Spread Betting by Vince Stanzione

The general theme of both books and my own experience of teaching people to trade is that otherwise intelligent individuals who normally have responsible day jobs can get caught up in speculative frenzies.

The general theme of both books and my own experience of teaching people to trade is that otherwise intelligent individuals who normally have responsible day jobs can caught up in speculative frenzies.

Extraordinary Popular Delusions & the Madness of Crowds is still as relevant today as it was when it was first written in 1841 by Scottish Journalist Charles Mackay. Another similar book written in 1895 is La psychologie des foules (The Crowd: A Study of the Popular Mind) by Gustave Le Bon a French social psychologist. Both books are still in print and easily available which is a testament to their popularity. Anyone involved in financial trading would be better rewarded spending more time studying psychology and less time reading or watching the latest news about the Dow or FTSE 100.

People who work hard and many hours a day to earn an income then become reckless gamblers and lose all perception of the value of money when it comes to trading.

Talking shop
I am not a fan of chat rooms or forums for trading, as the truth is that no successful trader ever posts or spends time on a forum, therefore the collective mass is made up of those that don’t know anything, and those that think they know something but really they know nothing. But I do like to browse some of these chat rooms occasionally as they can act as good contra indicators – see them as a modern day cave. The more convinced the group are that something will happen the more likely that the opposite will occur.

YouTube is another good contra- indicator and an insight to mass psychology; just see how many clips have been posted about silver in the last few months and why silver was heading to $100 any day now.

A bubble or a mania is easier to spot after the event and the media is very good at explaining to you what just happened and being very wise after the event but there are normally a few signs.

More media noise is always a good sign and we certainly saw that with silver over the last few months, and crude oil back in 2008. It’s true the crowd can remain irrational for a while but eventually the fundamentals always come back and you see a revision to the mean.

For years I have used the 200 day simple moving average as revision to mean. While a price trading over the 200 day moving average is a bullish sign, a price way over the 200 day moving average is a warning and the further it moves away the more you should be worried.

The price and 200 day moving average can move back into line in two ways: the price goes sideways allowing time to pass and as such the moving average catches up and gets back into line, or the price falls and comes down to the 200 day MA.

Silver streak
In the case of silver the price was recently at $50 with the 200 day MA at $28. Well you know what happened next. In a few days silver crashed and is most likely going to hover around the $28 level. If we look back at crude oil in July 2008 we also see the same pattern, however, oil while an extreme move was not as extreme as what we have just witnessed with silver.

As I have been saying for years the price of anything whether it be a Fabergé egg, a house, a classic car, a painting or an ounce of silver is only worth what someone is willing to pay for it. There is a classic scene in the film Trading Places where Dan Aykroyd goes into a pawn shop with his fancy watch which retails for over $6,955 and can tell the time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad to which the pawnbroker replies
‘in Philadelphia its only worth 50 bucks!’

So how much is an ounce of silver worth today? As much as someone is willing to pay for it.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details visit www.fintrader.net