Wednesday, July 25, 2012

Why I trade stocks

I've been asked why I prefer to use my system to trade stocks rather than say commodities or indices. There's a short answer and a long answer to that:

The short answer is that it makes me money, so why would I want to change?

The long answer is that trend following historically has been utilised trading a basket of instruments including indices, major forex pairs, commodities, interest rates etc. In these cases you are obliged to trade ALL the signals given, as one missed signal can mean you miss out of the most profitable trade of the year.

What you trade is purely a matter of personal preference. I prefer stocks because of the following:
  • The inherent volatility is a lot higher in trading indices, forex etc as the vast majority of scalpers, day traders, automated alogrithms, and short term traders concentrate on these instruments;
  • I'm not restricted to a small basket of instruments - in theory I have 10,000+ stocks to go at;
  • In a lot of cases, the potential reward:risk ratio is a lot better trading a stock rather than indices;
  • There is potential to be aboard a trend in a stock which can yield upwards of 10R profit on a single trade, such as here - you would need a pretty large move on the indices to generate the same amount of profit;
  • I do not trade options - I can be long and short stocks at the same time, so automatically I would be hedging my portfolio against the general market direction; 
  • As far as I'm aware, pure trend following is not applied to stocks as much as commodities, indices and the like. I like to be different.

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