The act of investment is at its cornerstone, gambling. I might add so is life! We make choices, whether to smoke or not, engage in dangerous sports, gamble on marriage, even choosing friends. Investing for gain, is a parallel. A best guess of the future. What criterion should we use to tip the scales in our favor?
The people are important! The issuers or advisors of the offering, as well as the management personnel of the business we are investing in. Usually, we are advised by a person we went to school with, maybe a trusted family friend or contact we have known who is reliable. In this “new investment” market we are somewhat vulnerable. With internet and high-speed communication opportunities are here now, but gone tomorrow, the pace is frightening. The new investment market is world-wide, making investment friends needs be almost a “warlike” exercise. We have to make fast friends to survive, and prosper. When everybody says “do it now”, instead slow down! Make your first determination based on the people involved. No right-minded advisor should assume you are going to invest immediately. I would like you to have conversations, see some correspondence, understand the mindset and goals, before investing.
Understand the investment. Do not take assurances from those who proposed to be competent. Make sure you understand. Ask questions specifically and repeatedly. Will all questions be answered affirmatively? Probably not. There are certain generic risks, both in time frame and yield spread, everyone in an investment should be conscience of. Inability to satisfy questions will not necessarily dis-qualify the investment opportunity. Personal determination, sometimes a forgotten item these days, will benefit you.
Controlling your investments means knowing your investment pace. How long is your investment time frame? Are we seeking the long-term accrual retirement income or short-term monthly income stream? Anything over 10 years is long-term investment. We should be conscience of interest rate variables, time vs. money decay should be adjusted and thought out. As we sort out our personal investment agenda, we turn our thought to the prospects which we can invest in. Not all good or great investments are suitable to each investor. If you have college tuition to be prepared for in two years, a five-year investment overlapping this event will not be advantageous. I would not assume I could borrow or sell this investment on suitable terms to accomplish this. With work, wide variety of investments can mitigate these issues. This can be long-term growth stocks, bonds, short-term equities, or C.D.’s, or whatever tickles your fancy. Unfortunately, investing in the right securities is just like work, It might be tedious. Your money will go out and reproduce itself, but it will need guidance from you!
In his excellent “Market Wizards” book series, Jack Schwager said, “There are a million ways to make money in the markets. The irony is that they are all very difficult to find.”
That’s true. If it wasn’t, we traders would all be multi-gazillionaires, wouldn’t we? Finding a trading edge is a lot of work, so it’s important to have an overall plan. In this first article of my series on finding an edge, we’ll look at an overview of the process. Future articles will delve into the details and different techniques that you can use in the search for your next profitable trading strategy.
Currently I’m primarily a Forex trader, but I’ve traded stocks, bonds and options as well. The procedure that I outline here can be useful to any trader, no matter the market.
What is an edge?
Before getting into our 3-step course of action, let’s first define what a trading edge is. We need to start with some basic trading math. This is a whole subject in its own right, so I’ll discuss trading math more fully in future articles. For now, let’s just concentrate on the ideas of risk, reward, and expectancy.
If I buy XYZ stock at 35 with a stop loss at 30, then my risk is 5 points. Let’s say I decide to sell if it reaches 50. Then my goal is a reward of 15 points. Of course I might not set a specific profit goal, waiting instead to see what the market gives me. If the stock rises to 44, and then stalls, I might sell there for a reward of 9 points. In the first example, my reward to risk ratio was 15 to 5, or 3:1, while in the second example it was 9:5.
Some newer traders naively think that they’ll automatically make money on average if they always set their profit targets higher than their risk. What actually happens is that they just get stopped out more often. This is because it’s more likely that the price will hit the stop before it reaches the target. So out of four trades, they may lose 5 points on three and earn 15 on the fourth, for a total “expectancy” of exactly zero (minus commissions and spreads).
The formula for expectancy is:
(Win Rate)(Average Win Amount) – (1-Win Rate)(Average Loss Amount)
Suppose I do 100 trades using some specific strategy, and that my win rate is 40%. My loss rate (or 1-WR) is 60%. If I have an average win of 8 points and an average loss of 5 points, then my historical expectancy for this strategy is:
(0.40)(8) – (0.60)(5) = 3.2 – 3 = 0.2 points/trade
The “edge” is the expectancy expressed as a percentage of my risk per trade, which in this case is 5 points. So the edge is just 0.2 points per trade divided by the 5 points I risk per trade, or 4% of amount risked. So for every $100 I risk with this method, I expect to gain $4. We say that my strategy has a 4% edge.
Gather and explore the data
The first step in finding a trading edge is to gather and explore historical price data. A simple internet search should yield several sources for this, ranging from tick by tick data to daily, weekly, or even monthly bars. In any case, you’ll want to get this data into a spreadsheet. Some data sources provide you with a quick way to do this, while others may require some copying and pasting.
If you’re not familiar with spreadsheets, then now is the time to learn. Using the powerful tools in MS Excel or Open Office, you can answer just about any quantifiable question you have about the data. What’s the frequency of inside bars vs. outside bars? If a bar breaks the previous bar’s high, what’s the probability that the next bar will do the same? And so on. If your creativity needs an initial kick-start, check out my blog site. It has oodles of free archived research notes, filled with examples of data explorations.
This is the stage that statisticians call “Exploratory Data Analysis” or EDA. You’ll want to look at overall features of the data such as bullish or bearish biases, the average price move per bar, and so on. This provides you with realistic profit expectations, and can lead you to further ideas for exploration.
Develop a trading idea
Great. So now you’ve got thousands of price bars in a spreadsheet, and you’re slicing and dicing the data to uncover its secrets. At this point, you’re bound to have a few “aha! moments.”
As an example, just a week or so before writing this, I was examining hourly bar data for the EUR/JPY currency pair, concentrating on just the 4-hour period during the London and New York session overlap. “Aha!” I said. I had just found that 72% of the time, the high or low for that overlap period occurred during the first hour, as opposed to the other three hours. Could I exploit this knowledge to create an edge? Well, I’m still working on that one, so you’ll have to stay tuned.
So the second step is to use what you’ve found in the exploratory stage to develop a specific trading idea. When developing your trading idea, be careful that you’re not just “data mining” and concentrating on some meaningless statistical artifact.
As a non-trading example of this, suppose I gathered data on the amount of rainfall in Boston over the past year, and organized it by the day of the week. It’s extremely improbable that any two days would have exactly the same average rainfall, so I could rank the amount of rain by day of the week. There’s clearly going to be a day, say Tuesday, that had the highest rainfall, and another day, say Friday, that had the lowest. But is this meaningful? Should I plan to have picnics only on Fridays, but never on Tuesdays? Of course not. The storm clouds don’t know what day it is. This is what I mean by a statistical artifact found through data mining. There’s an old saying in statistics that if you torture the data long enough, it’s bound to tell you something.
So when you develop your trading idea, it’s important to have some theory or model, grounded in the real world, which explains why the idea should work.
For example, if you notice that price often makes big moves when it crosses the 50-bar moving average as opposed to other moving averages, what could be causing this? Could it be that this MA is often a favorite among speculators? If so, then this isn’t just a statistical artifact, it’s the result of prevailing trader psychology.
If you notice that currencies often make large moves after three consecutive positive trade balance reports, is this just a statistical artifact? Probably not, as there is a clear fundamental connection between a country’s trade balance and the demand for its currency. Maybe some big bank out there has a strategy of accumulating currencies with good trade numbers. This is a model grounded in reality, and supported by your data.
Test it rigorously
Now that you’ve developed a trading idea supported by your data and a logical model grounded in reality, it’s time to test it. This last stage can often be disappointing, and consequently is sometimes ignored by traders, to the peril of their account balances.
During this stage, you’ll be using basic concepts from probability and statistics, so it’s a good idea to brush up on those subjects. You’ll want to be familiar with such ideas as statistical power and significance, sensitivity and selectivity, type-1 and type-2 errors, and a few others. Again, I’ll explore many of these tools in future articles.
Not only do we want to know how often a signal correctly predicts some behavior, we also want to know how often the signal fails, and how often the lack of a signal correctly or incorrectly predicts absence of the behavior. It’s these latter three statistics that traders often overlook.
In the case of a purely mechanical method with a well defined signal, traders will usually back-test the signal with historical data. In this case, it’s often a good idea to do “out of sample” testing. This avoids the self-fulfilling practice of confirming your hypothesis using the same data you used to come up with it.
In cases where the trading method is a bit more qualitative and difficult to define for back-testing, you may want to forward-test the method in a live account. It’s best to use either a demo account or a small amount of money at first. In this way, you can gather actual expectancy data before committing more funds.
So now you’ve seen the 80,000 foot overview of the 3-step process for finding a trading edge. Gather and explore your data. Develop a trading idea. And finally, test it rigorously. If, during this last step, you find that your brilliant trading idea turns out to be a dud, don’t get discouraged. And above all, don’t ignore your results and trade the idea anyway! That’s a sure path to emptying out your trading account. Instead, go back to your data and keep looking for ideas.
Remember, there are a million ways to make money in the markets. The trick is finding them. And now you’re on your way to knowing how to do that. Good luck, and keep pipping up!
Asset management courses are offered throughout the world by top training institutions.
Dynamically changing financial landscape and the plethora of new regulations in the sector requires staying constantly up-to-date with the changes. Whether you are new to asset or fund management or are an experienced wealth or fund manager, you can always bring your skills up to speed with a relevant training course.
From exploring the specifics of each asset class, their performance characteristics and correlation with other asset classes, to portfolio building and investment performance measurement strategies, to exploring the latest regulatory changes in the sector, it’s important that you choose a good quality training course. From traditional asset classes like equities and bonds to alternative ones like private equity and hedge funds, investment professionals can explore their characteristics and learn how to effectively implement them in a portfolio and spread the risks.
Financial asset management courses can provide you with a wealth of knowledge, tips and strategies. It can help you identify the best performing asset classes, put your strategies in place and give you insider tips to help you achieve the best results and return on your investments.
All investors invest in financial assets with the hope of coming out with a profit. While this does involve its fair share of risk, as an asset manager, you are responsible for helping your clients achieve the best results and come out with a profit wherever possible. This can only be achieved through the application of successful investment strategies, which come with market practice and knowledge. This is not an overnight success story, managing a portfolio of assets takes time, dedication and constant work to ensure that the portfolio comes out winning at the end.
You will learn how to evaluate risks and to identify what each asset is going to do moving forward using past market performance and specific characteristics of each asset class.
Constantly evaluating the assets and monitoring their progress is an important part of the process. This will give you a good indication on the right time to sell to ensure the portfolio comes out winning and not at a loss.
In addition to this, you may also want to learn about UCITS Funds, AIFMD or FCA’s COLL requirements and other regulations affecting the sector, or MiFID II which is supposed to affect investment research, transaction reporting as well as product offering and distribution channels for fund managers.
The asset management courses available will help you become a better portfolio or fund manager and invest successfully on behalf of your clients, as well as to stay compliant in the current market. In the ever evolving market it’s important to stay abreast of the competition and taking additional training courses throughout your career can certainly enhance the chances.
Are you willing to invest in a more long-term and reliable organic traffic source for your website? Then let’s look at a search engine that can assist you in increasing your traffic.
Interview an Influencer or Get Interviewed by a High-traffic Website
Have you heard of Tim Ferriss, the author of the Four-Hour Work Week?
His podcast is nowadays a staple content type that he provides to his viewers. Tim’s show has world-class performers who share their insights on a variety of topics, and he is well-liked on social media. Do Tim’s fans enjoy the show? So far, the show has received over 50 million downloads. On most days, it’s the most popular business podcast on iTunes.
Interviews, whether on video or audio, are inherently conversational, lively, and engaging. The great aspect is that it’s a win-win situation for both sides. The interviewer is exposed to a new audience, while the interviewee is able to provide his website visitors with new fascinating and authoritative information. You can ask an industry influencer to share your interview with their followers on social media if you interview them. Consider the organic traffic you’ll get from their social media followers, which number in the hundreds of thousands. Consider the level of interest generated by a prior Derek Sivers interview on the Tim Ferriss Show. Derek shared the show’s URL with his 283K followers on Twitter. It won’t hurt if you establish a relationship with the influencer as a result of the interview.
Similarly, being interviewed by a high-ranking website can result in a significant increase in search engine traffic. Harsh Agrawal’s blog, Shoutmeloud, received 35,000+ views in a single day after he was profiled by YourStory. That was the blog’s most popular search engine traffic source (with 600,000+ monthly visitors). Because interviews provide consolidated value, they can be used as a long-term lead generating source for your company. Consider how many bloggers you’ve learned about through interviews on YouTube and other high-authority websites.
You may also conduct a Reddit AMA if you have a very compelling storey to tell. Mateen’s AMA got about generating $85,000 in profit by selling TeeSpring shirts/hoodies received 2000 page views. He also boosted the number of visitors to his website on a daily basis.
By registering as a source with HARO, you can also answer queries from journalists. On HARO, Christopher from Snappa came across this question from Inc Magazine about the future of content marketing. He swiftly responded with a thorough response. He was mentioned in Inc a few weeks later as a result of this. HARO is an excellent strategy to have your brand mentioned on authoritative news sites such as Entrepreneur and Inc. Those backlinks will enhance your search engine traffic and increase your marketing strategy by improving your reputation in Google’s eyes. Contact an SEO agency to find out how you can do this and how they can manage it for you while you work on the bottom line of your business.