Stock Exchange: You Can Make It As A Trader, If You Do It Right

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Do You Trade Short-Term News Flow?

Our previous Stock Exchange asked the question: Do You Trade Short-Term News Flow? We noted that many long-term investors consider short-term market moves to be simply noise and volatility that should be ignored. While on the other hand, many short-term traders may see opportunity in the noise. We also reviewed examples of how news flow (whether accurate or inaccurate) has the ability to move short-term stock prices and markets.

This Week: You Can Make It As A Trader, If You Do It Right…

The idea of trading for a living is alluring, but can you actually make a living doing it? You can if you do it right. But of course, if it was easy then you’d probably know a lot more full-time traders. Remember, we love to hear the “feel good” stories about the guy who leaves the “rat race” and finds peace and happiness as a successful trader, but it’s also important to realize that inexperienced traders can make big mistakes, such as this guy:

That’s an example of why it’s important to be realistic about your trading aspirations, as Adam Grimes reminds us in this article:

One of the more salient takeaways from Adam’s write-up is that:

“Trading success requires a significant capital base. Out of all the marketing lies, the worst might be that you can make a living with a few thousand dollars. You do need money to make money in the markets.”

Of course if your nest egg is big enough, then why not just buy insured CDs and US government bonds, instead of spending so much time following the markets? But then few people can actually live off the current 2.85% yield on 10-year treasury, for example.

Trading psychologist, Brett Steenbarger, brings up some good perspective (as usual) by reminding us that:

“we are more likely to find happiness by pursuing experiences than by accumulating possessions. The sad reality is that most of us are so caught in busyness and routine that we fail to pursue fresh experience.”

Could another reason people pursue trading be because they enjoy the experience? After all, markets are constantly changing and evolving, and this dynamic can help satisfy a person’s need for new learning opportunities and challenges.

With regards to constantly evolving markets, Tom Brakke highlights some very important “quant questions,” such as this quote:

Today, according to Bank of America Merrill Lynch, “A seismic shift in assets and resources toward data-driven, systematic strategies and shorter-term investment strategies, which tend to rely on access to better, faster and larger stores of data is underway.” The quant rush is definitely on.

This is certainly an example of evolving markets, and it’s also a nice lead in to our own “data-driven, systematic trading strategies” which we review in detail below.

Model Performance:

Before getting into the specifics of some of our most recent trades, we first share the performance of our proprietary trading models, as our readers have requested, and as shown in the following table:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

This week’s Stock Exchange is being edited by guest contributor, Blue Harbinger. (Blue Harbinger is a source for independent investment ideas).

Expert Picks From The Models:

Holmes: This week, I purchased shares of Intelsat (I) on 8/28. This company provides fixed and wireless communication services, and it also provides commercial satellite capacity to the U.S. government and other select military organizations and their contractors. It’s headquartered in Luxembourg.

Blue Harbinger: Interesting, but why did you buy the shares?

Holmes: I bought because I am a dip-buyer, and as you can see in the following chart, there’s been a nice setup on Intelsat.

BH: What dip, Holmes? Usually I see the dip pretty clearly in the stocks you trade, but this week it’s not clear to me. Are you talking about the dip from almost $25 to below $23 over the last week?

Holmes: That’s it. And as you know, my typical holding period is around 6 weeks, and I exit when my price target is hit (or when my stop loss order hits).

BH: I know you’re a technical trading model, Holmes, but what about the fundamentals? Wall Street analysts are pretty mixed on this one, per the following ratings chart, and I’ve include the Fast Graph for good measure, as well.

Holmes: Thanks for your concerns and for sharing that information, but I’ll be out of this trade in about 6-weeks.

BH: Alright, well thanks for sharing your trade. And how about you, Road Runner–any trades this week?

Road Runner: This week I purchased Wayfair (W), as shown in the following chart.

BH: Now this is a trade that makes more sense to me. Wayfair is basically an online home furnishing store. And for starters, this trade makes sense to me because Wayfair is a leader in its industry, and people are buying more and more things online these days.

RR: Well I bought it because I am basically a momentum trader, and I like to buy stocks in the lower end of a rising channel, as shown in the above chart. My typically holding period is 4 weeks.

BH: I suppose you’re not interested in fundamentals either, but I am going to point out that Wall Street has a better view of this stock than Intelsat (as shown in the following ratings chart, the street thinks it’s a buy with price upside), and I’m also sharing the Fast Graph too.

RR: Thanks for the info, and since you’re into fundamentals, I’ll remind you that even though Wayfair is not focused on earnings right now, they are focused on growth, and revenues have continued to climb significantly higher in recent years, as shown in the following Y-Chart

BH: Thanks for sharing. And how about you, Athena–Any trades this week?

Athena: This week I bought shares of Etsy (ETSY).  It operates a technology platform which allows sellers to manage and scale their business. It offers handmade products such as shoes, clothing, bags, and accessories.

BH: Uh, Athena. Isn’t there another company that already does that. It’s called Amazon (AMZN).

Athena: Ha ha. Not the same. Etst focuses on unique things and independent sellers. Regardless, I bought it for the technical setup. I am a momentum trader, and I typically hold for about 17 weeks.

BH: You also have a great track record, particularly over the last 12 months, as shown in our earlier performance table. And this company certainly does have a lot of momentum on its side. For your reference, here is a look at the Fast Graph.

Athena: Thanks for sharing. And how about you, Felix–any trades to share?

Felix: Yep–I bought Endo Pharmaceuticals (ENDP). It’s been on fire. I like the momentum.

BH: Momentum in general has been on fire. But you typically hold for a longer time-period than the other traders–66 weeks. You think the momentum trade will still be intact then? By the way, here is a look at the Fast Graph.
Felix: I wouldn’t have bought the shares if I didn’t think the momentum trade will be intact for the next 66-weeks.

BH: The way this market (and the economy) have been going, I wouldn’t be surprised if the momentum trade keeps thriving through the next 66-weeks, at least. For example, here is a look at momentum stocks versus value stocks over the last few years.

And this is also part of the reason why our momentum models (for example, Athena) have been working even better than our dip-buyer (Holmes) and even Road Runner (RR likes to buy by things in the lower end of a rising channel).

However, we know that different styles go in and out of favor, and that’s why we prefer a blended approach–it helps keep returns high across varying market conditions.

Conclusion:

If you want to make it as a trader, find a strategy that works for you. That does’t mean never go outside your comfort zone, because it’s important to never stop learning, especially considering the market keeps changing and evolving. But don’t go too far outside your comfort zone because the risks of trading are very real. Keep your expectations realistic. And of course, enjoy the experience along the way!

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Trade Alongside Jeff Miller: Learn More.

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