Investment

Analysis
Class 12:
Other Traders Strategies

Technical Analysis
Debate

One advantage of using technical analysis is that it doesnt dependent

heavily on financial accounting statements. Everything is discounted in
the price, including the psychological aspect.
There are however some criticism:

The past price patterns or relationships between specific market variables and
stock prices may not be repeated.
Self fulfilling prophecy
Success of a particular trading rule will encourage many investors to adopt it,
so the technique would be neutralized.
It is subjective.

Trading the News

Trading the news can also be beneficial for traders who believe that
information will be propagated and assimilated slowly. The objective is to
jump on the right side as soon as possible.
The different news that traders speculate on are:

Politics: domestic events such as new regulation, taxes and laws can affect
business in general or some specific industries.
Geopolitics: events in the world such as wars can affect the supply of
commodities and business in general in with some region.
Earnings: each quarter, companies have to submit accounting reports, and
earnings are particularly watched.
Economic indicators such as GDP, unemployment, capacity utilization can
provide indications of where the economy is leading.
Some trade also on recommendations from analysts.
Other news such as change in management, catastrophic events.

Trading the News

There are logical pattern that you have to understand when trading the
news. For example, if there are positive earning news for a major
company, in certain circumstances you can expect to have similar good
earning news for similar companies in the same industry.
There are however some problems when trading the news:

It is often difficult to interpret the news. Connections between companies,

industries, resources, events are more and more complex.
Some people already had the information before (when it is not a total surprise
for everyone= totally random) or anticipated it. As a consequence, they bought
or shorted the security before the event went public. Then when it becomes
public, the same people sell or buy heavily to cover taking advantage of the
reaction of the people who didnt know. That is why sometimes the price of a
stock doesnt go up much or even decreases on good news.
Another why some stock could go down after a good news is the fact that the
news is not as good as expected.

Trading the tape

Trading platforms provide indications about prices and volume.

On the NYSE, there is a specialist on the floor that regulates the flow
of orders from buyers and sellers. The specialist shows the last trade
price and volume but also the bid, the ask and the quantities that the
traders are ready to bid and ask.
On NASDAQ however, there is no specialist. It is electronic and makes
available all dealers quotes immediately.

Tape reading allows trader or investor (by observing the

evolution of the price, the volume, the bid, the ask and their
respective size) to have a good idea of where the stock is going.
It is very difficult and requires a lot of experience and practice.
Strong orders at critical support and resistances can provide you
an indication about the solidity of it.
The size of the orders shows you with what conviction traders
want to trade.

Trading Correlations

Another way to trade is to think about correlations that exist in the

financial markets.
Pair trading is an example of trading correlation.
For example, lets suppose that Coca Cola and Pepsi are strongly
correlated, so the price of their stock move constantly the same way.
However, lets suppose that, for some reason, Coca Cola and Pepsi trade
in different direction: Coca Cola goes higher and Pepsi goes lower. Then
the trader can try to take advantage of the situation by buying Pepsi (the
one that went down) and shorting Coca Cola (the one that went up),
knowing that they eventually converge.

Trading
Recommendations

Wall Street research firms analyze stocks and write reports indicating
what they think of the stocks.
In the process they usually grade a stock: buy, hold, sell, etc.
Changes in recommendations may be a trading strategy.
One of the problem is that these research departments are usually part of
big firms with a lot of important clients. However, rules are supposed to
prevent this kind of conflict of interest.

Trading Principles

Buy Low and Sell High

Make your own judgment: do your homework = study, dont follow the crowd,
but learn how to use the momentum of the crowd and when to be a
contrarian. Know yourself, or try to!
Adopt clear strategies with a developed risk management plan.
Execute your plan and have discipline.
Market changes, so you should adapt and modify your strategies when it is
not working anymore.
Dont get emotional: think strategically, and you dont have to win all the
time. Dont take it personally.
Dont overtrade.
Be patient but get out fast when you are wrong.
You have to be able to control the way you trade by using market orders, limit
orders and stops.
Be careful about after hours trading: usually liquidity is low and there is
higher bid-ask spread.
You can trade incrementally, but you have to adopt a strategy.

Reference

Investment Analysis and Portfolio Management Reilly and Brown:

Chapter 6:

Sections 6.1 and 6.2

Section 6.4.1

Chapter 5:

Sections 5.1 and 5.2

Sections 5.3.1 to 5.3.4