Trading

[Mr. Perfect]

Ok guys, I promised CS to do this some time ago, a mega thread on my trading knowledge. I failed at that project, because it was becoming a book. Like a really big book. Fast forward a few years and I think there are enough youtubes out there that I can let other people do the work, I'll just organize it.

First, get fired up. You can get rich doing this.

It starts with vision and possibility. If you have questions let me know.

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[Mr. Perfect]

Let's start with the foundation.

Technical analysis, or chart reading. Here is your basic tool, the moving average.

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First, you want to know average prices, because it makes sense to buy when something is cheaper than average, and sell when something is more than average. But you need to what the average it.

Second, since stocks aren't supposed to flatline like the price of soap, moving averages are used to confirm and quantify uptrends.

Third, when you use 2 averages like a short term and long term average they can give you buy and sell signals. Although that is a lagging signal

[Mr. Perfect]

I'm not big on using volume, but anyone would accuse me of malpractice if I didn't include it.

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[Mr. Perfect]

Next is out of order, but I consider it so fundamental, that is candlestick charts. You can get really ninjafied with this one, and I think there is a lot of merit to the pattern trades, but candles just are a much better visual and convey better information once you start using them. Get into candles.

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[Mr. Perfect]

We will return to more technicals later, now I want to talk about the fundamentals of trading stocks, that is the earnings cycle.

Stock shares are worth money because they are a vote that controls an income stream. If the price falls too low insiders will buy up more control of the company, if it's too high then buying votes over dollars elsewhere becomes attractive. And this is how the game is played.

But the rubber hits the road in earnings. Every company reports it's financials 4 times a year, and we find out the real value of the company at that point.

We will talk about how the share price is arrived at later, but I think more important is trading earnings.

In the weeks going into earnings and the days following, share prices can break trend and experience sharp reversals, so it is a dangerous time and a time of opportunity.

One of your most important skills will be to manage earnings period.

We can make a little matrix.

Step 1. Pre earnings is all about expectations. If expectations are high, the stock may run, or vice versa. This can be traded or avoided. For me, this is about how in touch you are.

Remember, you are trading:

1. With or against the economy
2. With or against the sector
3. And the individual company.

As such, you have 3 things to balance. If all three are in one direction the trading is easy. 2 out of 3 can still be good but with caution. 1 out of 3 and you need insider information.

Step 2. The earnings date is usually after the trading bell, numbers are announced and executives discuss with analysts in a phone call. There can be an immediate after hours reaction based on if the earnings were a disappointment, in line our exceeding expectations. The stock will react how you would think in this case.

Step 3. In the days after earnings, the stock may confirm the reaction or reverse it. This is where being in touch will help you. We've seen APPL have "Disappointing" earnings, only for it to continue to chug upward the following week. This is a great buying opportunity.

Step 4. Guidance. This is where they give the last q result, but give their opinions about their future numbers. This is critical in that you could have a great quarter but poor guidance and the stock dies.

So we are building a little matrix.

I think this is a critical approach to trading, in that you take it quarter by quarter. Always analysing last q numbers, watching the flow of news heading into the next earnings date, and reassessing with each announcement. This is the true psychology of trading.

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[Mr. Perfect]

Now, we move to the true fundamental of trading.

One of the fundamental ideas of life.

The true force that makes humans take economic action. If you understand this intuitively it becomes x ray goggles that makes you see what was previously unseen to you.

That is, Present Value.

I've never seen a good explanation, I will try to make one myself.

Present value is what an investments future earnings are worth in the present. In other words, if a stock is $25 per share in the present, we have to know what future earnings would need to be to create a normal return (pls google normal return)

Here is a conventional explanation. We may take time to take it apart further, down to the bolts. It's important to view the universe through the lenses of present value.

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[Mr. Perfect]

Sorry this should have been the first techincal analysis post.

Eventually moving averages can be used for support and resistance.

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This is also the basis for trading break outs.

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[Mr. Perfect]

Also we need to start thinking in terms of trading both ways, we don't care up or down, we can make money both ways.

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[Mr. Perfect]

The three great trading philosophies are Random Walk, Fundamental Analysis and Technical Analysis.

Random Walk is a theory that the whole thing is unpredictable and everything happens effectively randomly. I don't personally believe that, and as proof I predict America will do better than Venezuela over the next 10 years. Having said that the philosophy deserves it's due, but it says there is no way to know in advance if Michael Dell or Steve Jobs is going to win 15 years into the future, so what you should do is buy both stocks. In fact Random Walk is all about diversity and buying as wide a basket of stocks as possible. The fact is if you follow this strategy in America you will retire very well off. So even though I don't agree with it it still has merit.

Fundamental Analysis is Warren Buffet territory, it's all about earnings, revenue, and balance sheet. Buy low PE companies that are steady businesses that you can understand. Again, not my thing but Buffet did pretty well.

Technical Analysis is my passion if you will. The premise is that all the debates about the above resolve themselves at any moment in time with a market price. The debate is always settled. However price changes with time, and often moves rationally and predictably. As such you begin to read charts and trade according to them.

But, often times you will have a beautiful chart that with no warning smashes it's pattern into oblivion. Usually this happens due to earnings, which brings back your fundamentals. Sometimes your CEO gets busted for sexual misconduct or smoking pot on a podcast. Unpredictable weird events.

So I have a weighted approach. 50% of my decision making is based on charts, 40% on fundamentals, and I allow 10% for random events. Which can be positive btw.

And I have a quarterly time horizon. I start over new every quarter.

[Simple Minded]

Thanks Mr. P.

Very interesting, I'm looking forward to this thread.

[noddy]

yah.

t, and as proof I predict America will do better than Venezuela over the next 10 years

big call!

[Mr. Perfect]

I know. It's that easy to defeat random walk.

[Mr. Perfect]

So the next topic is probably the most important of all, and is related to random walk ironically, and that is asset allocation/money management/"diversification".

Diversification is a bugaboo of mine, that is that if you own enough stocks you are "safe". In many ways this absolves you of thinking and it has a diminishing return. About the most diverse thing you can by is the S&P 500, and it's no more or less risky than hundreds of other choices.

My rule of thumb is that once you get about 10 different stocks, risk protection from diversification goes away.

Also, it is important to diversify between sectors. You could have 5 great stocks but if they are all in the same sector and your sector dumps then your whole portfolio dumps.

So my rule of thumb is I am always in at least 3 sectors and have positions in at least 10 different stocks.

[Mr. Perfect]

The following is related to asset allocation, but isn't, technically. It might be called something, I don't remember.

Basically you have to be effective at stopping losses and capturing gains. Waiting a year for a stock to come back and watching a huge profit fritter away is enormously counterproductive.

You need to take profits and stop losses very effectively.

Typically most people view stocks as a 50/50 proposition. You have even chances of profit.

There is a simple way to put the numbers on your side, and that is stop losses.

This is my approach. I thought the youngster in the first video had the right idea. Before you get into the stock you have to decide how much you would lose and how much you could gain.

You want the ratio to be at least 3 to 1. If I look at AMZN, I ask myself what is the potential downside compared to the potential upside. If it is 50/50 I'm at no trade. I have to expect my odds are that I can make at least 30% gain, compared to stopping out at a 10% loss. If I consistently gain 30% on my winners and stop out at 10% then I can afford to lose many more times. I don't have to pick winners at least half the time. And if I pick winners more than half then the gravy flows....

[Typhoon]

Thanks for creating this thread.

I find it interesting that most of the professional investors - the money managers - who invest in stocks do worse than the S&P 500 index over time.

Underperform is, I think, the investor lingo.

[Mr. Perfect]

Yeah. At the end of the day "most people" should just get into an index fund.

A lot of managers fail to beat the market. But the ones that do, boy, do they live a lifestyle beyond imaginings.

[Mr. Perfect]

A quick table of contents.

1. Get rich
2. Support and resistance
3. Moving averages
4. Volume
5. Candlesticks
6. Earnings cycle
7. Present Value
8. Trade both ways (short selling)
9. Random Walk, Fundamentals, Charting/Technical Analysis
10. Asset allocation/money management

A good beginning. A lot of advanced stuff to come.

[Typhoon]

ZH | Algorithmic trading

. . .
One immediate question that followed from this research is "if it is that easy to manage money, why aren't there funds who have perfected this copycat strategy"?

As it turns out there are. As Bloomberg reported just hours after we published the above report, a machine-learning hedge fund backed by PE giant Blackstone has been on a serious growth spurt after generating a 20% gain in this year’s wild pandemic markets.

Bayforest Capital - which we regret to inform all unemployed hedge fund analysts and portfolio managers employs just five people in London - is set to oversee $235 million in managed accounts over the coming month, a remarkable, six-fold increase compared with just $45 million at the end of 2019. It also plans to launch a fund for institutional investors later this year.

The firm run by Theodoros Tsagaris, a quant who previously worked at Tudor, GSA Capital and BlueCrest Capital, has impressed outside investors with a record of positive gains every month in this year.

How does the fund do it? Simple: it figured out long ago what we confirmed earlier this week, namely that "Hedge Fund Flows Are All That Matter." Tsagaris credits Bayforest’s success to algorithms surfing fast shifts in capital flows in real time. As Bloomberg details further, with a system trading futures based on the behavior of different investors and an average holding period of just eight days, the portfolio has managed to make money even as markets swing from despair to exuberance.

"We’re receiving billions of data points every day and we adapt our algos based on the new information," Tsagaris told Bloomberg in an interview. Translation: 'we are just doing whatever the price-setters are doing at any given moment.'

Follow the money.

[Mr. Perfect]

20% is not significant this year, to date. You can make 20% a month pretty easily, until about 3 weeks ago.

[Typhoon]

The retail traders are revolting

[Typhoon]

While recognizing that this is a complete bubble - a classic pump and dump, still

The retail traders are revolting

I was wondering how long it would take before the financial industry moved the goalposts back to "heads I win, tails you lose".

Bloomberg | Robinhood, Interactive Brokers curtain trading in some stocks

[NapLajoieonSteroids]

Remember the free market?

[NapLajoieonSteroids]

This pump&dump mentality...this pump&dump mentality...this pump&dump mentality.

these people are really asking for it

[crashtech66]

So, what may happen once the ordinary man feels he has exhausted all his option? À la lanterne?

[NapLajoieonSteroids]

For all we know, it may be close.

Some users are reporting that RobinHood sold their stocks against their will.

Citadel alledgedly shorted the meme-stocks again right before all the retail brokers magically decided at the same time to prevent any of their customers from buying them.

My understanding is that Citadel is financially connected to RobinHood, bought into Melvin and has a substantial stake in the shorting scheme the hedge funds had in obliterating Game Stop.