Category Archives: day trading

discount brokers and technical analysis

June 5, 2017 By in day trading, insider trading, Trading, trading: how valuable?, Uncategorized Tags: , , , Leave a comment

The stock market can be considered as the place where the financial characteristics of publicly traded companies meet the hopes and fears of potential equity investors.  Fundamental analysis addresses the former issue, technical analysis the latter.

In the US of the Roaring Twenties, technical analysis served both functions.  Depression era reforms that forced companies to release accurate and readily understandable financial statements had not yet been enacted.  So the trading activity of “insiders,” detected by carefully watching price and volume movements, was the best gauge one could get of how firms were actually doing.

Since that’s no longer the case, why do online brokers (Merrill Edge is the only exception I know of) provide such lame information on company fundamentals?

Several reasons, I think:

–brokers earn their revenue from trading, not from investment results.  (For what it’s worth, there’s a strong belief in the professional investment community that there’s an inverse correlation between the amount of trading a portfolio manager does and investment performance.)  So it makes some business sense that they should provide tools that make trades easy to do, with an old-style video game-like interface that makes it seem important and fun.

–a fundamental research effort is a headache.  It’s difficult to create and sustain.   It’s expensive, as well.  Arguably, offering proprietary research also exposes the broker to liability if the recommendations don’t pan out.  The user needs some accounting/economic background to understand what’s being said.  The broker who provides fundamental research has an obligation to consider whether a recommendation is suitable for a given client–opening another can of worms.  And, of course, an emphasis on fundamentals runs the risk of refocusing clients away from frequent trading, to the detriment of profits.

–discount brokers do offer a kind of fundamentals-based product through actively-managed mutual funds and ETFs, as well as through their sponsorship of networks of financial planners for whom they provide back office services.  Offering fundamental research might put brokers into competition with those planners.  And the fundamentally-based fund offerings carry a much higher price tag than DIY trading.

 

trading (iii): start with a paper portfolio

March 27, 2017 By in day trading, paper portfolio, Trading, Uncategorized Tags: , , Leave a comment

practice first

As I mentioned last week, your initial plan may be very simple, no more than “I intend to beat the S&P 500 index by selecting sectors with superior profit growth potential,” or “I intend to beat the S&P 500 by selecting individual stocks that are deeply undervalued as measured by the price/cash flow ratio.”

The next step is to create a paper portfolio to test out your ideas.

The paper portfolio is just what the name implies:  you create a portfolio on paper of the names you would want to buy (or sell, if that’s what you think you’ll be good at), watch what happens and keep score.

Based on the results, you refine your ideas.

using real money…

…in small amounts.  That’s the next step.

My experience is that if a paper portfolio is like going to the batting cages to practice your swing, using real money is like playing in a game with a live pitcher and fielders.  Your concentration is sharper, because the stakes are higher.  Sometimes, people who have no trouble performing with a paper portfolio encounter difficulties with a real-money portfolio.  That typically passes with time.

On the other hand, unless you’re convinced that you’re not taking your paper portfolio seriously enough, real-money trading won’t go well if your paper portfolio has consistently underperformed.

trading (ii)

March 24, 2017 By in day trading, Trading, trading: how valuable?, Uncategorized Tags: , 2 Comments

have a game plan

In the beginning, when you’re feeling your way, a plan will likely be relatively simple.  Still, it should contain at least three elements:

–what you intend to do

–why what you’re doing will enable you to make money, and

–how you are going to measure your performance.

the process

In all likelihood, a trading process will include a healthy dose of technical analysis, which in its saner elements is an effort to read the short-term emotional mood of the market.

Take the case of Tesla (TSLA), where investors seem to alternate between bouts of severe depression and wild enthusiasm.  The plan may consist simply of buying TSLA at, say, $200-, when spirits are flagging, and selling at $250+, when owners are dancing in the streets.

Or it could be that you’ve held Amazon (AMZN) for years.  You observe that the stock is travelling in an upward-sloping channel that’s now bounded on the low side at, say, $750 and on the high side at $850.  You might decide you can trade around a core position by selling some of what you own above $850 and buying below $750.

the source of profits

Ultimately you have to believe that something you do gives you an edge over the average investor. Maybe you are very familiar with the price action of a certain stock because you’ve owned it for a long time.  Maybe your work gives you insight into the publicly traded companies in a given industry or geographical area.  Maybe you think that rising trading volume always precedes rising/falling price and you use screens to identify stocks where this is happening.

measuring performance

There’s a very strong tendency among even professional investors to remember successes vividly but brush losses under the rug.  Because of this, it’s essential to measure how you’re doing, both in absolute terms and relative to the performance of a benchmark index on at least a monthly basis.

This is also the best way to identify your strengths and, more importantly, the mistakes you are prone to.  Everyone has something in this second category.  Simply no longer doing stuff that you always lose money on can give a big boost to performance.  I know this sounds silly, but I can’t think of a single professional I’ve known over the years who hasn’t had to deal with eliminating a chronic bad investment habit.

More on Monday.

 

so you want to be a day trader

March 23, 2017 By in day trading, Trading, trading: how valuable?, Uncategorized Tags: , , , Leave a comment

why trading?

As human beings, we’re all very complex.  Sometimes(often, in my case) we do things for reasons we don’t clearly understand.  We can be influenced in ways we’re not fully conscious of by our families, our friends, our neighbors, our heritage   …as well as by daily bombardment by media of all types.

Sounds silly, but:

–Early in my career as an analyst, I remember calling the CFO of an oil and gas exploration firm to ask him, in polite terms, why anyone would buy the tax shelter programs he was selling through investment advisers, since my reading of the prospectuses seemed to show that virtually all the benefits went to the promoter.  His reply was that buyers were not particularly sophisticated financially.  They typically bought the programs as a way to signal to others that they were wealthy enough to have a “tax problem.”

–Some people are attracted to the riskiest stocks simply because they’re risky rather than because they might offer superior returns.  Buying them is in effect a substitute for going on a thrill ride at the amusement park.

In my experience, successful investors and successful traders have one thing in common.  They are clear about their purpose   …which is to make money.  They’re not working to feed their egos, make friends, or enhance their standing in the minds of others, although these positive things might be nice as side effects.  It’s all about making a return.

This is not to say one shouldn’t have scruples.  As an active manager, I avoided tobacco stocks, for example, because I believe this is a morally bankrupt business.

There’s also no way to know whether you can make money buy buying and selling financial instruments–whatever your holding period–unless you try.

Nevertheless, if you are going to be successful, the bottom line must be that you intend to make a profit.

 

More tomorrow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Knight Capital and its algorithmic trading snafu

August 3, 2012 By in day trading, Investment firms, Recent Market Action, trading errors Tags: , , , , , , , Leave a comment

Knight Capital

Though not particularly well known to individual–and even some professional–investors, Knight Capital is a very large market-making and trading broker in the US equity market.

algorithmic trading

Algorithmic traders, or “algos,” are typically IT-savvy arbitrageurs.  Like any other arb firms, their business is finding and exploiting differences in the pricing of identical, or very similar, instruments.  Algos differ from traditional arbitrageurs in that they use computer programs to do their searching for them.  That way they can cover more ground than humans, potentially trading more quickly and spotting more opportunities. Computers also execute their trades.

On Wednesday morning, Knight Capital was running for the first time an algorithmic trading program it had apparently developed itself.  The story isn’t 100% clear, but it sounds to me as if Knight was hoping to create an algo service that could be used by individual investors.  In any event, Knight’s computers started churning out buy orders for about 150 stocks at the opening bell.  But the quantities being asked for were huge–much larger than Knight had intended.  And some of the stocks in the bundle were, well, weird.

One of the more offbeat selections was Wizzard Software (WSE).

The issue had closed on July 31st at a stock price of $3,50, on volume of 15,067 shares.  Wizzard provides home health care staff in the West, resells podcasting services from ATT and Verizon, and, yes, it apparently also develops corporate software.  In 2011 WZE had total revenue of about $6.5 million, and lost money.

From the chart I looked at, Knight’s initial order for WZE seems to have been for an astoundingly large 150,000 shares.  That’s a bit less than 2% of the company.  It’s also at least two weeks’ total trading volume. (My guess is that it would take several months to accumulate that amount, if you wanted to do so without moving the price much.  And then, of course, absent a sharp reversal of WZE’s fortunes, you’d have much greater difficulty getting back out.)

It reportedly took Knight almost an hour to figure out that something had gone wrong with its software.  Rival market makers were much quicker off the mark and were providing boatloads of stock to Knight at ever-rising prices.  When the music finally stopped, WZE was close to $12.  WZE was one of six stocks where erroneous trades were cancelled b market officials.

But that left around 146 issues where the Knight orders weren’t simply torn up.  The firm accidentally owned massive (for it) amounts of t=stock it didn’t want.  Once it realized what was going on, Knight cancelled any remaining buy orders and began dumping out the stock it had just acquired.  The company estimates it lost $440 million Wednesday because of the software glitch!!! (To be clear, I think Knight made the correct decision in selling immediately.  The gaffe was too big and too public for it to hope it might trade out of its positions slowly and quietly.)

press comment misguided

Most of the press stories about this incident have revolved around the idea that computerized trading is undermining the confidence of traditional long-only investors, especially individuals, in the integrity of the stock market and the desirability of holding equities for the long term.  I think the stories are  crazy.

For one thing, the S&P 500 only rose about five points in early trading on Wednesday–and then went sideways for most of the day.  If you weren’t a day trader, it may well be that the first you heard of the Knight Capital fiasco was on the news Wednesday night.  Or it might have been the paper on Thursday morning.

The real story?

Consider what has happened to Knight because of its foray into algo trading.

–Its stock has lost about three-quarters of its market value in just the past two trading days.

–The Financial Times reports that major clients have shifted orders to other market makers–Vanguard, e-Trade and TD Ameritrade among them.  Brokers did this initially at Knight’s request.  Clients are remaining mum for now.  Certainly, no one I’m aware of is saying the crisis is over and they’ve gone back to business-as-usual with Knight.  The silence on this score suggests clients think Knight may be badly enough wounded that counterparty risk is a concern.

–According to the FT, Knight has hired an investment banker to help it consider its options, including a merger or sale of the firm.

In other words, it’s conceivable that the management that built the company may soon no longer be in control of it.

I can’t imagine this snafu makes anyone more eager to get involved in algorithmic trading.  Quite the opposite.  The Knight experience may become the cautionary tale that prevents the spread of algo trading away from specialists and into the mainstream of equity trading.