Advanced Success Strategies

While the information you have already read will allow you to get started betting on the FTSE and similar markets with reasonable success – and many traders succeed with this information alone – you are bound to be interested in the many more strategies that are available to make even more money.

The number of markets you bet on and the number of strategies you use simply depends on your own time and interest. In this chapter we will reveal many of the strategies you can use. Although nothing can be guaranteed, there are ways to drastically cut your risks. I use a number of sources of information when trying to predict market behaviour.

Secrets For Predicting Market Behaviour

The better your understanding of the financial markets the more accurately you will be able to predict them. In many ways, a good knowledge of the markets and techniques which can be used to analyse them is like having your own crystal ball! Remember, of course, that these methods are only guides to support your decisions. There is, unfortunately, no definite way of predicting share prices and market values!

Stock market experts use four methods when trying to predict whether the values of the financial markets are likely to rise or fall. These are fundamental analysis, technical analysis, quantitative analysis and personal views and opinions :

• Fundamental Analysis : Involves a look at the overall performance of a company, a number of companies or the financial markets as a whole and trying to assess a true value for their shares or that market. By comparing this value with the current market price of the shares you can judge whether a fall or rise in price is likely and bet accordingly.
• Technical Analysis : Technical analysis is concerned with taking share prices and other financial data and using this to try and predict future share or market performance. Technical analysis centres around trying to spot and use trends and makes extensive use of charts. It is also sometimes called chartism, and those who use technical analysis are known as chartists.
• Quantitative Analysis : Quantitative analysis is concerned with trying to assess the riskiness of a share or market.
• Personal Views and Opinions : Personal views and opinions do not rely entirely on facts and figures. However they are useful in trying to predict financial markets since many investors, especially small investors, make purchase and sale decisions according to personal views and opinions and so these factors can and do have an impact on share prices and market values. This aspect is taken into account even by serious investors and financial experts.

Understanding The Financial Markets

To understand why the value of the financial markets rises and falls it is very important to understand just what makes the prices of stocks and shares themselves fluctuate.

Remember, the stock market brings supply and demand together, just like any other market. In an ideal world prices would vary only according to the fortunes of the companies which issue shares, but in the real world the following can affect prices :

• The General Economic Climate:  In other words, the state of the country and also the world economy in general. The general economic climate can be influenced by unemployment figures, interest rates, property prices, the size of the national debt, forthcoming elections, wars and political crises in other countries. Whenever an announcement of such events is made, or anticipated, you should try to consider what effect it might have on the financial markets you are betting on. Important: Many experts believe that investors’ confidence in the general economic climate affects share prices more than the economy itself. So you must also consider how investors interpret this information.
• The Laws of Supply & Demand:  Remember that, most of the time, the supply of shares in a given company is limited, but demand for them can vary considerably. Investors want to invest in companies which they believe are successful, and want to dispose of investments in companies who they believe are failing. So, watch for news and information on companies who are listed in the indexes on which you are betting and, just as importantly, how investors react to that news.
• The General Mood Of Investors: The general mood of investors is one of the most difficult things to consider, since it involves a degree of emotion. Many investors buy and sell shares (hence affecting the financial markets) on a gut reaction, rather than as a hard financial decision, and financial markets rise and fall as a result. You must consider the role of the financial press in this, especially with growth in the number of small investors who rely on the press for advice. Many investors take financial headlines seriously – often too seriously – and really do act on their advice. As a result, many financial headlines regarding share prices tend to become self-fulfilling prophecies, whether or not the original headline was justified or not.

Bulls, Bears And Crashes

You will have heard of bull markets, bear markets and crashes as they relate to the stock market. However, it is important to realise that these phenomena are primarily caused, not by real-life situations, but by the general mood of investors. By interpreting the mood of investors and hence what kind of market is likely to result you can to some extent predict the rise and fall of financial markets for several years hence.

• The Bull Market: A bull market is a market in which share prices are on the upward trend. Prices usually dip for anything from between one day and one week, but then begin to rise again. Bull markets last for approximately four years, rising most sharply after the first six months. In a bull market confidence is high and investors continue to buy shares even when financial experts suggest that prices are too high.
• The Bear Market: A bear market is a market in which share prices are on the downward trend. Prices usually rise for anything from between one day and one week, but then begin to fall again. Bear markets usually last no more than one year. At the end of a bear market share prices normally begin to rise, regardless of the economic climate at the time.
• The Crashed Market: A crash is defined as a fall in stock market prices of or exceeding 10%. Crashes are very difficult to predict, although they normally occur when prices in all the world’s financial markets have been rising to previously unknown levels for at least two years or more. So far as financial traders are concerned the most important thing to know is that, following a market crash, stock prices take approximately two years to return to their pre-crash levels.

A prime example of how fundamental changes can affect us was over the panic in Asia. So-called experts were constantly telling us that UK share prices will be hit hard once the effect is felt over here. These were the same experts who only a few months earlier were raving about the tiger economies and how we should all learn from them and adapt accordingly. Twelve months later we did feel the effect but by then the market was prepared and although the FTSE and US Dow Jones indexes did take a little dip the markets quickly picked up again.

In the rest of this section, we will look at some other criteria which can be taken into account when trying to predict the future value of the financial markets.

Financial Headlines

As we discussed in the previous section, many small investors follow the financial headlines closely and act on their recommendations, true or false, good or bad. This is more important now than ever before. In the age of fast, cheap telecommunications headlines can be flashed around the world in minutes and quickly affect financial markets everywhere. Therefore, you must get used to keeping an eye on the financial headlines in the mainstream media and considering what effects they may have on investor’s actions, and hence market prices.

Good ways to do this: Browse newspapers daily at your newsagents or library. Read the online versions of newspapers. Scan Teletext. The financial pages often repeat the financial headlines. Very useful : Late night TV news programmes often read out the headlines of the next morning’s papers. If they are of an economic nature these headlines can cause investors to buy/sell shares first thing the next morning and create a price fluctuation which can be reversed by happenings later on the same day.

Read The Financial Tips: Don’t just focus on the headlines. The stock market tipping columns in the popular newspapers have a fanatical following. Advice to buy or sell FTSE listed stocks can have a noticeable impact on the value of the market.

Financial Announcements

Announcements made by the business sector can have a dramatic effect on share prices, whether or not they are well founded or reliable.

The best way to illustrate how you can use financial announcements is by using an example : In early 1998 Glaxo Wellcome and Smithkline Beecham announced a £100 billion pound merger (but they did not finally merge until January 2000).  Because of Glaxo’s huge market capitalisation of more than £360 billion, they had a weighting of 5.7%. (Large companies are weighted on the FTSE 100 share Index, so that

fluctuations in the share prices affect the index proportionately according to their size.) BP is another company with a huge market capitalisation, with a weighting then somewhere in the region of a 5%. Compare this to British Steel with a market capitalisation of £2.6 billion and a weighting of 0.3%.

When news of the possible – repeat, possible not definite, at the time – merger was announced, it affected share prices considerably. The FTSE rose by over 100 points largely as a result. I personally made over £5,000.00 from this announcement and this is how I did it : The news of the merger was announced on a Friday. So over the weekend I obtained a quote from the financial bookmaker, placed a long bet and waited for the markets to react when they opened on Monday morning. As predicted they did, and I walked away with a handsome profit!

It is only because Glaxo shares had such a high market capitalisation that developments within the company could hit the FTSE price considerably. But financial announcements from other companies listed in the FTSE – these are listed later – will hit the index proportionately according to their size.

Glaxo Wellcome and Smithkline Beecham finally merged in January 2000 – a deal which makes them the biggest drug company in the world. As I mentioned earlier, when they first tried to merge back in 1998, I made a handsome profit even though this merger fell through because they could not agree on management positions.

Another example: Clinton Cards once fell by 71p or 30% due to a reduced profit warning issued by the company. They warned the market its full-year profits would fall below analysts’ expectations. Also in another example Tesco was hit with a fall of 6p, simply because stories had appeared in the press that they were to take over Marks & Spencer – but the company had not even issued an announcement as to whether they were planning to do so.

How It Is Done : The more information you gain from companies the easier it is to predict the markets. Use all the sources we recommended earlier.

My advice is to always be alert to announcements from the big companies who feature in the FTSE 100. Get to know who are the FTSE 100 companies currently are. These are listed later, although they are changed from time to time.

Next, consider their weighting, which you can also find out with a little research. Then, try to predict unexpected fluctuations in the FTSE 100 by looking for situations where financial announcements made by some companies will cause an unexpected rise and fall, which you can cash in on. For example : If 28 FTSE 100 company prices fall by 1%, Glaxo and BP share prices rise by 1% and the remaining 70 companies remain unchanged you would probably think the FTSE would fall sharply.  However, because it was Glaxo and BP shares which rose, the FTSE would in fact rise too.

Finally: Always pay attention to worldwide financial announcements, even if you are betting just on UK markets. Warnings of poor results in several large Japanese companies hit UK share prices resulting in the FTSE 100 Index falling by 82 points

and then a further 100 points the following day. Anyone who noticed these warnings and anticipated a fall in the UK market could have made a small fortune. (I placed a short bet of £20 per point as soon as the warning was issued and made £3,600.00 as a result!)

Director Dealings

The directors of many stock exchange listed companies have major shareholdings in their own companies. They also have a detailed knowledge of the past performance and future prospects of their companies, which is not yet available to the market at large. Just like private investors, directors often express their confidence or lack of confidence in their companies by purchasing or disposing of shares. Therefore, if you keep up to date with director dealings you can get useful information as to whether share prices are likely to rise or fall.

It is easier to obtain this information than you may think. Many financial magazines, including ‘Investor’s Week’ publish this useful information. It isn’t published merely for general interest. It has a serious purpose in helping you to spot lucrative opportunities!

Study this information in conjunction with ‘results due’ dates. A major purchase of its own shares by a director in advance of their financial results being published (known as ‘results due’) can indicate a rising share price, and can affect the market, and vice versa.