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Michael Hewson, Chief Market Analyst at CMC Markets (UK), "You invest for the long-term, but you trade in the short-term", Investing Matters Podcast, Episode 53

LSE 00:01

You're listening to investing matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.

Peter Higgins 00:17

Hello and welcome to the Investing matters podcast. My name is Peter Higgins and you could find me at Conkers3 on Twitter/X.

Today, I have the huge privilege of speaking with Michael Hewson, the award-winning Chief Market Analyst at CMC Markets.

CMC Markets is a best in class multiple award-winning platform for committed CFD and spread betting traders with over 30 years of experience in the financial markets.

Michael is respected for his candid and direct market commentary, he’s a well-known face on both financial and mainstream TV, appearing regularly on BBC News, Bloomberg, CNBC, CNN, Fox Business and several other outlets across UK North America and the Middle East.

With his background in FX trading, Mark has spent six years trading currencies, with particular emphasis on charting, and technical analysis, Michael has delivered several seminars on trading and technical analysis at the World Money Show, the London Business School, London Stock Exchange, and he holds an MSTA for the UK Society of Technical Analysis, amongst a lot of other qualifications as well.

Michael, I've given you that full introduction, I hope I didn’t bore you, because it's important to choose wisely, who'll be listened to, and I want our listeners to listen to you with regards to trading and investing because you're globally recognised as one of the best at what you do.

And you've got 30 years of experience behind you and you're top of your profession. So thank you ever so much for joining me.

Michael Hewson 01:51

That’s my pleasure, Peter, and thank you for inviting me on.

Peter Higgins 01:56

Thank you. Right, we're going to start right at the very beginning here. Back to you being a little toddler.

I'm going to start talking about your early money experiences Michael, started to earn your first bit of money on your own. What was the drive behind that at such a young age?

Michael Hewson 02:10

I think really, it came from my parents, I think they wanted to instil in me that you don't get something for nothing.

Anything you want to achieve in life you have to work for.

And while they were quite happy to pay me pocket money up to the age of 10 or 11.

Once I went to middle school, as it is called now, they wanted me to learn the value of money. So I went and got a paper around at the age of 12 think it was a pound a week gives you an indication how long ago it was showing my age a little bit.

But I did that for around about five years did six days a week, didn't do Sundays was just too heavy a bag to carry because you had all the supplements, you had all the magazines, and pretty much everything else.

And I think you know when you're 12 or 13 I think you deserve a lie in at least one day a week. I mean, let's face it. I'm nearly 60 now and I still think I need to need a lie in two days a week on Saturdays and Sundays. So no change there.

Peter Higgins 03:20

Fantastic. I love that response. Thank you. And you continue working when you're doing your O Levels and A Levels get how many O levels and A levels did you attain Mike?

Michael Hewson 03:29

Yeah, I mean, I got I got seven O Levels or took my English O level early on.

I too it in my fourth year, not my fifth year, because I felt that I would be able to pass it. I was told in no uncertain terms that I wouldn't pass it, which was really great for your confidence.

But I've always been one of those people who I'm not really that interested in what other people think of me.

I'm more interested in what I think I can achieve. Having said that, I did suffer from some self-esteem issues really shy and what have you.

But I still felt that I was capable of doing it. So I insisted on taking it. I passed it, which meant that I had one less O Level to take in my fifth year and allowed me to focus much more on mathematics, which was a little bit of a weak point for me.

But as you can see from where I am now it certainly wasn't an obstacle. And that was a consequently it was as a result, you know, hard work.

And then I went on to wanting to do A Levels. And again here I took on a Saturday job working at Waitrose. Again, you know, my parents said to me look, you know, if you want to earn a bit more money than your I mean, obviously I was getting more than a pound a week by them for my paper round.

But I realised that obviously I wanted to earn a little bit more money and save a bit. So we walked into our local Waitrose, me and my dad, my dad walks up to the manager and he said, hello, Sir.

My son's studying for his A-levels but he'd like a sort of a Saturday job. You know, do you have any vacancies all that as a matter of fact, sir, we do. But you have to do one week night as well. And it can be either Thursday night or Friday night.

So I thought well, three hours on a Thursday and then nine till four or eight so four on Saturday. Yeah, I can do that. So I did a Saturday job while I was studying for my A levels I got two, had the option to go to university.

Pretty much all of my friends were going but I don't know what it was about going to university. It just didn't really appeal to me. I think I probably had a belly full of bullying at school.

Think a belly full of sort of being bullied because I was getting bullied quite a lot during school because I really had to work to get my grades.

I'm not what you might call, you know, naturally, I'm one of those they naturally intelligent because that's not right.

You know, I think and I'm fairly intelligent, but nothing ever really came naturally. I wasn't one of these people who could swap the night before and then just breeze through. Yeah, it required an awful lot of graft on my part.

So, you know, I weighed up a few options. And, you know, once I decided what I was going to do, I'd really decided that I didn't want to go to university and I wanted to get some sort of job.

Peter Higgins 06:26

Thank you. Thank you for that reply, I'm sorry to hear about the bullying.

And I always think those that bully youngsters at school or in colleges or even the workplace, they tend not to be the ones that actually achieved the best outcomes in life.

So look at you now.

And I think you know, those bullies are looking potentially at you and going, yeah, wish we hadn't done that.

So kudos to you for just persevering and applying yourself, mate. Well, very well done.

So your second job essentially,or third, was the paper round and, NatWest bank, why not Waitrose…or?

Michael Hewson 07:04

It was very much a choice as either retail and I went to Waitrose head office, which I think at the time was Devonshire Square or Cavendish Square somewhere in London, I can't remember now.

It's such a long time ago. You know, and one thing I will say about Waitrose and John Lewis partnership, even if you're working part time as a Saturday job, they still invest in you.

They send you on training courses. And I went on a number of training courses with Waitrose, because I think being an A-Level student, and they had quite a few A-Level students working on the Saturday floor.

A lot of them were in my year at school.

So you know, I got a job there. And I thought, oh, that sounds quite good. And we were discouraged from doing it by our headmaster, he thought that it was a distraction.

But for me, I felt that it was a necessary part of preparing myself for the world and work.

Whereas he just wanted everyone to go to university and be an Oxbridge candidate.

Well, with all the will in the world, not everyone is an Oxbridge candidate case in point.

But that doesn't necessarily mean that you write yourself off. I know an awful lot of Oxbridge candidates who haven't got an ounce of common sense at all, or what I would call perception, soft skills, whatever you want to call them, I think they are just as important.

So going off that slight tangent, but it was either that or I got myself an interview with NatWest, NatWest Bank.

I had the choice decided to go with banking, I was probably more familiar with that, and decided that retail while you know it was quite appealing, I didn't really want to spend all my day on my feet.

And one thing I will say about, you know, working in Waitrose, you're on your feet all day, rushing around stocking shelves up, I was in charge of the drinks aisle.

So that was always very, very busy people coming in buying crate loads of Coke, Coca-Cola, I should say before anyone says anything else, not the not the white powdery stuff, lemonade, and all of that sort of stuff. But it was very, very tiring.

And I thought that, you know, that's not to say that I wouldn't have had a good career, you know, they had the cash registers. And I worked on the tills, but I did it was it was quite difficult on my back, particularly my body, because when you're on the tills, and I'm rambling a bit, in the old days, you basically had to take this stuff off the shelf yourself and pack it like that. So you're doing that all the time all day, and it just ruined my back. So this is a rather stupid reason. But I decided to go into banking.

Peter Higgins 10:35

No and you made the right choice today, when we look at what you did there. Yeah, learn multiple skills there as well. And you even took evening classes to get certain qualifications and other skills, and additional professional skills, whilst there.

Michael Hewson 10:21

Yeah, I think that's important.

And I think this is something that I actually feel quite passionately about, there is too much emphasis on students and pupils nowadays, to go to university, you do not need to go to university, to have a good long career, you have to be adaptable, vocational skills are just as important.

And the good thing about the vocational skills is that the company pays for you to take the exams, so you don't burden yourself up on debt.

And I think that's very, very important. I think, you know, going to go into university for the sake of university benefits, nobody and I may be a little bit old fashioned in that regard.

But it's something that I passionately believe it because ultimately, it dilutes the value of a degree if everybody goes to university because you're no different to everybody else.

Peter Higgins 11:19

Very good point very well made your absolute signature for that given what you've achieved.

So I want to talk now, post NatWest, all the way up to just prior to joining CMC.

So we're going from 1985 MHT, all the way through, and a few crossroads as well, just to give us a synopsis of that, you know, 20 years mate of your career path, lifetime earnings, etc.

And let's just condense that down and I want to hear as much as I possibly can regarding in different things that you learn the skills that you've attained as well.

Michael Hewson 11:53

Well, I think more than anything you think you, you have to persevere at things.

But I think one of the things I learned very early on is not to settle for something that I don't have a passion for and banking.

While I started out in domestic banking, it was retail banking, it was branch banking, and it was just boring. It just wasn't for me. So 1984/85, I wrote around about 50 or 60 letters to various investment banks in the City, asking them if they had any jobs in Foreign Exchange, because I knew a couple of my friends had got jobs in that area.

And I thought it actually was quite interesting and quite exciting.

I got two replies back to one was from MHT, Manny Hanny, which is now JP Morgan. And they offered me a position working in a back office in Stratford in East London, as it was then that is the back office.

I mean, obviously Stratford, East London is still there. I'm not sure the back office still is. And I spent a good part of three years there learning all about nostro reconciliation, settlements, cash payments, confirmations, balancing currency accounts, and what have you moved on to Bank of Boston, because they had a policy of promoting from within whereas Manny Hanny there was very much hit and miss.

And I wanted to get a move on. And I was in the back office at Bank of Boston, and I got a call. But actually, it's a funny story.

Let me tell you about it. Because the way I got my position at Creditanstalt was completely out of the blue. And it was stems from my time at MHT.

I was coming back late one night from doing overtime in Stratford. And I was on the train, Caterham train, it was on the way back from London Bridge late at night, dozing off a little bit because I was tired as you would be at that time of night. And I overheard two people talking into the talking in the compartment next to me. And I could tell from the nature of their discussion that they were talking about currencies.

And I deduced that they worked on the trading floors of major banks and one worked for Swiss Bank Corp and one worked for Creditanstalt.

And the guy from Swiss bank Corp, I can't remember his name.

He had a cardboard box in his hand, he had a plant in it. And he got up to get off at Pearly and the bottom started to fall out of it.

And I… Excuse me mate . Thank you very much. He got off the train. And the other guy, the Chief Dealer at Creditanstalt and still he stayed on. And he laughed and thought it's quite funny. And we got chatting. And he told me that he was the chief dealer at Creditanstalt. And I told him a bit about myself.

And I only had one stop to do this, because I was getting off at the very next stop. So as a sort of a final, final remark. I said, if you've got any vacancies, you know, I just can't I heard myself say it. And I automatically thought, God, why did I say that? And he goes, Well, actually, no, I haven't. But give me your number.

And if I have anything turn up, I'll let you know. Anyway, six months goes by and I get this new job working in Bank of Boston settlements. And I was sort of thinking, you know, I need to get a job on the trading floor. You know, this is this is really what I want to do.

And six months later, I get a phone call completely out of the blue.

And it's the Chief Dealer at Creditanstalt.

And he said Michael I’ve got a vacancy just opened up junior position working at Creditanstalt.

Were you still interested? And I went, hell yeah, absolutely, in that case, when can you start?

Would you be prepared to start third of January 1988? I said yes.

And that is basically how I got my first break, working on a trading floor in the City. And the moral of that story is don't be afraid to ask the question. What's the worst that can happen? We'll just say no and tell you where to go.

Peter Higgins 16:07

Fantastic. I love that. So you get your dream job. You're on the trading floor or near the trading floor.

Should I say with the guys and ladies that are on the trading floor, 89-93 CBA Junior Dealer, FX dealer, continue on from there for me? Fantastic.

Michael Hewson 16:26

Yeah, I mean, what obviously, only lasted 11 months of Creditanstalt for me.

They made some cutbacks, but one of the guys at Creditanstalt ended up putting a good word for me at CBA got me a job around there as a junior, best experience working experience of my life working at CBA massive learning curve, but Creditanstalt, it was an even steeper learning curve, unpleasant in a lot of ways because they don't take any prisoners on trading floors.

As a junior you get abused, you get shouted out and they do that to see whether or not you can cope with it.

Because it's a really high pressured environment.

And if you can't cope with it, you leave and I did cope with it.

It was a struggle. I'm not going to lie.

But once you get immersed in it and everything clicks into place, it is an absolutely great place to be the camaraderie is really good.

Probably much more of a split towards boys rather than girls which makes it very toxic environment.

I think if you're a female, one thing that I will say is that things have improved an awful lot since then, for women, I think back then it wasn't a particularly nice place to work.

Now, it's an awful lot better.

But yeah, I did four or five years there really enjoyed my time there and was really upset when I got made redundant the end of 1993.

But I didn't feel sorry for myself, even though I felt really resentful.

Peter Higgins 18:04

Then you got a job at TraderMade?

Michael Hewson 18:08

That is correct, yes.

I mean, I was basically looking for a job, you know, I signed on worst experience of my life. You know, it's not something that I wanted to do, but I had a mortgage to pay, I had bills to pay, you know, so you do whatever it is you need to do to get by.

And I got a call out of the blue from this guy from TraderMade, who'd actually demoed a product to me when I was working at CBA.

And he was asking, he asked me if I was interested in a role as an account manager, teaching technical analysis and trading and what have you to TraderMade clients.

My first interest in technical analysis came around as a consequence of my time at CBA, there was a big, big focus on technical analysis there on risk management.

And I think that's really at the core of everything I do, I think it's important to remember that whenever you're trading, or you're investing, the two are totally completely different mindsets, you invest for the long-term, but you trade in the short-term.

So if you're trading in the short-term, you are really concerned about where the price is going to go over the next five minutes, 15 minutes, 30 minutes, or however long.

If you're investing doesn't matter, because you're investing for the long-term. You know, if the price drops, five-10% in the next five to 10 weeks, who cares?

Because you're holding that for one or two years, three years, four years or five years.

It's about long-term returns, as opposed to short-term returns.

So you have to basically create or compartmentalise, those two parts of your brain when you're looking to invest and when you're looking to trade. And that's an important distinction.

Technical analysis is used for managing risk, but also for timing, and for determining a trend up, down or sideways. And there's only three options.

You only have to deduce whether or not to buy it, sell it, or stay out of it. There is a third option, sit on your hands. That is an option.

You'd be surprised how many people think that it's not, but some of the best trades I've made have been the ones that I haven't put on, because if I had, they'd have lost me money.

Peter Higgins 20:33

We’ll cover more on technical analysis and mismanagement later on. But thank you for sharing that. You've got some qualifications whilst you were with TradingMade as well.

Michael Hewson 20:42

Yeah. First year, it was a prerequisite of the role that I had to take the STA qualification and I sat that at Southbank University.

Peter Higgins 20:54

Ok, just expanded for those that don't understand what the STA qualifications are, please?

Michael Hewson 20:57

Society of Technical Analysis.

So essentially what that is, is it's it says that you satisfy the qualifications and their standards for being able to mentor people in the art or skill set of technical analysis.

And, you know, for me, it's a discipline, it's a discipline, training is a discipline, but also technical analysis as a discipline. And essentially, it's the analysis of price, nothing more, nothing less.

And that generates quite a lot of scepticism, from the academic community, economists, teachers and what have you, because they somehow think that you need to understand the fundamentals, you need to have an in depth knowledge of balance sheets and accounts and what have you.

And I do, because as part of my banking exams, when I was at NatWest, I did accounts, I did Banking Law, I did elements of banking, I did economics. So I have an understanding of all of that.

But at the end of the day, none of that matters. If you think the market should be going up based on your economic analysis, and it's not it's going down and me as a technical analysis, I try and strip away all of the fluff and just focus on what's in the price.

Peter Higgins 22:24

Absolutely. I'm going to get into that a bit later on as well, Michael, now, I wanted to talk now, because you're in the office. I'm going to see you in the office there. You're at CMC markets. We're going to talk about CMC markets now.

You get there in 2006. What was your first role, initial role, and how did that job come about?

And what's happened and transpired since then?

Just share with us a bit about that overview of the company as well, please?

Michael Hewson 22:50

Well, CMC Markets actually took over Digital Look in May 2007. I joined Digital Look in 2006.

So depending on how you view it, I was a Digital Look first, CMC second, but ultimately, CMC just subsumed all of Digital Look.

How did I get to Digital Look, well, coming towards the end of my time at TraderMade, I was a little bit adrift, shall we say, career wise.

I was no longer an account manager, no sales manager. I was more I worked my way around the company doing all various different types of job network administration, PC support, product testing, testing new products, making sure these technical analysis products worked quite well, feedbacking feedback towards the developer and what have you.

And ultimately, I just didn't really know what I wanted to do, you know, it was a very small company, great if you if you want to learn a wide range of skills, you know,I became a Microsoft Certified Professional, you know, so there wasn't anything that you couldn't tell me about building a PC, stripping it down, putting it back together and installing Windows on it, you know, I can do all of that puts you in big demand with all your friends whenever there's a PC problem, which is a bit of a mixed blessing.

But you know I digress.

Anyway, I mean, got married during that time when I was at TraderMade, you know, you would have thought that I'd have been happy.

But I wasn't, my wife walked out on me in 2004 wasn't particularly happy with the role that I was in, managed to engineer voluntary redundancy in 2006, and decided that I wanted to have a clean slate, and I had a long chat with a very good friend of mine.

And he suggested that, what do you know best?

Possible product manager or relationship manager, that sort of thing.

So I started applying for roles and came across this ad for a company called Digital Look, which I had multiple interviews for.

So I spent the summer of 2006, watching the World Cup, I met my girlfriend and now partner, around about the same time spent most of the summer on her sofa, watching the World Cup.

And then in August 2006, I started working at Digital Look.

And then we got taken over by CMC Markets in 2007.

So I spent most of my time on the Digital Look side of the business, writing commentary.

But I also got involved a little bit in the product development of their market data products, because of my expertise as a trader, and what have you.

So it was a bit of a cross section of skills, if you like, obviously, my trading background, made me an ideal candidate to try out all the market data products, they were looking to sell to investor relation websites, and that sort of thing.

But also, I'd learned to be able to write content. And I had a very good mentor, that Digital Look, a guy called John Harrington, who now works at Proactive Investors.

I don't know whether he's retired yet, but he basically ironed out a lot of the shortcomings in my pros, shall we say, my written pros, and went from Product Manager, to Digital Look to helping out with the new platform here at CMC, the current platform that you see right now, a lot of what you see in the charting on the CMC spreadsheet and CFD platform is me in terms of helping to deliver that test that and make sure that it's fit for purpose.

And then financial crisis came around, and they wanted someone who could write content, and I fit the bill. And I started to write content post 2008, 2009, 2010.

And when the other analysts left, I just slowly moved into the roles they vacated. And here I am doing everything else.

Peter Higgins 27:24

So tell us about your the full scope of your role, then CMC’s Chief market analyst and tell us the breadth of that? Because that's a significant role.

Michael Hewson 27:32

It is a significant role.

I mean, if you had to condense it down into just the content side of things, it would probably be a fairly narrow role.

Because ultimately, what I do is I write the content for the website, I write the content that goes within the platform.

So the news stories of the day that are current today, I wrote a couple of comments for Netflix and Tesla's results, which I published, and managed to get me an interview on Sky News earlier this morning, talking to Ian King. So that was good.

And that's essentially part of the role is basically making everyone aware of the CMC brand expertise in terms of markets, but also educating clients in how to manage risk.

For me, I think this is very important.

And it's at the core of everything that I do, I want our clients to succeed. I want our clients to make money.

Because if a client succeeds, and a client makes money, he's with you for a long time. And he keeps trading, you know, it's about longevity. It's about capital preservation, and then capital appreciation.

Okay, the two come together. And that is so important for me to think if you can encourage clients to take a risk based approach to their trading, then they're less likely they're less likely to blow their accounts up.

And that's what I hope to achieve and all of the stuff that I do my weekly updates to clients by YouTube talking through what's coming up.

What's happened, try and explain the relationships between bond markets, equity markets, commodity markets, how they all push and pull against each other currency markets as well.

Obviously, my key competency is currency trading. I used to trade dollar yen did a bit of cable as well, but also have some experience of trading Australian dollar. But the lessons I learned at CBA.

Last still with me now, in terms of when I learned, my first took my first steps in learning about technical analysis, its risk management, risk management, risk management, thinking about your entry point, thinking about your exit point, but not just about that it's about once you put the trade on, not only you know, what's your stop loss? What is your take profit, so many people obsess so much about where do I put my stop loss? Assuming they even use one, they never think about? How much money do I want to make on this trade? What's my upside?

It's always about, well, what's my downside? How much can I afford to lose? And it's never about what am I looking to make on this?

So it's about trying to make them think of the market in a slightly different way. And be very aware of the risks.

My biggest lessons, my biggest lessons haven't been my successful days, they've been when I've been absolutely slapped across the chops by the market.

And it's how you react to those negative days that sets you apart. It builds resilience, because you have to accept that as a trader, as one as an investor, you can have losing days as well as winning days. And it's how you were able to cope with that the you know, determines your longevity.

Peter Higgins 31:24

Absolutely. I agree with you and I think you've said something there about looking after the clients I think is really, really important.

And I think you've answered this question already. I was going to ask, last year, CMC won the award for best in house analysts at the Professional Traders Award, and the question was going to be to you, what do you and your team do, that's something extra special for the clients. And clearly, that's why you won those awards. And it was the third time in four years that you've done it. So you must be doing something special there?

Michael Hewson 31:57

It is precisely that it's also making myself available to our clients. So if they want to sit down and chat to me about the markets, obviously, I can't give them trading advice.

I can't say where you should buy here, we should sell here. But you know, I tell our account managers, if any of your clients want to come in and have a chat to me, I'm more than happy to sit down with them, you know, and talk them through about how I approach the markets, you know, doing events around the country, you know, doing those weekly, sort of videos on YouTube, that I do every week, the monthly webcasts, covering non-farm payrolls that I do, where I talk clients through the numbers, tell them what to expect to see what is likely to happen if a certain set of numbers come out, you know, and where I think the market is likely to go in the event such a scenario plays out for me without clients, you know, CMC is not going to be the successful business that it is.

Peter Higgins 33:03

Michael, I'm conscious of the time when I've got loads of questions and answers, but some quickfire replies to these questions for me. To start with. Please, can you share with us layman's explanation for fundamental analysis, followed by that of technical analysis, please?

Michael Hewson 33:19

Sure. Fundamental analysis in a nutshell is basically price earnings ratios, EPS, dividends, study of balance sheets, profit and loss accounts, economic fundamentals, like GDP, industrial production, all of the macro stuff. So I would call that the macro data very much the economically data driven analysis.

It can be a company balance sheet, it can be a set of economic announcements, numbers, non-farm payrolls, all of that sort of stuff. Okay.

Technical analysis is the study of one data point, not multiple, hundreds of data points.

price is the price going up, down or sideways, what drives that price? What drives that price? Is all of the macro stuff that I've just outlined.

With respect to fundamentals, an awful lot of those fundamentals will push and pull and push and pull, which of those has the greater push or the greater pull?

The only way that you can really tell that is the fundamental lesson that you learn when you first study O Level Economics or GCSE Economics, supply and demand supply and demand is what drives price.

So you know, the more supply you have the same thing, price drops, more demand for something over supply, price goes up. Technical analysis is the study of price. That's it pure and simple.

Peter Higgins 34:51

Okie dokie, so we're sticking with price and charts and price action. Please explain support and resistance for our listeners please?

Michael Hewson 34:58

A support level is an area of the market which has seen the market rebound and to go higher on multiple occasions.

So on a scale of between 10 and 90 if the market goes from 10 to 30, back to 20 and then goes up to 40 and then falls back to 20 again.

That is a support because the initial move back down from 30 to 20.

Prompted a rebound so there was a point there whereby demand started to outweigh supply and pull it back up again.

So it'll be a previous low in the market on a price point, which is a support level, flip that on its head for a resistance level, if the price goes up 10 to 40, comes down to 20, goes back to 40, comes down, that 40 becomes a resistance goes up goes through 40, up to 60.

That then becomes a resistance if it comes down to 40, that previous resistance now becomes support.

Peter Higgins 36:03

Bingo. Brilliant now, so regarding the technical analysis side, you've also got exponential moving averages, and simple moving average or standard moving average difference there and why the nuance?

Michael Hewson 36:17

I would urge anyone who's new to technical analysis not to get too hung up on moving averages, okay, moving averages or trend following indicators.

A simple moving average is essentially an average of open high low close of an individual data point.

Now a data point can be a daily bar chart.

And a daily bar chart consists of the open high low close of that particular day, a one day moving average is a line chart by any other name.

So in essence, what you're doing, if you've got a 20 day moving average, over 100 days, you're taking the average of the last 20 days, and assigning a value and dividing it by 20.

To give you that moving average, so they are what they are, in essence, trend following indicators.

And moving averages only work when the market is trending, they don't market they don't work.

Moving averages don't work. If the market is just trading in a range, going from 10 to 40, 10, to 40, 10 to 40, 10 to 40, they'll chop you out.

So for me, moving averages are all well and good. If the market is ranging, and you decide that they accurately reflect the nature of the market that you're looking to trade, the most important things for me for technical analysis, right, and I break these down into indicators, moving averages a secondary indicator, in the same way that an RSI and a slow stochastic is a secondary indicator that goes underneath the chart.

They are all lagging indicators, they lag behind the price. The most important component and we've talked about it is the concept of trend, up down or sideways support and resistance, which we've covered and trend lines, which basically link the lows in an uptrend and link the highs in a downtrend.

Anything over and above that, learn the basics first, get comfortable with them, then come and talk to me about moving averages because moving averages, if they're setting correctly, can give you false positives as to what the price is telling you.

The price can be telling you it's going up for the moving average could be telling you well actually, it could be about to go down.

But it depends on the value of the moving average, whether it's a 10 day moving average to 20,30,40, 50 or 200.

That requires skill and it also requires an awful lot of patience and analysing hundreds of markets over years. It's not something that you can learn overnight.

Peter Higgins 39:01

Brilliant. Thank you for that response.

Now, Michael, historically people that have been dismissive of technical analysis, the naysayers and they don't fully understand it.

So what is it that they're missing with a) regards to their investors, so they're not traders, but essentially, it could enhance their performance regarding their long-term returns for investing? Maybe if they understood it more?

Michael Hewson 39:23

Yeah, I mean, I think in terms of investing, moving averages are useful, because they will identify long- term trends.

So they will basically tell you what the long-term trend of a particular market is, you know, and I'm talking specifically about 50 day moving averages and 200 day moving averages, because essentially, if you're an investor, you want to know, if a particular market that you're invested in is in a sustainable upward trend, or whether or not the price is moving so far away from the actual underlying long-term mean, which I designate has been the 50 and 200, day moving average, and whether or not it's do a pullback. So I think they're important in that context.

Now, if people are dismissive of it, that's their problem. I'm not going to try and convince them.

Otherwise, if you're a sceptic, you're always going to be a sceptic, but not for nothing to hundreds of 1000s of banks worldwide invest huge sums of money. In technical analysis programmes, they design complicated macro models to try and tell them what the market is going to do next, they wouldn't be throwing all that money in it.

If it was akin to reading tea leaves, there is an element of skill to it. I would prefer if people were close mouthed and open minded about it, rather than the other way around.

Because I don't dismiss fundamentals. There are an awful lot of very good economists out there. But you'll also find that an awful lot of the economists who are dismissive of technical analysis aren't particularly good at the fundamentals either.

You know, there's the old joke about you put a dozen economists in a room and you come out with 20 different outcomes, all the data is the same. It's exactly the same. So how come you don't agree on it?

Technical analysis is no different. At the end of the day, it's down to the skill of the individual investor in the individual trader, you're not going to get every piece of money out of a given trade on any trade that you put on. But hopefully, if you're good enough, you'll be able to pick up some.

Peter Higgins 41:26

Brilliant, I love that response. And you touched on the importance of risk management as well. Can you expand on why that's a core component of actually surviving and being successful long-term, please, Michael?

Michael Hewson 41:37

It's down to market timing. I think one of the things that I learned very early on is you can be right about an overall direction of a market move.

But your entry level can be wrong. And that's why it's important in the context of trend lines.

Technical analysis allows you to look at a market, draw a trend line underneath an uptrend and know instinctively that you shouldn't be selling this market.

Because if you're selling into an uptrend, you're going to lose money.

So you need to flip your mindset of this markets going up, I need to be looking to time a trade to buy it, the trend line will allow you to do that you don't want to buy the market near a long way from its uptrend line, you want to wait for the market to come back towards it, timing your entry in put your stop loss below the trend line far enough away that doesn't flip through, and then take you out and then ride the move higher.

So it's market timing, it allows you to time the market by looking at the data in front of you putting a trade on and allowing you more control over when you get in and out of the market.

Now you may think I know this markets going up.

Yeah, you may be right, but what happens if you buy it up here, and it drops all the way down here are you still going to be as convinced then that the markets going up?

Whereas if you'd waited for it to come down there and bought it there, you'd have a lot more room to run your loss than if you bought it up there.

And that's the key, patience.

And that's what technical analysis allows you to do, time the market better, you're not going to time it to you're not going to have to fine tune it.

Many's the time I've sold at the bottom and bought at the top.

We've all done it markets ever had it moving really sharply for no apparent reason.

And stopping you out. Got news for you, get used to it, it's going to happen to you, it will continue to happen to me, particularly in these markets nowadays.

But if you time your trade to a comfortable level or a level that you're comfortable with, then hopefully you'll be able to keep your losses low and run your profits high.

Peter Higgins 43:58

Fantastic. I love the honesty of that response.

Thank you, Michael. Now, can you share with us some of your investing slash trading successes? And also you touched only about the greatest lessons you learned was from your failures or failing? So can you share some of that for our and educate our listeners, please?

Michael Hewson 44:14

Yeah, I mean, you're asking me to really delve into the memory banks now.

I think one of my most traumatic days as a trader was back in the 1990s.

And I was reading the dollar yen book.

And I was doing really well, I was about 25 grand up on the day to 10 o'clock in the morning.

And the markets been flying about a bit.

And a corporate desk basically left an order on my desk.

But I was plugged into a broket line at the time.

And I wasn't aware they've given it to me.

And it was an order for $70 million in dollar yen, which I had to execute on a Jap method basis, I won't go into the logistics of what Jap method means or Japanese method means.

But ultimately, it meant that I was $70 long at the top of the market.

And the market was falling very, very sharply. So for being $25,000 up, I was about $250,000 down on the day and getting bigger.

And yeah, I was looking at my P&L sheet looking at the Market Chief Data, one shoulder, head of the desk, the other shoulder. What we going to do with this, Michael?

And I'm all I can see is my P45 In front of me, and the bank had limits and basically you weren't allowed to run a loss for more than $300,000 loss.

And we were looking at $450,000 because the market was still falling.

And so he said you've got to get out some of this, you know, unfortunately, I've been long about 10-$15 at the time.

So it's only about 50 Bucks short, $50 million short, but it was still brutal on my insides. And I was sweating. I was sweating. But I also felt that the move was over done. And all the while this was going on. I was arguing the toss with the chief dealer. I don't want to cut this position. I don't want to cut this but yeah, but it's costing the bank $400,000.

He said yeah, but if you if you cut some of the position now you're going to destroy my average even further.

Because it's going to be it's going to basically put me short, especially at a ridiculous rate, you're essentially locking in a loss.

You know, a loss is only ever realised when you get out of it. Well, you said Michael, we can't run it overnight. I said no, I know. But it's mid-day.

You know, I think we've got time. So anyway, I mean, they made me the market started to rebound, and I pushed back.

But they made they made me cut all of about 10 bucks of it. And that put me long. I can't remember the rate about 200 points higher from where I was at the moment.

So I just sat there for the rest of the day, traded around it, finished the day five grand down. And even though I lost money that day, even though I lost money that day, that was one of my biggest successes.

Why? Because I pushed back against traders who are much more experienced than I was, and said, I don't think this market has got much further to go we should not be cutting this position.

And guess what? I was right. I was also mentally exhausted, mentally spent, went down the pub that night. Got totally wrecked. And you know what they did? When I went to the loo, I came back, they'd all gone home. I thought you I was about to say I was about to swear then but yeah, so yeah. So there was me basically in the in the Golden Fleece at the time. And where are they gone? Oh, yeah, they've gone mate. They said that you're being obnoxious. And I'm thinking that doesn't sound like me.

Peter Higgins 48:26

Celebrating your win, you survived.

Michael Hewson 48:29

Celebrating a survival day.

So yeah, that was a story. But yeah, I could tell you some stories. There's another story. It was kicking off on the Aussie desk, we were getting calls selling loads of Aussie we'd all been out the night before.

On a heavy night, we weren't our best, shall we say, and the Chief Dealer was standing there. And I think the Aussie book was about $250,000 in the red.

And everyone was shouting prices, this that and the other noise was deafening. And the guy who was basically logging all the positions in the deals, was looking greener, and greener, and greener, and greener.

And suddenly, in the middle of it all, he just grabs the bin, picks it up, throws up in it, puts it down and carries on. And the Chief Dealer looks at the head of the desk and went that is disgusting. He goes what you on about? He’s doing his job isn’t he?

Peter Higgins 49:32

Thank you for sharing that. Listen, I'm conscious of the time I've got two quickfire questions for you.

You've spoken about and written about extensively, I believe, probably more so than most traders, Michael, the importance of psychology, you've touched on it a little bit there is somebody replies to me.

And can you just expand a little bit for me about the importance of psychology, because sometimes it's not the market that beats us, it's ourselves.

Michael Hewson 49:58

I believe, you have to learn to trust your experience and learn to trust your instincts.

One of the biggest mistakes I made when I was learning and you know, very young was that I listened to all of these really experienced guys, and they were really experienced guys, you know, and they were sort of saying, well, I think this is going to do this and I think it's going to do that.

And I'm thinking wow.

But because you defer to that greater experience, think oh, okay, all right. I won't do that.

And I don't do it. And I'm proved right. And the thing is, life is a learning curve, you're not going to get everything right, you are going to get things wrong.

So I think the most important thing, and lesson I learned was to trust your instincts. If you feel that something strongly enough, and you can articulate a trading plan for it, go with it. It may not always succeed.

But more often than not, it probably will. And that for me believe in yourself. I really struggled that when I was younger, no self-esteem and what have you. But learn to trust your instincts. Because by and large, as long as you manage your risk carefully, they won't let you down.

Peter Higgins 51:14

Brilliant. Love that response. I've got one final very quick question for you, Michael, for the sake of all investors and traders, what would you change about the parameters of the markets right now, to engender their long-term success?

Michael Hewson 51:32

That's, that's almost an unanswerable question.

You know, I think there's always I think you just have to take the markets as they are.

I think it's almost a waste of it's almost it almost feels like you're trying to move the goalposts when you ask a question like that, and I don't think you can the markets are just too big, there's too homogenous? Is that the word?

Yeah, to really change. They are what they are. And ultimately, you just do the best that you can.

And as long as at the end of the day, you can look yourself in the mirror and say, well, I've done the best that I could today, the market wasn't my friend. It wasn't the markets fault that I lost money.

The market is the market. The only reason that I lost money today was because I got it wrong, you know, at the end of the day, you will, you know, and the most successful traders and investors understand that and come to accept it.

Yeah, put that trade behind you. It was bad.

It's gone, they’re like London buses, another trade comes along in a minute. And hopefully, it'll be a better experience for you. But you know, there's no substitution for perseverance and hard work and self-analysis.

Peter Higgins 53:00

I think it's a perfect answer, Michael, thank you ever so much.

Ladies and gents that was Michael Hewson, Chief market Analyst at CMC markets.

Michael, thank you ever so much for sharing your insights.

Thirty odd years of experience for our Investing Matters listeners, and I look forward to speaking to you soon and visiting you at your office.

Michael Hewson 53:20

Thank you very much, Peter. And just remember that you're always learning. I'm still learning even now. Never think that you've got it cracked, because you don't.

Peter Higgins 53:30

That's one of my mantras. Thank you ever so much for sharing with us. Thank you, Michael. Take care. God bless you.

Michael Hewson 53:33

No worries. Thanks, Peter. Thank you.

LSE 53:36

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