Which one do you use? Technical or fundamental analysis?

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Why is the trader not using the $40k eight times quickly? That's more the reality. I probably turnover my capital 7 times a year (more actual if you take account of leverage).

Yes I hate paying the interest and brokerage but it's still very profitable and "consistant"

You put all of your capital into each trade?

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

I'd like to make an attempt to bring this thread back to something that there is actually a point in discussing (rather than wasting time on circular arguments).

A while back, BSD posted a rather interesting question.

"Why dont the investment banks just hire a team of chartists with etrade accounts and margin loans?"

This has got me thinking. Why don't they run funds like this? Here are some of the reasons I can think of;

1. Chart trading requires the psychology to accept losing most of the time. Most people cannot handle this. Put an extra layer on top of this - the investment banking bureaucracy - and you have two layers or more of psychology to get through before being able to handle trading this way. I'd argue that the chances of this sort of culture existing in an investment bank are close to zero. To put this another way - I'd argue that few people in the investment bank industry know how to trade and rather rely on very deep pockets to survive at sub-index performance.

2. The people investing their money in this endeavour would need to be able to cope with drawdowns. The natural behaviour of most people is to put their money into outperforming funds and pull their money out of underperforming funds. This is exactly the wrong thing to do for trend following. This will lead to problems of having to close positions at the wrong time for a fund in order to cover withdrawals from the fund. In other words, there is a third psychological layer to get through.

3. One of the edges a private trader has over an investment bank is size. By and large traders can enter and exit positions without moving the market. This is impossible once you get above a certain size and would make it harder to be profitable as a large scale trend trader. I believe Soros has a word for this phenomenon, but it slips my mind at the moment.


I note with interest that in the US there are boutique funds that do indeed invest technically and even mechanically - I am unaware of any such funds in Australia.

Food for thought.

I'd add a fourth and fifth and sixth
4. Charting does not suit the psychology of a typical fund analyst. They are more suits & ties/power breakfasts/$500 lunches with clients. Being sat in the corner with a computer wouldn't cut it.

5. These guys are mostly applied finance graduates. The universities and bosses still tend to treat charting as a form of astrology (Sorry Yogi).

6. They make their money on their fees and most people would not understand a "charting" fund and would not invest in it.

MIT

 

[professor_frink]

Re: Which one do you use? Technical or fundamental analysis

Good point!!

But you have $40,000 in total and only put $5,000 on each trade the return is only $3920 on $40,000. It all depends what you do with the other $35,000.

Prof, if you have $40,000 to your name - how much would you place on each trade?

If I had $40,000 - I'd invest between $20,000 and $30,000 in about 6 to 8 different shares. $10,000 sits in the bank - as a safety net and incase I see a great opportunity to buy.

My return would be about $10,000 * 0.05 from my bank account. And $30,000 * 0.12 from shares. So about $4000.

Say 10% after all taxes and expenses. (more in bull markets, less in bear markets)

The amount I would put in changes with each trade. 2% maximum loss is the max I would take.

For an example-
ZFX is currently at 10.90 and I want in. After looking at the chart, I decide that I will sell out at a loss if it trades down at $10, meaning I will accept a 90 cent per share loss.
2% of my $40 000 is $800.
800/90 cents per share loss= absolute maximum 888 shares or $9680 invested.

Now I wouldn't be comfortable having 1/4 of my money tied up in one share, so I'd probably invest closer to $5000, or 460 shares, meaning my max loss for the trade would be about $415, or slightly over 1% of my bankroll. When brokerage and slippage are included, buying 460 shares will mean I am highly unlikely to lose more than the 2% on this trade(outside of a major event occuring).

Hope my maths is right here(someone correct me if it's a little off!)

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

You put all of your capital into each trade?

You haven't been listening very well (or read Guppy or Leon Someone very well) have you no wonder you aren't getting it. It's not the capital in the trade its the risk in the trade. If you want to risk 2% and your stop is 2% from your entry then you would put 40k on the trade.

MIT

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

It'll teach them to think about what it is they're actually buying when they buy a share, and think about why they are buying that share. It'll cause them to start to think and act independantly.

Most follow brokers and analysts opinions thoough.

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Now I wouldn't be comfortable having 1/4 of my money tied up in one share,

Thanks Prof, what you do sounds wise. Basically the same as an investor diversifying.

And that is my point MIT. You'd be a brave man to put ALL your capital into each trade.


As we discussed yesterday there have been cases where a share drops 80% overnight - unlikely of course, but it has happened and could possibly happen again.

Kitty Hawk -on the Nasdaq was the one. 93% in a week, 80% overnight from memory.

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

Sorry, I missed this question Nick. (Snake reminded me)

Well I'm guessing number 3 is the amount invested.

You may say the number of trades though?


I'd say you need to include both, but the amount is the key in my opinion.

1000 trades of $100 will get you nowhere, tax, brokerage and stress will kill you. But 1 trade of $1 Million with a 100% win is a great result obviously.

A terrible answer Realist!

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

Realist,


The more important part is the number of trades. The first 2 attributes nick mentioned are used to calculate expectancy . From there, the number of trades determines how much you can make. For example, if you are evaluating 2 trading systems with the same expectancy, the amount the system trades will determine which should be more profitable overall.

I'd add to this drawdown (or shape of the equity curve). A lower drawdown enables the trader to gear more or get a more consistant return with lower leverage. I've seen some published systems that look great for the first three items but have deep or long drawdowns.

I think it depends where you head is at. I want to live on trading so I want to make salary every year.

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

A terrible answer Realist!

Thanks.

you think the amount traded is irrelevant?

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

Thanks Prof, what you do sounds wise. Basically the same as an investor diversifying.

And that is my point MIT. You'd be a brave man to put ALL your capital into each trade.


As we discussed yesterday there have been cases where a share drops 80% overnight - unlikely of course, but it has happened and could possibly happen again.

Kitty Hawk -on the Nasdaq was the one. 93% in a week, 80% overnight from memory.

But it was your strawman example? So why is $40k in one share for a year not dangerous as well?

MIT

 

[professor_frink]

Re: Which one do you use? Technical or fundamental analysis

Thanks Prof, what you do sounds wise. Basically the same as an investor diversifying.

And that is my point MIT. You'd be a brave man to put ALL your capital into each trade.


As we discussed yesterday there have been cases where a share drops 80% overnight - unlikely of course, but it has happened and could possibly happen again.

Kitty Hawk -on the Nasdaq was the one. 93% in a week, 80% overnight from memory.

most of us traders work in this way, or a similar way. I would never have all my money in one trade even if I would be risking 2% or less on it, but that's just me. Trading is often about surviving long enough to get the big wins. If that means taking a lower return for a while, then so be it.

I'd add to this drawdown (or shape of the equity curve). A lower drawdown enables the trader to gear more or get a more consistant return with lower leverage. I've seen some published systems that look great for the first three items but have deep or long drawdowns.

I think it depends where you head is at. I want to live on trading so I want to make salary every year.

bang on. If you can keep your drawdown to a minimum, then you can use alot more gearing. But me thinks that topic is a whole thread by itself!

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

Thanks.

you think the amount traded is irrelevant?

Lets look at the original question then:

I am happy to debate but I, and no doubt others, would like a sensible answer. There are 3 cornerstone attributes to profitability and I do say that every trader/investor on the planet does pocess them. I'll give you two, you give the the third, then we'll discuss.

1. Win %
2. Win / Loss ratio
3. ?

 

[blinkybill]

Re: Which one do you use? Technical or fundamental analysis

you should also keep track of

1. $ profit per profitable trade

2. $ loss per loss making trade

3. # profitable trades / # loss making trades

so you can see from these numbers it's very important to keep losses small.

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

But it was your strawman example? So why is $40k in one share for a year not dangerous as well?

MIT

I would not put 100% of my capital in any one share ever.

But there is a difference to what investors buy and traders. Traders look for better returns and take more risks - hence they need stop losses.

An Investor may buy CBA for instance - dead boring but it'll be around next year. Traders may buy BMN - it may triple, it may go under, who knows?

But trading with 100% of your capital in one stock is risky in my opinion even with stop losses - what Prof Frink does seems about right to me. What MIT does may come unstuck one day.

 

[Nick Radge]

Re: Which one do you use? Technical or fundamental analysis

#3 is trade frequency. The amount of money is irrelevant. Once you have a positive expectancy, regardless of whether you are an investor or a trader, then your sole goal is to replicate that expectancy as many times as you can.

A stock can increase by 100%, but it takes time. In certain periods the time taken can be less than in other periods, assuming of course that the stock itself will double. The last few years have been exceptional,but a period such as 1990 through 1993 was nothing but treading water.

Trading however can replicate a positive expectancy outcome numerous times in a single day and usually regardless of underlying direction. Yes, taxes and commissions need to be paid, but they are still part of the positive expectancy equation which in turn still needs to replicated as much as possible.

I have a very close friend who starts each year with $25,000 in his account. By year end he's usually at $500,000. His accounts statements since 1999 reflect this each and every year. He has no concept of drawdown or percentage return. He simply has $25,000 to start and builds by trade frequency alone, not compunding his positions. He does 4 to 5 trades a day, all the same size and usually whilst on the golf course. He does not look at charts. He does not use FA. He rarely even looks at his computer. Gut instinct and a remarkable ability to remember price activity.

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

I would not put 100% of my capital in any one share ever.

But there is a difference to what investors buy and traders. Traders look for better returns and take more risks - hence they need stop losses.

An Investor may buy CBA for instance - dead boring but it'll be around next year. Traders may buy BMN - it may triple, it may go under, who knows?

But trading with 100% of your capital in one stock is risky in my opinion even with stop losses - what Prof Frink does seems about right to me. What MIT does may come unstuck one day.

My quote was mainly around the strawman example of yours, I actually limit a position to 15% in shares. But still explain why the trader buying CBA is limited to $5k because of the risk and the investor can invest 100% in CBA but doesn't have a risk because CBA will still be around?

It's still a strawman argument as you are defining risk different for the trader and investor.

MIT

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

I have a very close friend who starts each year with $25,000 in his account. By year end he's usually at $500,000. His accounts statements since 1999 reflect this each and every year. He has no concept of drawdown or percentage return. He simply has $25,000 to start and builds by trade frequency alone, not compunding his positions. He does 4 to 5 trades a day, all the same size and usually whilst on the golf course. He does not look at charts. He does not use FA. He rarely even looks at his computer. Gut instinct and a remarkable ability to remember price activity.

Nick, Why does he start with $25,000 each year?

What does he do with the other millions?

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

But still explain why the trader buying CBA is limited to $5k because of the risk

My point is how many traders waste their time buying CBA?

Most investors have a bank somewhere in their portfolio though.

 

[mit]

Re: Which one do you use? Technical or fundamental analysis

My point is how many traders waste their time buying CBA?

Most investors have a bank somewhere in their portfolio though.

A lot actually. Some traders will only concentrate on a single or a couple of companies and go long and go short repeatedly. CBA has gone from 43 to 47 down to 41 and back up to 46. That's around 15 dollars of movement compared to 3 dollars if you buy and hope. If you caught just 50% of each swing that's still almost 8 dollars of movement and even better because a trader would be leveraged.

MIT

 

[eddievanhalen]

Re: Which one do you use? Technical or fundamental analysis

Well I thought 100% pa was good on straight shares Nick I don't think 475k profit pa is anything out of the ordinary (depending on your capital base ofcourse)but from a capital base of 25k.......this guy's extraordinary indeed, even allowing for the fact that it's often easier to make large % returns from a smaller capital base.

Seeing as we've being talking mostly straight share investing/trading, can you clarify if he is trading straight shares, CFDs etc........

Cheers,

Ed