Predicting the future by looking at the past.

An analysis of trading strategies with backtesting.

The Problem:

You decide to invest in the stock market and buy a few shares of XYZCorp, you suddenly wake up one day and decide that you are going to day trade to capture the profit from the price movements but have nothing else to guide your decision but your gut, technical analysis is also starting to look interesting even though it all sounds a little fishy*, you trust fundamental analysis but see it more as a long term tool, you wish there was a reasonable way to capture all these ups and downs…

* Note: I've never been a fan of Technical Analysis but to each its own, my main beef is that it lacks a proven track record and hinges on a mostly absolute certainty that the past will repeat itself; and that there are rules governing behaviors across markets, exchanges and participants we can describe, yet the basis for these rules is usually not explained, a fertile ground for snake oil.

The Solution:

Don’t ! … You stand a better chance of turning a profit in your investment if you Buy and Hold than if you day trade; this strategy (Buy and Hold) while not without risk (global/local economy, market, sector, company) has a few things going on for it that others don’t:

• It’s cheap : Day trading can chew your principal capital via commissions and taxes.
• It’s low maintenance: You literally have to do nothing for years on end but provide capital, XYZCorp then uses your capital to generate monetary value and you get a cut via your stock price and/or dividends.
• It’s less risky: The risk here comes from missing out on the big swings that can happen in a matter of minutes, being on the wrong side of a trade during a swing is usually devastating.

This post is not about financial advice, but for an overview that expands on the risks of day trading and other financial follies I can recommend The Investment Answer (Goldie, Murray) 

A reasonable alternative ?

First things first, let’s call what we are about to do by its proper name: Gambling, we are placing our money at risk expecting a reward…