Friday, April 03, 2015

Trading Styles

If you are looking for the typical weekly trade summary, it is right under this post. With the market holiday, time for a rare bonus post. I don't give specific advice. However, I often tell novices that there are thousand ways to make money in the markets, and for each person to look for one or two that work for you. What works for me, may be a terrible fit for you, and vice-versa. So this post is about a few different styles.

My style tends to be low risk, low reward, high probability. I use a mix of technicals and fundamentals. My analysis tends to be shallow. I tend to have a lot of small to tiny positions, and I tend to use mental stops.

Classic trading training involves 33% winners, 66% losers, but with small losers and big winners. The CANSLIM method teaches this kind of risk management. With 7% stop losses and 20% gains as the first price target. So even if a trader loses 2 out of 3 times, it they are losing 7% on the losers and making 20% on the winners, they net out to plus six percent.

Some traders like charts. Others like to trade news. In the old days, there tape readers. These old timers could watch the ticker and get a good feel for the market or for their stocks. There are those that invest (rare for traders) mostly on fundamentals.

At the recent CANSLIM meetup, there was some discussion on concentration. IBD, CANSLIM, William O'Neill teach concentration. Maybe 5 stocks in the portfolio, no more than 10. 

Some at the meetup focus even more, perhaps putting half or one-third of their entire cash account into one position. Age plays a role. A young person with a high income, stable job, high savings rate, can take more chances. They will quickly replace any losses with new savings. 

Someone with limited income, or perhaps a big nest egg from an inheritance or other one-time event, would probably do better taking smaller risks and diversifying.

Indexing is as popular as ever. Search on Three Fund Portfolio, or Lazy Portfolio to get an idea of what that is about. The biggest colony of indexers call themselves Bogleheads, after Jack Bogle, founder of Vanguard. These folks keep it simple. They write out an Investment Policy Statement, and stick to that. Typically that will set an allocation for various asset classes (most stick to stocks, bonds, and international stocks), and what they plan to do if and when the market moves a lot. Whether to rebalance into a weak class or hold firm.

For technical traders there are many sub-types. There are trend followers, range traders, scalpers, home run hitters. Some use simple analysis. I tend to mostly look at a few moving averages, support and resistance and maybe a momentum indicator. I don't get heavy into indicators. Many beginners are attracted to stochastics. Bollinger bands, MACS are two more very popular tools. I never found much value in Elliot Wave theory, but others have been successful with that.

So if you are a beginner, try a lot of different things. Do you like reading balance sheets and digging through fundamental data, perhaps using screening tools? Do the charts "speak to you," or does it mostly seem like an arcane art. Do you have a high tolerance for losses, or is a high probability style with occasion big losses more suitable? Obvious the financail "unicorn" is high probability and high profits, but if a person had that, they wouldn't be reading my blog.

There are few rights and wrongs. There isn't a one-size fits all. Traders (and investors) can be successful using almost anything. What works for one person may be a terrible fit for another person. Keep a trading journal. Find what works for you.

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