Digital Diatribes

A presentation of data on climate and other stuff

Archive for the ‘Stocks’ Category

For Something Completely Different… Fun With Investing

Posted by The Diatribe Guy on January 13, 2009

This blog is a science/trends blog, mainly focusing on global warming. However, there are other types of anlaysis, trends, models, etc. that I dabble with.

When the markets crashed in late 2008, my investments crashed right along with everyone else’s. I’m young enough where I figure I can just hold my investments and one of two things will happen by the time I retire: (1) it will recover, or (2) everything goes to hell and the dollar isn’t worth squat, so anything I’d cash out an keep under my mattress wouldn’t buy anything anyway.

But this post isn’t about different economic prognoses, whether I should invest in currencies, gold, or foreign mutual funds, or whether the current stock market is a buying opportunity. It’s actually just about having fun with some disposable income to see if I can tak a small portfolio and develop a trading strategy based on nothing more than charts.

Stock theory says that stock prices incorporate all known data at any given time, and that this perfect information means that charts and technical analysis are already incorporated into stock prices. That’s a nice theory, but it cannot be 100% true. On any given day, numerous stocks swing wildly. Are we to believe that a stock is worth 20% more at 9 am as it is at noon, and then 15% more at close than it was at noon? That’s nonsense. Now, this is not necessarily an argument in favor of technical analysis, but it is evidence that there is an irrational component to stock prices.

This irrational component may well be individual investors making ill-informed decisions. It may also be a kind of “follow the crowd” or “group-think” mentality that comes into play. It may be institutional – hedge funds, shorts, profit-takers, etc. that play the market.

So, it may well be true that over the course of a week, two weeks, or other period of time, the average general price level may represent market fundamentals. But the fluctuations do not. And it is in these fluctuations where I felt one could figure out a way to make some money. However, being an actuary and investing a gazillion risky dollars does not mix. But I don’t like just “paper trading” because I think you learn a lot more when you are forced to make decisions with real dollars.

So, I decided to start tracking charts on a number of stocks. I have continually tweaked my strategy because, as you will see, I’ve really had some poor trades. As I’ve bounced around trying to learn from my failings, I have now bounced back. Only time will tell if the strategy I’ve now honed will be profitable. I make absolutely no claim that it will work. I make no claim that there is anything at all to the strategy of following charts and engaging in technical analysis.

I won’t outline my strategy here. It’s fairly complicated to explain, though with practice it’s really not anything all that bad. It requires some judgment, but as time has gone on I’ve incorporated less and less judgment, and it is much more formulaic.

My general strategy, without getting into the exact details of how I do this are as follows:
(1) I only look at charts and numbers. I pay no attention to fundamentals. I’m playing the variability.
(2) It is not day-trading, but it is short-term trading. I could hold a position for weeks, but usually I close out within a couple weeks.
(3) It’s a buy-low, sell-high strategy based on my evaluation of the charts. The key is how to evaluate the charts, and deciding what low and high means.
(4) I use E-Trade
(5) I currently focus only on stocks less than $5 per share, and average volume of 5 million or more.

I’ve decided, simply for interest’s sake, to post my results here. I currently am only at a slight win, and you will see that I was at one point at a substantial loss on a percentage basis. I would not make those same trades today based on revisions to my strategy. Also, I’m only playing with $2,000. I have a plan into the future, should it be successful, but currently I’m only in one or two stocks at a time.

The reason I’m posting it is because, if it works, I hate it when people say after the fact how great they are, and you don’t know if they’re blowing smoke or not. If it doesn’t work, well, then it;s a lesson in humility. But keep in mind that I am not making predictions of success. I’m basically experimenting to see if I can figure out a winning strategy. It’s entirely possible that I won’t.

After this post, I may add a page that I update, rather than just add update posts.

So, here is what I have done so far. My first 30 days had no commissions. After that it’s $10 a trade (both in and out) and I incorporate those costs into my exit targets.

Opening balance: $2,000.00
10/10/2008: Bought 750 AIG @ 1.9999 ($1,499.93)
10/10/2008: Bought 250 AIG @ 1.9099 ($477.48 )
10/16/2008: Sold 500 AIG @ 2.22 ($1,109.99)
10/16/2008: Sold 500 AIG @ 2.221 ($1,110.49)
10/23/2008: Bought 500 AIG @ 2.0599 ($1,029.95)
10/24/2008: Bought 500 SOV @ 2.2599 ($1,129.95)
10/30/2008: Sold 500 SOV @ 2.6901 ($1,345.04)
11/04/2008: Sold 500 AIG @ 2.351 ($1,175.49)

OK, at this point I’m feeling pretty good about myself. I then did a pretty stupid thing and decided to implement an exit strategy on the downside. After the next few trades, and then subsequent msised profits on the upswing, I abandoned that stupid strategy in a volatile market:

11/06/2008: Bought 500 ABK @ 1.7999 ($899.95)
11/06/2008: Bought 250 MOT @ 4.69 ($1,172.50)
11/06/2008: Bought 250 Ford @ 1.9988 ($499.70)
11/18/2008: Sold 250 MOT @ 3.8512 ($952.80)
11/18/2008: Sold 250 Ford @ 1.6901 ($412.53)
11/19/2008: Bought 1000 CDE @ 0.4617 ($471.69)
11/19/2008: Bought 1000 FNM @ 0.4049 ($414.89)
11/19/2008: Sold 500 ABK @ 0.81 ($395.00)
11/19/2008: Bought 450 UMC @1.8599 ($846.95)
11/20/2008: Sold 1000 CDE @ 0.392 ($382.00)
11/20/2008: Sold 1000 FNM @ 0.3401 ($330.10)

So, looking at that series of disasters, had I simply maintained my original strategy and not tried to be all cute with the negative exit strategy, I would have been OK. I can’t say exactly where I would have sold my positions, but the prices today on all those stocks are above where I sold them. Live and learn… In addition, based on some recalibrations to the charts, I wouldn’t have bought into at least a couple of those to begin with under today’s strategy.

11/25/2008: Sold UMC @ 1.9001 ($845.05)
12/04/2008: Bought 400 UMC @ 1.738 ($705.19)
12/04/2008: Bought 400 ALU @ $2.019 ($817.59)
12/10/2008: Sold 400 UMC @ 1.8701 ($738.04)
12/10/2008: Bought 1400 NT @ 0.3779 ($539.09)
12/10/2008: Bought 600 NT @ 0.3779 ($226.74)
12/11/2008: Sold 400 ALU @ 2.3801 ($942.04)
12/11/2008: Bought 300 CDNS @ 3.049 ($924.69)
01/05/2009: Sold 300 CDNS @ 3.681 ($1,094.30)
01/05/2009: Bought 375 ATML @ 3.009 ($1,138.87)
01/12/2009: Sold 2000 NT @ 0.4421 ($874.20)
01/12/2009: Bought 175 RRI @ 4.999 ($884.82)
01/13/2009: Sold 375 ATML @ 3.231 ($1,201.62)
01/13/2009: Bought 700 UFS @ 1.609 ($1,136.29)
Balance at end of 01/13/2009: $2,110.77.

So, I’m up a little after all that. It’s a good time to start tracking, since I’m neither way up nor way down.

Like I said, I’ll try to soon stick this on another page and update there. If I do find that I get a strategy that seems to work, I’ll share more details.

Update: I have added a page called “Stock Portfolio Experiment.”  That is where I will update my progress on the blog.

Posted in Investing, Portfolio, Stocks | Tagged: , , | 2 Comments »