# Dabbling in the stock market



## Stupid Boy (2 Nov 2008)

Hi All,

I am now in a reasonably strong financial position having finally cleared all that darn gambling debt, and also given up the gambling too...

I am earning 40K now and and i'm in a postion to put away 1,000 per month into a regular savers account earning a high interest rate...

This means I would have 500 euros per month left over effectively to invest in other asset classes, the one which appeals to me is equities...

I have been studying the market for sometime now and would have studied certain aspects of the market through university, so I would have a little grounding on the subject, I have identifed 5 companies that I would be prepared to invest in over the next year with a view to holding the stock for a 5-10 year period.  Therefore investing 100 euros in each company per month for the next year giving a total investment of 6,000 euros and a 1,200 euros holding in each...

My question is, how best to do this in order to minimise broker fees, I will effectively be making 60 purchases over the next 12 months, given broker fees range from 10 euros to 30 euros where should I be looking to get on to the market... as any potential gains could take a large hit given the broker fees...


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## DavyJones (2 Nov 2008)

Isn't dabbling in the stock market another form of gambling?


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## MOB (3 Nov 2008)

Gambling? Not really. 

To answer OP's question:

1. There are some online brokers who specifically cater for the very small investor. This is one option

2.  Just save until you have enough to buy a share; then buy it. €1200 is probably too small a purchase (many brokers have a minimum charge).  I suggest you save until you have circa €5,000; then buy a share;  save until you have another €5k and buy another.....It will take longer to get to having a reasonably diverse portfolio, but 5 x €1200 holdings is not terribly practical.


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## jrewing (3 Nov 2008)

You can take account of lower fees using online brokers such as Firstrade (I am a satisfied customer), who charge $6.95 a trade.  However, they are really only useful if you are buying US equities, and take associated currency risk.

If you buy 5 x Eur100 stakes per month, you are killing yourself with fees. Even with a cheap broker like Firstrade, that will cost you $35 a month or 7% of your investment! on the other hand, if you invested Eur 1500 every 3 months in one company, you would still pay $7, which will represent 0.5% of the investment.


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## limerickboy1 (3 Nov 2008)

playing the stock market is a gamble, but its an arena where you can give yourself an edge, something to help you increase your odds of victory. basically if you know ur stuff its like backing a horse where the race is fixed


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## lemur (3 Nov 2008)

A lot of the on-line discount brokers charge a spread in addition to the fee so the discount claim is really a con. 

In general you should stay away from investing in equities unless you are a professional or semi-professional investor/trader. That said there are some good equity deals out there right now such as the Canadian energy trusts which pay 15-18% dividends at current prices.


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## lemur (3 Nov 2008)

DavyJones said:


> Isn't dabbling in the stock market another form of gambling?



Only in the sense that all business risk is a form of gambling. Do you know how many people open up all types of shops every year and fold? On that basis you would say opening a retail outlet is gambling.


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## DavyJones (3 Nov 2008)

lemur said:


> Only in the sense that all business risk is a form of gambling. Do you know how many people open up all types of shops every year and fold? On that basis you would say opening a retail outlet is gambling.




No I wouldn't say that. The OP has quite recently given up gambling as he was addicted to it. (Congrats by the way). I was asking a genuine question directed at OP. 
Playing with the stock market is exciting for some and this could be a replacement for betting on a horse etc.


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## Bronte (3 Nov 2008)

To some investing in shares/stock market/equities can be considered gambling and anyone with a gambling problem would be well advised to not replace one problem with another one.  It's like telling an AA member to work in a pub.  Why tempt yourself.


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## therock (3 Nov 2008)

The difference in the shop analagy is that you largely have control over what happens and if the shop folds it's probably because you didn't do enough homework about whether it was the right location, competitors, and whethere there was a sufficent market there, so you'd only have yourself to blame.

With the stock market, once you invest, its largely out of your hands. You could invest in something in another country which might suffer overnight from a terrorist attack. 

With the ordinary person investing in the stock market you don't know what's around the next corner and you leave yourself exposed to considerable risk, so it is gambling in a sense.

The experienced person would I imagine reduce the risk, but even so, the example of the Volkswagen hedge funds disaster shows that the experts also can lose big time.


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## lemur (3 Nov 2008)

Your arguments there just don't hold water. In some cases, trading is less risky than other businesses because you dont have inventory, employees, arson and other risks etc  

Trading is no different than any other business risk and investing is just trading with a longer term timeframe.


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## Stupid Boy (3 Nov 2008)

Hi All,

thanks for comments, when I posted I just had that feeling the former gambling habit would be mentioned in a negative way when associated with stock market investment...

Just a few points...

I will be saving 1,000 p/m into a regular savings account 

I am prepared to write off the 6,000 over a ten year period ... I no longer gamble... I am happy to have shares to hold for a the long period of time as I feel the market is now in a strong buy position ...

Again this is 6,000 against 120,000 going on deposit, a very small percentage of any portfolio and in my opinion too small an amount to have allocated to equities in a portfolio... however I can reasses that position in ten years time when i'm in my mid thirties... 

I just want to get the ball rolling... 

I think I will follow advice below and buy stock by stock so as to minimise the outlay to brokers, therefore purchasing 1,200 euros of stock a time... so therefore investing once every two months... I'd like to avoid taking currency risk as well so I will more than likely stick to a irish based broker...


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## lemur (3 Nov 2008)

Stupid Boy said:


> Hi All,
> 
> thanks for comments, when I posted I just had that feeling the former gambling habit would be mentioned in a negative way when associated with stock market investment...
> 
> ...



My feeling is your parameters are too vague. Making money in the market is hard. You need a solid trading plan with an edge to succeed.


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## therock (4 Nov 2008)

lemur said:


> Your arguments there just don't hold water. In some cases, trading is less risky than other businesses because you dont have inventory, employees, arson and other risks etc
> 
> Trading is no different than any other business risk and investing is just trading with a longer term timeframe.



In the case of arson, most properties are insured, but if your share investments go down the tubes there is no such insurance, you just take the hit. 

Depending if you own the shop or not, it would be a fixed asset which may grow in value. You hire employees based on whether they can produce a profit and let them go when they can't. 

Owning a shop is not plain sailing but you won't suffer a catastrophic (50%+) loss of earnings over night or in a week or a month, maybe a long decline depending on competitors and you would sell up your fixed assets before that happens.

Shares are not fixed assets and cannot be insured against catastrophy. You could hedge against losses but even that is not certain.

But I agree somewhat perhaps that trading isn't altogether like gambling because you can make educated guesses with trading.


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## Bronte (4 Nov 2008)

lemur said:


> . In some cases, trading is less risky than other businesses because you dont have inventory, employees, arson and other risks etc
> 
> .


 In relation to arson didn't 9/11 affect shares?


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## lemur (4 Nov 2008)

Guys you really are missing the point here. All business activity carries the risk of losing money. The difference in risk levels between business models are the parameters. All pro traders have risk control parameters to protect their account even if something like 9/11 happens and the market crashes. 

Bottom line- trading is no different than any other business in terms of risk as long as you set yourself up correctly, dont over leverage and have a good trading plan with an edge.


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## demoivre (4 Nov 2008)

lemur said:


> Guys you really are missing the point here. All business activity carries the risk of losing money. The difference in risk levels between business models are the parameters. All pro traders have risk control parameters to protect their account even if something like 9/11 happens and the market crashes.
> 
> Bottom line- trading is no different than any other business in terms of risk as long as you set yourself up correctly, dont over leverage and have a good trading plan with an edge.



What "edge" are you talking about?


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## j26 (4 Nov 2008)

I'd be careful.

I do know someone who used to gamble a lot, but packed it in.

He merely started again, but this time in the guise of "investment".

Have you considered putting it into a unit linked savings plan?  Then you get the exposure to the stock market without the "rush" of backing a winning share (something that could awaken old feelings in you)


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## lemur (4 Nov 2008)

demoivre said:


> What "edge" are you talking about?



Every successful trader has an edge which varies according to which market he or she trades, the set ups he/she uses etc. 

For my own trading, I have set of 3 edges for 3 different markets.


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## Askar (4 Nov 2008)

I thought studies show repeatedly that there are very few successful traders? For example, 80% of US professional fund managers don't beat stock indices such as S&P 500.


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## lemur (4 Nov 2008)

Yes and the reasons for that are well known (around diversification, herd following & fee's) google it if you want to know more. 

Trading as a retail pro is a much different game. 95-98% of people fail. Just as most people dont have what it takes to become a pro golfer or a pro musician, most people don't have the right aptitude to become a pro-trader.

However, for those who make it, its a great business with huge advantages.


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## Stupid Boy (4 Nov 2008)

I looked at fund buts to be honest their performance rates for 5 year terms aren't great with a lot actually showing a negative...

I guess i'll just bite the bullet and go for it... I have a very supportive partner who is in charge of my finances in order to stop any relapses ... she may even get involved as well...


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## lemur (5 Nov 2008)

Stupid Boy said:


> I looked at fund buts to be honest their performance rates for 5 year terms aren't great with a lot actually showing a negative...
> 
> I guess i'll just bite the bullet and go for it... I have a very supportive partner who is in charge of my finances in order to stop any relapses ... she may even get involved as well...



Stupid boy. Don't do it. The markets are not a place for somebody with no experience or know how. You will just make a lot of expensive bad investments.


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## lemur (6 Nov 2008)

SPC100 said:


> Humans are optimists.
> 
> If a person could scientifically, repeatedly, demonstratively, outperform the market, they would be getting multimillion pay packets to manage the largest funds in the world i.e. pension funds for countries and the world's largest companies.
> 
> ...



I personally know five retail pro's who have stellar performance. 

Note an edge for a retail pro is not the same thing as an edge for a fund. As the amounts involved gets larger, liquidity moving the market becomes an issue. For that reason, it is much easier for a retail pro to find an edge than it is for  a fund.


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## Bronte (6 Nov 2008)

Stupid Boy said:


> I have a very supportive partner who is in charge of my finances in order to stop any relapses ... she may even get involved as well...


  Based on this maybe you should just let her decide where you should save/invest your money.


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## lemur (6 Nov 2008)

SPC100 said:


> Define Stellar.
> 
> As you say, one advantage of doing small trades is that you will not affect the market price of an asset. If a fund fancies a company at a price and starts taking a stake, they will push up the price, as they have so much money that they must invest.
> 
> That does not take away from the fact, that are very few documented cases in the world of people beating the market over a lifetime.



Re: the latter statement. How do you know this? Its a cliche right? How many traders do you know personally? 

Stellar is between 100 and 1000% a year. Some top traders set themselves a target of 2% day. They don't achieve this but they  can come close. 

The best way to trade is to compound short term gains. 

Of course, to reach the level of performance above requires a level of skill and discipline that few people have.


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## nuac (6 Nov 2008)

Thank you lemur and others for interesting posts on a topical subject.

What is an "edge" in this context?


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## lemur (6 Nov 2008)

nuac said:


> Thank you lemur and others for interesting posts on a topical subject.
> 
> What is an "edge" in this context?



An 'edge' is an advantage. So for example, when you sit down at a roulette wheel in a casino, the house has a 6% edge. The longer you play the more likely it is the casino will win. Professional blackjack players turn the tales on the casino by counting cards and put  the edge on their side by about 1% (51:49). But even this small edge is enough for them to make money.

Professional traders know how to get an edge in the market in contrast to the 'gambling' like behaviors of amateurs who tend to trade on the basis of what they think is going to happen.


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## Marc (7 Nov 2008)

lemur said:


> An 'edge' is an advantage. So for example, when you sit down at a roulette wheel in a casino, the house has a 6% edge. The longer you play the more likely it is the casino will win. Professional blackjack players turn the tales on the casino by counting cards and put  the edge on their side by about 1% (51:49). But even this small edge is enough for them to make money.
> 
> Professional traders know how to get an edge in the market in contrast to the 'gambling' like behaviors of amateurs who tend to trade on the basis of what they think is going to happen.



    I hate to get all uppity about statistics but I am statistician so I guess you can forgive me a small indulgence:
  The house edge for Roulette in the US for a standard 38 number American wheel is 5.26%
  The five number bet (0,00,1,2 and 3) has a house edge of 7.89%
  If the casino offers “surrender” the house edge is cut to 2.63% on even-money bets
  European-style wheels (37 numbers including a single 0) The house edge is 2.7%
  If en prison is offered, the edge falls to only 1.35% on even-money wagers.
  “Professional roulette player” is an oxymoron. No betting system will change the casino’s advantage.
  A fair roulette wheel cannot be beaten in the long term.

  I agree that Lemur has used the correct analogy to describe trading. Where we differ is that I also believe that in the long run, it is not possible to beat the market any more than it is possible to beat the casino.

  With thanks to Mensa International for the stats.


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## lemur (7 Nov 2008)

Marc said:


> A fair roulette wheel cannot be beaten in the long term.
> 
> Where we differ is that I also believe that in the long run, it is not possible to beat the market any more than it is possible to beat the casino.



Good comments guys, here is my response. 

  A fair roulette wheel cannot be beaten in the long term - No but blackjack can by using the correct techniques.  

It is not possible to beat the market any more than it is possible to beat the casino - how do you know this. I know pro traders who beat the mkt year in and year out. 

The best trader I know is a futures scalper with 25 yrs experience.  He did  almost 900% last year. He keeps his account a core size and takes money out every month for living expenses and taxes which explains why he is not the richest man in the world right now.


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## lemur (7 Nov 2008)

SPC100 said:


> Some percentage of these guys would be frugal, and we would still see hundreds of them on the rich list, and then their story would be documented. They don't exist. The simplest explanation is that it is not possible.
> 
> Academic/Scientific studies is how we know it is not possible for fund managers to beat the market over the long term.



Time for you to do some homework and leave your bias aside. Retail pro's and fund managers are different games so the studies you refer to above do not apply. 

Google Dan Zanger, the world record holder for stock market gains. He turned $11,000 into $42m in about three years. This has been audited via his tax returns. 

I know Dan. Last year his performance was negative but the year before his performance was 180% annual gain. Note that because Dan is now playing with larger sums it is much harder for him to achieve  stellar performance because of the earlier argument.  

The other star traders I hang out with every day on the web. If you choose to believe this is fiction there is not much I can do about that.


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## demoivre (7 Nov 2008)

Why do so many people in threads like this ( and there have been many such threads on here before ) have difficulty in distinguishing between investing and trading? Can people not see that a fund manager investing €300m in some stock for a period of time is substantially different to a retail trader getting in and out of 10 lots of FTSE futures a few times a day . Returns of a multiple of ones account size are perfectly attainable when trading a leveraged product.


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## lemur (7 Nov 2008)

SPC100 said:


> I don't claim to be a professional or have all the answers. And I am interested in finding out more.
> 
> I do want to take the best route to optimise my returns.
> 
> ...



'What do you think the normal joe should do with his excess income'- I think he should put it in the bank in a high interest savings a/c and stay away from the market especially investment products sold to the public which are usually garbage in my view. 

'I can show a sequence of coin-tosses that will give stellar returns, that does not mean, that I can repeat that over the real long term.' - irrelevant reference. Good retail pro's have a defined edge as I stated above.

Re:funds comment above. As I keep saying, retail trading is a completely different game to   fund performance. 

Re:3 yrs? Dan Zanger made his money during the dot com boom and continues to trade successfully. 

Becoming a successful trader is like any other profession. It requires aptitude, hard work, dedication etc It is not a quick easy money game like so many amateurs  expect  which is why so few succeed. Golf is a good analogy, some people take it up and become very good but most don't. The latter walk away after losing some money and say its gambling. This is like a bad golfer telling a good golfer his game/low handicap is a fluke.


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## nuac (7 Nov 2008)

Thanks Lemur for your explanation of "edge".   I can understand your examples of a roulette wheel, and blackjack if you have a system

However out in the worldwide instantaneous markets can you really have a workable edge unless it is inside knowledge.

I recall Jim SLater years ago writing about the Zulu principle - to know everything relevant about a particular share/business etc.   However there is always someone who knows more.


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## lemur (7 Nov 2008)

nuac said:


> Thanks Lemur for your explanation of "edge".   I can understand your examples of a roulette wheel, and blackjack if you have a system
> 
> However out in the worldwide instantaneous markets can you really have a workable edge unless it is inside knowledge.
> 
> I recall Jim SLater years ago writing about the Zulu principle - to know everything relevant about a particular share/business etc.   However there is always someone who knows more.



Traders play the price action. Its a numbers game nothing to do with inside knowledge. If you don't have an edge there is no point in trading.  etc.


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## magicbeans (8 Nov 2008)

Forgive me for my ignorance, I know nothing about trading stocks, but is the OP not talking about doing what Brendan reccomends in his book "The ask about money guide to savings and investments" ? (Investing as opposed to trading ?)

I know this book is currently under review, but is the share advice that was in it still applicable, and if so would NIB be one of the cheaper / easier brokers for a novice to invest € 1,200 per month in the top ten irish shares, and then leave them alone for 5 years plus in the hope that they might outperform deposit a/c returns ?

Thanks


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## webtax (8 Nov 2008)

magicbeans said:


> Forgive me for my ignorance, I know nothing about trading stocks, but is the OP not talking about doing what Brendan reccomends in his book "The ask about money guide to savings and investments" ? (Investing as opposed to trading ?)
> 
> I know this book is currently under review, but is the share advice that was in it still applicable, and if so would NIB be one of the cheaper / easier brokers for a novice to invest € 1,200 per month in the top ten irish shares, and then leave them alone for 5 years plus in the hope that they might outperform deposit a/c returns ?



That advice is not and never was valid, investing in the top ten Irish shares at the time that book was written was essentially a bet on the Irish property market, and you can now see where that investment has ended up. Stocks give the best long term return, but you should be diversifing outside of the Irish economy also (U.S., European, Far East & Emerging markets). Use an index tracker fund if you do not have sufficient knowledge of individual shares. To maximise returns a certain element of timing is required, i.e. selling at times of excessive optimism and buying at times of excessive pessimism.


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## Complainer (8 Nov 2008)

Stupid Boy said:


> Hi All,
> 
> I am now in a reasonably strong financial position having finally cleared all that darn gambling debt, and also given up the gambling too...
> 
> ...



Have you cleared any outstanding debts? Do you have an outstanding mortgage, or do you intend buying a property anytime soon?


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## lemur (8 Nov 2008)

SPC100 said:


> you quoted his returns for a 3 yr period.
> 
> how is it a different game?
> 
> ...



how is it a different game? - Already spelled that out. 

Edges - I have several. I am not going to reveal them here. 

Never buy & hold anything. All investment/trades require timing.


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## lemur (8 Nov 2008)

SPC100 said:


> As others have said the OP does not want to trade.
> 
> My feeling is that lemur's descriptions on how to make money in the market are too vague, and by quoting secret methods, they are not testable or reproducible. I don't mean to offend, but therefore I don't see any value that we can take from them.
> 
> ...




What secret methods?

 I have already said in answer to your question.  ''What do you think the normal joe should do with his excess income'- I think he should put it in the bank in a high interest savings a/c and stay away from the market especially investment products sold to the public which are usually garbage in my view.


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## lemur (8 Nov 2008)

SPC100 said:


> from http://seekingalpha.com/article/99747-the-dangers-of-timing-the-market
> 
> "
> I wrote a post earlier this year, Focus on the the Long-Term, in which it was noted missing just a handful of the market's best days in a given year can really penalize returns. If an investor missed just 40 of the biggest up days in the market over the last 20 years (1987-2007), their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.
> ...




Selection bias pure and simple.....

What if you missed the 40 worst down days.... apply those numbers

20 yr period- more selection bias. Far too short a time period. If you bought in 1929 it took 26 yrs to get back to break even etc etc. similar argument applies to the 1970's bear market. If you bought the Nikkei in the late eighties, you would still be waiting. 

Average market timer ... thats the old stick one foot in cold water and one foot in hot water and on average you get little change argument. Meaningless cliche stuff.


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## z106 (8 Nov 2008)

An interesting thread. The age old argument of trading vs buy and hold.

For my tuppence worth - while running the risk of seemingly sitting on the fence - I think both arguments are correct.


Lemur is referring to trading and is referring to having a system back tested that produces a positive expectancy which he refers to as his 'edge'.
His reference to the casino was an example of the where the casino has an edge (i.e. positive expectancy vs the punter).
ANother example might be if you go into a bookies and ask him for odds on heads or harps in flicking a coin he certainly won't give you even money but more than likely 5/6 or 10/11 or something.
That is his edge.

What pro traders to is try to create an edge similar to this.

Lemure - for the record - I think you are being WAY too paranoid in refusing to even give an example of a set up just for illustration purposes given the obvious confusion by some punters on this thread to your explanations.

Anyway - as an example - some typical rules a trader may employ to give him his edge might be along the lines of: 
a) Never bet more than 1% of your total available pot on any one bet
b) Never have more than 20% of your total available pot invested at any one time
c) Only buy if a 10 week moving average crosses over a 40 week moving average.
d) Never buy unless the 200 day moving average is rising.
e) a max leverage factor of 2

Basicaly there could be many many rules which once tested will display a positive epectancy over historical data (Back testing is a bit of a science in itself too mind you as there are good and bad ways to back test).

Once some traders realise the system they have selected displays a historic positive expectancy they will then use it going forward. 

Buy and hold also offers good returns if properly diversified (as opposed to the top 10 in the iseq as mentioned earlier).
Buy and hold will never offer the potential riches of trading though.

That said - being a trader requires a lot of discipline - which in fact is the hardest part of being a trader i reckon.
Coming up with the system with teh edge is only half the battle.
It's unquestionably largely a psycological battle in my book.

FOr anyone who is interested you should read market wizards and market wizards 2 - some good stuff in there.

Basically - I think buy and hold vs trading depends on the type of personality you have.
Different strokes for different folks - hence agreeing with both arguments.

To the OP - unless you have a good strategy worked out in advance - regardless on buy amd hold or trading - you will near certainly lose money.


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## lemur (9 Nov 2008)

qwertyuiop said:


> An interesting thread. The age old argument of trading vs buy and hold.
> 
> 
> Lemure - for the record - I think you are being WAY too paranoid in refusing to even give an example of a set up just for illustration purposes given the obvious confusion by some punters on this thread to your explanations.
> ...



Fair enough comment qwerty. 

However those rules don't constitute an edge. An edge is something you calculate after running a sequence of say 20 trades using the same set up rules. My favorite set up right now has an edge of 25%. So in other words, for every $100 I risk, I make $125 on average. 

A well known set up example would be: the gap play set up on US equities. If you apply a set of filters, the gap has a 70-80% chance of half filling the gap which is an excellent edge. The stop is at a risk reward ratio of 1. You can then keep compounding the gains to get a very high rate of return with this set up. 

The trick is to apply the right filters and then concentrate on good execution.


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## z106 (9 Nov 2008)

lemur said:


> Fair enough comment qwerty.
> 
> However those rules don't constitute an edge. An edge is something you calculate after running a sequence of say 20 trades using the same set up rules


 
Given that statement i am assuming you don't understand me correctly.
(Unless the fact that the examples i gave are a mixture of money-management rules as well as some entry signals. Maybe i shoudl have been clearer with my rules of set ups and buy and sell signals only as opposed to throwing money management rules in there too)

Obviously i am not saying those specific rules give an edge. But these rules *could* be an edge once backtestedand a positive expectancy is displayed.

My main point is that many successful trading strategies use similar rules(excluding the miney-management rules) to give themselves an edge.
This edge is determined by backtesting the rules to prove the positive expectancy.
The rules i outlined above were off the top of my head for illustration purposes.

In fact - any type of rule can be employed once it shows an edge.
It could be something like buy a certain index in september and sell in may.
THat may equally be a successful trading strategy.

The main general point is that you are looking for value for money bets
i.e. where the reward is greater than the risk
E.g. getting 6/4 on the flick of a coin.



SPC100 said:


> qwerty - I would say that a,b and e sound like bankroll management rules that are espoused for games like poker, in order to ensure that you don't go broke, if you have an unlucky streak.


 
In answer to SPC100 comment aboive you are right in that a trader must also use proper money management in conjunction with this successfully backtested trading strategy. (Ok- you are right in that strictly speaking admittedly not their edge)
But without the proper money management then the edge is useless.
These are all equally important parts of the jigsaw for coming up with a successful trading strategies.
Casinos and bookies also employ money management with their edge by having maximum allowable bets - which they combne with giving the punter bad-value bets only (i.e. their edge) - which basically is why the booie/casino never loses.


WIthout question traders use exactly the same general tecniques on the market as bookies/casinos use for horses or roulette or whatever else they allow bets on.

Lemur - going by your posts you seem to now what you are talking about.
That 25% edge is pretty impressive.

How long have you been trading by the way?

Also - out of curiosity how did you get involved in the game?
Are you a full time trader?

Any books that you would recommend?

I've read a good few aready.
Just wondering if there are any great one i have missed out on.


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## zephyro (9 Nov 2008)

qwertyuiop said:


> Obviously i am not saying those specific rules give an edge. But these rules *could* be an edge once backtestedand a positive expectancy is displayed.


 
Do you or anyone else know of even one rule that outperforms in backtests in at least three statistically significant out-of-sample periods? The 'evidence' I've seen until now is laughably lacking in out-of-sample verification, e.g. Covel in 'Trend Following' backtesting from 1990 to 2004 using a specified portfolio and then claiming that backtesting using very similar instruments during the same period represents out-of-sample verification!



lemur said:


> However those rules don't constitute an edge. An edge is something you calculate after running a sequence of say 20 trades using the same set up rules. My favorite set up right now has an edge of 25%. So in other words, for every $100 I risk, I make $125 on average.


 
Do you mean that you think this set up has an edge of 25% because that's what it has averaged over 20 recent trades? Do you realise how big a role luck can play in a sample size as insignificant as 20?


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## z106 (9 Nov 2008)

zephyro said:


> Do you or anyone else know of even one rule that outperforms in backtests in at least three statistically significant out-of-sample periods? The 'evidence' I've seen until now is laughably lacking in out-of-sample verification, e.g. Covel in 'Trend Following' backtesting from 1990 to 2004 using a specified portfolio and then claiming that backtesting using very similar instruments during the same period represents out-of-sample verification!


 
I don't think covel was expecting people to use his backtesting strategy as the definitive way of backtesting.
To be fair to the guy he does state on numerous occassions that backtesting is a science in itself.
He doesn't attempt to go through that science in detail because trend following is the core of that book.
I think he states in no incertain terms that backtesting must be done correctly to verify an edge.

I wouldn't get too bogged down in his backtesting methodology as that misses his main point which is is that edges do exist and that trend-following is one way of establishing an edge.




zephyro said:


> Do you mean that you think this set up has an edge of 25% because that's what it has averaged over 20 recent trades? Do you realise how big a role luck can play in a sample size as insignificant as 20?


 
Ya - I would certainly agree that 20 is in no way a proper sample size to claim a system has a certain edge.


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## lemur (9 Nov 2008)

zephyro said:


> Do you or anyone else know of even one rule that outperforms in backtests in at least three statistically significant out-of-sample periods? The 'evidence' I've seen until now is laughably lacking in out-of-sample verification, e.g. Covel in 'Trend Following' backtesting from 1990 to 2004 using a specified portfolio and then claiming that backtesting using very similar instruments during the same period represents out-of-sample verification!
> 
> 
> 
> Do you mean that you think this set up has an edge of 25% because that's what it has averaged over 20 recent trades? Do you realise how big a role luck can play in a sample size as insignificant as 20?



Zephyro. I trade my set ups with real money every day on the market so 'out of sample'  backtest arguments are not relevant.  

Yes I have often run 'confidence interval' stuff requiring 212 samples for 95% confidence Blah blah blah but trading in real life does not work like this. The confidence stuff is relevant to a sterile engineering environment where the inputs/outputs can be controlled but not in the market which is dynamic and suffers from 'trader effects'. 

Once a set up becomes well known among traders it stops working. Hence in practical terms a trader does not have the luxury of sitting around waiting for hundreds of samples to determine if he can get an edge with this method. In my experience, a sample size of twenty is adequate in real terms for an indication that the set up will improve odds. 

Backtesting - I am not a big fan of this as it is very difficult to capture all of the dynamics that will happen in the trading day. For example, I once had a trade set up with 452 backtests which had a very nice 3% edge per trade on average. When I tried to put it to work it failed miserably because I used end of day prices for the tests which did not catch the wider daily variation which often ran my stops.


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## lemur (9 Nov 2008)

qwertyuiop said:


> Lemur - going by your posts you seem to now what you are talking about.
> That 25% edge is pretty impressive.
> 
> How long have you been trading by the way?
> ...



Been trading - first started in the late 1990's. I worked as an engineer for many years before I packed it in to become a full time trader. A risky career move for sure but it has worked out for me. 

Its difficult to learn this business from books. You are welcome to call out and see me if you want me to show you some stuff for real.


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## lemur (9 Nov 2008)

SPC100 said:


> lemur and qwerty do you believe stock prices are a random walk?



Stock prices are largely random with a 10% upward drift over the last 100 years. However, they are pseudo random rather than completely random because of traders effects.


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## z106 (9 Nov 2008)

lemur said:


> Zephyro. I trade my set ups with real money every day on the market so 'out of sample' backtest arguments are not relevant.
> 
> Yes I have often run 'confidence interval' stuff requiring 212 samples for 95% confidence Blah blah blah but trading in real life does not work like this. The confidence stuff is relevant to a sterile engineering environment where the inputs/outputs can be controlled but not in the market which is dynamic and suffers from 'trader effects'.
> 
> ...


 
Some interesting points there Lemur.

The first one re set ups having an expiry date is an interesting good point.

I think your 2nd point is an unfair point though as the error there was your backtesting was done incorrectly by you (for not including daily swings resulting in stop outs) as opposed to the whole concept of backtesting being flawed generally. (unless you take the time limits on valid set ups although presumably many setups have distant expiry dates).

Lemur - out of curiosity - what time frames do you trade?
Are you a day-trader or do you hold positions for many weeks or does it vary?

Also - out of curiosity - are you a professional trader?
DO you trade for a firm ? Or just for yourself personally in a professional capacity?

Aldo - how long does a set up last you before the market adjusts?


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## lemur (9 Nov 2008)

qwertyuiop said:


> Some interesting points there Lemur.
> 
> The first one re set ups having an expiry date is an interesting good point.
> 
> ...



Backtesting - v.difficult to take everything into account with it becoming over complicated & unwieldy. 

Time frame - usually swing trades 1-3 days. But I change with market conditions. This is a whipsaw market so I trade it with small position sizes, wide stops and quick profits.  

Set up last - depends on the set up. Can vary from one month to years. For eample, gap plays seem to have been around a long time. 

Set ups are not to be confused with seasonality and cycles which have reasonably regular timeframes.


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## nuac (9 Nov 2008)

qwertyuiop - referring to your post re use of moving averages - trading on cross of 10 week and 40 week and on a 200 MA rising trend - are there any tests or other data to show these rules would work/


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## z106 (9 Nov 2008)

nuac said:


> qwertyuiop - referring to your post re use of moving averages - trading on cross of 10 week and 40 week and on a 200 MA rising trend - are there any tests or other data to show these rules would work/


 
I was just throwing those out as complete off the top of my head examples of typical rules that someone may have to create an edge.

I am not for a second saying those specific rules work.

That dosn't mean they wouldn't work of course- but highly unlikely.
As lemur mentioned - if the rules were that easy then everyone would be employing them which in time would make them redundant.

If you do want to backtest a specific set of rules there are a number of sites where you can do it.
One is www.wealth-lab.com.

A great forum for trading is ome called www.trade2win.com where a lot of trading questions will get answered.


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## lemur (9 Nov 2008)

SPC100 said:


> can you define pseudo random for me?
> 
> Do you think academics that have decided they are a random walk are incorrect?



Pseudo random means its largely random with pockets of non-randomness caused by trader actions. I can show you lots of non-random things on a price chart. 

Lets put it this way academics make lousy traders.


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## nuac (9 Nov 2008)

qwerty - thanks for the information re trading systems


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## zephyro (9 Nov 2008)

qwertyuiop said:


> I think he states in no incertain terms that backtesting must be done correctly to verify an edge.
> 
> I wouldn't get too bogged down in his backtesting methodology as that misses his main point which is is that edges do exist and that trend-following is one way of establishing an edge.



Why doesn't he backtest correctly in that case?

You may be correct that edges do exist but have you any properly backtested verification?


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## lemur (9 Nov 2008)

zephyro said:


> Why doesn't he backtest correctly in that case?
> 
> You may be correct that edges do exist but have you any properly backtested verification?



Zephyro, I sense you are been too analytical about this. The only verification that counts is the profit & loss column. If mine is not green, I cannot pay my bills. That tends to concentrate the mind onto what works.


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## limerickboy1 (9 Nov 2008)

just a note about edges.the simplest ones are usually the best ones 

for example - if you used the one that says buy if the 100 day crosses above  the 350 day and sell when it goes under then you would have gotten big profits on the dow jones in the last bull market. you also would have shorted the dow back in february and you would again be in profit.

FYI - trend following dosent work in the markets we have at the moment, this is great for us in the sense that most traders will adopt the belief that trend following is dead and it dosent work anymore. this is always the point at which it starts to work again. its quite possible that trend following wont work again for 12months + but when it does there will be big gains to be had. 

there are loads and loads of edges out there and they are simple to follow. the problem people have is keeping to the system and their rules even when their emotions say that the system isnt working . being a successfull trader is mostly about sorting out your mind first.


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## zephyro (9 Nov 2008)

lemur said:


> Zephyro, I sense you are been too analytical about this. The only verification that counts is the profit & loss column. If mine is not green, I cannot pay my bills. That tends to concentrate the mind onto what works.



Your approach seems to be to ignore backtesting and trade systems with real money, presumeably until they stop 'working'. I'm sure you realise there's a one in two chance that any system will record a profitable first trade no matter how daft it is. Without backtesting properly how do you have any confidence that a system has an edge and that any success you may have had isn't just luck?


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## zephyro (9 Nov 2008)

limerickboy1 said:


> for example - if you used the one that says buy if the 100 day crosses above  the 350 day and sell when it goes under then you would have gotten big profits on the dow jones in the last bull market. you also would have shorted the dow back in february and you would again be in profit.



It's very easy to pick a system that works in a particular sample. How does this system perform out of sample?


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## lemur (9 Nov 2008)

zephyro said:


> Your approach seems to be to ignore backtesting and trade systems with real money, presumeably until they stop 'working'. I'm sure you realise there's a one in two chance that any system will record a profitable first trade no matter how daft it is. Without backtesting properly how do you have any confidence that a system has an edge and that any success you may have had isn't just luck?



Zephyro. My sense is you fall into the trap of getting trapped in an analytical framework like somebody who obsesses about the angle of his golf swing rather than getting the ball in the hole. 

I make money trading and I don't do it on a lucky dip basis.


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