Lecture 10 (selection of markets and issues: Trading strategies & portfolio management) Flashcards
What are the 3 select issues to trade based on?
1) performance
2) larger trends
3) diversifications
What are the 6 factors to keep in mind in order to choose the right market (security) to trade on?
1) Costs
2) Personal risk tolerance
3) Suitability
4)Volatility
5) Liquidity
6) Volume
What does COST refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on? Hint: think cost physical and mental
-the cost of the learning curve (time consumption, opportunity costs, trading losses)
-Set up costs: computers, high speed internet, trading platforms, order execution, chart service
-Commission, slippage, missing order in fast market
-unexpected events
What does PERSONAL RISK TOLERANCE refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?
Leverage use; futures vs. stock, going on margin, etc
What does SUITABILITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?
-based on your experience and personality
What markets should you choose when first starting in trading?
-choose “slower” or lower risk markets when starting
What does VOLATILITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?
-the more volatility, the more potential gains but the more potential losses
-the breakout from low to high volatility is where most profits are made
What does LIQUIDITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?
-Ability to transport a large number of shares without bringing about a large price change
-dependent on bid-ask size, as narrow spreads does not always guarantee liquidity
What does VOLUME refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?
-you want issues with heavy volume that have liquidity
What are time horizons?
the amount of time someone holds a security before selling it
What is needed to trade on different time horizons
different experience levels and strategies
What are the 3 types of trading for different time horizons?
1) scalping
2) day trading
3) swing trading
What is SCALPING
-taking very small profits between bid-ask spreads and accumulating liquidity credits
What does scalping require (4 things)?
-time
-excellent order system
-experience
-direct market access to not waste any time
How quick is scalping?
Extremely short term (minutes) and fast paced
What is DAY TRADING
implies that you start the morning with no positions and end the day with no positions (sell them at or before close of markets)
What is SWING TRADING
-Trying to capture small trends or counter trends over several days or weeks
-Try to capture bulk of trade (approx 50-70%)
What two approaches are used to select which issues to invest in?
1) top down
2) bottom up
What is TOP DOWN selection?
-Section starting from the type of markets (stocks, bonds) -> country -> industry sector -> security
What is BOTTOM UP selection
-security -> industry sector -> country
-look for undervalued stocks: Low P/E stocks
What is industry sectors and sector rotation theories
-selecting sectors based on the business cycle
-ratio (relative strength) analysis
What is relative strength?
-a simple but effective method of stock screening
-Calculate a ratio between two investments, sectors, industry groups, indexes, etc, to see which is outperforming the other
What is Kirkpatrick stock screen selection methods of the Pros
-calculated all relative price ratios to each other; P/S, 6 month RS
-used a multifactor model of the above relative rankings
-uses fundamental and technical analysis
What is value line stock screening selection methods of the Pros
-Analysis service that uses a proprietary relative strength ranking 1 to 5 the “timeliness of stocks”
-also incorporates: earnings trends, recent earnings, earnings surprises
What is Wyckoff stock screening selection methods of the Pros
Method where it is believed that stock prices are determined by supplu and demand, and influenced by wealthy individuals and large institutional insiders
What are the important factors to remember about the O’Neil CANSLIM
1) Technicals and fundamentals go hand in hand
2) Focuses on “leading” growth stocks
3) stocks are ranked according to the 12 month relative price strength, with 3 month price strength weighted more heavily in percentiles from 0-99, 99 being the best
4) uses a 7-8% strict stop loss rule
5) hold position if stock rises greater than 20% within 1-3 weeks
6) PATTERNS used:
-cup and handle
-flat base
-double bottom (ideal: lower low on the second low)
7) allow a min of 7 weeks for pattern to develop
8) best time to buy is in a breakout form a pattern with at least 50% increase in volume
What does each letter in the world CANSLIM signify
C = current quarterly earnings
A = annual earnings
N = New product/management/highs
S = supply & demand
L = leaders choosing to win
I = institutional sponsorship
M = Market direction
What is the C (current quarterly earnings) in CANSLIM mean?
+25% or more in recent quarters
What is the A (annual earnings) in CANSLIM mean?
+25% or more in each of the past three years
What is the N (new product/management/highs) in CANSLIM mean?
Biggest stock winners had new. products, new management or new conditions in an industry that propelled the company to astounding height
What is the S (supply & demand) in CANSLIM mean?
-Low supply of shares outstanding
-strong demand for a limited supply of available shares will push price up
What is the L (leaders: choosing to win) in CANSLIM mean?
-Leading companies that are merging
What is the I (institutional sponsorship) in CANSLIM mean?
-Big institutional investors: insiders have a lot of their stock. This takes away the actual shares outstanding that are trading in the system
What is the M (market direction) in CANSLIM mean?
It is hard to go against the direction of the market
What is the base of CANSLIM method
-Before a stock can launch a big price run up, ut must have a solide base pattern to build upon
What is your insurance policy in CANSLIM? Hint: think of the stop loss method
7% insurance
What are some pitfalls of trading?
-Getting rich quick/tale big risks for big gains
-Education
Below this card is on Elliott wave theory, Fibonacci, and Gann
What is the Fibonacci Sequence
Two previous numbers add up to the next number
1,1,2,3,5,8,13,21,34,55,89,144
What is the idea behind Fibonacci Sequence?
Is it natures law of growth structures?
If this ratio appears so much in nature and in growth patterns, does it also appear in the way prices grow?
What are the retracement levels using horizontal lines in Fibonacci sequence
38.2%, 50%, 61.8%, 100%
If you break one level in Fibonacci, what needs to be done?
If you break one level you have to move to the lower level
In a bear market, what level (%) of retracement can be expected
The market can retrace 50% of the down move, and retraced 61.8% and once this is done, it retraced to 100%
In a bull market, what level (%) of retracement cn be expected?
It is normal for the market to retrace 38.2% in a strong, or even 50% of the up move
**What does the EWT (Elliott wave theory) state?
States that stock prices are governed by irregulr cycles founded upon the Fibonacci series (1-2-3-5-8-13-21…)
**How do impulse waves move? and how do corrective waves move with these impulse waves?
Impulse waves (move with the trend) with corrective (counter trend) eaves against trend
**What are the 5 motive waves
Waves: 1,2,3,4,5
**What are the 3 impulse waves?
Waves: 1,3,5
**What are the 3 corrective waves?
A,B,C
How does the market move in EWT (Elliott wave theory)
Market moves with “three steps forwards and two steps back”
In a BULL market how does the wave up and the counter wave move?
In a bull market, the 5 wave up trend is then corrected and reversed by 3 wave counter trends (down)
In a BEAR market how does the wave up and the counter wave move?
5 wave down and then corrected 3 waves counter trend (up)
What is important to know about the waves in Elliott wave theory?
Each wave (wave 1 and 2) is made up of impulse (smaller) waves
-> there is 5 impulse waves on wave 1
-> there is 3 impulse waves on wave 2
What are the 3 types of corrective waves?
1) Zig zags
2) Flats
3) Triangles
What are zig zag waves?
A-B-C, A&C impulse, B corrective (look at slide 28 for clarifications)
What are flats
A-B-C moves sideways with overlapping sub waves (look at slide 28)
What are triangles
Like triangle patterns with five waves A-B-C-D-E
What are the 3 basic rules of EWT (Elliott wave theory)
Rule 1) Wave 2 may not break below the origin wave 1
Rule 2) Wave 3 is never shorter than wave 1 and 5, but it does not necessarily have to be the longest wave
Rule 3) Wave 4 cannot overlap the termination of wave 1
What are the 3 guidelines of EWT (not always expected)
Alternation: Types of corrective waves in wave 2 and 4 alternate ( a flat is followed by a zig-zag or triangle)
Equality: At least 2 of 3 impulses sub waves in a sub of 5 wave sequence are often equal in length
Truncation: Occasionally the fifth wave fails to exceed the third wave, and gets truncated
Name 3 projected targets and retracements using EWT
-Channel lines can be drawn connecting waves 1&3, parallel to trend line starting from the low of wave 2, and this can be used to forecast waves 4 and the end of wave 5
-Wave projections become targets based on Fibonacci ratios
-Corrective waves tend to correct approx 61.8 or 36=8.2% of their corresponding impulse waves and are related to each other
Name 6 downsides to using EWT
-Difficult to interpret , especially corrective waves
-much debate as to which wave we are in? where is the wave?
-Tendency to over analyze
-Waves are fractal
-Waves known after the fact (after they are formed)
-Wave movements are related to the Fibonacci ratio
What are the 4 characterisitcs of Gann
1) Forecasted time and price: Time is more important than price
2) Fan lines
3) Price targets according to cycles and degrees of a circle
4) time from cycle high/low, to the next cycle high low can be related
