Technical Questions/Concepts Flashcards
In an oversimplified nutshell, what is Technical Analysis all about?
It’s all about pattern recognition and determining probabilities of certain price moments to occur.
How should you use your technical analysis indicators & tools?
You should never use them in isolation. You must also look at them together at the same time. Each indicator or tool simple tells one story or aspect of a current price movement. Adding them all up together, will give you a hopefully better idea of what price movement is more likely to happen
What interest environment favors which types of stocks?
During lower interest rates, growth companies are more favored. When the fed tightens up the interest rate, companies with good earnings are favored more
What is the OODA loop?
A cycle of behavior many experienced technical traders follow. Stands for Observe, Orient, Decide, Act, then immediately repeat by Observing what happened following the action
How does the bond market prices differ compared to the stock market prices when it comes to interest?
Since bond market obsesses over interests and almost collectively think long term, future expected interest rates are relatively quickly priced into the bond market. Stocks however have a shorter attention span, and is more reactionary and the interest rates are less priced in.
Why is shorting the market an extremely hard way to make money?
The market will not logically drop when you think it will, at least when it drops by a substantial amount. Because you have to factor in irrational exuberance, when the emotional bipolar herd finally decides to freak out and drop their overvalued shares. That could take a hell of a long while
What is the upside & downside of using margin to do short term trades?
Upside is you get to potentially get to experience the multiple rises and falls of a stock’s price. Downside is if the price turns against you and you’re in the red, you have to decide whether to take the loss or hold on for however long it takes to break even again (Loss Aversion). If you hold on, this locks up a portion of the margin you’re allocating towards investing, and if the other value stocks are also dropping heavily, you now have much less margin dry powder to invest into a great company at a nice discount.
Why do most daytraders lose their ass?
They’re heavily leaning on technicals, and not fundamentals. When a trade they make turns against them, they will either have to take the loss or hold on, forcing their trade into an ‘investment’ that may have questionable fundamentals. That combined with the powerful emotions involved, especially short term trading, likely leads to worse outcomes over time.
How can you interpret short interest and movements in short interest? What about short interest days-to-cover?
The higher the short interest, the more bearish the market sentiment is overall. The lower it is, the more bullish.
If there is a sudden jump in short interest, e.g. 10% jumps to 20%, that’s a dangerous bearish indicator. If sudden drop in short interest, bullish indicator.
Short interest days-to-cover is number of shorted shares divided by average daily volume. Tells you the number of normal trading days to cover all the shorted shares. The higher this ratio, the higher the chance of a short squeeze, as well as a larger one.
Why would people short a stock when they can buy puts?
There are tradeoffs involved. While puts limit the potential losses to just the premium paid, puts are on a timeline, and the longer the put lasts, the more expensive the premiums are. Additionally, based on the strike price, your put may expire worthless if the strike price isn’t reached, even if the the stock did in fact drop.
When short selling, you don’t pay any premiums (but do pay interest for borrowing the shares for as long as you hold on to them). Because of this, you short sellers aren’t limited by strike price limitation and can execute the moment the stock drops below the initial price to collect some profit. Also, you don’t have to worry about your short expiring worthless.
However, you trading the above benefits for much larger potential loss. If the stock keeps on climbing, you’re losing more and more money, cause your losses aren’t capped by premium.
TL;DR: Short selling lets you bypass theta & vega, at the cost of larger potential loss
What are the greeks (theta, beta, delta, gamma)
The 4 primary factors measuring risk, influencing options’ prices.
Theta:
Beta:
Delta:
Gamma:
What are some reasons to sell shortly after a short squeeze? Other reasons to hold on?
While a stock’s price can likely settle back down to earth after a huge panic short selloff, if the economy is on the rise, the price may end up just hanging out there until the rest of the market catches up, then continue to rise. Or the the price may rise a bit more for several months or longer before dropping back down. The timespan of the squeeze followed by it just lingering may make you miss out when selling while waiting for the drop that may never occur
If you mastered all the technical indicators, what is a huge counter that could counter all of that?
The fact of the matter that any big piece of news happening can flip everything on its head. The news could change world events entirely (like Ukraine War actually happening), or an idiosyncratic piece of negative news breaking out (supply chain crisis, chip shortage, student loan moratorium extension due to political cycle, etc.).
Technical indicators a lot of the time operate under the assumption of all other things being equal, or if the same macro set of factors continue along the same trend
What typically happens to a company’s stock if they announce acquiring another company? How about them being purchased by another company or group of investors?
When acquiring another company, their stock typically drops a decent amount. This is because most acquisitions are done at a premium over the stock’s current price (some exceptions are during the Height of Covid when Simon acquired a bunch of struggling/bankrupt companies for pennies on the dollar). Because a lot more is paid for the company than its current price, it’s seen as a really huge (and sometimes seen as excessive) expense.
If a company announces being acquired by another company for a certain price per share, their price will surge almost immediately to a price that’s near, but not matching, the acquisition price. This is because it’s officially announce. Part of the reason why the stock doesn’t match or come extremely close to the acquisition price/share is because of the inherent risk of the deal not going through, as well as the time it could take for the acquisition to close (3 months is best case scenario, can drag on to years), tying up their money in the stock for an almost guaranteed profit, passing up on other potential buying opportunities
Seasonal trends:
-What month do stocks historically do the worst? The best?
-What happens during holiday season?
-What happens during summer season?
-What happens around national holidays?
-What happens at the end of a financial quarter of year?
-The worst month historically is September/August, best month November/December followed by April
-During holiday season, Overall the last 3 months see positive performance due to following the usual September decline
-Summer months tend to reduce stock prices partly due to big traders selling their high risk assets and go on holiday
-Typically within one day before a holiday (not 2), people offload more stocks, partly due to avoiding risk of significant news happening while markets are closed. Buying day before holiday and hold until EOY results in more profit than loss
-The stock market becomes much more volatile
**NOTE THAT THESE TRENDS ARE FROM AVERAGING MANY DECADES WORTH OF DATA. It means they behaved more times in one direction than the other, but still have behaved in the opposite a number of times.
