Day trading: How to get started, where to invest – from stocks to currencies – BizNews.com

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Day trading: from getting started to finessing your portfolio

This podcast is brought to you by CMTrading. I’m Jackie Cameron for BizNews and with me to talk about how South Africans can trade in the global financial markets is Fred Razak, chief strategist at CMTrading. Fred, before we get into the nitty gritty of trading, perhaps just tell us briefly about your role at CMTrading and how you work with your clients. 

It’s been over seven years that I’ve been working here at CMTrading and my position kind of evolved over time. Initially, I was working on the desk – both the dealing desk, as we call it, and the working desk – with the clients as a specialist, basically guiding clients with their trading. And then my role evolved into more of an educational status, where I provide a lot of educational material for our clients in order to trade the financial markets.

What kind of a material is that? Does that start with the very basics of how you trade and information about how you read graphs and things, or do you need a certain level of knowledge to get started? 

We really go from the ground up.

We understand that most people who come into this business don’t have a background necessarily in trading the financial markets. And that should never be a barrier (at least from my perspective) why people should not enter this business. And so we try to make it as user-friendly as possible. We go from the basics up. 

So there’s a lot of things that you could get online. In today’s day and world – the level of the playing field has been pretty much levelled, because you have so much information online in order to learn how to trade. But we like to add another spin to it by adding valued content for our clients in order for them to really take a journey from not knowing anything into becoming something of almost semi-professional traders in their own right. 

And I’ve seen a lot of progression here at CMTrading with a lot of clients who, otherwise, would never have been able to expose themselves to this type of trading – had they not entered this type of opportunity.

Let’s start from the beginning then. We’ve got many South Africans who manage their savings and investments through financial intermediaries who do everything for them. And these people often end up placing their investments in funds. But we are hearing that people want to take control of their finances and they want to buy stocks, so – where do you begin? Does it start with opening a bank account offshore? 

As CMTrading, we’re a financial broker that provides trading services for clients anywhere in the world. And specifically, we are regulated in South Africa, which makes things much, much easier for somebody to open up an account with us.

So, in essence, opening up a bank account or opening up an account with CMTrading is almost essentially the same thing. 

However, at CMTrading, you’re able to open the door in order to trade the financial markets, and that includes currencies. So, you’re able to trade the category of currencies. You’re able to trade indices that otherwise you wouldn’t have access to. I’m not sure if, in South Africa, you’re able to trade that by opening up a bank account and having some sort of exposure to trading international indices like the Hang Seng, like the Dow Jones, like the DAX , like the FTSE, which are international. Those are foreign countries that you’re able to trade. 

Read also: Online day trading continues to benefit from coronavirus-related market woes

You’re also able to trade stocks. So, that is really the most exciting portion of the financial markets right now as the stocks have exploded over the past four years with what has been taking shape. And it’s in a few sectors. It’s really exciting, and you have the access to do that, whereas 20 years ago – you didn’t. We also have commodities. 

Also, especially now, gold is very exciting to be trading it. And we also have crypto currencies. Those are the five major categories that you’re able to trade here at CMTrading. So, essentially you have exposure to the world in terms of access to trading the financial markets. 

Day trading: a route to the S&P500 – Buffett’s favourite index

So, before we get to those exciting stocks, one of the stocks we hear about often in South Africa is the Vanguard S&P500. And that’s because it’s recommended by the so-called sage of Omaha, Warren Buffett. And it’s seen as a relatively safe, long-term bet, and for many people – this is perhaps the first step they want to take in trading on markets. Is this an offering that you can give South Africans? 

Essentially, yes. You could trade the S&P 500, which is an index that is located also on our system that you can trade. There are also others. The S&P 500 represents 500 of the largest companies that are listed on the New York Stock Exchange. So, there’s two major exchanges in the United States (there’s actually three – but we’ll leave that one for the side because that’s more institutional trading). 

There’s the New York Stock Exchange and the Nasdaq. The New York Stock Exchange was referred to the big board, which really represents old school stocks, also categories of indices, something like the railroad, which had been in the markets a very long time, or something like the conglomerates: Colgate, Palmolive, the Coca Cola’s – those type of companies that are very, very large companies. 

And in the 1980s, 1990s: the Nasdaq came into the forefront as the new wave. The high-tech stocks started to really list their stock on the Nasdaq, because it was a smaller exchange. And then, it really represents some of the larger ones, where companies who wanted to list themselves on the exchange couldn’t do it on the big board – on the New York Stock Exchange – so they listed themselves on the Nasdaq. 

And today, most of all (maybe besides one or two major technology companies) are all listed on the Nasdaq. So, like I said before, you’re able to trade both sectors: both the New York Stock Exchange stocks and the index, and you’re able to trade the Nasdaq and some of the major stocks that represent in the Nasdaq as well. So really, you have all the tools in order to trade some of the most exciting markets today.

Amazon: Assessing its potential for day traders

Stocks that are doing very well in the BizNews Portfolio include Amazon, and some of our audience likes to replicate the Portfolio. How much money do you realistically need to invest in Amazon, and do you think that it’s a good time to invest now? 

That’s the million dollar question. Every time the market goes up, you say to yourself: OK, why didn’t I buy it like a month ago or two months ago? So, let’s take stock of what’s going on. We haven’t gone into the Covid-19 situation right now, but over the past four years, companies like Amazon and Tesla have gone to exponential numbers. I think even the largest fund managers in the world are still trying to digest it. And it’s really because of several reasons. 

Tesla, because it’s a very exciting product. The CEO obviously saw some of the potential of that market really making not just an electric environmental friendly kind of car, but also making it a very dynamic and – for a lack of a better word – sexy car. And that has exploded. And some of the traditional automakers are still just lagging behind both in technology and both in just style. 

Read also: South Africans pile into day trading as Covid-19 erodes savings, claims jobs

That, I would say, is a separate situation to why Amazon is going up. Now, Amazon has really been around. I remember when Amazon was trading at five dollars. Today it’s trading at $3000 (plus or minus a couple hundred dollars). But I remember back in the day when Amazon almost went out of business after the dot com bust of 2000. And really, everybody knew back then that it was going to just be a matter of time until Amazon was going to restructure itself and rephase itself back into the market. 

Now, there were a lot of other things going on at that time, and the fact that Amazon today is just such a massive company is because they’ve levelled every single part of the industry that they’ve gone into. They started out as just selling books online. It’s a very exciting company, and at a certain point – with all these types of companies that have gotten so much large market share – they will be broken up, in my humble opinion, because they’re so powerful. Any type of data that they have on us today is so scary. 

I was doing a little bit of research and they know when we can conceive before we know it. Crazy, right? So, the type of information that Amazon collects about us today – or Facebook or Apple or any one of these major (those are the four major ones that are really taking and collecting so much data, including Google as well) – between these companies: it is no longer services that they’re providing or no longer consumer products that they’re selling – but they’re collecting so much data on us and they’re able to analyse that data and make decisions about the future based on that data. 

And I think that that’s the scariest part and why these major countries are really coming down on them in terms of regulating them. Regulation, to a certain degree, always stunts growth, and President Trump: his biggest contribution over the past four years is that he wanted to deregulate everything. Being a former businessman, successful businessman: some of the most aggravating things for someone who’s an entrepreneur is when you have regulation to stunt your growth. 

So, deregulation is fantastic for the market. Now, it has to be also with a little bit of control and accountability. So, it’s a little bit of a balance between both. So going into those stocks right now, I think is a very exciting time.

If Amazon gets broken up, would that be good or bad for people who own those stocks?

It’d be good for everybody else. But for Amazon itself, it would be kind of interesting how it happens. There are two scenarios that could happen out of that: one of them being that it would be bad, because that would take the power away from Amazon. But it would be also good because some of the spin offs, some of these companies that they would be broken into could then galvanise and get bigger also. So, I don’t want to celebrate that too soon. 

I think the next real wave, which I missed to mention earlier, was the cryptocurrency, because these companies are now getting very interested in these cryptocurrencies. We know that Facebook is coming out with Libra as a potential cryptocurrency moving forward. That, I think, is going to be the next propelling force to move these companies even higher, and then I think there’s going to be some regulation actually coming down. 

Until now: it’s in the backdrop, it’s been maybe a little bit of threatening from the part of the government agencies to Facebook and all these types of companies. But until now, they haven’t really gone down to putting something on paper. But I think that the next step will be when we get into cryptocurrencies that will stunt their growth even further.

Cryptocurrencies: Traders beware

I chatted to one of your colleagues recently and he was quite negative about cryptocurrencies as a trading option. What is your view on cryptocurrencies? 

Cryptocurrencies very much remind me of what the Internet stocks of 2000, 1998, 1999 look like. Back in the day – I started trading in about 1996, 1997 – when I first participated in any kind of exposure to the market. I was just starting out. I didn’t have a background in it. I didn’t see the 1980s to give me a little bit of a backdrop to it. 

So it was quite a very exciting time to come into this, because all of a sudden you had companies like Yahoo! and other companies which you don’t know anymore today – because they don’t exist. And they came out and they all opened up: eBay, Amazon – and there were the peripheral companies that were coming out as a result of these companies. 

All the networking companies like Cisco and all their competitors that were coming out. And it was a very, very exciting time in the markets. And at that time, no one really knew how to value these companies, because ultimately these companies were Internet stocks. What was Internet? Nobody understood that. 

All the fund managers always understood when you had a goods or services kind of company: traditional goods where they produced a product, then they sold it. So I understand that business model, but all of a sudden you have this Internet and nobody knows what to do with it. So much so that AOL – it was one of the first Internet browsers and providers – were bought out by a company for, I think, $5bn, and at the end of the day – it was a wash because they never produced any income. 

So, it was interesting that they were going into the Internet business, but they didn’t know what they were doing yet. So I think that that’s the case here with Bitcoin. I think that right now the Bitcoin and the cryptocurrency is coming into the market as a first splatt: where everybody’s just kind of digesting this information and nobody knows what to do with it yet. 

It’s not regulated. It’s mildly regulated. It is traded on the exchanges already – like the CME – so it does have some validity to it. But at the end of the day, no one knows how to really sustain it. And I think that that’s what’s going to happen: we’re gonna have something like a Google kind of format that’s going to come in. 

So Google, interestingly enough, came into the scene of the Internet age at the end – after everything happened. They came in at about 2001, 2002: they went public. They made a massive splash, but they saw all the mistakes all the other companies made, and they did it better. And once they did better, they were able to take the market share. 

So, at one time: a company like Yahoo! was a hundred times bigger than a company like Google. But today, Google’s so big because they’ve done the product better. And I think that’s what’s going to happen with Bitcoin also or any of the cryptocurrencies. I think everybody is just going to be there and just wait as all these cryptocurrencies make all the mistakes and someone like Facebook or Google is going to pounce on it and really take advantage of the situation. 

Sounds fascinating, Fred. Let’s take a step back to Amazon. You said that you remembered it was $5 a share and now it’s $3000. How do you find the next Amazon? Where do you see the new opportunities? 

So, that’s a really great question. And that’s going to be in some of these cryptocurrencies and AI – artificial intelligence. And it’s really hard to pounce on it, because sometimes we’re not exposed to some of these types of companies that are at the cutting edge of artificial intelligence. And when they do start really perking up and becoming interesting, companies like Microsoft or Google come in and they buy them out – because these companies have so much cash. 

So, I really think that it’s going to be very interesting what’s going to happen in the next five to 10 years, and like I mentioned before – the level of the playing field has been level. So, with that said, that really means that anybody in Africa or anybody in India or anybody in Pakistan – or any one of these other countries that are not, let’s say, the cutting edge of high-tech – are really going to be able to jump on the type of technology that is missing in the market. And so, it is going to be very difficult to find those types of companies. 

And I think that that’s also a generational thing, because when Amazon came in – let’s go back to the year 2000: it was the year 2000, the markets crashed, and Amazon went to about $7 a share. And at that point, how much Internet did you have in the rest of the world? You didn’t have it so much if you went to the Middle East or went to Africa or you went to India – it wasn’t so prevalent to have Internet access. It’s only about 10 years later that you had Internet access. 

Now, that time period was a tremendous time for Amazon to really build itself. But now that you have the Internet and everything is built around the Internet or everything is built around the smartphone – the apps and all that – I think that the next thing will be much faster. It won’t take 10 years for it to hit the rest of the market. So it’s just a matter of time until these exciting things actually develop and keep your eyes out, because it can happen in any market today. 

Thank you. We’ve got a lot of people who come to our webinars and these people are newly retired and they’re wondering how they can turbo charge some of their returns. What stocks would you put in that type of portfolio? 

Right now, there’s a few exciting categories of assets that I think that anybody who has the money on the side or wants to develop some sort of income can really participate in a very big way. So, it’s what we call the FAANG stocks, which I’ve mentioned several times already over this podcast. It’s Facebook, which is very exciting. Apple, which is also very exciting with some of their peripheral types of services that they are offering today. Amazon, which is the big boy, Netflix and Google. Those are really very exciting stocks. 

Now, there’s one other stock that’s really added to this: I call it bank stocks plus Microsoft. Microsoft really has been the market leader over the past year, I would say, where they got some major contracts over the past year for the next 10 years. I think it was something like $10bn, which has really brought the company back to life, so to speak. And there is a resurgence. 

So, it’s the FAANG stocks that are very interesting today. It’s also gold that’s very interesting as it looks to break through new yearly highs. We hit it yesterday to 1860, which we haven’t seen since 2011. Now, this is also happening in the backdrop of this pandemic that we’re going through, which agitates the markets even more and makes them a little bit more volatile. 

And that’s really what traders really pounce on. That’s really the haven for traders: when the markets are really volatile and there’s multiple opportunities during today to take advantage of those volatility opportunities. 

Sasol has been a very interesting share for South Africans to watch. It’s been powering up on the JSE and it’s shot up in the last three months by about 270% and we hear that part of this performance has been driven by the trade in American deposit receipts. Can you just tell us what those are and how South Africans can also get in on these types of trades?

Well, the JSE: you’re able to trade on the platform as well, which has been kind of looking to break out. It’s been at that 52-53,000 level. And Sasol, I did actually follow on your platform, and it looks like durable good orders are starting to rise again. And with that, that means that there is going to be liquidity in the market and there’s going to be more borrowing. 

So, when that happens, you’re looking for a steady currency to do that against and that’s the US dollar. That’s actually how that unfolds. Now, with the US dollar right now, because the markets are shooting up, the index markets are shooting up and the stocks are shooting up – that brings the value of the dollar down. It’s an inverse relationship. 

So, it’s a double edged sword when that happens, because it makes US goods less expensive. But it also means the purchasing power parity for the United States is much less. So, it’s kind of going to be a very interesting situation how central banks of respective governments are going to respond to the current situation, because they don’t want to flood the markets too much with money, but they don’t want to keep it away too much either. And it’s gonna be a very delicate balance. 

Sometimes people ask me: how do you compare this to the pandemic of 1917, 1918 with the pandemic of the Spanish flu? And really, you can’t compare the two – because the economies back then and the economies today are much different. The old school economies (what was reflective of the New York Stock Exchange and some reflective of most of the exchanges around the world) are usually companies that produce goods: automobile companies, railroads, consumer products, etc.. 

Today, we have a much larger category of services than what we had in the early 1900s. So there’s a little bit of a shift in the market that it’s no longer goods that are fuelling the economy – it’s also the services. So, with that said, I think we’re in a very interesting time. And like I said, it’s going to be very interesting how the central governments are going to have to control this deflation, inflation, recessionary kind of issues in the current environment.

Day trading: Route into rand volatility

South Africans are always very interested in the rand, and we see that the Big Mac index – which is produced by The Economist – places South Africa amongst the world’s worst currencies in terms of being undervalued. Do you have any thoughts on where the rand is going? And also how somebody who’s never invested or traded in currencies before can actually get started with that? 

So, those are two questions: one is about the rand, and one is about how you get started in trading currencies. So, let’s answer the second question first and then we’ll go into the rand. That’s one of the fantastic things you’re able to do here at CM trading: you’re able to participate in trading the currencies. And that’s really very vital, especially when the currency is being clobbered internationally. 

Now, the South African rand – on an international level – is an exotic pair. It’s not a liquid pair like the euro or some of the majors like the Japanese yen. We have to take that into consideration. So, to move it is much easier. Now it’s much more volatile than some of the others, like the euro or the Japanese yen. And as such, a lot of investors try to shy away from that. But when your home currency is the rand, then it behoves you really to participate in it much more, because you could really protect yourself with the devaluation of it. 

I mean, we saw it go from -in 2011 – about R8 for one dollar to R19 just a month or two ago to one dollar. I mean, that is probably the worst – I think across the board – of any kind of performance for any kind of currency in the world. It’s probably even worse than what happened to Bitcoin. And that’s really unstabling. Bitcoin is just Bitcoin. It doesn’t reflect the country, but the rand reflects and country reflects people earning that money and purchasing that money. 

Whenever South Africa has to purchase something in the international forum: that makes their value of the rand much weaker, and then you don’t have as much purchasing power. So, it’s kind of interesting what is happening to the rand, and this is how I’m going to tie it into the rand: right now the rand has corrected itself from 19 to about 16.5 right now. It’s sitting on support and I’ve been watching it, sitting at this support – and it’s reluctant actually to break this 16.44-Ish support level. 

If that does happen, I do expect it to take a further decline and to get stronger versus the dollar. And this is really tied up to the gold, because gold deposits a big factor for the GDP of South Africa. So, I’m positive about the rand in the short-term.

But, like we’ve mentioned before, it’s also kind of the government’s responsibility to make sure that their currency is stable. And I haven’t seen yet – and this is really very difficult to watch – the government taking some major, major steps to control the rand in a way that it’s not as volatile as it is presently. 

I just want to highlight the fact that the VIX, which is the volume index, which has never been above 20 for such a long period of time, is sustaining this 26 level. We saw it perk up at the end of February, really, and into March. And what that means is that the volume and the volatility of the market is exceptional right now. 

So, if there was ever a time to really participate in trading the financial markets or at least getting yourself acquainted with it, this would be the environment and the atmosphere that you want to understand and see. Because these types of environments, they don’t happen so often and they don’t happen for such a long period of time. And because we’re in this pandemic and we don’t see a light at the end of the tunnel to this – I think it’s going to be a little bit of an elongated time period that this volume is going to sustain itself. 

And so there will be multiple opportunities in the next, I would say, six months that have not been present for about 10 years – even 20 years – since I started trading. So a lot of exciting times right now to really start yourself and participate yourself and get yourself engaged in the financial markets. 

Tell us a bit more about what VIX is?

So VIX is a volume index. It pretty much gauges how volatile the market is. So, why do traders like volatility? It’s just like surfers going to the beach. When you’re going to surf a wave, you’re looking for the biggest wave possible, because then you earn points that way. In volatility – because the markets are so volatile – there’s multiple opportunities to take the most out of that. 

Then that exasperates your potential profits to levels where – normally, let’s say you’ll make 100 to 1000 dollars – in these types of markets, you’re making anywhere between 2000 to about 7000 dollars. So, the potential to make much more profits during this type of environment is that much greater, because they’re trading that much greater in that much greater range. 

Do you have courses that people can do so that they can familiarise themselves with the VIX and learn how to trade it successfully? 

Well, we have our own webinars that are directed to both non-clients and clients of our company. There, I highlight some of the potentials of different market scenarios of how to really take advantage of the markets, and I really focus in on different educational, both educational and which markets to really participate in. 

So, there’s really two concepts here: there’s one familiarising yourself with the markets and there is trading it. So we really try to cover both bases in order that our clients really can take advantage of trading the markets. 

Thank you very much. If that doesn’t get people signing up, I don’t know what will. You’ve been listening to Fred Razak, chief strategist at CMTrading. For more, do visit the SA investing section on biznews.com, where you will find more information about CMTrading as well as useful news and information on stocks.

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