Q&A is a new regular segment where a series of questions are answered by the experts, to learn from their experience and expand our own horizons. In this edition we talk to Trader, Author and Market Educator Ray Barros.

Q. How did you get into trading / investing?

A. My father was the investment manager for his company and I gravitated to the stock market during the Poseidon Boom in Australia.

The Poseidon bubble was a stock market bubble in which the price of Australian mining shares soared in late 1969, then crashed in early 1970. It was triggered by the Poseidon NL company's discovery of a promising site for nickel mining in September 1969. In the late 1960s, nickel was in high demand due to the Vietnam War, but there was a shortage of supply due to industrial action against the major Canadian supplier Inco pushing the price of nickel to a peak of £7,000/ton.

In September 1969, the mining company Poseidon NL made a major nickel discovery. Their shares had been trading at $0.80, but as information about the discovery was released, the price rose until it was trading at $12.30 on October 1. After this, very little further information came to light, but the price continued to climb due to speculation; at one point, a UK broker suggested a value of up to $382 a share. The price of Poseidon shares quickly became too high for many investors, so some investors turned to other nickel stocks, stocks in other mines near Windarra, and eventually other mining stocks in general.

As the price of mining shares grew, numerous new companies were listed by promoters looking to cash in. Some of these new listings did not even have any mining leases, let alone viable mines. Many investors lost money on these shady listings, and this attracted substantial negative press. Thus the image of mining stocks was tainted, and the prices began to fall. Mining stocks peaked in January 1970, then immediately crashed. Poseidon shares peaked at an intraday high of $280 in February 1970, and fell rapidly thereafter. By the time Poseidon actually started producing nickel, the price of nickel had fallen. Also, the nickel ore was of a lower grade than originally thought, so extraction costs were higher. Profits from the mine were not sufficient to keep Poseidon afloat, and in 1976 it delisted.

Source: Wikipedia

Q. How long have you been trading the markets?

A. My first trade was 1969 (Australian Stock Market - Peerless Options). I became a full-time trader in 1980 when I sold my legal practice. My private hedge began in 1990.

Q. Were there any authors, market teachers that influenced your style of trading as you started?

A. Richard Wyckoff and Pete Steidlmaye.

Q. What was one of the most common mistakes you made when you started trading the markets?

A. All the common ones and some that were unique: Looking for certainty and the Holy Grail - Confusing Win Rate with Positive Expectancy - Overtrading in terms of Frequency and position size - Failing to predefine initial exit strategies (initial stops) - Trading without a Plan - Trading Without Risk Management - Failing to keep a Psyche Journal and thus failing to learn from my mistakes......

Q. Which exchanges do you prefer to trade and why?

A. FX (major crosses including AUDUSD and USDCAD), S&P futures, 30-year Bonds, Crude Oil Futures, Gold Futures. At one point the basket offered diversification - not now but I do expect it will do so again in the future.

Q. Are there any markets you won't trade and if so why?

A. Thin markets like Orange Juice, Heng Seng because of the slippage.

Q. What time frames do you aim for your trades (short term, mid-term, long term, combination of all 3?)

A. I trade the monthly trend, the 18-day Barros Swing.

Q. Do you utilise any fundamental analysis in your trading, or do you use Technical Analysis exclusively?

A. I use Austrian economics to provide a context to my trading but my trading entries and exits are based on technical analysis.

Austrian School economists hold that the complexity of human behaviour makes mathematical modelling of an evolving market extremely difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the strict enforcement of voluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible imposition of forces they consider to be coercive. In particular, they advocate an extremely limited role for government and argue for the smallest possible amount of government intervention in the economy, especially in the area of money production (advocating instead a commodity-money system).

Q. What is the most important lesson you've learned as a trader so far?

A. 1. Success comes from the consistent execution of my trading and risk management plans. 2. The educational system by which traders learn to trade (similar to US Army pilots pre-1934) is partially responsible for the dismal success rate (8%) of traders. It needs revamping.

Q. Do you utilise leveraged products such as CFD's?

A. I trade FXC and Futures because they are the most cost effective way to trade. I do not trade stocks in bear markets.

Q. Do you utilise any hedging products such as Options?

A. No. Options are outside my realm of expertise.

Q. Can you give the details of one of your best trades (setup, entry, exit, etc).

A. On April 29 I said in my Forum Daily Free Service that I believed that the S&P had topped. I sold a full size position. The next day, the S&P pushed past minor resistance, so I covered 1/4 of my positions. I was expecting the market to head higher but on May 4, the S&P had a bearish-conviction bar down and I added to my shorts. By end of trading May 4, I had twice my normal position. I covered all my shorts on May 6.

Q. With the debt problems in Europe, and the massive bail outs we've seen in Australia and across the globe, what effect do you think this will have on the markets (if any)?

A. Add dark pools and quant trading, and you have the recipe for greater volatility. Success will depend on knowing when to stay away from the markets as much as knowing when to take part. This will be a function of our personality and trading methodology.

Dark Pool Liquidity is a term that refers to the trading volume created from institutional orders, which are unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges.

Source: Investopedia.com

Q. If you had to pick 3 things no trader should be without, what would they be and why?

A. 1) The beliefs that, a) money can be made from the markets b) I can make money from the markets c) I deserve to make money from the markets.

2) Honesty - to see what the market is telling us rather than fit the information to our preconceptions.

3) Integrity - to keep the promises we make to ourselves.

Q. The internet is flooded with claims market traders can see 1000's of percent profit each year which can be very misleading to those just starting out. What would you consider to be an achievable average return (p.a.) for people trading the markets?

A. That is a difficult question because it depends on the trader and where he is in his stage of a trader's evolution. With low risk of ruin, probably around 15% to 20%.

Q. Do you recommend your book, The Nature of Trends, for novice traders or does it require some experience in the markets to be fully beneficial? What knowledge were you hoping to impart to your readers?

A. The Nature Of Trends is aimed at the experienced trader. For most experienced traders, Nature of Trends brings a fresh perspective with a robust edge. If you are a novice, it will take effort to master the material. I am writing a new book with the target audience being the novice.
In Nature Of Trends I was looking to provide an approach that was statistically sound and one which moved away from the normal set of Technical Analysis tools.

About "The Nature of Trends"

The Nature of trends draws on the latest developments in the neurology, psychology, game theory and complexity theory to construct a written trading plan with an edge. The books step by step approach will assist traders in their quest for investing and trading success. The Nature of Trends provides a template for a successful trading plan. It assists the trader to answer questions such as:

• What are the conditions for low-risk entry?
  
• What is the trend of my time frame?
  
• Once in a trade, how can risk be managed?

This practical guide to identifying trends and determining their likelihood of continuing or changing is an essential tool for traders looking to achieve their financial goals. Click here to purchase.

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