The Contents of a Bar

[ducati916]

Do the above ONCE and you could change your life .

Eg
The housing boom
The tech boom
The mining boom
The gold boom
The oil slump
The rise of the dollar
The rise of the DJI
The rise of the DAX

If you catch it all, or at least the majority, with enough size, yes, it could. However as previously pointed out to me: As Howard Bandy advocates trade frequently , trade accurately , hold a short period of time, this style of trading would preclude much of that.

Something like your old techtrader could catch something like the above.

jog on
duc

 

[ducati916]

Are you sure? That's an assumption on your part that may be (and probably is) incorrect. If my net worth is $10mil, and I trade with $500k and bet $25k per trade on a small cap is that a small position size? I dunno about everyone else but it isn't to me. Everything isn't always as it seems on the surface.

Now in context:

Initially from tech/a

Stock Halt
Happens often when trading Smalls
But Has never been an issue relative to
capital at risk and net worth.

Fair enough, in this case the answer [would seem to be] diversification, leading to small position sizes.

You seem to have started your analysis with the word 'diversification' and worked backwards. This has led to your assumption that the word diversification pertains to a diversification of stocks held, in a single strategy.

Clearly this need not be the case. The word diversification could equally be applied to a diversification of strategies, which has already been raised on this thread as an option.

Further, it ought to be clear that by including the words [would seem to be] in the sentence, that the sentence becomes conditional on confirmation by the original protagonist. My sentence is therefore in the form of a question. It cannot therefore be an assumption.

If my net worth is $10mil, and I trade with $500k and bet $25k per trade on a small cap is that a small position size?

Well that is 5% of your trading capital as a position size and your trading capital is 5% of your net worth. That to me, would seem to be prudent, or a small position size.

Putting $25K into a small cap might or might not be a small position size. All depends doesn't it.

jog on
duc

 

[ducati916]

So from the abstract, to the practical.

Today I manage risk differently than I have in the past. I offer this as an alternative to some of the other strategies.

My starting point is the structure of the security. Do I want individual stocks? The answer is no. While individual stocks have many advantages, they also have disadvantages that for me, cross them off my list.

I will only hold ETFs. There are many to choose from. If you hold a sector ETF, for example 'consumer retail' you have a concentration of consumer retail stocks. Usually, not what I want.

I want a concentrated position, that is diversified. So I want an index, or an ETF structured like a mutual fund with a diversified holding of stocks. The reason will become clear later. On occasion I will hold commodity ETFs [Gold/Silver]. I want a dividend yield. It must be optionable.

An ETF does not preclude the ETF from being delisted due to lack of assets under management and other reasons, but this risk you have to accept for the most part. Just ensure in your selection that you choose wisely.

Then I look at structuring the trade. I want to and will hold for long periods of time. This is now measured in years rather than days or months. I want the trade position to be comprised of:

(a) ETF shares; and
(b) option position; and
(c) cash position.

My assumptions entering the trade position are:

(a) it will rise; and
(b) it will fall; and
(c) it will go nowhere.

The option position and cash position are the risk management tools after the selection of the ETF.

The options are used simply as a covered call position. So they generate an income. As each contract is 100 shares, hence the requirement to keep the number of ETFs lower, which allows lower trading costs and more contracts per position.

I am looking to trade the position over time. So I will sell shares or allow shares to be exercised when in an uptrend, thereby adding to the cash balance.

In an extended chop, the options expiry OTM provide a return while waiting for something to happen.

In a downtrend, you will lose money on shares held, which will be offset by income from OTM options expiring.

At certain points, I will add to the position from cash.

It is not foolproof. Nothing is. It is an alternative way of trading that seeks to embrace randomness, rather than avoid randomness [assuming you even consider randomness].

jog on
duc

 

[Triathlete]

Also, I'm interested, with regard to an alternate thread that discusses 'diversification': is diversification, or concentration, your preferred methodology?

It all depends but usually it is between 5 and 12 stocks.

It is closer to 5 stocks in a trading portfolio and between 8 and 12 for a longer term portfolio.

While it is true that diversification reduces risk, a portfolio of shares that is over-diversified is exposed almost exclusively to market risk, which cannot be eliminated by diversification

As a trader, if you are looking to achieve higher returns, you invariably need to take on a higher level of volatility to outperform the market.

Therefore, you need to hold a smaller number of shares around 5-8 to actively manage the specific risk.

If you do not have time to manage the specific risk then holding a portfolio of 8 to 12 shares enables you to reduce volatility without dramatically reducing returns.

You do not get twice the benefit from holding 20 stocks than you do from holding 10,and you certainly do not get 10 times the benefit from holding 100 rather than 10.

It makes sense to simply get rid of the stocks that are going sideways or down. We only want to hold stocks that are rising in price. ( if going long)

Assets that move sideways or fall in price have a negative effect on your overall ability to create wealth.

If stocks are falling in price, it increases your risk and reduces your overall returns.

Cheers Triathlete

 

[ducati916]

Tri,

Essentially you are advocating the fairly standard methodology of the systems traders, which is select stocks based on specific criteria, hold those that win, cull those that don't, measured by specific price levels, or some other criteria.

Most of the time, that works perfectly well. There will be times, when it doesn't. That is my concern. Although the more simple the system, the more resistant it is to outliers. Simple in financial markets is an attribute.

jog on
duc

 

[ducati916]

For consideration:

(a) There has been a suggestion that the higher the volatility, the higher the returns; and
(b) the higher the diversification, the lower the returns.

So currently, in the US stock market, volatility is historically about as low as it has ever been, yet market [index] returns have been trending higher since 2009, viz. high diversification [500 stocks SPY].

So my question:

Given the high returns, with the opposite of the metrics claimed, should you increase your exposure and/or leverage at this current point in time.

jog on
duc

 

[Triathlete]

Tri,

Essentially you are advocating the fairly standard methodology of the systems traders, which is select stocks based on specific criteria, hold those that win, cull those that don't, measured by specific price levels, or some other criteria.

Most of the time, that works perfectly well. There will be times, when it doesn't. That is my concern. Although the more simple the system, the more resistant it is to outliers. Simple in financial markets is an attribute.

jog on
duc

I personally like to keep things simple as there is no use over-complicating things.

I am not sure what system traders do or how their selection process goes, but I would think that they would generate far more buy and sell signals than I ever would.

Currently I only average about 2 trades a month going back 3 years, so as you can see I do not trade that much but it is not required in my strategy as I also use leverage CFDs etc....The success of the strategy is in the Leverage X high win rate with the current R:R and expectancy.
Until this changes I will keep moving in the same direction and no need to change anything.

I can only trade the way I have been taught and that is all that is required for me.

I like to trade on what I see [on a chart] and not what I think and reading this in context with the market. This has served me well.

 

[Triathlete]

Given the high returns, with the opposite of the metrics claimed, should you increase your exposure and/or leverage at this current point in time.

What are you saying are high returns??
What has been the returns over the particular timeframe ???,please advise.

 

[ducati916]

What are you saying are high returns??
What has been the returns over the particular timeframe ???,please advise.

Since March 2009 to May 2017

Total S&P return 215%+
Annual 15.2%
Dividends reinvested [annual] 17.5%
Trading costs: close to nil

500 stocks [high diversification]
Volatility has been low for years now.

So with volatility [very] low if you were entering the market today, do you believe based on the volatility metric that:

(a) risk is low; therefore
(b) to earn a higher return it is necessary to;
(c) increase exposure [or leverage]; and
(d) reduce your diversification, that is, increase your concentration?

Volatility is usually a component of the calculation of risk management strategies.

jog on
duc

 

[rb250660]

How to you measure volatility?
What's the definition of low volatility?

 

[Quant]

Lever up on todays low volatility and you are tomorrows high volatility margin call

And the most risk adverse person in the world bought the march 2009 low and held through the 20% 2011 correction . yeah right .

 

[Quant]

How to you measure volatility?
What's the definition of low volatility?

I measure range as a % over 'x' period along with ATR as a % over 'x' period . Cant speak for others , they probably cant use these metrics unless they can code it up

 

[ducati916]

How to you measure volatility?
What's the definition of low volatility?

I would simply use the VIX

jog on
duc

 

[Triathlete]

Since March 2009 to May 2017

Total S&P return 215%+
Annual 15.2%
Dividends reinvested [annual] 17.5%
Trading costs: close to nil

500 stocks [high diversification]
Volatility has been low for years now.

While this may be a good return for a Fund manager who may manage hundreds of millions in their fund, but do I think this is a good return for someone who manages 50k or 100k... absolutely not.

Now I am not saying do not have any of your money in funds such as these.
Where I see the problem is will these people know when they should be removing their money from the fund or at least protecting their position after such a good run??.

I assume we do not want to get caught out with another GFC and many of these funds are mandated to stay invested which could cause problems.
I am making the assumption that this is a long only fund.

 

[Triathlete]

So with volatility [very] low if you were entering the market today, do you believe based on the volatility metric that:

(a) risk is low; therefore
(b) to earn a higher return it is necessary to;
(c) increase exposure [or leverage]; and
(d) reduce your diversification, that is, increase your concentration?

Volatility is usually a component of the calculation of risk management strategies.

jog on
duc

Again this depends on the type of trader or investor you are.

I make my decisions based on the Top down approach and whether or not the particular companies will continue growing over a set period of time and from a technical perspective does it also line up with where is the share price is today based on its current cycle and where it is likely to move too in the following cycles.

If I am just trading with leverage than 4 stocks is the most I will have running at any particular time. I will also make the comment that I only use leverage on a maximum of 10% of my total portfolio so the other 90% is without leverage.

Based on this criteria above I will make my decision and I would use leverage if the company passes my selection process.

Cheers
Triathlete

 

[ducati916]

While this may be a good return for a Fund manager who may manage hundreds of millions in their fund, but do I think this is a good return for someone who manages 50k or 100k... absolutely not.

This is the 'market' since March 2009.

I suspect that many fund managers trail the actual market returns. They will also be the odd out-performer in there as well.

jog on
duc

 

[ducati916]

Lever up on todays low volatility and you are tomorrows high volatility margin call

Exactly.

However the point that I wanted to make, but clearly didn't, was that 'volatility' is an endogenous quality of stocks [futures, etc] and not exogenous quality.

Many [some] who consider risk as market participants, consider it as a quality of the latter. This is the genesis of the issue.

jog on
duc

 

[ducati916]

I make my decisions based on the Top down approach and whether or not the particular companies will continue growing over a set period of time and from a technical perspective does it also line up with where is the share price is today based on its current cycle and where it is likely to move too in the following cycles.

I would argue that this is one of the approaches that contains so much uncertainty as to make it very dangerous. So much so, that I would assign zero weight to any analysis.

I will at a certain point in a 'macro' approach contradict myself, or flip sides. However when looking at a macro economic analysis, I am cognizant that 'time' remains [highly] unpredictable. Given that the 'when' is going to be random, how much can you wager on the 'if'?

jog on
duc

 

[ducati916]

If I am just trading with leverage than 4 stocks is the most I will have running at any particular time. I will also make the comment that I only use leverage on a maximum of 10% of my total portfolio so the other 90% is without leverage.

Leverage [margin, futures, cfd] allows other people [your broker, lenders, etc] to dictate how you must react in periods of stress. If your trading plan [system] makes account of this, then leverage can work.

I prefer 'options' for leverage, as I still retain control, even when the trade goes wrong. There are more strategies available to modify [leveraged] positions and thereby retain control of the trade.

jog on
duc

 

[Triathlete]

I would argue that this is one of the approaches that contains so much uncertainty as to make it very dangerous. So much so, that I would assign zero weight to any analysis.

I will at a certain point in a 'macro' approach contradict myself, or flip sides. However when looking at a macro economic analysis, I am cognizant that 'time' remains [highly] unpredictable. Given that the 'when' is going to be random, how much can you wager on the 'if'?

jog on
duc

I have only been trading the last 3 years and prior to that spent 3 years completing courses to understand the markets and how to trade them so can only follow the process that I have learnt and been shown.

At this stage it has not been the case in my situation as yet and in the leveraged portfolios over the last 3 years trading only ASX 200 stocks a couple outside of this, whilst the market has only increased by about 400 points or 6%-7% over that time period the portfolios have increased 550% of the starting capital.

1st year 6 trades 6 wins 250% increase
2nd year 21 trades 18 wins 165% increase
3rd year 26 trades 21 wins 135% increase
Can it continue only time will tell...