Friday, December 31, 2010

Q&A

As promised, a short Q&A. I would like to do these periodically going forward, however I would need readers to provide the questions. As and when I receive a reasonable number I will do a similar post. As with all that I post on my blog, these are only my thoughts and opinions related to how I trade - if you ask 100 different traders the same questions, you'd probably get 100 different answers.

Q. Have you ever used fundamentals at all to narrow down your targets?

A. The short answer is No. The long answer - in my opinion, a move in a stock can get underway before any news is put into the public domain. I've also seen instances where, on the face of it, the fundamentals are great, yet the SP is going down, and vice versa. Price does not necessarily move in tandem in fundamentals, so I therefore do not worry about it. I also don't even bother with looking at volume. In my world, price is the be all and end all, and therefore the only metric I need to monitor. Finally, look at all the various internet forums and bulletin boards on the internet - people are always trying to predict everything - be it the top or bottom of a move technically, or more usually the fair price of a stock based on earnings and other fundamental information etc. Trend followers never predict - they identify potential trends and then follow. I do not fight the market- it tells me which direction to look, and I trade accordingly, regardless of fundamentals. If I am wrong, so what? That's what risk management, and placement of stops are for.

Q. If you use more than one strategy, do you use same risks etc but and simply adjust the timeframe? Also, for stats purposes do you do it on 2 seperate portfolios entirely, or incorporate them both?

A. I'll deal with the easy bit first, you should keep track of the stats on each strategy/portfolio, whether it's 2 or even more strategies, as it may show which strategy is clearly not working.You also need consider at this point the general state of the market - a short term system using say hourly charts may work well in a range bound market, however in a strongly trending general market and a longer-term system may perform better.

With regard to the first part, I am looking ahead and considering trading a longer term strategy to run alongside my existing strategy. Partly this is due to potential position sizing issues I may encounter down the line. In my own case, I have my 'core' strategy which would trade the bulk of my funds, and the longer term strategy would have a smaller percentage. However, I may use a larger risk per trade in the longer term portfolio. Stops would be wider as a consequence of trading longer term, therefore to make it worthwhile the risk per trade would need to be bigger. If you are considering a shorter term strategy, I would certainly risk less per trade - I know of traders who risk less than 0.3% of their equity trading intra-day stuff.

Finally, simply keeping the parameters the same and switching from, for example, daily to weekly charts may not be appropriate - you need to think about the change in volatlity characteristics, frequency of trading, and other issues. I touched on this in 'The Trading Triangle' when considering how to tweak my system.

Q. You do not trade many stocks in the FTSE100 or the Dow - is there a reason for this?

A. Yes - these are the largest companies (by market cap) and therefore the big growth phase within the company has tended (but not always) to have passed. When looking at the charts, the price does not tend to trend all that well, and they can be subject to whipsaws in direction. In addition, their price moves tend to be influenced more by the volatility and intraday moves in the major indices around the world. I prefer to look for lower priced stocks, where possible with a tight bid/ask spread, that are more speculative, with the potential for a significant move.

Against this, in a bear market such as mid to late 2008 then all companies are suspectible to a sharp drop, and I did well in shorting a lot of the larger cap UK companies in 2008.

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