the market is for prices to rise – if they go long.

Going short is just the opposite - you want the prices to go down, and I will tell you
right now that the CFD portfolio we run at Australian Stock Report is in a very short position
right now. I want the market to go down, I really do, I hope we are just at the beginning of a
big GFC and the market falls a few thousand points.

The point I’m trying to


get across here is, for the people
that are making money when
the market is going down (those
who short), who are they making
their money off? The people
who are long. And the people
who are short and making their
money when the market goes down, do you think they feel sorry for the people who are
long? No, we don’t. So I need to ask you, which group do you want to be in? And I love
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going long, don’t get me wrong, but I only go long when the market is rising. When the
market is going down, I get short. Now I can’t have it both ways, because if I go short and
the market goes up I will lose money. Let’s illustrate this with a nice little analogy, another
property analogy because I find people understand property investing, but when it comes to
the share market they are completely baffled!

Profiting From A Falling Market

So let’s use another property analogy. Let’s say that your neighbour was going on
holidays to Thailand. He is on his way to Thailand and before he leaves, he gives you some
really important documents to look after. Now you’ve got this envelope and it’s sealed,
what do you do? You have a peek - you can’t help it. In that envelope is the title deed to his
house.

Now you’ve got the view that property prices in your suburb are about to tumble,
but you don’t want to sell your house because you need somewhere to live. What can you
do? Sell your neighbour’s house! (Remember, this is hypothetical!) So what you are going
to do is get a price for your neighbour’s house in the market, which turns out to be
$500,000. You sell his house and have the $500,000 sitting in your bank account. Property
prices plummet over the next couple of weeks he’s away and you are able to buy that house
back for $400,000. When you buy something, what comes out of your account? Money!
$500,000 went in, $400,000 came out to buy that property back, and what’s left is
$100,000. You’ve got $100,000 left in your account, your neighbour comes back, you return
to him the deed and no one is the wiser. What you have effectively done is just short-sold
your neighbour’s house – hypothetically, of course!

Now let’s think about the process here. We saw an asset which was overvalued and
sold it, but we had to borrow that asset first. We borrowed the asset, we sold it, it went
down, we bought it at a lower price, and the difference was our profit. When it comes to
shares it is exactly the same concept. Effectively you can borrow shares in a company
whose price you believe will fall, sell them at a high price and when they come down you
buy them back and the difference is your profit.

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Let’s use the BHP example again: we are going to type 100 shares into the quantity
box on the CFD order ticket, and the reason why I’m typing 100 shares is because I want to
limit my exposure on BHP to $1 per 1 cent movement (remember just divide 100 by 100).
So let’s say I trade 100 shares of BHP, buy them at $40 and it goes to $40.01. I make $1. If I
buy them at $40 and they go to $41 – I’ve made $100, and so forth. But I don’t actually
think that BHP is going up, I really think it is going to go down because here we are at the
start of the next GFC. So I type in 100 shares and before I do anything, what do I need to
do? Step three of ‘protect what you’ve got’: always use a stop loss. So where should I place
my stop loss, I wonder? Let’s put my stop loss at $1 away. So do I put it at $39 or $41? If
I’m going short, which way do I want the price to go? Down, so to “stop my loss” the stop
loss has to go up to $41.

So I put my stop loss


at $41, which means $1 for
every cent movement. I’m
risking $100 to try and make
money if BHP goes down. If
$100 is your worst case
scenario, what’s your best
case scenario? It could be anything.

So what you have done is limited your risk by using your stop loss but kept your
reward way open. That’s what you should be doing, entering trades with limited risk but
relatively unlimited reward. Now the question is – and it’s the same with our neighbour’s
house - in terms of the order of transactions, do we sell first or buy first? We sell first, to
sell the asset at a high price. So which button are we going to click right now to go short for
BHP? Sell. So we hit the sell button and what that does is it initiates a short trade for us.
We have an obligation to buy back these BHPs somewhere down the track, just like we had
an obligation to buy back that house for our neighbour. Ideally we need to buy these BHP
shares back at a much lower price, just like with that property example.

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Now, look what happened to BHP. Wouldn’t it be nice if in reality you just had to
click on a button in life and the shares just go where they’re supposed to? BHP has gone
down by $10. $10 and if we are making $1 for every cent it has gone down, I wonder what
our profit would have been in this case? The answer is $1,000. We’ve made $10 which is
1,000 cents, at a rate of $1 per 1 cent movement, so that’s $1,000 profit. And I think that is
a really great profit. Why don’t we take it, how do we get out of this trade now? We need
to buy. It’s the same as when we sold our neighbours house first and needed to buy it back
later, with BHP you need to buy it back later as well. That completes the transaction and
sitting in your account now is $1,000 profit.

Now everybody who was holding onto BHP, who remained long from $40 to $30,
how are they feeling? Miserable. How are you feeling? Wonderful! Do you see how this
really changes the ball game? If you are able to do this, does it matter which way the
market goes? No, and this is why I was saying before - I’m excited at the prospect of the
market going down. Yet that scares the pants of everybody in the room because you are not
in that group of winning investors yet who can profit from a falling market. Does the market
go up faster or down faster? Down faster! So which is the market that is going to make you
the fastest money? The bear market, and that’s why I’m excited about that prospect.

So, that’s what I mean about protecting what you’ve got. These are some really
good methods and I hope you have been taking notes. What I want to talk about now is not
so much about protecting what you’ve got but the other side of good investing, which is
actually making some money. Notice the order I discuss them in; protecting what you’ve
got first and making money second. It is a good philosophy, isn’t it?

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So let’s discuss now how


we find opportunities for our
members. Australian Stock
Report is a subscription-based
business. We’ve got quite a few
thousand members all over
Australia who subscribe to our
reports.

There are three reports in total. The first is the investors report for longer term
investors; a self managed super funds style of investing, a more ‘buy and hold’ approach.
We produce the investors report once a week for share traders; this report doesn’t go short,
it’s a long-only strategy. The Investors Report costs just $690 for an annual subscription.

The next one is the Traders Report. Traders are looking at a much shorter time
frame and a lot more transactions. The Traders Reportcertainly can be used by CFD traders
or those who simply wish to invest in normal shares. The report includes more frequent
transactions, both long and
short. We have a selection of
shorts at the moment, and
what we have been able to do
is limit our losses a great deal
in the last few weeks because
those shorts have made us
money, offsetting our longs.

And I think that if you can break even in the volatility of the last few very difficult
months in the market then you have done a fantastic job. The Traders Report involves
Australian equities only, is produced on a daily basis in the evening around 5.30-6pm, and is
then ready for you to use. The Traders Report costs just $990 per annum because it takes us
a little bit more work to produce every day than the Investors Report.
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Then we’ve got the deluxe version, the CFD Traders Report. Now this is not just
Australian shares, this is
Australian shares, US shares,
foreign exchange, indices and
commodities like gold and oil.
This report is really for CFD
traders, including very short-
term, very frequent
transactions. With the CFD
Report we’ll sometimes do two or three trades a day. These trades can be aggressively long
or aggressively short. Right now we are aggressively short, absolutely. The DOW was down
120 points last night – hooray! The report has a great focus on returns; we produce it three
times a day, hence it costs a little bit more at $1,490 for an annual subscription.

Think Outside the Square


The reason we want you to start thinking about some of these exotic things, such as
US shares, commodities, gold and oil, is that it is important to think outside the square a bit.
Of the four product types we like to trade a lot, shares are just one of them; we also trade
indices, foreign exchange and commodities.

I will just skip forward a little bit and show you why you want to think outside the
square. This is a chart of Apple (left). Who would have thought years ago that this stock
would be going up right now? Well, you should have seen the line up on George Street
yesterday for the new iPad. If you don’t know what an iPad is, then you must have been an
ostrich for the last six months! Look at the Apple share price. Was it that hard to draw that
conclusion? How many people in the room have an iPhone? Look at that - Baby Boomers
take note! What a great business model, invent great gadgets and sell them to Gen X’s and
Gen Y’s. And they go nuts for them, they line up around the block to buy these things. How
much free advertising did Apple get yesterday? Do you realise now that Apple is a bigger
company than Microsoft? Amazing stuff.

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Let’s take a look at


gold. Did anyone in the
room forecast two or
three years ago that gold
was going to get to
US$1,000 an ounce? A lot
of people felt strongly
that gold was going to go
up, and in fact it continues to move up. How many people in the room still think that gold
has a long way to go? I’ve got my hand up here. Because when the euro is worth nothing
and the US has printed as many US dollars as they can possibly print, gold is going to up. I’m
going to make money out of that move, what are you going to do about it? Just watch it?

So what I am putting to you here is this concept of


thinking outside the square. It all goes back to that red dice.
There are three sides: on the top is reward, on your right is risk,
on your left is effort. You all have the equal ability to get out
there and put your money into the best opportunities across
the world, but people simply don’t want to put in any effort and
end up holding onto what they have. But if your stock is going
sideways right now, it’s really going backwards, isn’t it? So you need to discover new
opportunities, and that’s what we are all about. I think Australian Stock Report is the only
report in Australia that covers US shares, commodities, FX and indices, in the one report.

So we now have the first step in making money - think outside the square. You need
to get your money into the best place possible and this will not always come from Australia.
The second step involves doing some really good technical analysis. I think believing beyond
all hope that Company X will continue to be healthy has gone the way of the dinosaur,
because we have seen a lot of companies we thought were blue chips halve in value,
haven’t we? Some of them have even gone bankrupt. So it is really important to have

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something up your sleeve that cuts through all the hype and just tells you what you need to
know – and this is called technical analysis.

Technical analysis is simply the study of charts. Charts are just price versus time,
aren’t they? What causes the price to move? Supply and demand. It’s all simple Economics
101. If there is more
demand than supply, what
is the price going to do?
Go up. If there is ample
supply and not enough
demand, where will the
price go? Down. Now
what causes that supply
and demand is peripheral.
It is the fact that price is
moving up or down which tells us what the supply and demand is doing, and that’s what we
need to know. Technical analysis is really the study of supply and demand.

Who creates supply and demand? I’m looking at them. You do, yes. Technical
analysis assumes that human beings tend to react to certain situations in very predictable
ways. We are either governed by our fear or we are governed by our greed. And because
human beings react in a predictable way they create predictable price patterns. That’s
really all we are saying with technical analysis. And as long as you believe that human
beings will continue to make the same mistakes over and over again you should be fine with
this concept. If you think we are all going to learn from our mistakes and figure things out,
don’t use technical analysis.

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Step 1. Technical Analysis - Always follow the trend

Step number one


with technical analysis –
and I’ll employ three
steps here again - is
always follow the trend.
Let me show you why.
The trend gives us the
highest probability of
success -high probability
and high profitability. Now looking at that chart here (above), it is safe to say it is in an
uptrend. It starts at the bottom left and finishes at the top right. I wonder what we should
do?

How many people looking at that chart feel that they want to put their hard-earned
money on the line and buy that right now? How many people think it is too expensive? I
think everyone has an opinion on this. How many people think that one’s too expensive
(over 90% of the audience)? You see, I think that stock is so cheap and that response does
not surprise me. It also does not surprise me that people lose money in the markets, they
get it wrong. I look at that stock and I think, ‘That is so cheap’. Do you know how I know
that is cheap? Because everyone wants to own it; that’s how the price got up there. Did the
price get up there because nobody wanted to own it? The price got up there because there
was so much demand.

So people who don’t have this stock are demanding it, aren’t they? Does this mean
that people who have this stock are supplying it? No, they’re not - there is no supply, and if
you’re not supplying the stock even after it has gone up that far, you are not supplying it
because you think it’s cheap. You’re demanding it because you think it’s cheap. What I am
trying to tell you here is that the market, not you, thinks this stock is very cheap. So the
market thinks that stock is cheap, yet you just told me it was expensive.

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I’ve got a news flash for you: it doesn’t matter what you think, does it? It matters
what the market thinks. So, start to learn about how the market is thinking. Ok let’s look at
another one, what’s this stock? ABC Learning centres. And what’s ABC Learning Centres
trading at now? Zero! What will it be trading at in 12 months time? Zero! What is the
trend there? Your friend! Yep, the trend really is your friend, isn’t it? Now normally people
look at a stock which has fallen in price like ABC in this chart and they say, “That looks really
cheap, doesn’t it? That looks really cheap because that was $9 and now it’s $4, it must be
really cheap. If I buy that at $4 and it goes back up to $9, I’ve doubled my money. It’s really
cheap, it’s a good blue chip company, and it pays good dividends, doesn’t it? It’s really
cheap.” Yet, I look at that and I say that’s so expensive. That is the most expensive stock
I’ve ever seen.

How I know a stock


is expensive is when
everybody wants to sell it
and nobody wants to own
it. If they don’t want to
own it, they will sell it, and
create supply in the
market. And even at that
low level they are happy to supply. Why are they happy to supply at that low level? Because
they know it is going to go down further. Who’s demanding this stock right now, apart from
you? Nobody else is! So the market looks at that and says that’s expensive, yet you look at
it and you think, ‘Oh, that’s cheap’. Of course now ABC Learning Centres has gone to zero.
It’s broke, bankrupt!

A lot of people lost a lot of money in that stock because they didn’t follow the trend.
Unfortunately, that’s what most investors are still doing, walking up and down Pitt Street
right now; looking at the market exactly the opposite way to how you need to in order to
understand what the market is thinking. We think that what we think is important, don’t

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we? Not when it comes to the share market. The share market is unlike anything else that
you have ever experienced in your life.

Step 2. Identify high impact trading opportunities

Step number two is to identify high impact trading opportunities. I’ll show you a
little trick of supply and demand. What we’ve got here - and it doesn’t matter what the
stock is, I will tell you what it is later – is a stock that was trading at this level for about a
good six to eight months. It’s been trading around that level, and all of a sudden it takes a
big jump up. Why did it take that jump up? Because there was more demand than supply.
A lot of people say it went up because of the news, but the greatest news is worthless if no
one acts upon it. What this is showing you is people putting their money where their mouth
is by going to the price and affecting it. It went up because there was a huge amount of
demand and not much supply. Eventually it took a little bit of a pause up there. This is
because suddenly supply and demand became equal. When supply and demand are equal
you get a pause, it trades a little sideways. That’s the most basic understanding of the
markets.

And the reason why supply increased there is because the price went up, owing to a
lot of investors unable to compute the increase in their brains. Most investors automatically
think that if it’s gone up, it must be expensive; but the reason it went up is because
everybody else wanted to own it. So because some people think it’s expensive, it creates
supply which equals demand which causes the price to go sideways.

Now a couple of things can happen from here. The first one is that eventually all
those people taking profits eventually run out of steam. Is there still a lot of demand in this
company right now? There is because it is holding up there. It’s hovering. If there wasn’t
demand, it would have come right back down again. So because it is hovering up there, we
can tell that there is a lot of demand here and we just wait for that supply to run out. Don’t
we? When supply runs out, where’s the price going to go? That’s right, up! Is it going to go
up slowly or quickly? Quickly, and we are not going to be really sure that it’s happening
until price clears this level here (indicates on chart resistance level). The suppliers are
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keeping the price at that level. When the price moves above that level, it must be because
there is more demand there. The price needs to move rapidly. The alternative is that
supply doubles and demand decreases and what happens to the price? It comes back down
again, doesn’t it? We don’t want that to happen. So the question is: What do you do with
this?

There is a potential opportunity here, so how do we trade it? What we are going to
do is use this thing called an on-stop order (see chart below). An on-stop order is a
computerised order you set with your broker to tell them to get you into a trade if it moves
above that supply level.

Let’s just say hypothetically that level was $29. If it clears that level you are confident
now that supply is gone. If supply was still there it wouldn’t clear that level, would it? So
we are going to buy at
$29 and we are going to
follow our rule of always
using a stop loss. So in
one order you have set
up; you’ve got an entry
level; you have a stop
loss; and finally why not
put on a target.

Why not? Because now you can set and forget this trade. With this example, the
price went up strongly. But if the price didn’t break through that level and fell all the way
back down, how much would we lose? We wouldn’t lose anything because we are only
going to get in to the trade if the price breaks through that $29 level. If the order isn’t
triggered we are not in a trade, and the order can only be triggered if the price goes up.

That’s the great thing about this order. It only puts you into the market at the best
possible time. The market goes down, it doesn’t matter: you haven’t lost anything. Now
your goal is to find as many charts that look like that as possible, because they will tell you

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the same story I have just explained to you. Lots of demand, then supply increased for a
while, and now you are just waiting for the supply to dissipate and the price to go up. You
just want to find that chart 100,000 times now, don’t you, and put your money on it. This is
a really effective trading strategy.

Now, to compile our reports we scan through 600 Australian stocks, everyday. We
also scan through over 2000 US stocks, 95 foreign exchange pairs, 120 futures and indices
from all over the world, and commodities. Each day! How many people are looking at that
many securities a day, trying to find those opportunities? It looks like no one! This comes
back to the “effort”on that dice -the effort and the reward. The people that are putting in
the effort are getting the rewards.

Now, it doesn’t sound like a very hard process: read the CFD Traders Report, get the
trades, put the orders on –we’ve done all the work for you. So we take care of that “effort”
side of the dice. That’s an example of what we do for our members.

Moving along, I advise you to attend one of our Stock Market Educational
Workshops and learn what you don’t know. How many people in the room have learnt one
new thing today about their investing? I was hoping it would be unanimous, but I’ve got
about 95%. I’m thinking that some people in the room are starting to realise that there is
quite a bit about investing they don’t know. The Stock Market Educational Workshops are
all about helping you to learn. It’s a two-day workshop that we run and that’s why I’ve been
in Sydney, because I’ve been running workshops for the last couple of days. I’m going to
show you one of the concepts we teach at the Stock Market Educational Workshops. This
concept is Japanese Candlesticks.

How many people


don’t know anything about
Japanese Candlesticks and
want to know a little bit
more about them? That’s
quite a lot. Japanese

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Candlesticks charts include a simple coloured box for each day of the week. Monday gets a
box, Tuesday gets a box, Wednesday gets a box, and so on. The difference is that on the up
days (when the price went up) we are going to make them a white box. On a day when the
price went down we are going to make them a black box. Why do we do this? Because
these boxes are telling us what is happening to supply and demand in the market.

On the up days - a day with a nice white box - there is only one conclusion you can
draw: there is more demand than supply. Conversely, on the black days there has to be
more supply than demand. When we are looking at a Japanese candlestick chart, we’re
looking at a schedule of supply versus demand. If you are going long, you want to be
confident that there are a lot of white candles backing you up. And if you were long and all
of a sudden you saw some black candles, what’s that telling you? There is a lot of supply
coming out, so be careful. If you are short, you want to see black candles backing you up; if
white candles appear you want to get out of those shorts.

Now just to show you the style of the Stock Market Educational Workshops, I’m
going to give you a fun exercise which will teach you some technical analysis as well.

Technical Analysis - Japanese Candlesticks


(In this exercise, the chart is covered except for a small region on the far left-hand
side of the screen. Carl will reveal the chart (below) one day at a time and challenge the
audience to make the correct trading decision without knowing what is going to happen
next)

So what we are
going to do here is you are
going to tell me what you
want to do on this chart
(below) - whether you are
going to buy, go long, get
out of that long, go short -
you tell me what you want

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to do. Right now we have a bunch of black candles there (points to far bottom left-hand
side of chart); what does that mean? More demand or supply? More supply. For those in
the room wanting to go long at this point in time, you might have just missed the point.
More supply means people are selling and we don’t want to be involved. We want to be
involved when everyone’s buying. Remember: it doesn’t matter what we think, it matters
what everybody else thinks when it comes to the market.

So, regarding black candles, you need to avoid being long; but I’m not going to go
short here because I don’t have enough information to act on. Let’s say we are in the
market, in this trade, and we certainly don’t want to go long. What I’m going to get you to
do is shout out where you would like to make a trade. (More days are revealed) Is this
where we want to go long? Why? Because of the white candles which signify that demand
is flooding into the market and people want to own this stock. People want to own this
stock because they think it is cheap, they think it is going to go much higher. That’s why
they are demanding it and we want to be involved too.

Now, tell me where you want to get out of the trade you just got into. Oh, why?
That’s right, supply. People are supplying because they think it is expensive, aren’t they?
(More days are revealed) Tell me where you want to get back in, if you want to get back in
or if you want to go short. Now? Wait a minute - it hasn’t broken the support, the
resistance there, it hasn’t broken where the supply is. What order could we use instead of
just watching the market each day? We could use an on-stop order above that high; it
would just be an automatic order and if it hits that level we will just get straight into it.
(More days are revealed) Bang, we are in! You would literally come home from work that
day and say, ‘Oh, I’m in a trade now, that’s great’. It’s a nice trend, lots of white candles,
super. Let’s see how this one went; oh, a bit of wobble. (More candles are revealed) Tell
me where you want to get out. Why? It is going sideways, it’s flat lining. If your stocks are
going sideways they’re essentially going backwards, aren’t they?

If a stock is going sideways and we scan 3,000 stocks and securities a day, do you
reckon out of those 3,000 you are going to find something better right now? Of course you
are. Get your money out of that one and get it into one of those other ones. Does that
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mean you ignore this stock forever and ever, Amen? No. What type of order can we use to
get us back into the market if it goes the right way? An on-stop order? We don’t even have
to watch this stock, we could be monitoring 30 or 40 of these at a time, having these orders
in place and only getting in when each one goes the right way. I think this is a totally
different way of looking at the markets. We just got into a trade and we didn’t even need to
make a decision, did we? The computer made it for us: you are in a trade and you tell the
computer when you want to get out. It’s very automated, it’s very clinical, and very
scientific. I wonder how many mums and dads are using this sort of approach? Not many.

(Looking back to the chart) There’s a lot of supply there, isn’t there? Now, tell me
where to get back in, if you want to get back in (more days are revealed). There are lots of
white candles, you probably know what’s going to happen next because now you know
what company this is, don’t you? (The company name “Babcock & Brown” has been
revealed) But it is fair to say in real life you don’t know what is going to happen next. So you
still have to take that long trade, even though we all know what happened if you got into
Babcock & Brown in October 2007.

So, what’s going to happen next? (More days are revealed with very large black
candles) Who wants to get out of their long trade now? (All hands go up) Would anybody
stay in a long after that day? Anyone at all? No. Well, that’s a relief. What is Babcock &
Brown trading at now? Zero. October 2007 was the beginning of the end and Babcock
never came back from that. What I have just done in this exercise, which took just four
minutes, is put everybody in this room in a position where you can now look at a chart like
that, understand the supply and demand dynamics, and tell yourself where you need to get
out to protect yourself from the market. How many shareholders of Babcock & Brown on
that day held on? You all said you would get out, yet how many people held on that day
and rode it all the way down to zero? The lot. Well, you don’t need to be one of those
people anymore, do you?

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Step 3. Attend an Education Workshop with Australian Stock Report

So in four minutes I have shown you just one tiny little technique from the workshop
that can seriously change your outcome in the market. Imagine what you are going to get if
you come to this workshop and spend two days with me? Because I have only just scratched
the surface of what you don’t know in this game. For those of you that have a financial
planner, a broker or an advisor, how many of them have spent an hour and 20 minutes
talking to you about how to protect what you’ve got and increase your returns? How many
of your brokers, your financial professional have sat down and told you the stuff that I have
told you today? (No hands go up) None of them. Why don’t they do that for you? Surely
they want you to make as much money as possible? The truth is that if they taught you how
to do all the stuff I’ve just shown you, you wouldn’t need them anymore. They would be
out of a job! You see, I’m not the head of broking at Australian Stock Report, I’m not the
head of financial planning or head of advising, I’m the head of education. My job is to take
people like you and empower you to do it yourself, that’s what they pay me to do. That is
the difference between us and those brokers and advisors.

Conclusion: What Winning Investors Do

Wrapping this up now: winning traders go short just as easy as they long. If you
know how to go short it really doesn’t really matter which way the market goes, does it? Up
or down, it’s all the same. Do you know what keeps me awake at night? Not the market
going down. I’m tossing and turning and my wife is saying, “Carl stop worrying about the
market going sideways”. That’s because I don’t care if the market goes up or down, I just
don’t want it to go sideways. I wonder how many people in the room can say that.

Next, Winning Traders can accept a trading loss, and it’s all about accepting a trading
loss, as we discussed before. The irony of losing traders is that they cannot accept a loss.
They let small losses become big losses. Winning traders use a stop loss to get them out of
the market at a small loss. They don’t take big losses; they’refrugal with their capital when
taking risks. We only risk small amounts of money on each trade we do.

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The next thing Winning Traders do is think about probability and not profitability.
The point here is about following the trend. Now if you can pick every top and every bottom
in the market, are you going to make a bunch of money? Yes, you will. But what’s the
probability of doing this? Zero - it’s not going to happen. On the other hand, if you can
follow the trend you’re more able to identify the trend using some of these tools. So if you
have a high probability of being able to identify a trend, what’s your profitability like? Good,
isn’t it? I will give you the big tip here: if you focus on the probability part, the profitability
will take care of itself. Unfortunately, most people only focus on making big profits and they
forget the probability part. I say, get the probability right and the profitability will take care
of itself.

The next point is to treat your trading like a business and not like a hobby, because
not enough people put in the effort to get the reward. They think, “Oh, you know, I’ve got a
few shares. Yes, I look after my portfolio, yes I’ve got a few shares that I buy and sell,” but
that’s about the extent of it. If you don’t take this seriously, if you treat your investing as a
mere hobby, it is going to cost you money, isn’t it? How many people have a hobby that is
dear to their heart that costs them a little bit of money to keep going? How many people?
A lot of people in the room. That’s what hobbies are for, aren’t they? They give us a little bit
of enjoyment but cost us money. You need to treat your investing like a business. You need
to be disciplined, you need to be consistent, and you need to be informed.

What is the biggest part of a successful business? A business plan, yes – and this is
the next point – a plan for your success. And when it comes to investing, what a plan really
does is specify to the finest detail how you get into the market. This includes how much you
risk you’re exposed to when you are in the market and how you get out of the market. How
many people have actually sat down and written out or typed out a plan for getting into the
market? Only one person! So we have all these people in here who are hobby investors, is
that right? Should we be surprised that people will ride such a rollercoaster in the markets?
We shouldn’t, because not enough people actually take it seriously enough.

The final point is that we need to trade seriously and without emotion, because
when we are emotional we make bad decisions. A lot of people will say that trading without
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emotion is the most important part of trading, because if you’re really emotional, it doesn’t
matter how good the information is - you won’t be able to apply it. So a lot of people say
you’ve got to control your emotions, but I say that if you don’t care which way the market
goes, you are going to be less emotional. If you’ve got a stop loss on everything and you’re
not risking everything, you are going to be less emotional, aren’t you? If you are following
the trend, you will be less emotional; if you’ve got a business plan, you will be less
emotional. Do you see how all of these points are interlinked? These points are all equally
as important as each other in achieving success in this game.

Now the great thing about the workshop is that it’s really a trading plan workshop,
an investing plan workshop. And for two days I will show you how to turn my investing and
my trading plan - which you get on a piece of paper, you get my plan - into your own plan
over the course of two days. Everything you need to do, all the boxes you need to tick
before you get in, exactly how to understand your risk and exactly how to get out of the
market. Finally you can get your investing organised.

This is a nice little quote here from Margaret Thatcher, former British Prime
Minister. She was asked why she was spending so much money in her first term on
education and this is what she said (I won’t do the voice): “This is the cost of education; one
can’t ever spend too much on education. Tell me, what is the cost of ignorance?”

And the cost of ignorance


is often a lot more than the cost
of education, isn’t it? I wonder
what the cost of ignorance has
been for a lot of people in this
room over the last few weeks, of
not knowing how to protect
what you’ve got, of not knowing how to profit in a falling market. What has that cost you in
the last couple of years since the GFC started? Now I want you to think about what that is
going to cost you over the next 12 months if the market keeps going down. What is going to
be the cost of your ignorance? Now, what is the plan for your investing success?
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It’s time to get started right now!

For more information on any of Australian Stock Reports products including the
Investors, Traders, and CFD Traders Reports, or the Stock Market Advantage workshop call
13 20 60.

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