Idea Generation: Trading

I usually find that I have good trading ideas but precede the market by 3-6 months (Bill Gross style). I’m not looking for YOUR ideas, more your trading style and what methods you use to find ideas that you might find worthwhile. I usually scour web sources (BBRG, Reuters, Marketwire, ZeroHedge, SumZero [Free Version], Options Hawk etc…) then look at historicals for the industries in question. I think look into the higher beta/levered names to find equities that will hopefully have an outsized reaction to anticipated runup. So I guess you can say my style is more of a macro event driven for short term (6mos - 1yr). For value/lt trades I have PBR, VALE, BAC (I know I’ll get some heat here) and two micro cap drillers. Where do you usually look for trading ideas? What screening methods do you use to begin to drill down before researching individual equities. Do you usually trade single stock or play macro trends through ETF’s. Stop losses? Timeframe? BTW, anyone see the GOOG numbers? WOWZERS!

AM, I think it really depends on knowing yourself and what kinds of things you have better insight on than the others you are competing with. You have to “know yourself” and figure out what type of “edge” you might have in investing. If you’re young, it just might be that you have the physical energy and patience to dig deep into 20 companies and their financial statements that someone older might not be willing to do, or it might be that you know a particular sector because your parents worked in it. Whatever it is, you need to figure out what you analyze better than the average investor, and particularly your competition. For me, I have decades of experience and a Ph.D. analyzing economic policy decisions by governments and central banks, as well as development policy in emerging markets, so it just makes sense for me to use that knowledge base as the thing that is hardest for my competition to replicate, and so I do mostly macro decisions with ETFs. By contrast, I have less experience analyzing individual companies (although since I also have training in how to structure qualitative analysis, I could try to leverage that for things like pairs/spreads trades). As I gain more experience with the industry, though, I am starting to tip-toe into equities a bit more as a way to add spice and pop to a portfolio. It’s hard to get good sharpe ratios with just macro and ETFs, though, because there are just too few independent decisions to make. It helps a little when you go around the globe and increase the number of instruments, but a macro portfolio really is only going to have perhaps 25 or maybe 50 different things you can trade in it, whereas a stock portfolio has 1000s. What I’ve learned in the macro space is that it can take an amazingly long time for something that is “macroeconomically obvious” to actually happen. It is baffling to me, because for a long time, I’m looking at things and saying to myself “why is the dollar strengthening now, all the long term things say it should weaken.” So it just takes some time to get a feel for how the market seems to respond to things. It’s a bit like ice skating. It takes a while to realize that - although it’s not quite like walking - it’s not entirely different either… Or being on a waterbed… yeah, I know that the economy has to shift this way long term, but every time I try to crawl out of where I am, things move in weird ways. I think the real trick is to work hard on controlling your risks, either with small positions or possibly stop losses. This allows you to make your trades and get used to things without the euphoria and panic that messes people up. One thing that comes out of quantitative analysis, particularly the “kelly criterion” is that the penalty for not taking enough risk is fairly mild on the long term performance of your portfolio. By contrast, the penalties for taking only a little too much risk on a trade can destroy you surprisingly quickly. So when you’re learning, don’t be afraid to make many small bets (though it’s better if they aren’t all correlated with each other).

One thing I trust in life is: Trend is your best friend. Ride the bus, have fun and get off without any feeling of remorse. But again; the point is, how do you identify between a good trend and bad trend and false trend and no trend? IMO, that depends, in my trading I focus on volume trends for low caps, volume or price*volume trends for mid caps, and price trends for large caps. This acts as first level of screening, because mathematical rules are pretty easier to apply here, to catch these trends or atleast rank them, there are variety of technical indicators for that, choose whatever suits you best, or create your own; the point is you should be able to trust it. Then starts second level of screening, which is something with which you are comfortable, like I focus on option activity and correlations for second level of screening, and fundamentals at last as mathematical rules are pretty hard to apply on balance sheet data, thanks to inconsistency in reporting and poor quality of freely available data (which is often erroneous); but if you have BBG then you might want to give it the amount of respect it demands and deserves.

ASSet_MANagement Wrote: ------------------------------------------------------- > Stop losses? > > Timeframe? > > BTW, anyone see the GOOG numbers? WOWZERS! “wowzers!” youre single, right?

Those 570 call options are going to be looking nice tomorrow.

two words: plastics

For trading, I find headline risk most rewarding. Whatever people are freaking out about, find the best company in the sector, buy, and wait. It’s worked out very well for me except for uranium after Japan, but I still like URA. /Meredith Whitney

Sweep the Leg Wrote: ------------------------------------------------------- > For trading, I find headline risk most rewarding. > Whatever people are freaking out about, find the > best company in the sector, buy, and wait. It’s > worked out very well for me except for uranium > after Japan, but I still like URA. > > /Meredith Whitney Yeah I got CRUSHED on CCJ. So pointless…

Sweep the Leg Wrote: ------------------------------------------------------- > For trading, I find headline risk most rewarding. > Whatever people are freaking out about, find the > best company in the sector, buy, and wait. It’s > worked out very well for me except for uranium > after Japan, but I still like URA. > > /Meredith Whitney Newscorp anyone?

Are you trading or investing? If you’re trading, I look for equities that have some sort of catalyst coming up or just had one. I use briefing live-in play as my news service. If you’re investing for the long-term, the only investment you need is Google, which will own the world at some point.

ManMythLegend Wrote: ------------------------------------------------------- > If you’re investing for the long-term, the only > investment you need is Google, which will own the > world at some point. I wonder whether that has been said before about Ford or IBM or Madoff.

maratikus Wrote: ------------------------------------------------------- > ManMythLegend Wrote: > -------------------------------------------------- > ----- > > If you’re investing for the long-term, the only > > investment you need is Google, which will own > the > > world at some point. > > I wonder whether that has been said before about > Ford or IBM or Madoff. IBM hasn’t been a slouch…

Have you looked at REITs? There’s some nice yields out there…

LBriscoe Wrote: ------------------------------------------------------- > Have you looked at REITs? There’s some nice > yields out there… Are you kidding? Which REITs? REIT preferreds? I think REITs are much more of a rent growth story now than current yield, but I’m not focused on the area so I could be incorrect. If you are looking for income I prefer the fundamentals behind MLPs, although you have to be selective. NG pipeline toll takers with limited/no/hedged commodity exposure could be a good place to be, as tranmission needs to continue to be built out for the “cheap” NG supply glut to be put to efficient use. For idea generation I usually try to think of a secular trend that everybody agrees is going to happen and try to think of a non-obvious way to play it.

One word: Biotech

ZeroBonus Wrote: ------------------------------------------------------- > One word: Biotech Agreed, you can’t go wrong investing in biotech…wait, wtf?

LBriscoe Wrote: ------------------------------------------------------- > Have you looked at REITs? There’s some nice > yields out there… I’d rather buy NLY, they’re trading right at the 200 DMA after the follow-on offering… It’s like buying a perferred stock with 2x the yield and .5x the price. 14.5% what upppppp