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Artful Trader

“Balancing being humble and confident is a key trader mindset”

JC Parets started his technical analysis research firm All Star Charts as a “side hustle” shortly after launching boutique hedge fund Eagle Bay Capital. But Parets’ side hustle quickly became his full-time gig.

“I underestimated the appetite,” he says. “So I decided to wind down the fund to concentrate on building the research offering.” Through his research firm All Star Charts, Parets offers a range of technical analysis products used by thousands of institutional investors, retail traders and financial advisors in more than 100 markets. The success of his trading come in part from hard lessons learned playing sports like baseball in college and the name, All Star Charts, is a nod to this passion.

Parets continues to trade his own account and plans to relaunch Eagle Bay when the time is right. Due to the growth and demand of the business, “it would be irresponsible of me not to continue to focus on All Star Charts right now,” he explains. Here are his tricks of the trade.

 

I have a top-down, global macro approach. 

I start by looking at every stock market index, commodity index and tradable currency in the world, from Canada to Sri Lanka and everything in between. If there’s an index in a country, it’s on my list.

“I have a top-down, global macro approach”

 

It’s why 95% of the reason that I ever buy or sell a stock has nothing to do with the chart of that actual stock.

I first look at the overall direction globally, through analysing markets by country, before drilling down to the sectors within that market. From there, I look at industry groups within those sectors – take healthcare, for example. People often forget that within that category there’s pharmaceutical, biotech and medical equipment, to name but a few. Only after identifying an industry group will I analyse the individual components of that grouping to find the stock that best represents my thesis on the market, as well as the best risk versus reward.

 

The idea that fundamentals tell you what to buy and technicals tell you when to buy is a vicious lie.

I don’t know which fool made that up, but for me, it’s the technicals that tell you what to buy. If you're not looking at a chart, how are you going to know what’s trending up? How are you going to know what’s outperforming its competitors, and where momentum is flowing? I'm not sure why people think their opinion of the market will be the same as the market’s opinion, but to me, that's very foolish. If we’re going to be focussed on stocks, then we should focus on stocks, not “companies”.

“If we’re going to be focussed on stocks, then we should focus on stocks, not “companies”

 

Price is by far the most important indicator.  

The most bullish thing a stock can do is go up, the most bearish thing it can do is go down. Yet I can’t tell you how many people identify a stock they like without taking half a second to look at whether it’s underlying trend is moving up or down. I use a 200-period simple moving average to aid trend recognition, but I never use the moving average for support and resistance purposes.

 

My two key supplements to price are relative strength and momentum.

For relative strength, I look at how an asset is performing relative to its closest alternative opportunities. In the case of stocks, I compare their performance to bonds or gold. In the case of sectors, it’s to the overall market and other sectors. For an individual stock, I’m looking at how it’s performing relative to its sector. For momentum, I use a 14-period Relative Strength Index (RSI) on both daily and weekly charts. I don’t diverge from this and I never average the RSI out.

“For an individual stock, I’m looking at how it’s performing relative to its sector”

 

I’m a John Murphy disciple through and through.

Murphy pioneered intermarket technical analysis; examining the correlations and links between stocks, bonds, commodities and currencies. I encourage everybody to read everything he’s ever written.

 

Balancing being humble and confident is a key trader mindset.

It’s something [retired poker player] Annie Duke talks about extensively in her book Thinking In Bets, which I also recommend everyone read. It’s important to be humble in the face of the game you’re playing; understanding how little you know is essential to continued growth in knowledge and wisdom, as well as evolving your strategy and process. But if you’ve done the work, you also need to be confident in the knowledge you do have, confident that you’re more prepared than the majority of your competitors. In the case of the market, we’re up against the rest of society, and personally, I’m incredibly confident that I am far more prepared than 99.999% of market participants out there.

“But if you’ve done the work, you also need to be confident in the knowledge you do have, confident that you’re more prepared than the majority of your competitors”

 

I use three programmes: Excel, Koyfin and Optuma.

Excel keeps life organised. I use it to track index and sector components, changes in ETF weightings and it also holds my algorithms and formulas. For charting and research, I use Koyfin, a new piece of software I’m a private equity investor in, which incorporates lots of data. Optuma is a piece of Australian software that I use for data visualisation.

 

Keep it simple stupid. 

People often make things so complicated and spend so much time analysing individual stocks that they miss what’s right in front of them. A good example of how my global macro approach gets around this is from a trade in September 2019. Semiconductor stocks were breaking out in America, at the same time that Taiwan was breaking out to new all-time highs. The charts were almost identical. So what should you buy? Taiwan Semiconductor of course. It was a huge winner for us.

“People often make things so complicated and spend so much time analysing individual stocks that they miss what’s right in front of them”

 

Don’t ignore the data.

In 2011 and 2012 there was key support in gold around the 1560-1570 area which broke in 2013. The thing they teach on day one of technical analysis kindergarten is that former support turns into resistance. All the people that thought in summer 2019 that gold would continue to go higher chose to ignore that very obvious data point.

 

I find sentiment is useful at extremes. 

Earnings don’t drive markets, politics doesn’t drive markets. Sentiment is what drives markets. But, unfortunately, 95% of the time sentiment data is useless, apart from when it’s at extremes. Look again at the example of gold: from September 2019, commercial hedgers had the largest net short position ever. I wouldn’t want to be the trader standing in front of that train.

“Earnings don’t drive markets, politics doesn’t drive markets. Sentiment is what drives markets”

 

It’s why buying stocks and selling rocks is our philosophy right now.

I think this continues throughout 2020. We’re still in a very strong downtrend in precious metals relative to stocks, so I don’t see any reason to be buying precious metals whatsoever. Quite the opposite: I’m a seller. Meanwhile, stocks are, in my opinion, set to go a lot higher.

 

I see European banks moving a lot higher.

The Stoxx Europe 600, the broadest measure of European equities, has literally done nothing for 20 years, it’s had zero returns for two decades. It’s why I’m part of the camp that believes Europe is about to start a new secular bull market driven by an epic rally higher for European stocks.

 

It’s just one reason I believe we’re closer to a new bull market than we are near the end of an old one.

The lie that we’re in a 10-year bull market in stocks was the greatest trick the market ever pulled. I don’t know what data people are looking at to draw these conclusions, but my data suggests the exact opposite.

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Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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