I've talked in the past about the importance of constructing your own trading method which is based around your beliefs.
But how do you start this process?
Showing posts with label fundamentals. Show all posts
Showing posts with label fundamentals. Show all posts
Tuesday, August 16, 2016
Saturday, July 25, 2015
Beliefs and simplicity
A trader friend recently told me about a commercial property transaction he was asked to get involved with some years ago. The deal was worth several million pounds, and given the complexity of the deal you would have expected that the people involved concerned would have wanted a detailed reports from the banks or property agents, surveyors, and the local councils, running into many pages, covering all aspects of the potential deal being suggested.
Sunday, April 12, 2015
What are your beliefs?
Part of your success as a trader will depends on what you believe to be important. As Van Tharp says "You trade your beliefs about the markets".
If you look at this list below, then I do not follow or use many commonly held beliefs out there:
If you look at this list below, then I do not follow or use many commonly held beliefs out there:
- I don't study the fundamentals on a company - half the time I don't even know what these companies do;
- These days I don't even let the price action in the indices influence my trading decisions or market exposure;
- I don't track volume;
- Apparently trend following on stocks doesn't work;
- I take entry signals regardless of the time of day - whether it is in the first minute after the markets open or the last minute before they close;
- I take intra-day exit signals.
Wednesday, July 11, 2012
The Lazy Person's Route to Prosperity?
Edit: This blog post originally had a different title, however I have been legally advised to change it.
Ok, so lazy may not be the right word, but now I've got your attention, I'll carry on.
To use a trend following system, you need to put all the hard work in at the beginning - preparation is key. This involves things such as setting the key parameters for your system, entry/exit criteria, and your risk management limits.
Ok, so lazy may not be the right word, but now I've got your attention, I'll carry on.
To use a trend following system, you need to put all the hard work in at the beginning - preparation is key. This involves things such as setting the key parameters for your system, entry/exit criteria, and your risk management limits.
The three critical areas of a trading system
There are three aspects to using any trading system, that you must be able to stick to. I have likened these three areas to the legs of a bar stool - if one of the 'legs' is deficient or missing, then the stool (and your trading system) will fall over. These are:
Sunday, June 17, 2012
Why trend followers get the biggest gains in BOTH directions
Think back over the last 20 years or so, and of the stocks that increased the most in that time before falling back or levelling out. Who's on the list? Well, there are hundreds of multi-baggers, but to take just three (that everyone has heard of), there's Microsoft, Google and Apple.
Now think of those people who trade in the markets, who like to get a bargain. Generally, this means they like to buy something that's fallen in price, so that they feel like they are getting value for money. As a rule, they like to buy low, and sell high.
To get the huge winners like those three that I mentioned above, would someone who likes to buy on a dip have been able to get in on those stocks? Somehow I doubt it. The one thing those stocks did was continually make new high, after new high, after new high. They were trending to the upside.
Even if someone DID get in on one of those stocks on a pullback, I very much doubt they rode the trend for all it was worth - they probably got out when they got an 'overbought' oscillator reading, or a minor down day within the context of the uptrend. Worse still, they may have even have tried going short on the basis that 'it can't go up any further'.
The people who would have ridden those stocks up were either investors, or trend followers, who would have been getting repeated signals on the way, and may even have pyramided their positions (while still respecting their risk parameters) all the while the uptrend was intact.
What investors DON'T necessarily have is an exit plan, that enables them to ride such stocks on the way up, but enables them to get out with the bulk of their profits intact when the top is reached.
Now you may say that those three companies mentioned above had faultless fundamentals, but there are thousands of other stocks that had huge share price rises on nothing more than hype (think 1999 and dot.coms).
Sure, to have ridden these stocks all the way you would have needed a longer-term trend following system, but even a shorter-term system like I trade would have enabled you to get large chunks of those rises, would have got you out at an appropriate time when price told you to do so, AND would have even have told you when to short these burnt out shooting starts, like the dot.coms and thousands of others that have come and gone into the midsts of time. Again, if a stock is trending downwards, making new low, after new low, after new low, it is the trend followers who are able to stay the course all the way until the trend ends, or the stock reaches zero.
Want a case study? Go find a chart of Enron - trend followers would have made a fortune in both directions, while those who wanted to buy on pullbacks probably missed out on the way up, and when the trend reversed kept getting stopped out when they were entering long positions, thinking they had got a bargain. More recent examples include Research in Motion and First Solar to name just two.
I was speaking to someone last week who has always looked upon himself as an investor, and was looking for a way to marry up his fundamental beliefs with that of price action, that did not require lots of PC time. In this regard, a trend following system is an ideal candidate. The parameters of such a system can easily be tweaked to coincide with your preferred timeframe/holding period, but will still tell you when to get out of either a winning or losing position.
Don't believe me? Well, look at someone like David Harding at Winton Capital - his hedge fund has been long on gold for over 10 YEARS - he bought when it was still in the $200's. But he will know when the party is over and will exit the position at the appropriate time (and he may have done already - I do not know).
Now think of those people who trade in the markets, who like to get a bargain. Generally, this means they like to buy something that's fallen in price, so that they feel like they are getting value for money. As a rule, they like to buy low, and sell high.
To get the huge winners like those three that I mentioned above, would someone who likes to buy on a dip have been able to get in on those stocks? Somehow I doubt it. The one thing those stocks did was continually make new high, after new high, after new high. They were trending to the upside.
Even if someone DID get in on one of those stocks on a pullback, I very much doubt they rode the trend for all it was worth - they probably got out when they got an 'overbought' oscillator reading, or a minor down day within the context of the uptrend. Worse still, they may have even have tried going short on the basis that 'it can't go up any further'.
The people who would have ridden those stocks up were either investors, or trend followers, who would have been getting repeated signals on the way, and may even have pyramided their positions (while still respecting their risk parameters) all the while the uptrend was intact.
What investors DON'T necessarily have is an exit plan, that enables them to ride such stocks on the way up, but enables them to get out with the bulk of their profits intact when the top is reached.
Now you may say that those three companies mentioned above had faultless fundamentals, but there are thousands of other stocks that had huge share price rises on nothing more than hype (think 1999 and dot.coms).
Sure, to have ridden these stocks all the way you would have needed a longer-term trend following system, but even a shorter-term system like I trade would have enabled you to get large chunks of those rises, would have got you out at an appropriate time when price told you to do so, AND would have even have told you when to short these burnt out shooting starts, like the dot.coms and thousands of others that have come and gone into the midsts of time. Again, if a stock is trending downwards, making new low, after new low, after new low, it is the trend followers who are able to stay the course all the way until the trend ends, or the stock reaches zero.
Want a case study? Go find a chart of Enron - trend followers would have made a fortune in both directions, while those who wanted to buy on pullbacks probably missed out on the way up, and when the trend reversed kept getting stopped out when they were entering long positions, thinking they had got a bargain. More recent examples include Research in Motion and First Solar to name just two.
I was speaking to someone last week who has always looked upon himself as an investor, and was looking for a way to marry up his fundamental beliefs with that of price action, that did not require lots of PC time. In this regard, a trend following system is an ideal candidate. The parameters of such a system can easily be tweaked to coincide with your preferred timeframe/holding period, but will still tell you when to get out of either a winning or losing position.
Don't believe me? Well, look at someone like David Harding at Winton Capital - his hedge fund has been long on gold for over 10 YEARS - he bought when it was still in the $200's. But he will know when the party is over and will exit the position at the appropriate time (and he may have done already - I do not know).
Tuesday, January 10, 2012
Fundamentals, Investing and Trend Following
The vast majority of investors and longer-term traders use some form of fundamental analysis when selecting stocks to invest in. This is all well and good, but what triggers a buy or sell in their investments?
The usual story is that, once they believe that a particular company has good prospects and the fundamentals look promising, they will start to buy, with the intention of holding their positions until such point that the fundamental story changes. The trick is to realise when there is a danger of overstaying their welcome, and to exit their positions before losing the bulk of their profits. This is where a trend following system, geared towards longer term trading and investing, can be invaluable.
Although longer term investing can be profitable even when there are adverse general market conditions, it should be remembered that, in a sharp downtrend in the markets, even the strongest and best stocks fundamentally will suffer, as was seen in late 2008. Of course, when a downtrend like that starts, it is not known whether the affected stocks will rebound at least back to its former highs, or will even continue further downwards.
In the past, I have suffered abuse from the 'fundamentalists' on a bulletin board when my own trading system signalled the end of an uptrend in a particular stock, and therefore I exited my position with a nice profit. However, those who solely used their fundamental analysis accused me of de-ramping the stock (as if I could influence the markets!!!) and rubbished my own analysis. The stock in question was just below 50p at the time, having peaked at 60p a couple of weeks prior.
The investors I left behind continued to champion this particular stock, and some of the posters on the bulletin board in question 'loaded up' their position to almost absurd levels, so confident were they that soon they would be holding significant profits.
As of last week, that particular stock was at the 15p level, with a lot of investors now holding massive losses after 'buying on a pullback' which was actually a new trend - downwards. Some of those still holding shares are even blaming the directors for the lack of recent positive news flow from the company for their losses!
Now, this may be an extreme example, but you only have to think about stocks such as Enron to know that people who were once sitting on huge profits in some of their investments managed to ride the share price all the way down, losing all of their hard earned profits. Enron fell from around $100 to 50c, with the true fundamental picture becoming apparent late in the day. You can also think of those who made (and lost) fortunes in the dot com bubble when prices collapsed there too. In these cases, it was not only individual investors, but hedge fund managers who also commited the same crime of not exiting their positions when the trend reversed - greed took over and they decided to load up even more.
Those of you who have read about Nicolas Darvas will know that he used a basic system marrying fundamental and technical analysis back in the early 1960's and did very well.
No system is perfect, and my intention is not to poke fun at those who have lost money by holding on too long - far from it. Everyone invests or trades to make money, however there is always someone on the other side of a winning trade, who loses money. Sometimes it is me, sometimes it is those who follow the company 'story'. Either way, if you are able to combine the two in your longer term holdings, I would be amazed if your overall returns did not improve.
The usual story is that, once they believe that a particular company has good prospects and the fundamentals look promising, they will start to buy, with the intention of holding their positions until such point that the fundamental story changes. The trick is to realise when there is a danger of overstaying their welcome, and to exit their positions before losing the bulk of their profits. This is where a trend following system, geared towards longer term trading and investing, can be invaluable.
Although longer term investing can be profitable even when there are adverse general market conditions, it should be remembered that, in a sharp downtrend in the markets, even the strongest and best stocks fundamentally will suffer, as was seen in late 2008. Of course, when a downtrend like that starts, it is not known whether the affected stocks will rebound at least back to its former highs, or will even continue further downwards.
In the past, I have suffered abuse from the 'fundamentalists' on a bulletin board when my own trading system signalled the end of an uptrend in a particular stock, and therefore I exited my position with a nice profit. However, those who solely used their fundamental analysis accused me of de-ramping the stock (as if I could influence the markets!!!) and rubbished my own analysis. The stock in question was just below 50p at the time, having peaked at 60p a couple of weeks prior.
The investors I left behind continued to champion this particular stock, and some of the posters on the bulletin board in question 'loaded up' their position to almost absurd levels, so confident were they that soon they would be holding significant profits.
As of last week, that particular stock was at the 15p level, with a lot of investors now holding massive losses after 'buying on a pullback' which was actually a new trend - downwards. Some of those still holding shares are even blaming the directors for the lack of recent positive news flow from the company for their losses!
Now, this may be an extreme example, but you only have to think about stocks such as Enron to know that people who were once sitting on huge profits in some of their investments managed to ride the share price all the way down, losing all of their hard earned profits. Enron fell from around $100 to 50c, with the true fundamental picture becoming apparent late in the day. You can also think of those who made (and lost) fortunes in the dot com bubble when prices collapsed there too. In these cases, it was not only individual investors, but hedge fund managers who also commited the same crime of not exiting their positions when the trend reversed - greed took over and they decided to load up even more.
Those of you who have read about Nicolas Darvas will know that he used a basic system marrying fundamental and technical analysis back in the early 1960's and did very well.
No system is perfect, and my intention is not to poke fun at those who have lost money by holding on too long - far from it. Everyone invests or trades to make money, however there is always someone on the other side of a winning trade, who loses money. Sometimes it is me, sometimes it is those who follow the company 'story'. Either way, if you are able to combine the two in your longer term holdings, I would be amazed if your overall returns did not improve.
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