Trading learning year 2

In 2018, I created a Robinhood account and I added 1000$. I had a goal, it was to trade with that money, and learn about how to trade in a systematic way and understand how the environment was going on.

I started slowly, with few amount of moves, practicing on stocks I knew and using the learning I acquired trading with crypto-currencies (year 1).

As the money was limited, I divided the trades in 4 units, so every long event should be around 250$. My initial goal was to obtain a 6% growth through 2019.

I did not want to limit myself to a goal number, as the market would have a direction that I cannot control in 12 months, but I wanted to set a reference and initially it was 6%, then I moved to 10%, then I moved to 25%.

The math result? I did a 40%

This final result was an unexpected result, I started doing individual moves and learning from my previous experience, understanding the SPX behavior and trying to learn from the results. Initially I was psychologically stressed with the situation, but I learned how to handle it and the results started to be positive once I keep the actions aligned to my convictions.

The learning result?

I have learned a lot of things, as in the middle of the process I had no money to trade, or I had problems to be with time in front of the computer, or there were times where the market was not in the conditions I defined to trade. Some of the things I learned:

  • To be as much systematic as possible:
    • defining a set of environmental factors that I checked before to trade.
    • I have defined a set of companies that I use for trading, depending on different conditions.
    • I have been able (not 100% of times) to close the computer and read a book when the conditions where not the right ones.
    • I started to be more systematic after reading Systematic trading šŸ™‚
  • Analysis:
    • Analysis of companies, about how they generate cash-flow, in which part of the cycle they are, etc.
    • I learned how to follow trends (differentiate when market is pushing or is moved by inertia).
    • I learned to focus on quote ranges, not on trends. There is a space where the market is moving, I have tried to focus on that range of realistic moves, focusing on small trades.
  • Act aligned to my convictions, and recognize that I have to be flexible about convictions:
    • I have learned a lot about how bad I am about this. I need to improve a lot if I really want to be successful. To trade with 1000$ is nuts, and when the number will increase I have to be more mature on this area. Let’s say that I am more aware of my problem with early shorts that could gave me bigger returns.
    • I learned that I am mainly a negative skew trader. The good thing is that now I’m aware of that and I’m adding some actions on my habit at the time of adding stop-loss actions.
    • I have to improve better to short on loses before the lose is too high. I have earned an average of 2,32$ per trade, if I remove the 10% of biggest loses I would have obtained an average of 3,78% which is a lot.
    • The thesis I have done have changed with respect the environmental conditions that have been happening. I have used the China-US trade news, brexit, Brent price and euro/dollar exchange as variables to modify my thesis and market behavior.
  • You are managing a portfolio of money, and you have to be consequent with the limits of resources:
    • Sometimes I had no money to trade, when the market was in the best moment to short.
    • I learned to anticipate to the best moments and short some moves with the purpose of doing small margins but have cash for next days.
    • During the last 2 months I was able to do 5 units, as I was over 1200$, so I could trade a little bit more.

Analysis of data

I have done 157 trades during these 12 months.

  • 20 trades were below zero (loses), 137 were over zero (gains).
  • The worst 10% of the trades supposed me to lose 173$. If I would have stopped these loses before I would have earned more. I have to take into account too that the use of stop-loss in the wrong way would have made me to lose some margin on trades that I have finally be over zero.
    • Using pareto principle (six sigma), where solving 20% of the issues you can solve 80% of the consequences, I have added to my habits:
      • Stop losses in a controlled way: do not let the loses to be over the defined range.
      • Use stop loss actions to sell, and in this way not stop the positive trend of a stock.
      • Divide the money in 2 for the longs, so in case of a small negative trend, I use the second part of the money and I reduce the average cost.
  • The average of the earnings have been 2,32$.
  • Without the 10% of the worst trades the average would have been 3,78%.
  • Without the 10% of the best trades the average would have been 1,1%. This is interesting, because reviewing some of the trades, I have realized that I’m not trading with negative skew the 100% of the times. I have progressed to a more positive skew habits.

Distribution of the trades depending on the days that took to open and close a trade:

Best values I traded:

CompanyGross marging
GE$78,08
CRM$38,50
CTVA$32,17
BA$28,74
TXN$28,10
MSFT$25,54
INTC$23,33
GIS$19,05
GMRE$18,68
WDAY$18,66

Worst values I traded:

CompanyGross margin
PTC$2,02
DUK$1,51
WELL$1,50
CELG$0,93
XOM$0,88
T-$1,52
KO-$6,54
JNJ-$7,82
MMM-$8,67
DWDP-$46,08

 

Trading on stock market Year 2

After trading with crypto-currencies and obtaining some learns I have created a Robinhood account, which I want to use to continue learning but on a different environment.

Following theĀ V2MOM model:

  • Vision: built my own tactics and habits that enable me to trade in a way that I earn some money in a systematic way. The % of growth is not important, the important thing is to be consistent with the number.
  • Values: have fun, learn a lot, do practices and more practices.
  • Method: learn about trading basis, focus on a set of companies, learn about the market environment, learn about new trading indicators.
  • Obstacles: Time.
  • Measures:
    • Finish the year with at least a 6% growth of the 1000$.
    • Read at least 3 trading books.
    • Read quarterly reports of at least 12 companies.

Death line = December 2019

The results?

Here I have documented the results of this initiative.

The summary of the measures:

Red Electrica EspaƱola (REE)

Some notes related to Red Electrica EspaƱola (REE)

21 – November – 2019

Positive things found:

  • It’s a moat.
  • Protected by the government.
  • Defensive company with good fundamentals.
  • good dividend >5%, dividend growth 5Y 6,75%, so chowder rule >10%

Negative things found:

  • CEO is a politician that was minister and now they have given this role to him.
  • Hispasat acquisition is not in their core business. It looks like a protection move promoted by the Spanish government.

Actions:

  • Buy at 17,26ā‚¬
  • Sell when RSI is over 70%
  • wait for dividends
  • Wait for a second short.

negative and positive skew tendency

One of the most interesting things that I read on Systematic trading by Robert Carver is the tendency that a trader can have when doing his transactions.

The concept

Basically when you are completing a long-short action (completed transaction), ideally you will have positive outcomes and negative outcomes. If you accumulate all these results and you order it, you will have a Gaussian bell. This bell will not be perfect, it will have different shapes.

The trader with negative skew, will have:

  • high number of transactions are completed positively, with small amounts of profit.
  • Few amount of transactions are completed in a negative way, but with high loses.

The trader with positive skew, will have the opposite situation.

It’s important to understand the way you make decisions, the results they return and identify the pattern of behavior you have.

Once done, you can identify the weaknesses of your behavior and then include some habits on your trades to be able to improve your trading in a systematic way.

I generally act as negative skew trader

For a negative skewed trader, there are ways to minimize the negative skew. The main ones are:

  • Use stop loss to cut the loses.
  • Use stop loss to not directly sell a stock but protect the minimum margin while you let it grow and grow.
  • Divide the longs in 2 moves, to decrease the average cost.

Other times I act as positive skew trader

And these times is when I use to manage better the capital that is involved in the trade.

 

 

 

Chowder rule

I have just realized about this guy named Chowder. He has a guidance method to guide your investments and create habits that enable you to increase the value of your equity.

It starts with basic rules and they increase their complexity with respect you go in deep.

Portfolio diversification

Use the Morning Star classification based on economic sensitivity and divide the equity as follows:

  • Defensive = 50%
  • Cyclical = 25%
  • Sensitive = 25%

High Total return

Chowder defines the concept of “high total return” that is calculated as follows:

High Quality Stock + High Current Yield + High Growth of Yield = High Total Return.

This total return you take the current yield, the minimum value of 3 years, 5 years or 10 years dividend growth and ideally the total return should be at least over 10%

Current Yield + Min(3 / 5 / 10) Year Dividend Growth = Total Return.

The 10% threshold is an initial threshold that can be increased depending on the market situation.

Compound Annual Growth Rate (CAGR) Calculator

He uses this calculator to define objectives: https://investinganswers.com/calculators/return/compound-annual-growth-rate-cagr-calculator-1262

 

General Mills (GIS)

Some notes related to General Mills (GIS)

1 – November – 2019

Positive things found

  1. Strong hand buying (Konkorde indicator)
  2. Cheap by fundamentals PE=16
  3. Stable volatility.

Negative things found

  1. Cyclical consumer business, now on the low side of cycle.

Actions:

  • Buy at 51,25$ (Done)
  • Take a look on the channel
  • Sell on 54$

15 – November – 2019

I have sold it at 52,36$. Why? because the McClellan indicator and the AD line was telling me that a bearish market was coming and I made the short decision.

Bad move. Why? Because I had a clear plan and I have changed it. I should have waited till the value evolved some weeks more as it was expected.

 

Texas Instruments

Notes related to Texas Instruments (TXN)

12 – November -2019

Positive points founds

  1. Fundamentals are healthy
  2. Management team buys stocks at the end of year.

Negative points found

  1. High volatility due to China’s issue with customs duties.
  2. Strong hand selling in the weekly chart (Konkorde indicator).