Trading strategies

What is a dividend? A dividend is a payment made by a company to its shareholders to give back some of its profits or return. Dividends are most often paid to shareholders, annually, semi-annual, or quarterly.

Non annual dividends that are paid periodically are known as interim dividends. Companies can also pay dividends at their discretion, and these are known as special dividends. Companies that issue dividends are usually very mature and stable businesses with steady cash flow.

Index funds, or ETF’s will often also pay dividends from as they receive dividends from their underlying holdings. In Australia, well-known companies that issues consistent dividends include ‘Big 4’ banks, BHP, Rio Tinto Wesfarmers, and Qantas just to name a few. In the USA, the big banks such as JP Morgan and other mature company’s such as Walmart and Coke Cola.

Important Terms Dividend Yield - The dividend yield is the total value of all dividends paid in the year divided by the share price. Alternatively, it can be thought of as the dividend return on the market value of the share. Ex-Dividend Date – This is the date in which a holder of stock must possess the stock to receive the dividend payment.

Dividend Payment date – This is the date in which the payment is made. Do Dividends even matter? There are theories that suggest dividends don’t really provide any benefit for holders as they are just eating into the overall Compound Annual Growth Rate of the price.

This is because once a dividend is paid the share price should adjust to account for the payment that has been made to the holder. For example, company A has a share price of $100 and issues a $1 dividend. Therefore, after the payment date, the price should in theory drop down to $99.

Consequently, those who oppose dividends as opposed to the being paid a dividend it a holder of a top performing share could just sell a certain number of their units to in some respects pay themselves a ‘dividend’. On the other hand, companies that pay dividends generally allow the holder to participate in what is known as a ‘reinvestment plan’. This is a scheme in which the company allows holders to reinvest their dividends back into the company’s shares and use the payment to purchase more of those shares allowing for compounding.

These schemes often operate without needing to pay commission and sometimes the shares are discounted. The reinvestment plan also removes certain tax liabilities. For instance, look below at an example of theoretical share that trades.

Price = $10.00 Number of shares at inception = 1000 Total Investment = $10,000.00 Annual Dividend growth =1% Annual share price growth = 1% Time period = 10 years Below is the same share but with a change in the timeframe of 10 to 20 years. This highlights how important having as much time in the market as possible can make a huge difference to the overall returns of a reinvestment strategy/portfolio. The return for 10 years with reinvestment is around 1.32 times the amount for without reinvestment.

Having the same investment for an extra 10 years will yield a return a result 2.35 times better than if the dividends are aid in cash. Can you live off dividends? Dividends payments have created an ideal or goal in which traders and investors strive for is to ‘live off’ their dividends.

Creating a portfolio that is heavily weighted towards dividend stocks can be a way in which to have a periodic income to supplement a pension or salary. This process involves developing a large enough portfolio that can provide these periodic dividends to a level that will cover the cost-of-living requirements. Choosing high quality, high yielding investments can provide this outcome for those who are savvy.

Below is a list of ETF’s and ASX Listed Stocks with the highest recent Dividend Yields? List of ETF Code Company Price Yield Gross DRP 1yr Return IVV Ishares S&P 500 ETF $37.63 16.67% 16.67% Yes -10.40% IHVV Ishares S&P 500 Aud Hedged ETF $37.06 14.93% 14.93% No -16.90% HACK Betashares Global Cybersecurity ETF $7.57 8.99% 8.99% No -23.30% SLF SPDR S&P/ASX 200 Listed Property Fund $11.28 7.45% 7.52% No -16.01% VAS Vanguard Australian Shares INDEX ETF $91.89 6.92% 8.86% Yes -2.18% ILC Ishares S&P/ASX 20 ETF $28.95 6.67% 9.35% Yes +2.77% STW SPDR S&P/ASX 200 Fund $67.10 6.43% 8.42% Yes -1.19% A200 Betashares Australia 200 ETF $123.01 6.35% 8.35% Yes -0.98% IOZ Ishares Core S&P/ASX 200 ETF $29.87 5.96% 8.06% Yes -0.53% VHY Vanguard Australian Shares High Yield ETF $69.87 5.93% 8.31% Yes +5.46% SFY SPDR S&P/ASX 50 Fund $65.77 5.78% 8.01% Yes +1.78% VSO Vanguard MSCI Australian Small Companies INDEX ETF $64.70 5.54% 6.32% Yes -10.81% MVA Vaneck Australian Property ETF $21.20 5.14% 5.25% Yes -13.43% List of ASX Stocks Code Company Price Yield Gross DRP 1yr Return TER Terracom Ltd $0.99 20.20% 24.53% No +360.46% CRN Coronado Global Resources Inc $2.125 19.72% 19.72% No +40.26% MFG Magellan Financial Group Ltd $9.35 19.14% 25.46% No -53.25% YAL Yancoal Australia Ltd $6.53 18.85% 18.85% No +123.63% ACL Australian Clinical Labs Ltd $3.065 17.29% 24.70% Yes -43.24% NHC New Hope Corporation Ltd $6.67 12.89% 18.42% No +177.92% SIQ Smartgroup Corporation Ltd $5.41 12.20% 17.43% No -25.48% TAH Tabcorp Holdings Ltd $1.115 11.66% 16.66% Yes +13.99% BFL BSP Financial Group Ltd $4.80 11.36% 11.36% No +12.41% GRR Grange Resources Ltd $1.07 11.21% 16.02% No +30.49% LFS Latitude Group Holdings Ltd $1.42 11.06% 15.79% Yes -31.73% The final word Ultimately dividend portfolios can be a great step in achieving financial security and freedom and is also a great way to diversify a portfolio or trading strategy.

Many traders early on in their trading journey may jump into trading without knowing if their system or edge can be profitable. The most important metric that a trader should measure their system on is by using expected value. This essentially wors out the average return that the system will return for every trade that it makes, considering both winning trades and losing trades.

The formular for the expected value is written below. Expected Value = (Probability of winning trade X Average Winning Trade Value) – (Probability of a Losing trade X Average Loss) For example, Trader A - Wins 40% of their trades - Loses 60% of their trades - Average win = $20 - Average Loss = $10 Therefore, Expected Value = (0.4x20) – (0.6x10) = $2 This means over the long run the system will return $2.00 per trade made. This relationship describes any trading strategy or edge’s average performance per trade.

Therefore, by determining the expected value a trader can see how effective their edge will be excluding slippage and transaction costs in the long term. Risk and Return The relationship also shows that a strategy does not need to necessarily win every single trade to be profitable. The rule of risk and reward is that they are inversely correlated.

This means that the more a trader is willing to risk, whether it be size or distance to a stop loss the higher potential reward. Alternatively, the less risk a trader takes the lower potential reward. It doesn’t matter which type of trader you are often different personality types will gravitate to either more frequent winning and smaller winnings or larger winnings, but a smaller number of wins.

In fact, a trader may only need to be profitable on 20% of their trades if they can ensure that their average winning trades are more profitable by a factor of 5:1. A strategy that wins more frequently may only need a smaller average win vs its average loss. When testing a system, it is important that there is sufficient data to ensure the inputs for the above formula is accurate.

This means using data from various time periods and potentially across a range of markets to measure the Expected Value of the system. See below for the required a=Average Winning trade/Average Loss trade per Average win rate for a breakeven trading system. Ultimately it is vital that when assessing the performance of a trading strategy or edge to be able to measure the profitability of the system.

The best way to do this is by using expected value. Profitable trading strategies can be made with either a high win rate and low average W/L ratio or a low winning strategy with a high W/L ratio.

How to use Arbitrage trading to increase profits Professionals in finance like to use hard to read and complicated language to make what they do much harder and more complicated than it sounds. However, when it comes to arbitrage, it is actually a relatively simple concept that can be used in trading, to develop an accurate system that can be used in various markets. The Law of One Price In order to understand Arbitrage trading, a trader needs to understand the law of one price.

It states that the same goods sold in different markets in conditions, free of competition and expressed in the same currency, must be sold at the same price. Although this is an economic theory, the principles follow into financial markets. This means that in an efficient market, prices for the same asset cannot be different.

In practice, this is not always the case or rather it is not always the case straight away and his is where arbitrage opportunities exist as the market tries to move the prices into one. What is an Arbitrage? An arbitrage is when the law of one price has not yet been realized.

Essentially, the market is in the process of converging the prices. The best example is that of dual listed companies. These are companies who have shares listed on multiple exchanges.

Initially the price may be different due to exchange rates, different number of shares on issue. However, the relative value for each share must be the same. Usually, they are larger companies or multinational companies.

For instance, BHP is listed on both the ASX and the London Stock Exchange. The strategy can involve selling the shares on the exchange where it is more expensive and buying them back on the cheaper exchange or the alternative and profiting the difference. Other arbitrage opportunities can exist in companies that are primarily traded on an exchange but also have an over the counter, (OTC) listing.

These OTC listings are often much more illiquid allowing for more arbitrage opportunities Additionally, the primary market will usually be the lead pricing target, whilst the OTC or secondary market will attempt to move towards that price. Merged Arbitrage This strategy involved targeting companies that are in the process of being taken over or bought out. The acquirer will need to put an offer per share in order for a take-over to occur.

This gives the market a value for the shares. Generally speaking, the price will have to move towards the offer, especially if it is accepted. In a recent example, company Tassal formally TGR.AX, announced it was being bought out by a private equity firm.

There were previous offers made at $4.67, $4.80 and $4.85 per share before the final offer came at $5.25 a share. It can be seen from the price chart that the share price did not reach $5.25 immediately. The interesting thing to note here is that even though the final and accepted offer came in at $5.25 on the day of the announcement the price only reached $5.12 still $0.13 short of the offer.

This represented an arbitrage opportunity of $0.13 for savvy traders and investors. Although the actual % gain was not very high, the relative certainty of the price target made this trade a potential big winner. Opportunities like this are not always perfect and deals may not always follow through, but a skilled trader can develop a very strong system around this premise.

Overall, arbitrage trading may seem difficult but in reality, the theory is relatively straight forward. Finding mispricing within the market and capitalising on them can take some practice but they can also offer longer and shorter terms edges when the market is not providing other sufficient trading opportunities.

As a new trader, riding the emotional ups and downs can be a very difficult task. It is human nature to feel the pain of a losing trade. The losing often outweighs the positive feeling of any winning trade.

Dealing with the emotion of trading can be an incredibly difficult task. It can cause even the best system to fail. A trading journal especially early on in a trading journey can provide important feedback and information about the effectiveness of an edge.

The reality is that early on profit and loss can be terrible measure of an individual’s trading ability which is why a journal is so essential. There are many different formats and styles of journals that can be used. Some like to base their journal around a calendar.

Others like to pick out their best and worst trade each day and analyse them intensely. In the end, it doesn’t matter what style is chosen if a consistent structure is followed. Both quantitative and qualitative measures that ca be used to measure performance.

What to include in your journal? Below is a breakdown of elements that can be analysed in the trading journal. Initial trade idea – This is the overall basis of the trade, it can be related to a technical pattern, fundamental factor such as a news or a mix of both.

Some traders call this the trade hypothesis or thesis. In its most simple form, it is the very reason a trader enters into a trade. When journaling, it is important to evaluate the strength of the idea, whether it was correct and why or why not the trade was validated or invalidated.

It is also worth noting if the idea is a common one, such as news catalysts, repeating technical patterns. This can also be elevated by understanding how different trade ideas work together to create stronger overall trade ideas. Entry – Breaking down the key elements of the trade are important aspects to a journal.

More specifically outlining whether an entry was ideal, correct and managed well. Was the entry chased or was patience shown to achieve a more ideal entry. The entry is also a part of a trade with heightened emotion.

Therefore, journaling how emotions were managed and ways to improve emotional management is an important aspect of reviewing the entry. Exit – It goes without saying that the exit is the reciprocal of the entry and just as important. Analysing whether the exit was correct at both the time and in hindsight is an important step.

By continuously analysing both entries and exits, a trader will likely see an improvement in this aspect of their trading. In addition, they will potentially remove external factors such as emotion and noise from other influences such as twitter. Sizing – Sizing is an extremely tricky area of trading to master and there are many different theories on what sizing tactic is the best for each trade.

Some traders like to increase size depending on how strong a trade set up is whilst other like to have more consistent sizing strategies regardless of the strength of a trade. When reviewing it is important to make note of whether the sizing strategy worked. Trading with too much size can affect the active management of a trade as a trader can lose sight of the trade at hand and become too concerned about the potential outsizes loss.

Trade management – Whilst all the above can all constitute some level of trade management reviewing, analysing the whole management of the trade is vital. This can include the effectiveness in taking profits or losses and how the trader has dealt with their emotions. Management of fear and greed are the two most common emotions that a trader feels.

Grading – Having some quantitative measure even though it is subjective can help classify many trades over a long period of time. Using either letters or a number ranking can be just one method. This allows for a trader to identify their best performing trades and where the strongest edge is.

This list should not be seen as exhaustive, and traders can tinker and adjust to suit their own trading strategy. Reviewing the journal. It is important to review the journal at the end of a set time whether it be weekly or monthly to see if common mistakes are occurring or a theme is emerging.

If the same mistake keeps occurring, it may act as point of emphasis for future journaling or improvement. Ultimately, using a journal can accelerate the learning curve drastically especially for new traders.

The market in recent months has created exceptionally difficult conditions to trade. Low volatility and obscure price action has reduced the volatility available for traders to capitalise on. These conditions have affected FOREX, Equity, and Index trading.

It has been specifically difficult for momentum and trend following traders as a certain level of volatility is needed for trader to return profitable trades. How to spot low volatility The Average True range or ATR range can be an important indicator in determining the level of volatility in a market or asset. It measures the average trading range of a particular asset’s price over a period.

It can exceptionally be helpful in determining how volatile the asset is at a certain point in time, or how volatile an asset is compared to another one. For instance, looking at the ATR for the Dow Jones, it has been getting progressively lower and is at its lowest level since August indicating a reduction in volatility. The Market Volatility Index or the VIX measures volatility across the S&P 500 is also an important indicator to not just gauge market volatility, but also general market sentiment and emotion.

When fear and greed are prominent in the market volatility tends to increase and when they dissipate, they tend to decrease. As the chart shows, volatility has been reducing to levels not seen since the rally in August 2022. The characteristics of the chart are also interesting as the VIX acts much more in waves then other indices do.

How can you optimise your trading during periods of low volatility? Tips for trading in low volatility markets Understand that breakouts will fail. Specifically for traders who like to use strategies based on momentum breakouts, during times of low volatility the price means to stay close to moving averages and mean price points both on an intra and inter day level.

Wait for confirmation before a momentum move. Although breakouts are less common in low volatility markets, they do still occur. In this instance, it is ideal to wait for a confirmation or retest of an important level before entering trades.

Confirmation can be supported by strong candle in support or increased volume. Being patient is essentially in times of low volatility. Opportunities that may have otherwise eventuated.

Utilising volume and strong candlesticks as secondary Price tends to stay close its mean. This means that if a price does break out or break down, the price often swings back to the mean. The mean may be a simple moving average, Volume Weighted Average, or some other measure.

In essence it does not really matter what is used, rather than the price tends to retrace back to the mean in some manner. Therefore, these conditions lend themselves to mean reversion systems or strategies. As seen on the chart below, the price has reverted to the 20-period moving average on multiple occasions.

Using multiple time frame analysis for identifying support and resistance. As previously stated, when there is low volatility, finding real breakouts that will last becomes more difficult. By ensuring that the breakouts or breakdowns in price are occurring across multiple timeframes a trader can enhance their chance of it being sustained as their will likely be a higher level being traded at longer term levels.

Trading can be difficult during periods of low volatility. However, this does not mean traders should not trade. Rather, traders should be aware of potential obstacles and difficulties that may arise and the strategies that can help work though these difficulties.

Stop loss hunting is frustrating, annoying and can be detrimental to any retail trader. The premise of stop hunting is that large systemised institutional trading strategies know where the average retail trader or most traders will set stop losses and therefore profit off triggering these ‘stops. Their own algorithm will then deliberately, trigger the stop losses.

For traders there are few things as frustrating as have a well-positioned trade, being stopped out and then watching the price reverse in their original direction of the trade. What is a stop loss? Understanding stop loss hunting requires a simple understanding of what a stop loss is.

A stop loss is a trigger on traders’ position to close the position at a certain price. Generally, once triggered the position will attempt to be closed at the specified price. Stop losses provide an important role in risk management for many traders.

Generally, traders use stops losses to avoid emotional mismanagement and better manage overall risk by having clear exit points for the trade in worst case scenarios. The second element that is important to understand is where traders put their stop losses and why. Retail traders often place their stop losses near important market structures also known as support and resistance levels.

These areas represent strong zones of supply and demand. When support and resistance zones become more and more consistent and more obvious, it can create a clump of stop losses. These stop losses can be thought of as orders that must get filled if the price reaches those points.

This creates an attractive opportunity for large institutions with powerful algorithms that can push the price down and generate profits by ‘stopping out’ traders by triggering these stop losses. Once this process has occurred, the price will often move back in the direction the original trades were positioned for. Why would a system want to trigger stop losses Firstly, when stop losses are triggered, a price tends to see an increase in relative volatility.

Therefore, it may indicate the beginning of a reversal which sophisticated traders profiting. It also allows these large institutions to maximise their own existing trades as it may allow for better entries. Common areas for where stop hunters will look Stop Loss hunting tends to be most active around significant and clear areas of support and resistance.

This is especially true with regards to commonly traded assets. However, stop loss hunting can occur in all assets with various sizes. A stop hunt can be seen often with a small candlestick and a large wick.

In addition, they often occur on very short time frames. Common Area for Stop Loss Hunting At key moving average levels Clear Support and Resistance Levels Historical Support and Resistance Levels ie, Multiyear levels How to deal with Stop Loss Hunting? The obvious tactic to deal with stop hunting is to lower the stop loss below the obvious support and resistance level by a factor of maybe 10%.

This may require smaller trade size, but overall will allow the trade to hopefully avoid these potential stop losses. Treat support and resistance as areas instead of specific price points. Support and resistance do not exist at one price and rather a range of prices that are supply and demand zones.

Therefore, placing stop losses below these 'zones' may put the trade out of arm length of stop hunters. Simply being aware of stop loss hunting may provide some reassurance when a sharp spike in price occurs, to remain in the trade and not exit immediately. Ultimately, Stop Loss Hunting is just another challenge that traders must deal with in the pursuit of profit.

However, with some knowledge traders can adequately accommodate these tricky occurrences.