-- Posted Friday, 19 October 2007 | Digg This Article
| Source: GoldSeek.com
By: Nadeem Walayat
Today is the 20th anniversary of the 1987 stock market crash, so it is time to go back to the roots of a successful trading strategy, one that had me short on the day of the crash ! The REAL secrets of successful trading. Okay so you have heard this one many times before :), in books printed by the skip full, but bare with me a while whilst I take a 20 year step back down memory lane, long before I went through my gannophile phase or saw elliott wave patterns and fibonacci golden ratios in virtually every object that my eyes gazed upon.
Firstly some key points
This article concerns Trading the markets rather than investing which requires totally different strategies. Also I am writing this article some 20 years after the event, relying on memory and the financial records that I have managed to dig out, so my recollection may not be 100% spot on! This is first of a two part article, this part covers the 1987 Crash, Part 2 will cover the REAL Secrets of Successful trading.
The Dawn of my Trading Career
Back in 1986, at age 18! I wanted more than just to invest in stocks and watch them grow slowly, it was just not enough! At the time Thatcher's Conservative Government was eager to buy votes and dish out cash to their city funders by selling off state industries such as British Gas on the cheap which meant free instant profits for anyone that subscribed, with subscriptions capped at x number of shares per individual investor. Back in Dec 06, just prior the float of British Gas, I was made aware due to the media that there existed grey markets in the price, where you could trade the premium between the issue price and the actual price the company traded at on the first day of business. Immediately this drew my interest, as it introduced the concept of gearing in trading.
The local libraries were stocked with basic books on the stock market, and basic technical analysis, i.e. open high low close charts and moving averages. Where derivatives were concerned there were books on the basics of futures and options.
Having looked into a number of futures brokerages, I quickly came to the opinion I was not in their league, where the demand was for funding of several thousand pounds PER position, each being charged several hundred pounds in commission, so very profitable for the brokers!
That led me to the alternative - Options, which 'appeared' to fit the bill ! I could actually afford to trade options with my meager £700 bank roll. So after some research I opened my first Trading Options Account with a Northern Stock / Options Broker and started trading stock options on a full time basis. I played the options market for the next 5 months and saw my £700 shrink to £300. The only winner was the broker!, and this after several hundred trades! If I ever happen upon a successful options trader, then I always tip my proverbial hat, because they are rare breed !
So I was back to square one until August 87, when I happened upon an advert in the Financial Times by IG Index, a spread book maker, which promised to offer the facility of trading the futures markets including indices on the Dow Jones Index and the FTSE 100 Index, but at miniscule position size of as at little as £60 per position ! It seemed to good to be true, so I gave it a shot and signed up. IG Index blew my socks away ! This was even better than the futures brokerages, because all of the commission was included in the spread and also they offered guaranteed stop losses !
So opened an £500 credit account in August 07 and started trading just the stock indices FTSE100, FT30 and Dow Jones Index, as I knew absolutely nothing about the commodities markets. All I had were my trusty hand drawn daily OHLC charts sprinkled with trend lines and support / resistance levels. With no knowledge of anything more I managed to make about £1000 in profit prior to the crash, and was well on my way towards a profitable trading career, which allowed me to withdraw £200 a fortnight as an income from profits.
Pre- 1987 Crash - The Great Storm Hits Southern England !
Thursday 15th October - Michael Fish is a Weather Man
I remember watching Michael Fish the BBC weatherman late Thursday night, he said. "Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way; well, if you're watching, don't worry, there isn't." Well that statement has haunted the Mr Fish ever since and is a good lasting memory imprint from 1987.
My analysis had expected an up day and therefore the initial position was for the Dow to rally, this was stopped out with a loss of £165. Later in the session I took a chart trigger to go long again which I closed out with a profit of £100, so I ended the day with a small loss of £65. However the earlier downtrend had weakened the Dow and risked a break below the Sept 07 low.
With the winds buffeting the house, some 180 miles north of central london, I eventually decided that tomorrow would be a strong down day for the FTSE given the brewing storm, both weather and financial.
Friday 16th October - The Hurricane Hit Southern England
The News reporting was full of the devastation in the South of England with power cuts in many areas. Also much of the city failed to report to work and hence the UK financial markets were not fully operational.
I called IG index up, half expecting no one to pick up and was pleasantly surprised that they were open for business ! Whilst I waited for the Dow Jones to make up its mind on whether it wants to break the Sept low, I shorted the FTSE twice during the day with the expectation that the unexpected storm would drive stock markets lower, and exited prior to the close with two profit trades of £305 and £30.
I was alarmed by the sell off in the Dow which closed Friday sharply lower, not only decidedly breaking the September low, but the downtrend appeared to be accelerating.
I spent the whole of Friday and Saturday contemplating the change in market behavior and it slowly dawned on me by Sunday that the market was going to crash ! Being isolated from market commentators, I was not aware of the reasons of why it should crash rather that the Market's character had changed.
I was kicking myself for closing the two short FTSE positions by Fridays close! For I concluded that if it was now obvious to me, a newbie to trading that the stock market was going to crash on Monday then it must be obvious to everyone else in the world ! I.e. the experienced futures and stock traders ? Therefore the futures would discount the crash and therefore how can I make any money by shorting the market on Monday's open?
Anyway after resigning myself to more or less having missed the boat, I had decided that I would see if its worth shorting the market on the opening, hopefully the futures won't be discounting too much of a drop may be a hundred points from the spot indices.
1987 Crash - Pay Day ! 
Monday 19th October 1987 - Tell me Why I Like Black Mondays
I saw the FTSE open down, it was down about 100 points, I sighed and called IG Index, and asked for the pricing, expecting bad news that the futures would be discounting drops of several hundred points for both the FTSE and Dow, but they were not ! They were discounting barely a 50 point drop from the spot which meant that the market was NOT expecting a crash ! I immediately sold the Dow Short at 2247 and the FTSE Short at 2147.
Mid-day - I called up the broker and moved stops to lock in profits, which with IG Index, means freeing the money for use in further positions. The FTSE was down over 200 points, with little difference between spot and futures so I shorted the FTSE some more at a price of 2047.
2.40pm - Wall street opens - Well tries to open but the stocks are not all opening due to the volume of selling. So i give IG Index a ring:
"Hi could you give me a price for November Dow ?"
"Yes Sir, It is trading at 2045"
"Good, I would like to sell to open £5 at 2045, with a 50 point stop"
" You want to sell ?"
"Yes Sell", maybe he thought I was already too heavily short ? Perhaps people were to scared to short the Dow ? I don't know, but the impression I got was of surprise.
So that was my fourth short for the day.
7.40pm - The Dow is down about 300 points,having rallied from about 340 down. I want to sell more ! So I give IG a ring.
"Hi, can you give me a price fro November Dow please".
"Mr Walayat, we are only accepting orders to close"
Damn !!!
8pm - The Dow is hovering around 300 points down with an hour to go, this is nail biting time! - I can't stand it, so I go out out for a drive ! until the US markets close at 9pm.
9pm - BBC 9'0 Clock News - Dow Jones closes down 508 points at 1739 !!! cough, cough splutter, 508 , FIVE HUNDRED AND EIGHT POINTS !!
Wow ! I am rich ! rich, RICH - How much ? £14,000 At least !!! From an account balance of £700 to £14000 in one day ! I am rich ! Okay in today's money £14k is not a lot but to a 19 year old in 1987, £14k was a massive amount of money especially as it was made in one day !
Now what to do next ? No time to sleep I need to work out what to do tomorrow clearly the FTSE is going to open sharply lower ! This looks like a complete and utter collapse of the financial system were looking at - 508 points down ! Not in my wildest imagination could I see the Dow closing down 508 points this crash is bigger than 1929 ! Which was about 10%, not 22% !
I decide to close the positions tomorrow during the morning.
Tuesday 20th October 1987 - Big Bounce Day
The FTSE opens sharply lower and trades lower by over 200 points by mid-day. Having watched the market trend lower, and having withheld on my decision to liquidate any of the positions so far, I am absolutely exhausted by mid-day due to not having slept in over 24 hours and actually starting to get dizzy so I give the broker a call to get some prices with the aim of liquidating all of the positions whilst I am still mentally able to do so without starting to hallucinate figment price action :)
IG is giving me a quote of 1720 on FTSE and 1570 on the Dow. These are excellent prices, I decide to close the larger Dow position at 1570. And move the stops on the rest, I set the FTSE stops at 1790 and 1800, and the remaining Dow position to 1730, i.e. just below last nights close.
Wall street Opens Sharply Higher - I am stopped out of all positions. Exhausted, I was off to bed.
The Outcome
In financial terms, I made a profit of about £12,300 virtually overnight. In EGO terms the increase was much larger :), I was off floating into fantasy land of being a millionaire by the time I hit 20 ! What actually transpired ?, well that's another story ;) . Speculation was rife that some financial institutions may go bust due to the crash, worried that my new found wealth my disappear I withdraw more than 50% of the funds on the 23rd of October.
Okay so You have read the above, and now say what about some proof? Well in that regard see the scans of the 1987 contract notes / statement from IG Index. If I find the price charts then I will update this article at the Market Oracle, or seek to include them in Part 2.
1987 Statement and Main Contract Notes / Position closures
19-10-07 - Dow Short 2227 - Open
19-10-07 - FTSE Short 2147 - Open
19-10-07 - FTSE Short 2047 - Open
19-10-07 - Dow Short 2045 - Open
20-10-07 - Dow Short 1570 - Close
20-10-07 - FTSE Short 1790 - Close
20-10-07 - FTSE Short 1800 - Close
20-10-07 - Dow Short 1730 - Close
October 87 Trading Statement
Look out for Part 2 in the coming days - The REAL Secrets of Successful Trading
By Nadeem Walayat
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Nadeem Walayat is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
-- Posted Friday, 19 October 2007 | Digg This Article | Source: GoldSeek.com
