Why spend thousands of dollars on trading seminars when it is all covered in this eBook?
In addition to covering important information such as trading fees and technical indicators, you will learn about advanced topics such as trading strategies, how to analyze the results of a backtested strategy and even learn how to program some basic trading strategies. This eBook is one of a kind. The bullet point, straight to the main idea format makes for a much faster, fun and efficient way of learning about the financial markets.
2. Trading versus Investing
• Investing involves longer holding periods of
investment vehicles
(stocks, bonds, futures, currencies)
• Trading involves shorter holding periods of
trading vehicles
(stocks, bonds, futures, currencies)
3. Trading versus Investing
• Investing involves fundamental analysis using
financial statements that are reported on a
quarterly basis.
• Trading involves supply and demand analysis
using news and technical analysis on very short
time frames.
4. Trading versus Investing
• % of managers outperforming their benchmarks?
Studies show 75% of managers DO NOT beat
their benchmarks.
• % of traders that make money?
Surveys estimate that 95% of traders DO NOT
make money trading in the long run.
5. What trading used to look like?
• Paper, Paper, Paper
• Ticket orders
• Runners
6. What does trading look like?
• Screens, Screens, Screens
• Information on screens
• Price quotes, charts, trading platform
7. Types of Trading
• Institutional Trading
• Brokerage Trading (discount, full service)
• Proprietary Trading
• Quantitative Trading
8. Products to Trade
• Currencies
• Equities (stocks, ETFs)
• Bonds
• Options
• Commodity Futures (Crude oil, Gold...)
• Financial Futures (S&P 500, Ten Year Note)
10. What is a trading a strategy?
• A strategy is a set of defined rules that are
applied to a trading product
(stocks, bonds, currencies, futures product) with
the goal of generating a profit.
2 Sets of Rules
• Entry Rules
• Exit Rules
11. Tools for entry rules
• News: Bloomberg, Reuters...
• Technical Analysis (Covered in depth in the
trading seminar)
12. News strategy
• Entry Rule:
Company AAA announces that it will acquire
company BBB for 20% more than the current
market price.
Buy BBB on the announcement of the news.
13. Technical strategy
• Entry Rule:
Company AAA has lost 20% of its value in the past
10 trading days and it is now currently oversold.
Buy AAA when it becomes oversold.
15. Risk Management/ Exit Rules
2 Types of Exit Rules
• Profit Taking Exit
Example: Sell 100 shares of BBB at $100 profit.
• Stop Loss Exit
Example: Sell 100 shares of BBB when I hit unrealized loss
of $100.
16. Backtesting a trading strategy
Backtesting means analyzing the trading results of
how your system would have performed in the
past.
Example:
If I bought BBB every time X happened and sold
BBB every time Y happened, how would much
money would I have made or lost from 2009 to
2012?
17. Automating a strategy
Automation of a trading strategy is when you
program the buy and sell rules in a program on
its on.
Automating a strategy is often called:
Black Box Trading
Algorithm Trading
Quantitative Trading
19. What is a Pair Strategy?
• Market Neutral Strategy.
• Theoretically supposed to make money in
up, down and sideways markets.
• Developed in the 1980s at Morgan Stanley
• Involves taking 2 products that are historically
correlated.
20. Correlation
• Find two stocks that are highly positively
correlated.
Correlation of 0.90 = Strong positive correlation
Correlation of -0.90 = Strong negative correlation
21. Finding stock pairs for trading
• Coke and Pepsi
• Wynn Casinos and Las Vegas Sands
• GM and Ford
What about other less obvious?
• Spurious Correlations
22. How to make money with pairs?
• When the two stocks diverge in price:
Buy the oversold stock in the pair.
Sell short the overbought stock in the pair.
23. How to make money with pairs?
• GM Ford % Diff
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
24. How to make money with pairs?
Step 1: Find a correlated pair.
Spread= GM/F
GM Ford Spread
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
25. How to make money with pairs?
Step 2:
Determine your entry rule
based on the spread.
If Spread => 6%,
Buy oversold stock.
Sell the overbought stock.
GM Ford Spread
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
26. How to make money with pairs?
Step 3:
Execute the pair trade.
Buy Ford shares.
Sell short GM shares.
GM Ford Spread
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
27. How to make money with pairs?
Step 4:
Determine your exit rules.
Close the trade if:
Spread returns to 0%
Or if I lose $1000.
GM Ford Spread
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
28. How to make money with pairs?
Step 5:
Close the trade since the
Spread returned to 0%.
Sell Ford shares
Buy to cover GM shares.
Profit= 6%
GM Ford Spread
Jan 5% 6% -1%
Feb 2% 4% -3%
Mar 20% 11% 6%
Apr -7% -1% 0%
May 2% 1% 1%
29. Summary
• Pair trading is very popular because its concept
is simple and logical.
• Pair trading is more complicated than it looks.
• When applied properly, pair trading can be
extremely profitable.
