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  Most import is risk management. Practice defence, defence, defence: Decide how much of your total capital you feel comfortable losing , say 5%. Then how much of this you may lose per trade e.g. 0.5% T...  

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Becoming a trader: how to start, where to learn and potential dangers

You need to be prepared to lose a bit of money and work for little to get experience, says Petri Redelinghuys.

NASTASSIA ARENDSE:  Tonight we are going to be looking at trading. What I want to do with this part of the show is not look at some of the stuff we’ve already looked at, where we’ve talked about Trading 101 – how to pick shares, for example. I want to kick things up a couple of notches, so we can talk about how to become a better trader. Maybe you’ve decided to given it a try, and you are reading some stuff, or you are also selecting your stocks and really getting involved with the information.

One person who also started off trading at the beginning and is now the founder of Herenya Capital Advisors is Petri Redelinghuys. Petri, thank you so much for your time this evening.

PETRI REDELINGHUYS:  It’s a pleasure. Thank you very much for having me.

NASTASSIA ARENDSE:  We always talk about how to get started, where to get started, what to read up on. Before we even get into that, I want to talk about how you got into the business of trading.

PETRI REDELINGHUYS:  It was a long journey, I won’t lie. It involved many courses that I did in terms of technical analysis and trading strategies and that kind of stuff. I think through that I learned that you don’t necessarily have to do these courses. A lot of the stuff is really repetitive. You can do courses, for example, ranging from R2 500 to R22 000. I did it a bit differently. I worked for one of the companies that sold these courses, so I managed to get all the stuff done free. But all of these courses – the information is available on the internet for free. There are websites that do videos, for example, that you can go and watch, which have pretty much the same content that you learn in courses. I did start there, I won’t lie.

So I started just messing around, buying some shares, trading up till I had about R5 000 and then buying some stock with that R5 000, and then doing it again, and slowly starting to build a portfolio.

When I just started out I was working at a bank. Eventually I left and I tried my hand at day trading, and I pretty much lost everything that I had at the time. I was quite a bit younger than I am now. It was difficult. I lost all the money I had. I didn’t really have any clue what I was doing. I thought that I had been armed with all this knowledge and I knew technical analysis, and I knew all the theoretical things that one needs to know in order to make money. And then, when I got to a point where I now entered into a professional trading environment, I realised it’s not exactly like it says in the books – it’s not exactly what the people [say]. I was trading on the internet and that kind of thing.

It was pure persistence. Eventually with no money and a head full of dreams I started looking for work as a stockbroker. Someone eventually gave me a shot. I’d had to then move cities, down to Durban from Johannesburg, to go and work at a stockbroking firm for no money, for free. I was living with a friend at the time who had taken me in, and gave me somewhere to sleep and helped me out with meals and that sort of thig. For five, six months I was in Durban working essentially for no money at all. But I was on the trading floor and I was learning. I continued to sort of keep that attitude – work for knowledge, not for money.

I then got an opportunity at a different firm in Cape Town. I moved down and was there for a number of years. It was a sort of stockbroking firm that also had a hedge-fund licence, so the learning curve there was immense, learning to manage money and that kind of thing. Another opportunity cropped up in Johannesburg where again it was a stockbroking position, where I then worked for a number of years as well.

Eventually I had gathered enough experience to figure I’d have a go for myself, and I started my own stockbroking firm about a year ago. It’s going, it’s growing, slow progress. Owning a little business is like having a baby, I guess, but it’s good. I’m very pleased with how it’s grown, and I’m again in a position where I’m trading in a professional capacity within a day-trading environment.

It’s a long journey and I think that for people who start out, everyone needs to focus on what shall I learn, where shall I go to get the knowledge. What you need if you really want to have a go at this, as a lifestyle and as a career, is persistence. You have to understand that there are thousands upon thousands of people who want to do this for a living, but only a very few make it. It’s not because those few are smarter or better capitalised than the others or have more money or have better grades at school. It’s just because those are the ones that are more persistent.

NASTASSIA ARENDSE:  Here is a text that has just come through on the SMS line from Tembi in Doornpark, and she says that there are people claiming to teach people how to trade in the hood, using dummy accounts. Is this a feasible way to learn?

PETRI REDELINGHUYS:  Absolutely. I think that one has to pick very carefully who you learn from, but I do think that dummy accounts do help. Look, to some extent dummy accounts are way easier to trade than what it is to trade with real money. Obviously when there is real money on the table, you suddenly have an emotional response to when you buy something, when you sell something, or you take a loss or make a profit. Money is an emotional thing, and people will tell you that you have to remove emotion from the equation. But the truth is, you can’t. You need to learn how to control that.

But to some extent, yes. For learning the way that the market moves a dummy account is good to watch. You can essentially use dummy accounts or demo accounts to test new ideas and to just watch and learn how the market reacts to things. But understand, once you start trading, you are actually interacting with the market, especially when you are trading derivatives based on JSE stocks – or not necessarily the derivatives. If you are buying or selling anything on the actual JSE, you physically now interact with the market. On a demo you think, oh well, if Shoprite gets to this price I am going to buy it, and if it gets to that price I’m going to sell it. When you physically buy it at that price, you might not necessarily get all the shares you wanted or it might never make it to that price – or whatever the case is. The decision-making really does change when you go live.

So I would suggest playing around with the demo account, yes, but not for too long. Unfortunately you have to lose a bit of money in order to learn the lessons. Also, if people are out there selling these trading courses where they are going to teach you how to make millions, just remember that your money is probably going to be better spent losing it in the stock market and learning that way than what it is going to be paid to these guys who are going to teach you something that is probably not going to help you in any case.

NASTASSIA ARENDSE:  Petri, earlier on you were talking about being a day-trader. What other trading styles are out there?

PETRI REDELINGHUYS:  There are a number of different things and I think that, if you were to consider really getting into it, it’s almost like building a pyramid. At the base level of the pyramid there is long-term investment, or a long-term trading, where for example you say “I think Transaction Capital is a great business, I think microfinancing to the taxi industry is incredible, because in this country in South Africa people are going to be using taxis as their main form of transport for many years to come and, as the economy grows so will the number of taxis on the road. So Transaction Capital is a good business, I’ll buy it and I’ll hold the company for a very, very long period of time.”

Then the next sort of step from there is more shorter-term trading where, for example, you start trading stuff like CFDs and futures and derivative contracts. A CFD is called a Contract for Difference, and it allows you to trade something with margin – in other words, if the share costs R100, you put a R10 deposit down to finance essentially this purchase of a R100 share, which means you can buy more shares than what you have in money. And you can also sell shares that you don’t own. So you can benefit if the price of the shares comes down. So, for example, if yesterday you were selling Naspers shares that you didn’t own, you went short, and today the price drops R50 and you buy them back, you can make some money. So trading in the shorter term, or CFD trading, is sort of the next step to the equation. Here you start taking a lot more risk because you are now leveraging yourself and you are leveraging the capital that you have to work with.

And this is also where a lot of these forex trading platforms fall in. I’m actually quite strongly against forex trading, especially for inexperienced traders, simply because the amount of gearing that you are able to get access to is insane. You can get 500 times your money – which means that for every R1 that you put in you can R500 worth of foreign currency. In most cases you aren’t really buying foreign currency, you are just kind of trading against a house – it’s technically called spread-betting. I’ve got opinions of that as well, but we haven’t to enough time for that. But it’s the new hot thing – forex trading. Everybody is a “forex millionaire” these days. If you were really a forex millionaire you wouldn’t be flying around country teaching people, selling jolly forex courses. But in any case.

Derivative trading is sort of the next thing. This is where your trade last anything from a couple of hours to a couple of weeks. A good example would be buying Impala [shares]. So last week I was buying Impala Platinum and I was buying it at around the R34 level. It’s currently trading at around R39, so I’ve made a nice R5/share profit. I can sell some now or I can wait, which I’m actually doing for another week or two, to see if it can maybe get to R41. If it gets to R41 I’ll start selling. So this is really shorter-term trading, where you are trying to profit from smaller moves in the market, taking slightly bigger positions. Therefore you are making use of derivative products, where you can gear you money up by making use of leverage. Then that is shorter-term trading. If you do that successfully you can make quite a lot of money. The truth is, very few people actually do it successfully, and that is why the few that do make a lot of money.

NASTASSIA ARENDSE:  Okay.

PETRI REDELINGHUYS:  Then the very tip of the pyramid is almost day-trading. It’s always called day-trading, where the leverage is incredibly high, the cost is incredibly low, and you don’t even hold positions overnight. A good example would be – this morning the only trade that I did for the whole day, partly because I had to go out of the office, I had to go to a compliance meeting for the brokerage company. But within half an hour this morning Naspers’s Tencent came off quite a bit in China because of some regulatory issues that they are having there, Naspers being a big holder in Tencent. The share price dropped. When the market opened, it opened lower, rallied after a little bit. At that point you can short some. Twenty minutes later it’s trading R30 lower and you buy it back.

So in that situation day-trading is almost where you start the morning with cash and you end the afternoon with cash, and intraday you are in and out of the market very, very actively. So you can take anywhere between 5 and 30 trades a day. This is incredibly active and this is incredibly risky. So this is almost the very tip of the pyramid, if you want to call it that, especially guys who are beginning.

Everybody wants to be a day-trader but, believe me, don’t start with day-trading. I did. I went from having a very theoretical understanding and having a number of long-term shares, straight into a day-trading firm. I had to sell all my long-term shares, I lost all my money within like four months. And then I had to take a step back and go back into, okay, well, trade for the long term, start educating myself. And this is why I worked for knowledge and not for money, educating myself on trading strategies and different ways of analysing, and understanding how the market works.

I think the bulk of the trading that people can do successfully from home is almost CFD and shorter-term trading, where your trading time frame is anything from three or four hours to three or four weeks, and anything in between there, where you are not taking crazy amounts of risk, you are not up at night wondering. You buy R500 000 worth of stock because you’ve saved up R50 000, and the first thing you do is put all of it into one share. Then you can’t sleep at night because you are taking more risk than you have money. It’s ridiculous. But I think if done responsibly you can use this way to really build up capital over a medium-term timeframe.

NASTASSIA ARENDSE:  There is a text here from Lerato in Sandton, saying. “How does one check the credibility of a trader. Is there a website you can look at?”

PETRI REDELINGHUYS:  Individual traders – I suppose that’s a bit tough. But ultimately the Financial Services Board is there to make sure that the institutions that you deal with are credible. So if somebody comes to you and says, hey, I’ve got this brokerage firm, or I’m going to teach you how to trade, the ultimate aim for them really is to teach you how to trade and probably make them some money from giving the course. But by the end of the course they are going to be referring you to somebody to open a trading account, because everyone wants to make a brokerage. So what you need to do is find out whether or not the person who is teaching the course or is the referring party that they are going to refer you to, open a trading account, does that company have a financial services provider licence? Does it have an FSP number? You can phone the FSB and say, “Hey, this Petri Redelinghuys guy was telling me that I need to come and sit with him for two Saturdays or whatever. He’ll teach me and coach me and mentor me how to trade and then he wants me to trade through his company. Is he credible?” They are going to say, “Petri Redelinghuys, hmm, what company does he say he owns?” “He says he owns Herenya Capital Advisors.” “Okay …[small last bit of audio lost].

NASTASSIA ARENDSE:  Petri, thank you so much for your time.

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Marise Smit

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Trading is like the young farmer who decided to raise ostriches because there is so much money to be made. He went along and bought 100 ostrich chickens at an auction, and then went to the old farmer and asked him for advice on raising ostriches. Now the old farmer’s advice on raising ostrich chickens is so valid for new traders.

The old farmer told the young farmer”The only thing I know about raising ostriches is that you can fit 30 dead, day-old ostriches on a wheelbarrow.”

Very insightful interview Petri.

Heartwarming story attached to it as well.

You go!

A central concept that is not getting any mention here is the fact that markets are nearly efficient, in other words any characteristic of the observed price movements that you attempt to exploit ( like a trend ) is quickly defeated by the act of trading it as soon as it becomes apparent. In a highly liquid market, this action leaves day trading at best a marginal game encumbered by crippling trading costs. As for Forex, I really challenge anyone to show us consistent gains – I haven’t seen one. Its as close to a zero sum game as it gets – be warned!

Very interesting to read your path to becoming a good trader.
An easy way as indicated is to sell high and buy low.
How is this achieved?
When markets go down BUY.
When markets go up SELL.
As most traders loose (fact) you just have to trade against the move consistendly without emotion and do it long term.

I think it’s very easy : Buy Low, Sell high!

Most import is risk management.

Practice defence, defence, defence: Decide how much of your total capital you feel comfortable losing , say 5%. Then how much of this you may lose per trade e.g. 0.5% This allows a maximum of 10 trades.

Set a stop loss per trade of say 20%. Divide the 0.5% of capital by the Rand amount of the stop loss to determine the number of shares you may acquire per trade.

Once a share has moved up by 20% you may enter an 11th trade(set a trailing stop of 20% on all shares that move up), provided the other 9 trades collectively do not show a loss of 20% or more.

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