
I Had to Develop an iPhone App to Understand Swing Trading - riveralabs
http://chartingninja.com/2014/09/12/app-understand-swing-trading.html
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chollida1
Good for this guy for making this app.

However, this makes me worried for him...

> There’s a 50% chance that I can lose $50.00 in a few days, but there’s also
> a 50% chance that I can make $100.00 or more in a few days. Why 50% chance?
> This number will be different for every person depending on his profit &
> loss history.

Ummm..... This doesn't seem true to me. What if the stock just stays flat?
That's more often than not the default for many stocks.

if you make the dubious assumption that all three outcomes are equally valid
then you loose 2/3s of the time.

If the stock stays flat then you lose as you have to pay commissions to enter
into the trade and to exit the trade. Lots of people model algorithms, very
few model them accurately, sometimes myself included unfortunately:)

> But swing traders need to win at least 50% of the time in order to be
> profitable.

If you don't pay any commissions or have any overhead, sure. But I'm guessing
you pay commission and I'm guessing you have overhead.

I would read up on the Kelly Criterion to imporove your capital allocation.
[http://en.wikipedia.org/wiki/Kelly_criterion](http://en.wikipedia.org/wiki/Kelly_criterion)

> You should stay away from stocks priced below $5.00 because these are Penny
> Stocks and involve a higher risk. You might consider stocks between $5.00
> and $10.00, but again, they involve higher risk and even worse, they might
> go into Penny Stock territory.

This is just plain false. Being under $5 is one of 3 criteria that make up a
penny stock, its a necessary but not sufficent condition. There are plenty of
good companies with stock prices under $5.

The price of a stock isn't a good indicator of its risk.

> The reality is that it’s easier said than done! It’s actually very hard to
> make money in the stock market! You will win but you will also lose a lot!
> To put it into perspective

Full points to the author for realizing this! I'm still amazed at the number
of people who think they can slap together some machine learning, nlp or deep
learning and make money. People literally spend all their time doing this, if
there was free money to be made someone would be making it:)

~~~
jeffreyrogers
> People literally spend all their time doing this, if there was free money to
> be made someone would be making it:)

I agree with everything you said above, including this. I want to add though,
that there is effectively free money in the stock market. For example, just by
buying a low-fee index fund (e.g. something from Vanguard), you're almost
guaranteed to do better than most investors and probably better than nearly
all speculators. (And there are other investment strategies that typically
outperform the indices as well). I guess the reason people do poorly in the
stock market is similar to why people start dumb startups that don't really
have any hope of being profitable: The idea of rapidly creating an enormous
amount of money for very little effort in a very short amount of time is much
more appealing than making 12+% per year indefinitely, even though this
strategy is much more likely to net you a higher return in the long-run...
plus you actually have to save money if you want to invest this way :)

Edit: It's also interesting to learn about how some of the big quant trading
firms started. D.E. Shaw, for example, originally had some bond trading
algorithms they used. It was very profitable and the hours were short compared
to the rest of the Wall Street/Finance world. Then they got greedy and tried
some more aggressive strategies, blew up, and nearly lost the fund.
Fortunately for them they seem to be doing much better now, though I'm not
sure what their current strategy is.

~~~
Hermel
Note that you are somehow arguing in favor and against the efficient market
hypothesis at the same time.

By arguing for ETFs, you are implicitely assuming that there is not much to
gain by doing your own research because markets are efficient and have already
priced in everything.

By arguing that most people underperform the market, you are implicitely
assuming that it is easy to underperform the market - something that should in
fact be hard if markets were efficient and everything priced fairly.

~~~
jeffreyrogers
No, I'm arguing that the market is efficient most of the time and that most
people don't have the time and inclination to find underpriced securities.

Also, most people underperform the market because of fees. If you invest in a
mutual fund with a 2% management fee, then the fund needs to outperform the
index by 2% to breakeven. It needs to do significantly better than that if
you're invested in a hedge fund with a typical 2-and-20 fee.

Edit: in particular, small-cap stocks tend to be inefficiently priced because
it doesn't make sense for institutional investors to research them heavily
since they cannot allocate a large percentage of funds to them without: 1)
significantly disturbing the market price 2) in some cases owning a
significant percentage of shares (5% or 10% I think) that requires filing with
the SEC.

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mstefff
> But swing traders need to win at least 50% of the time in order to be
> profitable.

That's not true. It completely depends on your strategy/system. You can be
highly-profitable with a 30% win-rate (or any number) granted the amount you
win is far higher than the amount you lose. If my average win is $1000 and my
average loss is $100, I can be profitable with only 10% wins (excluding
commissions).

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dirtyaura
A tangential question: It seems that a lot of smart people believe in
technical analysis, but to me it sounds like telling the future from tea
leaves. Does it really work or are successes just part of the standard
randomness of stock investing?

~~~
chollida1
This is a good question, and I don't think you'll get a definitive answer.

If by technical analysis do you mean watch for patterns to appear, then yes it
works. There are patterns all over the place.

Renaissance Technologies is famous for its pattern matching AI. They hired 2
key employees out of IBM many years ago that layed the base for their
technology and the rest has been money making history. See:
[http://www.businessinsider.com/bob-mercer-peter-
brown-2010-3](http://www.businessinsider.com/bob-mercer-peter-brown-2010-3)
and
[http://en.wikipedia.org/wiki/Renaissance_Technologies](http://en.wikipedia.org/wiki/Renaissance_Technologies)

The world of trading has been a cat and mouse game of pattern matching for
awhile. One of the earliest attempt at hiding large orders was an algorithm
called POV( Percent of Volume). It's an order that would slice up a big order
into smaller chunks and sell it throughout the day. The first variations would
just sell every 10 minutes. Its easy to see how someone could find this
pattern (Hmm, it seems like 1,000 MSFT are being sold at market every 10
minutes by Goldman Sachs) and exploit it which lead to more intelligent order
spreading, and the cycle continues.

However, if by technical analysis you mean looking for patterns like "head and
shoulders" ([http://www.investopedia.com/terms/h/head-
shoulders.asp](http://www.investopedia.com/terms/h/head-shoulders.asp)) then
it might be true only in that if so many people/computers believe in it that
it becomes a self fulling prophecy. For example, if every one believes that
when a stock crosses above its 20 and 50 day moving average then its going to
fall, then it will fall just because everyone will start selling because they
believe it will fall, which causes it to fall which reinforces everyone's
belief that the pattern works and you have a positive feed back cycle.

Does that mean technical analysis works? IMHO this type of investing doesn't
work, but who am I to say...

~~~
TDL
I've come to the conclusion that those who successfully employ technical
analysis (i.e. chart reading, etc.) are practicing a form of risk management
(knowingly or unknowingly), but do so consistently. In short, they are quickly
out when they are wrong (taking small losses) and allow their 'winners to
run'.

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hoopism
"The reality is that it’s easier said than done! It’s actually very hard to
make money in the stock market!"

There should be a follow on sentence... It can be very difficult to make money
in the stock market IN THE SHORT TERM. You should not do this... most people
should not do this.

See this:

[https://personal.vanguard.com/us/insights/investingtruths/in...](https://personal.vanguard.com/us/insights/investingtruths/investing-
truth-about-emotion)

~~~
fennecfoxen
I'll go a step back from that to something simpler:

You can use the stock market to make money. You can't use the stock market to
make _free_ money.

There's a number of different ways to pay for your money. You can pay for it
by doing intensive in-depth research and figuring out undervalued stocks. You
can pay for it in cash up front (buying a bond or index fund) and make it back
over time while other people do the work (your returns will be lower). You can
pay for it by taking crazy risks with your money, hoping the market will swing
in your favor (not necessarily gambling if you accurately understand the risks
involved and don't overpay for risky assets).

It's just like a lot of other business, when you get down to it, except the
really crazy risks are easier to find and harder to analyze.

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emcnicho
The chances of the stock moving from {$25 - $24 = 4.00%decrease} is much more
likely than a move from {$25 - $27.5 = 10% increase}-plain intuition. To be
brutally honest, it will most likely hit both of those price targets assuming
the stock has been trading between that range and they are within one standard
deviation of the historical price records.

The most important part of being a trader is TIMING and the second most
important part is being able to make decisions based off of analysis of
technical parameters and NOT based off of your emotions.

This type of analysis tells me that you are not comfortable emotionally with
losing more than $50 on one trade which I see as a sign that you should be
looking into more traditional investment practices.

I would suggest you analyze the opportunity cost for the amount of research,
training, and actual trading it will take before you become profitable. Don't
forget about taxes!

As a seasoned trader, I can assure you this is the type of analysis that will
result in lost money and unimaginable negative emotions. It is too simplistic
and lacks both fundamental theory and actual technical analysis.

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Mikeb85
While this is interesting, it's pretty much useless. Traders can do the basic
maths in their head, in a split second. If they can't, they have no chance of
making sense of any sort of financial numbers and indicators.

Furthermore, the price of the stock doesn't really matter for anything above a
penny stock. 100 shares at $25 is the same as 10 shares at $250, all else
equal (for instance, market cap).

I also think larger positions are better, for instance $10K per trade is a
good number. It's high enough that commissions are trivial, so you can make
money off a 1-2% swing, rather than needing to make 3-4%. Of course, the ideal
is 5-10% (well, more is ideal, but 5-10% is a realistic enough number for a
short time frame, say a week or two), but it's nice to exit out of a trade
that turned against you and still take a small profit at the end.

And of course, this app ignores the most important part - picking and timing
stocks. Some understanding of technical analysis as well as sentiment is
required, and basic market dynamics (supply vs. demand, volume, etc...).

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phkahler
>> I have the potential to make a higher 2R profit, with the same amount of
risk as before, because I’m simply buying more shares.

What he's really doing here is demanding a much larger percentage gain in the
stock price to get that higher return. It has nothing to do with the number of
shares.

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lotsofcows
"Successful swing traders win only 50% of the time."

Save yourself a lot of effort, toss a coin.

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kelvin0
The development of this app, and the technical know-how gained is really
something positive. However, doesn't it worry anyone how the Stock Market
seems to be reduced to a mobile game? It`s not even about adding value to the
market, but just piggy backing on this humongous money machine for the sake of
individual gain... Please correct me if my perspective is missing some
'optimism'.

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pbreit
Since even lots and round numbers don't matter anymore in the stock market,
seems a strategy would be to _not_ follow the $10-25 guide.

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TDL
Nice job. This looks like a much better and more complete position sizing tool
then the one I built (more of a learning exercise for me.) I wonder if the
William Eckhardt position sizing algorithm was used.

[http://powerful-reaches-1118.herokuapp.com/](http://powerful-
reaches-1118.herokuapp.com/) [very much a work in progress.]

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gregonicus
Sounds like this type of trading could generate near 1000 taxable events per
year. How do you manage this data for your tax filing?

~~~
jonknee
Computers... Your broker does the math and you get a form in the new year that
details your various gains and losses (mainly capital gains and then dividend
income, which may not apply if you're not holding positions).

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mlrtime
It is certainly not 50%, each stock will have an implied volatility that will
statistically determine the likelihood of a move.

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jonknee
Weird idea for an app, but at least it's pretty. Swing trading probably isn't
for you if you can't do basic math in your head.

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cheepin
> It’s actually very hard to make money in the stock market!

Can't you just buy an index fund, forget about it and come back to ~8% per
year gain?

~~~
lutusp
Good for you for knowing this. It's true, and it's something brokers wish
people wouldn't point out. If you're simply interested in making money in
equities and not gambling, index funds are the way to go.

[http://arachnoid.com/equities_myths](http://arachnoid.com/equities_myths)

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zak_mc_kracken
> Successful swing traders win only 50% of the time.

Is this better than just picking stocks at random instead of carefully
selecting them?

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ipsin
So won't high frequency traders discover your limits (by posting and canceling
orders rapidly) and drive you into them, costing you money? I thought this was
the simplest kind of fish for them to catch.

~~~
Mikeb85
I don't think you know what HFT is...

