Saturday, April 4, 2009

04/04: Markets over the past week

This week's action on the equity markets featured an uptick in volatility, and hence in trading opportunities.

The Dow began the week with a collapse on Monday but then built a strong upward trendline throughout the rest of the week, culminating with fresh highs (over 8050) and a strong close (8017):

10-day chart of the Dow; source:

Particularly surprising is that the markets recorded a strong gain on Thursday, April 2: the day of London's G20 summit. I'd expected markets to rise on expectations of the event, as they did in the three preceding days, but to sell-off on the event's actual occurrence, i.e. behave in their oft-repeated buy-on-the-rumour and sell-on-the-news fashion.

With regards to my own trading strategy, I have focused my energies this week on closely tracking and opportunistically trading shares of Bank of America (BAC). Several reasons make trading BAC attractive given my risk-seeking investment strategy:
  1. A high beta, meaning that price movement of the stock, in percentage terms, amplifies the percentage movement of the broader market, e.g. the S&P500 index.
  2. Well-defined patterns in price movement; generally, the movement is less "random" and more pattern driven.
  3. Deep liquidity, which both facilitates the execution of large trades and also minimizes the spread between the bid and ask prices.
In fact, I have practically given up in recent days on the trading of other stocks, an outcome that admittedly appears laced with laziness but, actually, is motivated by simple profit-maximization motives: why would I closely track, say, Apple or Boeing, in hopes of harvesting a one or two percent intra-day gain, when Bank of America is regularly trading in a broad envelope of 10%?

While on this topic, I might add my thoughts on what I perceive to be one of the most important elements of successful trading: staying emotionally level-headed. At first glance, the goal seems odd, even misplaced; aren't markets driven by the interminable struggle between fear and greed? It's true that fear and greed drive a trader's actions, but these emotions are generally productive only when channeled towards the objective measure of price, not towards the charged issue of one's personal profit/loss. Based on my experience, it's critical to appraise a trade in a strictly objective way, as though one were simply making a judgment call that did not involve one's actual money and, by extension, subjective metrics such as: one's potentially growing indebtedness if the trade fails, one's potential ego boost if the trade prospers, how impressive/embarrassing one's P&L (profit & loss) sheet will look with this trade's outcome, etc.

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