I Had to Develop an iPhone App to Understand Swing Trading(chartingninja.com) |
I Had to Develop an iPhone App to Understand Swing Trading(chartingninja.com) |
However, this makes me worried for him...
> There’s a 50% chance that I can lose $50.00 in a few days, but there’s also a 50% chance that I can make $100.00 or more in a few days. Why 50% chance? This number will be different for every person depending on his profit & loss history.
Ummm..... This doesn't seem true to me. What if the stock just stays flat? That's more often than not the default for many stocks.
if you make the dubious assumption that all three outcomes are equally valid then you loose 2/3s of the time.
If the stock stays flat then you lose as you have to pay commissions to enter into the trade and to exit the trade. Lots of people model algorithms, very few model them accurately, sometimes myself included unfortunately:)
> But swing traders need to win at least 50% of the time in order to be profitable.
If you don't pay any commissions or have any overhead, sure. But I'm guessing you pay commission and I'm guessing you have overhead.
I would read up on the Kelly Criterion to imporove your capital allocation. http://en.wikipedia.org/wiki/Kelly_criterion
> You should stay away from stocks priced below $5.00 because these are Penny Stocks and involve a higher risk. You might consider stocks between $5.00 and $10.00, but again, they involve higher risk and even worse, they might go into Penny Stock territory.
This is just plain false. Being under $5 is one of 3 criteria that make up a penny stock, its a necessary but not sufficent condition. There are plenty of good companies with stock prices under $5.
The price of a stock isn't a good indicator of its risk.
> The reality is that it’s easier said than done! It’s actually very hard to make money in the stock market! You will win but you will also lose a lot! To put it into perspective
Full points to the author for realizing this! I'm still amazed at the number of people who think they can slap together some machine learning, nlp or deep learning and make money. People literally spend all their time doing this, if there was free money to be made someone would be making it:)
I agree with everything you said above, including this. I want to add though, that there is effectively free money in the stock market. For example, just by buying a low-fee index fund (e.g. something from Vanguard), you're almost guaranteed to do better than most investors and probably better than nearly all speculators. (And there are other investment strategies that typically outperform the indices as well). I guess the reason people do poorly in the stock market is similar to why people start dumb startups that don't really have any hope of being profitable: The idea of rapidly creating an enormous amount of money for very little effort in a very short amount of time is much more appealing than making 12+% per year indefinitely, even though this strategy is much more likely to net you a higher return in the long-run... plus you actually have to save money if you want to invest this way :)
Edit: It's also interesting to learn about how some of the big quant trading firms started. D.E. Shaw, for example, originally had some bond trading algorithms they used. It was very profitable and the hours were short compared to the rest of the Wall Street/Finance world. Then they got greedy and tried some more aggressive strategies, blew up, and nearly lost the fund. Fortunately for them they seem to be doing much better now, though I'm not sure what their current strategy is.
I used to think this, then I worked on a trading system in an investment bank. Don't underestimate how quickly and easily you can learn and exceed people who should know what they're doing, given sufficient motivation.
By arguing for ETFs, you are implicitely assuming that there is not much to gain by doing your own research because markets are efficient and have already priced in everything.
By arguing that most people underperform the market, you are implicitely assuming that it is easy to underperform the market - something that should in fact be hard if markets were efficient and everything priced fairly.
Just as a side note, I was watching the excellent ESPN series "30 for 30" and they were describing why so many athletes have gone bankrupt so quickly after retiring, even though they supposedly made millions when they were playing.
Your quote is the key. They had several financial planners and they said the same thing, "It's not cool for these guys to their money in an index fund and watch it grow over 20 years. They want bars, dance clubs, music studios, and other frivolous stuff. THAT'S why they broke."
The stories the athletes tell are pretty jaw dropping by the way: http://www.youtube.com/watch?v=TSOAwNSv8EM
A couple other good quotes to remember by one of my favorite investors, Ray Dalio. "Just because something hasn't happened recently doesn't mean it's implausible." "Always ensure that the improbable outcome is still acceptable."
[1] http://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incer...
That's not true. It completely depends on your strategy/system. You can be highly-profitable with a 30% win-rate (or any number) granted the amount you win is far higher than the amount you lose. If my average win is $1000 and my average loss is $100, I can be profitable with only 10% wins (excluding commissions).
There should be a follow on sentence... It can be very difficult to make money in the stock market IN THE SHORT TERM. You should not do this... most people should not do this.
See this:
https://personal.vanguard.com/us/insights/investingtruths/in...
You can use the stock market to make money. You can't use the stock market to make free money.
There's a number of different ways to pay for your money. You can pay for it by doing intensive in-depth research and figuring out undervalued stocks. You can pay for it in cash up front (buying a bond or index fund) and make it back over time while other people do the work (your returns will be lower). You can pay for it by taking crazy risks with your money, hoping the market will swing in your favor (not necessarily gambling if you accurately understand the risks involved and don't overpay for risky assets).
It's just like a lot of other business, when you get down to it, except the really crazy risks are easier to find and harder to analyze.
The most important part of being a trader is TIMING and the second most important part is being able to make decisions based off of analysis of technical parameters and NOT based off of your emotions.
This type of analysis tells me that you are not comfortable emotionally with losing more than $50 on one trade which I see as a sign that you should be looking into more traditional investment practices.
I would suggest you analyze the opportunity cost for the amount of research, training, and actual trading it will take before you become profitable. Don't forget about taxes!
As a seasoned trader, I can assure you this is the type of analysis that will result in lost money and unimaginable negative emotions. It is too simplistic and lacks both fundamental theory and actual technical analysis.
Furthermore, the price of the stock doesn't really matter for anything above a penny stock. 100 shares at $25 is the same as 10 shares at $250, all else equal (for instance, market cap).
I also think larger positions are better, for instance $10K per trade is a good number. It's high enough that commissions are trivial, so you can make money off a 1-2% swing, rather than needing to make 3-4%. Of course, the ideal is 5-10% (well, more is ideal, but 5-10% is a realistic enough number for a short time frame, say a week or two), but it's nice to exit out of a trade that turned against you and still take a small profit at the end.
And of course, this app ignores the most important part - picking and timing stocks. Some understanding of technical analysis as well as sentiment is required, and basic market dynamics (supply vs. demand, volume, etc...).
What he's really doing here is demanding a much larger percentage gain in the stock price to get that higher return. It has nothing to do with the number of shares.
Save yourself a lot of effort, toss a coin.
http://powerful-reaches-1118.herokuapp.com/ [very much a work in progress.]
Can't you just buy an index fund, forget about it and come back to ~8% per year gain?
Is this better than just picking stocks at random instead of carefully selecting them?
If by technical analysis do you mean watch for patterns to appear, then yes it works. There are patterns all over the place.
Renaissance Technologies is famous for its pattern matching AI. They hired 2 key employees out of IBM many years ago that layed the base for their technology and the rest has been money making history. See: http://www.businessinsider.com/bob-mercer-peter-brown-2010-3 and http://en.wikipedia.org/wiki/Renaissance_Technologies
The world of trading has been a cat and mouse game of pattern matching for awhile. One of the earliest attempt at hiding large orders was an algorithm called POV( Percent of Volume). It's an order that would slice up a big order into smaller chunks and sell it throughout the day. The first variations would just sell every 10 minutes. Its easy to see how someone could find this pattern (Hmm, it seems like 1,000 MSFT are being sold at market every 10 minutes by Goldman Sachs) and exploit it which lead to more intelligent order spreading, and the cycle continues.
However, if by technical analysis you mean looking for patterns like "head and shoulders" (http://www.investopedia.com/terms/h/head-shoulders.asp) then it might be true only in that if so many people/computers believe in it that it becomes a self fulling prophecy. For example, if every one believes that when a stock crosses above its 20 and 50 day moving average then its going to fall, then it will fall just because everyone will start selling because they believe it will fall, which causes it to fall which reinforces everyone's belief that the pattern works and you have a positive feed back cycle.
Does that mean technical analysis works? IMHO this type of investing doesn't work, but who am I to say...
I totally believe that with algorithm trading you can detect patterns, but I would assume that the sweet spot - like you described - would be detecting and exploiting patterns of individual actors (or a cluster of actors) instead of the patterns of the chaotic mass.
The rest seems accurate.
My own view is that it's a window into the pricing process and adds depth to the practice of reading the market that many analysts go through. Ignoring technical analysis when looking through charts is kind of like watching TV in standard definition instead of HD. Even though it's kind of still the same thing, I enjoy it.
Technical analysis is just acknowledging that while price moves are random (and if you plot daily price moves, they represent a bell curve with fat ends), there are still patterns that reappear. And if you have tight stops in place to manage risk, you can (try to) take advantage when a pattern emerges.
Also, most people underperform the market because of fees. If you invest in a mutual fund with a 2% management fee, then the fund needs to outperform the index by 2% to breakeven. It needs to do significantly better than that if you're invested in a hedge fund with a typical 2-and-20 fee.
Edit: in particular, small-cap stocks tend to be inefficiently priced because it doesn't make sense for institutional investors to research them heavily since they cannot allocate a large percentage of funds to them without: 1) significantly disturbing the market price 2) in some cases owning a significant percentage of shares (5% or 10% I think) that requires filing with the SEC.
I think the argument is that many people (including fund managers) trade too actively, which generates costs that cause them to underperform an efficient market.
The fact that you saw some people you perceived to be clowns once, does not demonstrate the market is anyone's for the taking.
What Buffet does and what HFT do are completely different. The reason why Buffet has to change how he trades is because of HFT. If Buffet puts in an order for 100,000 shares of Coke (KO) while it's at $40 a share, he would not stand a chance. HFT bots would swarm in and scoop every last share of KO that's available and then sell it back for incrementally more. All within a fraction of fraction of a fraction of a second.
I agree there must be some niches are that are amenable to exploitation by small independent traders (perhaps anything to do with nanocap stocks).
I have not had success finding niches where I thought I would be successful, but I could very well be insufficiently clever.
But trading highly liquid equities on a multi-day timescale (the strategy proposed here) is certainly not prohibitively hostile territory for large, sophisticated buy side operations.
Don't try to be clever. Just invest your money in a few different indexes and let it be.
Last year my account grew ~30%, it's increased 16.1% so far this year (the market isn't as crazy as it was in 2013 but it's not bad, either). You need to be disciplined enough to let your money sit and resist the temptation to do dumb things when the market dips.
It's not rocket science, the best way to fuck it all up is to try and manage your money yourself and play the market. Don't do that. There are thousands of bankers out there working 12-14 hours each day to take advantage of people who don't know what they are doing. Don't be a sucker.
We are in the midst of a 3 year old bull market. We are just barely off all time highs in the S&P and Dow. Nasdaq is also killing it -- even after some pullback in high beta (volatility) stocks.
Your returns the last 2 years are not typical of an average year. A return approaching double digits over a long trendline is not beyond reach, but it would be a mistake to bank on a 12% return IMHO, and even more of one to suggest other people could expect the same.
There are tons of calculators where you can play with average returns over time, check one out.
The ones that crashed and burned in the recession are the ones most likely to provide a high return in a bull market, there are plenty that were largely unaffected by the recession (mostly securities) but you won't benefit as much from a bull market with those.
I have a blend of different funds.
Everyone looks smart during a bull run-up. That same SPY allocation would have been crushed in 2008-2009. On average, you'll get average results.
The CAGR of SPY for the past 100 or so years is about 6.5%, inflation adjusted. Good, but not 30% good.
There is nothing special about Vanguard ETFs, and even if you feel you are diversified there's an old saying that in a severe downturn the correlation of everything goes to 1. So most likely, in a downturn, everything you hold will go down, even if you feel you're diversified. This of course is not a law, just a probability.
(And just as a helpful FYI, both stocks and bonds are securities)