Investing strategy, markets, financial, risk
Trading associate gambling and there’s a lot of truth in this. There are lots of types of investment strategies: based on technical analysis, fundamental, stochastic/quantitative. We all supported the key strategies is to determine the probabilities of gain or loss. Even the classic fundamental analysis of companies is a tool used to predict the future of the company, and because of the nature of prediction is burdened with an error, the result of AF is merely the probability of occurrence of the expected scenario. As opposed to gambling on the markets can make a profit in the long run, because the expected value of profits is not necessarily negative, as in the classic casino games. The expected value is equal to the result of the transaction:
E (W) = p * Z – (1-p) * S
where Z – profit, p – the probability of profit, S – the maximum loss that can meet us during the project.
As you can see from the formula is not about winning to the probability p was greater than the probability of losing (1-p), but that the expected value of profit p * Z was greater than the expected loss (1-p) * S. You can therefore lose very often and win a small amount and once on every 10 transactions get large amout of profit Alternatively, the opposite: often win small amounts and rarely lose a lot of money and also be in the black as long as the sum of the “awards” will be greater than few, rare, big losses. My style would classify the trading position, with a tendency to fundamental analysis. This means that I try to participate in long-term trends. Long-term trends in turn I try to set using the analysis of fundamental data and observing the attitude of market participants. I think that this last factor (ie psychology) has a huge impact on the process of formation and collapse of the trend. Investing involves a constant search of opportunities: share of the market moves from less to more profitable income. This process causes shortly after the formation of a trend, the market is observed and its yield is attracting more and more capital. Incoming capital reinforces the trend, the trend strengthens capital and so on. It takes as long as the level of loan financing costs of speculative capital will exceed the increasing profitability of the market. Stopping the growth of the stock market for example, causes the outflow of capital and the transition to the decreasing trend. Fall usually stops when the share price reaches the book value of companies (or just an intrinsic value determined by the majority of fundamental analysts.) As trends such as those described above, tend to last a long time they can be very profitable, that is why a long-term speculation is more interested for me than the so-called daytrading. Unfortunately, I see serious negatives of long-term strategies: no way to prove that they are indeed profitable. Take, for example, the Forex – a market that has existed for many years recently, a number of trends that have emerged in the past is relatively small. It is hard to expect that, based on so few observations can be firmly concluded that the strategy of “long-term trend following” makes sense. As for the stock market, the situation is slightly better, though not perfect. Known and probably overrated method of value investing, it belongs to those strategies which can not be neither proven nor denied. Investing in value presupposes economic growth in a very long period – comparable to the length of human life. The fact that someone over the last 40 years has managed to get through it a great fortune, does not mean that the next 40 years there won’t be events that will destroy the achievements of an entire generation. All strategies have their positives and negatives. Almost as religions have their followers and opponents. Listening to the stories of some extremely talented traders, it seems that they are not human of flesh and blood but the supernatural beings coming down to Earth to make their followers happy. It is significant that the most frequently published their methods are extremely simple. So simple that it can swallow without pain, anyone who wants to buy the book. Interestingly, after reading this book you usually know exactly the same as before. I do not want to distract anyone from reading books. But I encourage you to … think, to search for the real reasons for this and other behavior of the markets.
At the beginning you’ll be able to translate phenomena only post factum. As far as scooping the experience and knowledge you will notice soon that you not only will be able to explain the facts that have already taken place, but also to understand what is happening on markets. Understanding is a prerequisite to successfully invest for a long time. Is it sufficient? Of course not! Yet it would be necessary to possess the art of forecasting. Since this is art it would be better if you leave this art dor artists and storytellers. For you and for me it’s just to know roughly when the opportunity arises to enter and exit the market. In fact, every open position should become a theory, which we are constantly forced to observe the economic and political phenomena, to detect causal relationships, and analogies. Invented the theory is correct or not, but establishes a framework in which we operate. If the theory does not work, close the position and look for the next model better describes the behavior of the markets. It is important to first grasp relationships between economic developments and the price moves. Due to the continuous search after a certain time in your mind will emerge a “database” of links, which you will apply almost automatically to the next “surprise” situations. Unfortunately, this requires work: learning to acquire a good knowledge of economics, and continuing to observe of markets (related to exploration of cause and effect relationships). Fortunatly this work is in a great pleasure. Curiosity, the ability to ask stupid questions, the passion to create models of phenomena are features that help you when you invest, if only because thanks to him we are able to endure all this tedious work of data collection and analysis. The prize is not only money but the satisfaction from a better understanding of the surrounding phenomena.
Published in Chaos Laboratory – contrarian strategies of global and forex inwvesting
About the Author
Physicist, global and forex investor for over 15 years
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