Backtesting a stock selection idea is a complicated process. Here are some free websites that let you test your ideas:
www.backtest.org
www.keelix.com
Tuesday, January 13, 2009
Tuesday, November 11, 2008
5 ways to succeed in a volatile market
Whew! The S&P 500 is down roughly 42% from it's high last October. Buffet is buying. Sentiment indices are hitting lows. It's a tough time to be long stocks. Here's 5 ways to ease the pain and succeed in a volatile market such as this one:
1. Hedging
Here are 5 ways to hedge your long positions:
2. Market timing
There are many successful market-timing models out there. People that say market-timing doesn't work don't understand the purpose. The purpose of market-timing is to reduce risk! Most of the time a market timing model will not keep up with fully-invested long positions. However, when the market gets ugly, market timing shines. Take a look at the performance of HSGFX and you'll see what I mean.
The Halloween indicator is one such market-timing model that would have worked well this year. Learn more about this model here.
3. Asset allocation
Increase cash when the market gets volatile! Reduce position size! Don't be as aggressive with long positions. Perhaps you use VIX as an indicator of how much cash to hold in your trading account.
4. Market-neutral or uncorrelated strategies
Here's some examples:
- uncorrelated markets (Corn anyone?)
- option selling
- covered call writing
- Bond trading, etc...
5. Stick with your trading plan!
Remember that all traders and investors are feeling significant pain at this point. Contrarians and value investors are starting to buy. Just when the pain is unbearable, the market is ripe for a turnaround. A good trader sticks with his plan even through the drawdowns.
1. Hedging
Here are 5 ways to hedge your long positions:
- Pairing
- Short against the box
- Exchange-traded funds (ETFs)
- Futures
- Options
2. Market timing
There are many successful market-timing models out there. People that say market-timing doesn't work don't understand the purpose. The purpose of market-timing is to reduce risk! Most of the time a market timing model will not keep up with fully-invested long positions. However, when the market gets ugly, market timing shines. Take a look at the performance of HSGFX and you'll see what I mean.
The Halloween indicator is one such market-timing model that would have worked well this year. Learn more about this model here.
3. Asset allocation
Increase cash when the market gets volatile! Reduce position size! Don't be as aggressive with long positions. Perhaps you use VIX as an indicator of how much cash to hold in your trading account.
4. Market-neutral or uncorrelated strategies
Here's some examples:
- uncorrelated markets (Corn anyone?)
- option selling
- covered call writing
- Bond trading, etc...
5. Stick with your trading plan!
Remember that all traders and investors are feeling significant pain at this point. Contrarians and value investors are starting to buy. Just when the pain is unbearable, the market is ripe for a turnaround. A good trader sticks with his plan even through the drawdowns.
Wednesday, November 5, 2008
What are the market effects of presidential elections?
CXO Advisory does a great job of summarizing market movements with presidential elections. Here's an executive summary:
Get the whole scoop here:
http://www.cxoadvisory.com/blog/internal/blog1-04-08/
In summary, there appear to be both long-term and short-term connections between the U.S. national election cycle and stock market performance, with presidential term year 3 (1) the best (worst) and a tendency for a brief election-time rally. However, the subsamples for presidential term year analysis are very small, so confidence in related tendencies is very low.
Get the whole scoop here:
http://www.cxoadvisory.com/blog/internal/blog1-04-08/
Wednesday, October 29, 2008
Hedge with VIX?
The VIX has me a bit nervous because it is higher now than it ever has been.
Wouldn't it be nice to add a VIX ETF to your portfolio? The last time I checked into this, VIX is a tradable futures contract, but it doesn't quite act the same as the index. Perhaps selling options would be a good way to mimic the VIX. I've been thinking about a strategy where I would sell strangles or straddles on the SPY, and rolling them every so often so the market doesn't penetrate one side. I haven't thought this all the way through, though. Any opinions?
Wouldn't it be nice to add a VIX ETF to your portfolio? The last time I checked into this, VIX is a tradable futures contract, but it doesn't quite act the same as the index. Perhaps selling options would be a good way to mimic the VIX. I've been thinking about a strategy where I would sell strangles or straddles on the SPY, and rolling them every so often so the market doesn't penetrate one side. I haven't thought this all the way through, though. Any opinions?
A market-neutral options strategy
With a market like this, everyone would like to add some uncorrelated or market neutral strategies to their portfolio. Here's one that I ran across quite accidentally:
http://www.agoraoutlook.com/
Here's a summary of what they do:
It looks interesting, but the costs are a bit high at $100 per month. But it least it gives us ideas on how to survive in a volatile market such as this one.
http://www.agoraoutlook.com/
Here's a summary of what they do:
We use a unique program for trading index options which is opposite of the buy and sell method of trading options. What we do is sell options using credit spreads and outright selling techniques and watch the premium evaporate over time. We mainly trade the S&P 100 and 500 cash and futures indexes. Besides our trading program, the publication is designed to inform you of significant economic news, the mood and technical condition of the market and relevant trade data by e-mailing it directly to you. If there is an important news event that moves the market we also let you know about it right after it occurs!
The special emphasis of the Agora Outlook is its unique trading program. Established in 1990, by Ken Davidson, the program concentrates on trading U.S. indexes. Mr. Davidson has tested his program with key option indexes since 1982 and to date has produced an impressive 94% reliability. Since he began actual trading in 1990, the program has produced an average 134% profit per year, excluding commissions. The program has never had a down year!
Simply put, our trades involve selling options in a way which gets time working for you instead of against you. Most people who buy options do so to make a profit on a rising or falling market. Unfortunately, over 88% of all index options expire worthless! The problem is, the index may go the wrong way or it may not go anywhere so the investor’s premium in the option slowly decays. As each day and hour goes by, the option moves closer to expiration reducing the time premium! A trade can be profitably made if the market is moving up, down or even sideways! This gives investors the opportunity to make money 66% of the time instead of only 33%, which is the case when you outright buy for either a rising or falling market. This means that our program has a much higher success rate than the traditional buy and sell method! We apply a mathematical model to the market to find trades that make time work for you instead of against you. This is what makes our program unique! We always try, if the opportunity presents itself to trade the market on both the upside and the downside as our program supplies the upside and downside closing boundaries of a particular expiration cycle. This also means that you are guaranteed a win on at least one trade.
It looks interesting, but the costs are a bit high at $100 per month. But it least it gives us ideas on how to survive in a volatile market such as this one.
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