Tag Archives: 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tesla (TSLA), me and momentum investing

March 7, 2017 By in Industry Analysis, Investment firms, securities markets, Technical Analysis, Uncategorized Tags: , , , , 1 Comment

Why should a company fundamentals-driven investor have a problem with momentum investing?

Two reasons:

–momentum investing is a reactive strategy, and

–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.

In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company.  Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is).  Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.

 

What kind of a thing, reactive or predictive, is my formula for TSLA of:   buy at $180 and sell at $250?  In a sense, I’ve got some fundamental underpinning.  My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price.  And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.

But how did I get the $180?

What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013.  Yes, at $180 I have better potential for upside than I do at $250.  But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.

In sum, then, the fundamental underpinning of at least the buying are pretty lame.

So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit.  On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.

trading a stock: what to consider

March 28, 2016 By in Trading, Uncategorized Tags: , , , Leave a comment

the cardinal rule

Last week I mentioned that for you and me trading–as opposed to investing–should only be for a small portion of our portfolios.

How so?

Our biggest, perhaps only, advantage over professional investors comes from knowing a few things better than most other people and in being able to adopt a longer time horizon than pros who are worried about quarterly performance.

When we decide to trade, we give up those advantages.  The main reasons for doing so are that we’re currently in a period of unusually high volatility and because we can probably find one or two stocks to study to the point that we know the short-term movement patterns as well as anyone else.  Having something to do to fill up the day is a far distant third reason to trade.

finding a stock to trade

fundamentals should be at least stable

Our idea is going to be to buy and a low point, sell at a high point and then repeat.  We don’t want to be involved with a stock where the business of the underlying company is deteriorating, because this diminishes the chances of the stock ever going up.

trading range

When we find a candidate, the first thing to do is to get a chart of the stock price over the past several years.  On it, make one line that goes through all the short-term high points, and a second that goes through all the lows.  This will typically form what technicians call a channel , within which the stock will trade and whose upper and lower walls will mark turning points between which the stock will bounce.  The move from lower wall to higher wall and back could take a month or it could take six.  The assumption we make, as the basis for our trading, is that this pattern will recur.  Buy at the bottom, sell at the top, and repeat.

Channels can either consist of two horizontal lines or have an upward or a downward slope.  In my experience, the chances of a breakout to the downside are much higher if the channel has a downward slope.  Avoid downward sloping channels.

ranges don’t last forever…

…although a given stock can trade in a well-defined channel for years and years.  So we have to be alert for a breakout from the channel, either to the upside or the downside.  Upside breakouts are little more than an eventual fact of life for traders, and a key reason not to try to trade the entire position in a core holding.  Downside breakdowns are a greater practical concern.  Finding companies to trade that have strong fundamentals and are in uptrending channels is our best defense against this.

 make a plan in advance:  (my) rule of thirds…

If we’re going to try to trade a stock that has shown a past pattern of trading between 10 and 20, there’s no need to buy/sell at precisely the presumed high/low and all at once.  My personal preference would be to buy a third of my intended position at 12, another third at 11 and the final third at 10 (assuming the stock cooperates).  I would plan to sell a third each at 18, 19 and 20.

…and stick to it

We all tend to get caught up in the moment.  At least I do. Let’s say the plan is buy at 12, 11 and 10–and sell at 18, 19, 20.  If the stock drops to 9, don’t buy more.  If the stock gets to 19.5, don’t decide to hold out for 25.  Sell at 20.

trading is not for everyone

I find it entertaining.  But it can be time-consuming.  Some people have a knack for it, some don’t.  Remember, too, that trading can be a bit like bowling or golf.  Other peoples’ public success stories are most likely not true and complete.