Why
short-term trading is now better than buy-and-hold
Warren Buffett, the worlds
greatest investor, known as the ultimate buy-and-hold investor believes
that stock market returns over the next ten years or so will regress
to the long term mean of around 11%. If he is correct (and we think
he is) by definition this means that we can expect a number of years
of very mediocre returns, and some negative years after having had
18% returns on average for the last 10 years. This is an excellent
argument for trading rather than long term buy & hold investing.
Why
Warren Buffet Expects Lower Stock Returns Over the Next Decade
How
to trade SPDRs & QQQs
The most efficient way to trade them is through an electronic
order execution platform such as those offered by Datek, E-trade,
or CSFB Direct. As a subscriber to Trader-Alert, you receive specific
trade signals generated from our trading model that can be applied
directly to trading the SPY and QQQ.
Examples of what these
text alerts look like are listed below along with explanations for
each:
3:18
EST 6/7/01
Buy 50% QQQ 48.50 w/STP 46.49
The above alert communicates that
the Trader-Alert model is initiating a buy to go long by buying
QQQ at a limit price of 48.50 or better and also placing a protective
stop at to sell and close out the position at 46.49. The 50% indicates
to buy the equivalent dollar amount of QQQ shares equal to 50%
of the capital allocated to your trading account. (See
Money Management Rules & Deploying Capital)
3:21
EST 6/7/01
Filled on Buy 50% QQQ at 48.40 w/STP 46.49
The above alert communicates the
estimated price that was executable to subscribers upon receipt
of the alert using a 48.50 limit order. The estimated execution
price indicated above was .10 better than the 48.60 limit price.
(A limit price is filled on the floor at market if the market
is trading below the 48.60 limit at the time a buy order is entered.)
Normally we issue a limit order
to buy that is priced above the price trading at the time we issue
the alert to allow for price fluctuations that occur between the
time we issue the alert and the time that subscribers receive
them. Likewise, we issue a limit order to sell that is priced
below the price trading at the time we issue the alert to allow
for price fluctuations that occur between the time we issue the
alert and the time that subscribers receive them.
11:01
EST 6/8/01
Sell one-half QQQ MKT
The above alert communicates that
the Trader-Alert model is taking partial profits on half of the
ENTIRE long position in QQQ at market.
11:24
EST 6/8/01
Sold one-half QQQ at 50.60
The above alert communicates that
the estimated price that was executable to subscribers upon receipt
of the alert using a market order.
12:00 EST 6/10/01
Sell All QQQ MKT
The above alert communicates that
the Trader-Alert model is taking profits at market on all remaining
shares of the long position in QQQ in order to close the position
out.
The short
sale process is very similar to the buy long process:
3:18
EST 6/7/01
Short 50% QQQ 48.50 w/STP 50.01
The above alert communicates that
the Trader-Alert model is initiating a short sale by selling short
QQQ at a price of 48.50 or better and also placing a protective
stop at 50.01. The 50% indicates to sell short the equivalent
dollar amount of QQQ shares equal to 50% of the capital allocated
to your trading account. (See Money Management
Rules & Deploying Capital)
3:21
EST 6/7/01
Filled Short 50% QQQ at 48.60 w/STP 50.01
The above alert communicates the
estimated price that was executable to subscribers upon receipt
of the alert using a 48.60 limit order. The estimated execution
price indicated above was .10 better than the 48.50 limit price.
(A limit price is filled on the floor at market if the market
is trading above the 48.50 limit at the time an order is entered.)
Normally we issue a limit order
to short that is priced below the price trading at the time we
issue the alert to allow for price fluctuations that occur between
the time we issue the alert and the time that subscribers receive
them. Likewise, we issue a limit order to buy that is priced above
the price trading at the time we issue the alert to allow for
price fluctuations that occur between the time we issue the alert
and the time that subscribers receive them.
11:01
EST 6/8/01
Cover one-half QQQ MKT
The above alert communicates that
the Trader-Alert model is taking partial profits on half of the
ENTIRE short position in QQQ at market.
11:24
EST 6/8/01
Covered one-half QQQ at 46.60
The above alert communicates that
the estimated price that was executable to subscribers upon receipt
of the alert using a market order.
12:00 EST 6/10/01
Cover All QQQ MKT
The above alert communicates that
the Trader-Alert model is taking profits at market on all remaining
shares of short position in QQQ in order to close the position
out.
Money
Management Rules & Deploying Your Capital
Markets Destroy
the Weak
Our money management rules
must be followed or you exposure your capital to excessive drawdowns.
Drawdowns are debilitating or worse fatal. It is very important
to preserve trading capital at all times AND just as important to
maintain your mental balance at all times by placing your trading
capital in safety. Markets always destroy the weak, and trading
using too much leverage and excessive risk make you weak.
Automatic Money
Management
The alerts that you receive
have built-in money management algorithms for strict risk control.
For example, see the following alert:
3:18
EST 6/7/01
Buy 50% QQQ 48.50 w/STP 46.49
The nominal risk to the stop involves
a 2.06% adverse price movement risk (2.01 divided by 48.50), but
the actual risk at a 50% allocation to the 2.06% exposure is 1.03%.
Regardless of the size of your account by following the % allocation
of your account to the number of shares, you are automatically
following our money management rules.
What Fail-Safe
Stops Mean
Sometimes we will issue
an alert that might look like this:
3:18
EST 6/7/01
Buy 200% QQQ 48.50 w/STP 46.49
Since the allocation is 200%, this
means you fully margin your account at 50% margin buying the equivalent
of $200K of QQQ in a $100K account. This may seem like a lot of
exposure but the leverage involved is in fact still only 2:1 which
is not excessive if you are following our trading model closely,
or following the market on multiple intraday timeframes as we do
at Trader-Alert.
Since the risk to stop involves a
2.06% adverse price movement risk (2.01 divided by 48.50), and the
allocation is a 200% allocation the worst case risk exposure is
theoretically 4.06%. Since we prefer to take risks in the 1/2 of
1% to 1.5% range, such a wide stop and higher than our normal theoretical
risk means that while we need to have a fail-safe stop order in
place, in fact, we are monitoring the price action to either adjust
and raise the stop soon or exit the position at market. The probability
of the fail-safe stop actually getting hit is quite low using our
model.
Opportunity Costs
Can Be Very Expensive
Opportunity cost is how
much it costs you to exercise discretion in your trading. If you
are going to take advantage of our model you cannot pick and choose
the trades you think will work. The most profitable trades will
often be the most difficult trades to execute from a psychologically
point of view. That is just how markets work -- they constantly
minimize profitable participation by looking too strong to short
at highs and too weak to buy at lows. What is good for the psyche
is bad for the bottom line. So if you want to work the Trader-Alert
model you need to take the trades in the correct size and allocaiton
that we suggest.
How
to use Trader-Alert with Stock Index Futures
The following information
describes how to use our service if you are a futures trader. If
you are relatively new to trading we do not recommend futures trading.
Suppose you saw the following alert:
3:18
EST 6/7/01
Short 20% QQQ 48.50 w/STP 50.01
At the time we issued
the alert the intraday swing high extreme of the QQQ was 48.90,
the analogous swing high in the NQU1 (the Sep 2001 Nasdaq futures
contract) was 1984.50.
When the subscriber received
the alert he/she could have easily shorted the QQQ between at 48.65.
A 1.36 point risk divided by 48.65 is a 2.8% risk X the 20% allocation
equals a net .056% (about half of 1%) risk to your trading capital.
For a futures trader, the calculations are simple.
First, calculate the
% risk to stop. The stop in the QQQ was set at 1.11 points above
the swing high at the time we issued the signal, which was 48.90.
Therefore, the stop was 1.11 points above the high (not where you
may have shorted it!) That means the stop was set at 2.27% above
the intraday swing high in place at the time we issued the signal.
2.27% X the 1984.5 equivalent high in the futures is equal to a
45 point stop ABOVE 1984.50 which is 2029, always round up to a
tic above the next even or half handle, therefore 2031 STP. Thats
all there is to translating the order into futures prices. But,
how about the critical issue of money management?
If the NQU1, the Sep
futures Nasdaq, was 1975 bid when you received the alert, then the
risk to the 2031 is 2031-1975 = 56 points X $20 per point for the
Nasdaq 100 futures is s $1120 risk. In order to take a $1120 per
contract risk and not risk more than the 1/2 of 1% suggested by
the 20% allocation above means you have to have a futures account
funded to the amount of $224,000 to trade a single e-mini Nasdaq
contract, or pass on the trade.
Since most futures traders,
want to get rich overnight, and trade based on allowable exchange
margin rates which is around 15:1, instead of using any sensible
money management algorithm, most futures traders are extremely over-leveraged
relative to their level of knowledge, which is why most of them
do not last more than a year.
If you want to trade
futures using Trader-Alert you must follow the money management
rules that we recommend or you stand to incur excessive drawdowns
which do not give you staying power.
f you are a futures trader
or NASDAQ stock trader using Trader-Alert as an adjunct to your
trading tools then you can follow these general guidelines:
- If we are recommending a wide-stop
and a low-leveraged entry like a 20-50% entry, that means that
we have identified an area where you want to try to use whatever
entry tools you are already using in futures to try to get positioned
in that area.
- If we are recommending a tight-stop
and a 100% or a leveraged position (150 to 200%) then that means
that we have identified a more exact inflection point, one more
directly translatable into an immediate futures execution.
- Instead of using the 15:1 leverage
that the exchanges offer you, deleverage your futures trading
to 5:1 or 7:1.
SPDR/QQQ
Vs. Stock Index Futures
The ES and the NQ are
the e-mini futures contracts for the S&P 500 and NDX 100 stock indices,
respectively. They also move in tandem with the underlying cash
indices, and SPY and QQQ as well. But, because they are a futures
contract, they also have a premium, or carrying charge built into
the pricing due to the amount of time between today and the expiration
of the futures contract.
Futures symbols normally
contain four characters: On my data service, ESU1 is the symbol
for the September 2001 contract of the e-mini S&P 500 representing
50 shares of the S&P 500. ES stand for e-Mini S&P, U is the symbol
for September and 1 is the symbol for the year 2001. This symbol
may vary according to different data vendors.
The main difference between
trading the ES vs. the SPY, or the NQ vs. the QQQ is the issue of
leverage. Futures contracts may be traded with high leverage, while
the maximum leverage that one can apply to SPY or QQQ QQQ is 2:1
if traded in a stock margin account using all of one's buying power.
The margin on the e-mini S&P is (as of June 2001), about $4000 per
contract which controls 50 shares of the S&P 500. With the S&P 500
priced at 1270, for example, you can control $63,000 worth of the
S&P 500 stock index for $4,000 which is about 15:1 leverage if one
wants to use the maximum leverage. For futures trading we suggest
using a more manageable leverage ratio or 5:1 or 7:1.
A lot of traders are
drawn to trading stocks indices and futures, but if you are wrong
over a series of trades and do not exercise proper money management
the leverage can be absolutely lethal. The use of disciplined methods
that govern a trader's habits are indispensible in rapid and volatile
markets. To see how precise stock market timing is integrated with
convervative money management sign up for the free trial...
