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Posted: Sat Apr 19, 2003 12:01 pm
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Posted: Sat Apr 19, 2003 12:16 pm
I have done some limited research. It seemed that X-week high breakouts on weekly data was the best method that I looked at. All my testing ws done during mainly bull market periods. Shorting (and equity trading in general) is a huge employer compliance headache for me so I didn't pursue it for long.
It would be nice to get paid dividends though. One benefit of long term equity trading.
Posted: Sun Apr 20, 2003 12:22 am
I did some limited trading since beginning of the year, using Jesse Livermore's trend signals.
They worked great ... but the danger is in the uncertainty of stocks in general. You will never be sure if / when a new ENRON pops up in your portfolio ... dragging your equity line WAY down
The "other" markets don't show this occasional extreme uncertainty.
I stopped trading the stocks because of that. ( My account was too small to be able to compensate that risk using diversification)
Just my $0.02
Posted: Sun Apr 20, 2003 6:32 am
Thanks for the responses.
Robert - Perhaps I misunderstood but if you apply trend following principles to trading stocks then you would have never ridden a dog like Enron all the way down. You would have cut your loss or taken profits long before it ran into the ground. In that sense, stocks are no riskier than futures. In fact, they are probably less so, given the lower leverage.
Posted: Sun Apr 20, 2003 11:13 am
Nope, it is the SUDDEN huge movements of a stock which gives you this extra RISK.
As you might know, companies can LIE in their financial statements an in recent month many were caught doing so. In the FUTURES markets, you will not find this kind of risk.
To give you a flavor:
AFFX 4/4/03 or 6/12/01
LGTO 1/20/2000 or 4/3/2000
I hope this made my point clearer.
Posted: Sun Apr 20, 2003 11:38 am
There are price comparison wtbisees that can help you choose one. Most online accounts will charge a certain amount per trade and a certain amount per month if you are not trading much you will probably want a higher charge per trade and a lower charge per monthIf you're in the UK Hoodless Brennan is one of the cheapest (just opened an account there myself) http://ladbmzzj.com yqzolr
Posted: Mon Apr 21, 2003 5:10 pm
In general, many individual stocks have a much higher implied volatility than futures as a group, which was one of the arguments for higher margins for single stock futures. Given that stocks don't represent any physical commodity, I would agree that they are substantially more prone to overnight outlier scenarios. I don't recall many times in the past when a commodity or financial contract (i.e. bonds) lost 50% or 70% of its value from close to open.
Posted: Mon Apr 21, 2003 5:45 pm
My perspective on this is that since futures are more highly leveraged than stocks a 10% move in the price of a futures contract can cause you the same amount of dollar loss as a 50% move in a stock. I don't think you can compare the volatilities of the two instruments that easily unless you adjust for the leverage factor.
Posted: Mon Apr 21, 2003 6:20 pm
Leverage is all relative. Just because it's possible to trade some futures with tremendous leverage due to low margin to contract capitalization ratios does not mean it's common (or wise) to do so. Besides, there are hedge funds and proprietary stock trading firms that can (and do) employ futures level leverage in stocks.
Just looking at the data alone is the most pure form to analyze this situation in my opinion. Forget about margins. Look at data, look at system entry risk in data points (and open position risk as a function of entry risk) and then compare those values to implied volatility.
Stocks versus Futures
Posted: Mon Apr 21, 2003 6:55 pm
Having spent the last two years doing research on just this issue. I've found some interesting things:
- Stocks Trend - at any point in time, there are many good looking stocks trending.
- Stocks are More Volatile - a single stock moves more than a future (sorry I don't have quantified comparisons, I'm just using my memory)
- Stocks Don't Trade Inversely - there is an upward bias and other factors that make symetrical systems perform poorly. You can make money with shorts but trading long and short the same way will not work well
- Stocks are Good for Smaller Accounts - the amount of money required to trade a diversified portfolio of stocks is much lower than that required for futures. This is mainly because of the dollar risk implied by a single contract in futures.
- Portfolio Selection is King - there are thousands of stocks, you can't trade all the signals, you have to pick the right ones.
- Stocks Move in Unison - stocks correlate very highly in terms of direction on a given day. Over a few months this might not seem to be the case but "the market" is a concept in stocks that does not really exist in futures.
- Listed Stocks (NYSE) Trade Different from NASDAQ - There is a big difference in the way stocks execute and this affects their suitability for trading. Some specialists in New York can screw you every bit as badly as the pit traders in Chicago.
To comment on much of the discussion that has occurred here so far, I think that the ability to have 40 or 50 positions as compared to 4 to 8 with futures makes the risk of a given stock doing something crazy much lower since it's effect will be reduced correspondingly. You will also find the occasional trade where the market is in your favor 10% to 30% in a single day because of a surprise.
Posted: Mon Apr 21, 2003 11:42 pm
I agree with most everything you say, but the more positions you have in your stock portfolio, wouldn't you start to emulate an index fund? The less risk you take the less of a return you shall recieve.
trading mutual funds
Posted: Tue Apr 22, 2003 7:32 am
Gary Smith talks about trading mutual funds due to their very low volatilty, and inmany cases, no transaction costs if you are switching in a family of funds.
The drawbcks are that there is no leverage, although in some cases this may actually be an advantage, and the fact that you can not short a mutual fund.
Anyone have experience with trading mutual funds?
Posted: Tue Apr 22, 2003 9:01 am
Thanks for the sharing your research findings with us, it is most appreciated.
I also appreciate your point. But I suppose then it comes down to position sizing and equalizing positions as taught in the original turtle rules. If a financial instrument is more volatile than another then size postions according to volatility thus equalizing positions across instruments. Therefore, higher volatility on stocks should not stop you trading them it should just make you trade smaller.
Posted: Tue Apr 22, 2003 9:20 am
Therefore, higher volatility on stocks should not stop you trading them it should just make you trade smaller.
Yes, that's my thinking. I wasn't trying to imply that high implied vol should stop stock trading in a system...just that volatility should be incorporated...particularly implied volatility versus a system's entry risk (and open position risk) values in market points. For example, let's say a system signals a trade in a stock with a 90% implied vol level; the signal has an exit $3/sh from entry, and the stock price is $95/sh. This is a market point risk of 3.15% of asset price. Now the decision needs to made of what %risk this will represent in the portfolio (i.e. size the initial position). My point was comparing this to the implied volatility of the asset, as it may be a better measure of what the potential future could bring than even ATR or historical volatility. For example, coming into an earnings release, perhaps the last 30 days of trading have quieted down the vol measurements (ATR, hist vol,etc...) while imiplied vol is still high.
Note that I'm not making any presumptions about good or bad here but am just trying to point out a potential area for study in risk management.
Re: trading ETFs vs mutual funds
Posted: Tue Apr 22, 2003 1:43 pm
Dave S. wrote:Gary Smith talks about trading mutual funds...
Won't trading sector ETFs serve as a better alternative to mutual funds because they benefit from being margin-enabled and shortable (even on an uptick) ?
emulating an index
Posted: Tue Apr 22, 2003 2:11 pm
I have to agree with Gerry, I've been looking into trading stocks mechanically for years. But my experience also dictates that trading many stocks together..begins to emulate an index.
Would like to hear other view on this.
Are we talking about stocks that have a low correlation to sp ?
is there an initial criteria that we choose prior to picking the stocks ?
do we pick each stock from different industry group.
I've been looking into this for a while now...but would like to hear other's opinion on preliminary selection for picking stocks to include in the mix ?
Forum Mgmnt, if you can expand on your prior posts regarding correlation of stocks vs. futures..it would be great.
Posted: Tue Apr 22, 2003 2:15 pm
I'm new to this type of trading - can you tell me about ETF's?
Posted: Tue Apr 22, 2003 3:26 pm
My experience has shown that emulating an index does occur at some number (of positions).
Putting on a basket of 20-30 leading stocks from the top industry groups is working well for me. This diversification must come with proper position sizing. The signal of when to buy or sell is very important, in my opinion that is the determining factor. referred to this as the Market factor/effect. I agree, 60-70% of stocks tend to follow the Market. Trading a group of leading stocks (or lagging stocks) will determine if your return is better or worse then the index.
Posted: Tue Apr 22, 2003 6:46 pm
I have traded a stock system that was actually adapted from my longer term futures system.
I traded a maximum of 20 stocks. Anything beyond and yes, you start to replicate the index. There is no risk/adjusted return benefit by trading more than 20 stocks to my knowledge anyway, all you do as increase the workload.
I too the first signals that came along until I had my 20. Obviously Trader A and Trader B would have different portfolio's if they started on different dates. I used a flat dollar 5% of total capital allocation to each stock and I used no gearing. I then needed to equalise the positions. Lets face it, a smaller valued stock will prooduce a different P&L from a higher valued stock. I overcame this, not perfectly mind you, by placing a dollar ceiling on the purchases.
The system works perfectly well and as you can imagine with any type of trend following philosophy. What I did find is that you still have market risk, that is in times like now the system will outperform the index but will still generate negative returns because of the climate. I think I can overcome this by using a 1/3 allocation on the initial signal and pyramid from there. In a bullish climate you are best off allocating the full position on the initial signal. I am yet to test my 1/3 initial allocation but am at least confident that the results can only be improved.
Posted: Wed Apr 23, 2003 2:37 am
NickR wrote:I traded a maximum of 20 stocks. Anything beyond and yes, you start to replicate the index. There is no risk/adjusted return benefit by trading more than 20 stocks to my knowledge anyway, all you do as increase the workload.
I was told that the effect of diversification is proportional to the square root of the number of traded securities or systems. E.g. to multiply this effect by 2 you must increase traded instruments by 4. So the changes must be minimal for over the first 5-10 instruments.