Successful stock market trading strategies
There are many instances where low volatility was evidence of high risk. There are many strategies that make moderate money most of the time, giving low volatility track records. Once in a while, these strategies are prone to huge losses- they are highly left-skewed. A lot of the hedge fund world is engaged in strategies that have this property. They make money most of the time, but once in a while can lose a lot. These are strategies which are explicitly or implicitly short volatility and are long illiquidity and short credit.
Imagine you have to walk through a field that has a few land mines scattered through it. If you walk through it and nothing happens, it seems there is no danger. You meet people who are painfully shy, overly extroverted, egocentric, academic, athletic and more. There are however, some successful traits. Regardless of their personality, they will have flexibility.
Discipline is also important. People who are successful will do things because they have to be done. If they go on vacation, they will probably check-in… getting up in the middle of the night often.
Markets are always different and part of the process is adapting and maintaining traits that allow you to win in any environment. The past 25 years has seen an increase in the diversity of strategies. Jack has shown us that markets are complex and constantly evolving entities. The true measure of skill is developing a strategy that works around your own skill and information, considers the real left-tail risks in the marketplace, and is run with a spirit of responsiveness.
We are faced with the reality that many of our attitudes towards trading are built on antiquated precepts. Half a century ago, when markets were simpler and slower there is no doubt that a few successful strategies could be applied repeatedly to generate success.
Now however, things are very different. Some exchanges such as CME group are handling over a quadrillion dollars of trade every year. Markets this large will require new attitudes to risk, and new methods of generating value. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular…. Is there a strategy or style which is most effective at generating return? What is the relationship between risk and volatility?
Do successful traders share any behavioural or personality characteristics? Have success methodologies changed much in the last 25 years?
How has the financial crisis impacted trading strategies? What does this mean for Investors? The Failures of Our Economic System. Like many of his peers Vincent has immersed himself in playing football and being the best on the pitch- but perhaps most interestingly, he has also taken a deep We promise not to SPAM.
The past quarter century however, has seen a gradual move away from the efficient hypothesis to greater considerations of information asymmetry and behavioural biases driving inefficiencies opportunities in the market. So faced with this complexity, how do some traders generate such astonishing success? Jack Schwager is a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books.
He is also an advisor to Marketopper , an India-based quantitative trading firm, supervising a major project that will adapt their trading technology to trade a global futures portfolio. Schwager was a partner in the Fortune Group , a London-based hedge fund advisory firm, which specialized in creating customized hedge fund portfolios for institutional clients.
Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge fund managers of the last two decades: Those people looking for a single unified strategy are not asking the right question. Even when looking at differences between asset classes we see that every market can be traded using different strategies be they fundamental, technical, or a mixture.
If we take equity markets we see that traders can use strategies including fundamental, value, extreme long term, and day. If you want a microcosm that proves diversity, there it is! This is a great analogy as the key to successful trading really is the space between trades! I use one specific example in my book which I think highlights this really well, and that is a fellow called Kevin Daley manager of the Five Corners Fund. There are two elements… Firstly, he is a very good stock picker.
When opportunities are not good, he simply does not invest! Instead of losing money, he treads-water. Any approach will give you instances of winning or losing. If you have an effective approach, you will hopefully make more money than you lose. If you take a trade that follows your process exactly whatever that process may be… fundamental, technical or otherwise , and if that trade loses money, that was not a bad trade.
People have to differentiate between trades that are consistent with a winning strategy, and trades that are inconsistent. You have to ask the question: If the answer is yes, then it was not a bad trade.
Too often, people fail to differentiate wins that come from the market and wins that come from skill. Somewhere along the line, risk and volatility have become synonymous. I suspect this is because the measure of volatility- the standard deviation- has nice mathematical properties that allow portfolio managers and financial academics to neatly define precise ways of allocating that seem comfortable.
More money has been lost on the mismeasurement of risk than not having risk management at all. The battle is not won through being attuned to risk control. If your measurement of risk is completely wrong, it could be worse than having nothing in place. Imagine you have an odometer in a car that you thought was working correctly but was, in fact, giving you speed readings 30mph too low… that would be a lot worse than if it was stuck and you knew it was broken. People find track-records of managers that have low volatility and make the conclusion that low volatility means low risk.
Low volatility may indicate low risk, but it does not make that a certainty. There are many instances where low volatility was evidence of high risk. There are many strategies that make moderate money most of the time, giving low volatility track records.
Once in a while, these strategies are prone to huge losses- they are highly left-skewed.