Written by Jeff Miller, A Dash of Insight
— this post authored by Mark D. Hines
Our previous Technical Thoughts asked the question: Are the Bots Winning? For example, the use of automated technology and artificial intelligence continue to permeate our lives whether it be Internet advertising programs, self-driving vehicles, or algorithms/trading models. It seems whether you love or hate the robots, you’re going to have to deal with them. And the better you learn to work with the bots, the better you may be able to pick your investments and your trades.
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This Week: What Motivates Traders to Trade?
It seems we often here about the wildly successful traders that consistently “hit it big” in the markets. However, most data suggests most traders fail miserably. For example, according to expert trading psychologist Dr. Brett Steenbarger:
“Why do so many pursue a living from markets when there is clear evidence that the great majority never succeed?”
In his fascinating blog post, he first reviews data showing many people are so unhappy in their professional lives, that they may actually pursue trading on the glimmer of hope for a better lifestyle. He writes:
“Perhaps, just perhaps, people seek trading – against all odds, against all common sense – because the pursuit of a remotely possible winning life feels preferable to assured misery. It’s the same reason refugees defy all odds on the high seas in hopes of a better home, a better life. What many aspiring traders need is not false hopes, but genuine, viable alternatives to the traditional “opportunities” out there.”
Dr. Steenbarger’s suggestion is thought-provoking, and perhaps it explains a variety of other trading-related phenomenon. For example, what has motivated so many traders to purse crypto currencies, such as Bitcoin (GBTC) instead of traditional, less-volatile, currencies? Perhaps it has something to do with the vast distrust of central bankers’ extreme currency manipulation during and after the financial crisis? Barry Ritholtz suggests something along those lines in this recent Bloomberg article where he writes:
“Think of it [Bitcoin] as a social movement in reaction to the wreckage of the financial crisis.”
And still thinking along those lines, perhaps it was the pain caused by the housing crisis that led so many people to leave behind normal sized homes to pursue extreme lifestyle changes, such as the “tiny house” craze that seemed to have peaked a few years after the housing crisis.
As another example, perhaps not coincidentally, the rise in popularity of electric vehicles (such as Tesla) gained momentum shortly after the price of a gallon of gas rose to levels considerably higher than previously, as shown in the following chart.
Model Performance:
Per reader feedback, we’re continuing to share the performance of our trading models, as shown in the following table:
We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.
For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.
Expert Picks From The Models:
This week’s Technical Thoughts is being edited by Blue Harbinger; (Blue Harbinger is a source for independent investment ideas).
Holmes: This week I bought shares of Restoration Hardware (RH). It offers furniture, lighting, textiles, bathware, decor, outdoor and garden, as well as baby and child products. What do think about that?
Blue Harbinger: It looks like you bought on the dip. Those shares were trading over $160 a month ago, and now they’re in the $130’s.
Holmes: That is correct. I am a “dip-buyer,” and I typically hold my positions for about 6-weeks.
BH: Between all the insider buying at RH over the last year, and the very high levels of short-interest (currently 34.1%, even higher than Tesla, mentioned earlier, at 22.0%), I am a little leary of this stock. Here is a look at the Fast Graph with more fundamentals for you to consider, Holmes.
Holmes: Thanks for the data points, but I make my trades based on technicals, and the long-term fundamentals are less relevant to me. Specifically, I am a technical trading model designed to keep investors active in the market while protecting from wild swings. I use a mix of advanced trading techniques (including profit taking, stops, and trailing stops) and technical analysis to avoid significant drawdowns. Perhaps my most identifying characteristic, as you know, is my ability to identify attractive dip-buying opportunities, such as RH.
BH: Very interesting, Holmes. I’ll check back in with you on this one in 6-weeks. And how about you, Road Runner – any trades this week?
Road Runner: I purchased shares of Whiting Petroleum (WLL) at $51.50 on July 5th. As you know, I am a momentum trader, and here is a look at the “buy chart” with the channel that I like, as well as the 1-year technical chart.
BH: You are aware that WLL is an oil & gas drilling and exploration company, correct Road Runner? To help you understand more about how its price moves, relative to the price of oil, check out the following chart. Do you see the resemblance?
Also, here is a look at the Fast Graph with more fundamental data.
RR: Thanks for the long-term data, but my typical holding period is 4-weeks, and there are plenty of idiosyncrasies and opportunities in the 4-week price moves on this one.
BH: Thanks Road Runner. And how about you, Athena – any trades this week?
Athena: I purchased shares of ABIOMED (ABMD) back on June 4th for around $394, and I sold them all above $411 this week on July 10th. What do you think about that?
BH: Not bad. And yes I do recall discussing this position when you purchased the shares back in June. I am happy you turned a profit on this one, Athena.
Athena: Thanks. And as you know, I combine two successful trading methods: momentum and rotation. And my typical holding period is about 17-weeks.
BH: I am impressed with your trade, but these shares have already doubled this year. Have you ever thought about “buy and hold,” Athena? By the way, here is a look at more fundamental and longer-term data in the Fast Graph.
Athena: Thanks for the data and suggestion, but did you see my strong performance in the table earlier in this report? I’m sticking with my strategy. And by the way, for what it’s worth, I also hold Whiting Petroleum – the new position Road Runner took this week.
BH: Thanks Athena. And how about you, Felix? I know you have a longer-term focus than Athena. Did you place any trades this week?
Felix: That’s right; I typically hold for 66-weeks; much longer than the other traders. But, no. No new trades this week. However, I did run all the stocks of the S&P 400 midcap index through my system, and I’ve included a ranking of my top 20 below.
BH: Thanks for that, Felix. Would you please remind us, what is your trading style?
Felix: I am a technical model, and I embrace the most durable and successful trend in trading – momentum. I look for uncrowded trades, and then give them time (usually around 66-weeks) to play out.
BH: Thanks, Felix. And I see ABMD is ranked high on your list. I already suggested to Athena that she might consider holding her positions for a longer time-period, but she already sold her ABMD shares for a healthy profit, earlier this week. Anyway, how about you, Oscar – anything to share this week?
Oscar: Yes, this week I ran the Comprehensive & Diverse ETFs universe through my system, and my top 20 are ranked as follows
BH: Thanks, Oscar. I recognize you are also a momentum trader, you typically hold for 6-weeks, and then you rotate into a new sector or ETF. I see that you continue to like energy, as evidenced by your inclusion of US oil (USO) and the oil and gas ETF (XOP). Both Athena and Road Runner will appreciate this considering they both have an open position in oil and gas company, Whiting Petroleum. Its shares tend to have a high correlation with oil, so it looks like all three of you are on the same page in this regard.
Conclusion:
Trading isn’t easy, and many get into the field (and place specific trades) because they are fleeing something negative. Ultimately, most traders fail, but there is hope. We find that consistent dedication and constant learning are keys to success in the field. Overnight success is practically unheard of, however with discipline, time and dedication, trading success is attainable.
Background On The Stock Exchange:
Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
Getting Updates:
Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.
Trade Alongside Jeff Miller: Learn More.
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