Saturday, February 22, 2014

Strategy Summary

Strategies:

A successful trading strategy in a way is similar to a chess game like GO. The difference is that one is you and the other side is the market. Good chess player should be able to handle different moves by your opponent. A good trader should also be able to deal with different market movements as well. In the case of GO, the goal is to capture the bigger territory than your opponent. Very often, you have to sacrifice a few stones to achieve the goal as long as the potential territory (gain) is greater than the lost stones (loss). The concept of margin of the victory or loss is also important. In Go, if you can minimize your margin of losses (a few points), and maximize your winning (10+ pts). You can still win even if your winning percentage is below 50%. This is exactly what a successful trader does. When he loses, he manages to lose small. However, when he wins, he wins big.

A professional GO player can think of many potential moves by his opponent. This is because some players are very good in capturing territory through attacking techniques, while others are better in defending their territories by employing efficient formations of stones. Some players prefer territories around the corners and edges of the board. Others prefer the middle. Based on the understanding of his opponent, he needs to guess what moves his opponent would make. Then, he would picture how several scenarios would play out. Then, he would pick the best play. His opponent often places the stone at a point to his surprise. He has to think of a new move to counter that. A trading process should be very similar. You should always have a plan to deal with different market movements. Strategies of dealing with different stocks (opponents) should differ under different market conditions (bullish or bearish). But, there should be a common thread in discipline, loss cutting, etc. An amateur often assumes that a stock will go to his plan (up). When the stock does not, he will be at a loss of what to do next. If you are surprised, it means usually that you are not well prepared. It may even indicate a hole in your strategy.

Assessing the current environment

Before considering any trade, one should assess the condition of the market, the condition of the stock in consideration, and the condition of the relevant sector. If one is interested in the long side, one should only buy when "all the ducks are lined up", meaning the market and the sector is in a bullish mode, the stock has a strong fundamental outlook in the near term. Technically, the stock should be the strongest stock, and the stock has a right setup, meaning that it is just about to satisfy a buying criteria (could be 80day - 15day SMA crossover points, or breakout point, or reversal pattern, etc.). One should avoid buying "extended" stocks, no matter what the justification might be. In other words, don't chase the stock. The key is to buy the right stock at the right time, regardless of the time horizon. Once bought, stay on the bullish side until proven wrong. ONE CANNOT MAKE BIG $ TRYING TO TRADE BOTH SIDES! If the condition is indeed bullish, the stock should spend most of its time going up. Up-leg should be long both in price and duration, and the down-leg should be brief and short. The down-leg is the potential risk and the up-leg is the potential reward. Don't try to capture every wiggle of the price movement. If this is not the case, your assessment was wrong and you should exit your buy. The same is true on the short side.

Long stocks, which are options: C, BAC, MTG, HLS at extremely depressed levels. The stocks themselves have become call options.

Long ZIV/Short VXX, UVXY

Key Strategy: 15d-80d crossovers

It is only supposed to work for hyper-growth companies. For others, it has been treated as a test-trade, where trend is prone to reverse.

Big Negative surprise announcement.

Other related patterns:

  • Head-shoulder formation
  • Heavy volume, on a high point, with little price movement. 
  • Break-out Pattern
    • Cup and handle
    • Others

Intra-day techniques:

  • Big-Up Day or follow-through day
  • Bid-Down Day and day 2
    • Intra-day hedging
  • Intra-Day postive surprise announcement
  • Intra-Day Square-Root pattern (plateur shaped upward sloping chart).
  • Intra-Day buying a stock whose competitor announced bad earnings, using intra-day 10-15 min chart patterns.


New ideas:

Intra-day Hedging

There appears to be a greater negative drift for companies, which missed earnings, on a bid down-day.
Today, 1/24/14, was such a day. IGT, GDII, ISRG, RMD all underperformed  the Russell 2000. It may make sense to short these stocks between 10-11am when it is clear SPX will be down for good (low advance/decline ratio, high VIX move).

looking for N

After a company pre-announced on the down side, buy its competitors' stock for a trade. It requires a thorough understanding of the intra-day trading dynamics.

Intra-day surprise announcement.

There seemed to be a way of going for the initial trend (positive or negative) following a surprise news. A surprise event during a trading day does not give participants time to figure out what to do. They are forced to follow the initial trend, which should continue until the middle of the next day because there are always participants who did not learn about the event until the end of the day and they would be participating the same trend the following day. The stock should settle down quickly to a new compromised price (within next couple of days) between buyers and sellers. The opportunity lies in the transitional chaos.

Selling Calls on companies with really disappointing earnings

BBY, AAPL, LULU are recent examples, where the stock prices never got a chance to recover. The market and sector bearish sentiment contributed as well. Some studies are needed.

VXX hedging

It seems that VXX has a low delta with VIX when VIX is under 18. As soon as VIX crosses 18 towards 20, VXX's delta picks up. More data is needed. One idea is to switch VXX short into puts.  

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