Stock Exchange: What Is Your Trading Personality?
The Stock Exchange is all about trading. Each week we do the following:
- Discuss an important issue for traders;
- highlight several technical trading methods, including current ideas;
- feature advice from top traders and writers; and,
- provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!
Review: Have You Ever Tried To Design A Trading System?
Our previous Stock Exchange asked the question: Have You Ever Tried To Design A Trading System? We described how creating your own trading system can be appealing, but also reviewed many common mistakes to avoid along the way. A glance at your news feed will show that the key points remain relevant.
This Week: What Is Your Trading Personality?
One of the big advantages of having a trading system is that it helps you avoid many of the common emotional and psychological mistakes that many human traders often make. However, to ignore your own personality when developing your trading system could be a big mistake, as well. For starters, here are four high-level trading personalities that you may or may not be able to relate to:
- The “Panicker”: If you talk a big game, but immediately run for the hills when the stuff hits the fan, you might be a panicker. Don’t know what we’re talking about?… check of this excellent article from Financial Samurai: Your Risk Tolerance Is An Illusion: Wait Until You Start Losing Big Money.
- Mr. Insecure: If you have a habit of taking profits on your trades way too soon, it could be an indication that you don’t have a lot of confidence in your trading system. For example, Peter Robbins says it well in his tweet: “Believing you are never wrong taking profits can have a devastating effect on your trading results. It may feel good in the short term but usually shows a lack of confidence in your system and reinforces bad behaviour.”
- The Pessimist: According to a recent blog post from the always insightful Dr. Brett Steenbarger, “We experience pessimism when we believe we have little control over the important outcomes in our lives.” And that certainly applies to traders too.
- The Machine: There is something very appealing (yet also frightening) about advancements in artificial intelligence to the point that machines are beating humans across many walks of life, including trading, and even head-to-head debates, as was the case in this recent artificial intelligence project about IBM’s “Project Debater.”
And while advances in machine learning may seem objective, machines can also take on different personalities. We’ll get into examples of recent live trades by our specific trading models later in this report, but first here is a reminder of our trading models’ individual personalities.
Stock Exchange Character Guide:
|Character||Universe||Style||Average Holding Period||Exit Method||Risk Control|
|Felix||NewArc Stocks||Momentum||66 weeks||Price target||Macro and stops|
|Oscar||“Empirical” Sectors||Momentum||Six weeks||Rotation||Stops|
|Athena||NewArc Stocks||Momentum||17 weeks||Price target||Stops|
|Holmes||NewArc Stocks||Dip-buying Mean reversion||Six weeks||Price target||Macro and stops|
|RoadRunner||NewArc Stocks||Stocks at bottom of rising range||Four weeks||Time||Time|
|Jeff||Everything||Value||Long term||Risk signals||Recession risk, financial stress, Macro|
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.
And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.
If you have been thinking about giving it a try, 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 Stock Exchange is being edited by Blue Harbinger; (Blue Harbinger is a source for independent investment ideas).
Road Runner: This week I purchased Huazhu Group (HTHT). As I am sure you are aware, this company engages in the hotel operation business in China.
Blue Harbinger: Yes—I know. HTHT offers four different hotel brands designed to target different segments of customers. Why do you like this stock, RoadRunner?
Road Runner: Because is was in the lower end of a rising channel. You can see what I am talking about in the following chart.
BH: Yes, I see what you’re talking about, Road Runner, and I know that type of trade fits your personality well. For your reference, here is the 1-year chart too; I hope it is helpful.
Road Runner: Thanks, but I typically hold my positions for only 4-weeks, so that view is a little long for me.
BH: How about fundamentals, Road Runner? For example, this company’s revenues and earnings have been bouncing around a little bit, relative to expectations, but the overall trend continues to be up. Here is a look at the Fast Graph with data going back to 2011; it also gives earnings estimates out to 2020.
Road Runner: 2020? I will have completed many trades before 2020.
BH: Well based on the earlier performance table, your returns have been positive over the last year, but your still lagging behind the other traders. Maybe you should start considering more fundamentals.
Road Runner: I’ll stick to my disciplined process, it fits my personality. I also realize that different styles/personalities work better under different market conditions.
BH: I see. Anyway, how about you, Athena? I noticed you put up some really good performance last week (and over the last year). Did you place any trades?
Athena– I purchased Momo (MOMO) on Monday. What do you think about that?
BH: Wow—you and Road Runner both like Chinese stocks this week. Momo operates a mobile-based social networking platform, and its revenues have been growing like wild fire. Its also been consistently topping quarterly earnings expectations. This a growth stock with a lot of room to run. But why do you like Momo?
Athena: As you know, I am a momentum trader, and MOMO looks attractive over the next 17-weeks, which is my typical holding period.
BH: Interesting. It’s been volatile, and it’s clearly above its 50-day and 200-day moving averages. Here is a look at the Fast Graph to give you a better idea of the rapid growth I was talking about, which by the way is expected to continue through 2020.
Athena: It’s been a powerful grower, but I don’t need it to grow through 2020, I need the price to go up for the next 17-weeks (my typical holding period). It’s my personal trading style that’s been putting up those big returns.
BH: You certainly have been doing well, Athena. How about you, Felix—any trades this week?
Felix: I purchased shares of ABIOMED (ABMD) on Monday for $444.27. Athena also purchased this stock in the week ending 6/7.
BH: I can see the shares are up since Athena purchase, and up a little since you purchased (as shown in the following chart), but why did you purchase and how long to you expect to hold?
Felix: My typical holding period is about 66-week, much longer than the other traders. And like Athena, I am also a momentum trader.
BH: These shares certainly have momentum on their side. ABMD announced quarterly earnings last month, and they were up 40% year over year. The company also raised guidance. Here is a look at the Fast Graph.
Felix: Looks good. Thanks for sharing. And speaking of sharing, I’d also like to share another batch of rankings this week. I ran the S&P 500 through my system, and my top 20 rankings are shown below.
BH: I see Netflix (NFLX) at the top of your list; certainly not surprising considering those shares have more than doubled already this year. Plus, there is a ton of room for continued growth from new customers, and if NFLX ever does decide to raise its price again that would fall through directly to its bottom line. Thanks for sharing. And how about you, Oscar—do you have anything to share this week?
Oscar: This week I used my system to rank the High Liquidity ETFs (those with price x volume over 100 million per day). My top 20 are ranked below.
BH: Interesting list, Oscar. I see a couple ultra ETFs (3x and 2x) at the top of your list, which is not surprising. But I see you also still like oil based on your Oil and Gas ETF (XOP) ranking. I know you are also a momentum trader. Thanks for sharing.
Our trading programs have been designed based on different trading styles and to fit different personalities. For example, our models are not emotional, and therefore avoid mistakes that human traders often make when they panic. Also our trading programs are thoroughly tested and backtested, thereby giving us confidence in their approach, therefore we’re comfortable almost never overriding them. Further still, our trading programs fit different styles, ranging from dip-buying (Holmes) to varying degrees of momentum (such as Athena and Felix). These personalities help us better match different trading programs to different traders and investors. We also combine these model personalities to develop programs that keep expected returns high and downside risks lower across varying market cycles and conditions.
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.
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.