Articles Of Interest

Market Analysis

Feb 27, 2007

The recent market surge has kept me from putting money into stock funds, but the last few days have made some of them more attractive. I think it's a fairly good time to move into some small cap mutual funds.

More Thoughts

With a little work, anyone should be able to be a profitable trader. The problem is that no one is a perfect trader -  some percentage of  trades will be unsuccessful.  And, due to the Monte Carlo Effect, which says that sooner or later  you will have a long series of losing trades,  you need to have a large number of trades outstanding. I think the number is about 90.

Managing 90 active trades isn't too difficult or time consuming. What  is difficult and time consuming is finding new trades to initiate. With 90 trades in process, using  normal swing trading techniques,  you can easily close out  10 to 15 positions in a single day - which means finding 10 to 15 new trades to execute. I have tried many approaches for identifying  large numbers of  trades, and  everything  I've tried  has been  far too  time consuming.

The alternative technique is to  trade index funds. Since index funds contain many stocks, the Monte Carlo effect is greatly diminished. So, however, is the profitability of the trades. Nevertheless, trading index funds has the virtue of being a low intensity effort.

 So, what to do? My conclusion is that  a "core and explore" approach is best.  With "core and explore", the default mode of operation is to trade index funds.  That's the core. But in addition, I also trade as many individual stocks as  I can , the number being limited by the ease with which new trades can be found. If I'm very lucky, my number of active trades will get very large and the amount of money in index funds will be minimum. If I'm not lucky, I end up indexing most of my capital and settling for the lesser return. But I'll gladly give up a little profit for a lot of time!

The chief disadvantage of the "core and explore" approach is that you have to keep two very different things going on at once. The techniques are different and it's possible to forget what you're doing. You have to be able to walk and chew gum.

So, how should you trade index funds? I've documented one simple technique in my Core Trading Strategy document. 

More To Come