Investoid

Over the past few weeks, I’ve decided to try and gain some expertise in short-term trading. I define short-term trading as a security holding period between 1 day and 6 months (more or less), and can include buying or shorting a stock as well as holding options on a stock or futures on a commodity or index.

I decided to get into this space for a few reasons:

• I am fully invested in my long term holdings right now, and I have found it difficult maintain interest in finding long term buys beyond periodically evaluating my current holdings.
• I currently believe that the overall market is fairly or slightly overvalued, based on the stagnant economic conditions in the US and the spectre of inflation around the globe, along with a rising interest rate environment. As a result, I am finding it hard to find stocks I think have good growth potential as well as solid dividend stocks at a reasonable yield, beyond my existing holdings.
• There are opportunities in short-term trading for profits regardless of the market cycle, and outsize returns at that.
• I believe the market is less efficient on a shorter time scale, due to the human factor involved in short-term predicitions. Thus I believe there are greater opportunities for skilled agents in short-term trades over long term investing, which reflects my long term portfolio index-oriented core.
• I am looking for a challenge, and being consistently successful in short-term trading is one of the biggest challenges that anyone can face in the finance world.

I am aware that with the large potential rewards by doing short-term trading comes with it outsize risks. Indeed, on a risk/reward basis the potential returns may not justify the chances I will be taking with my hard earned assets. Nonetheless, I am interested to see if I can apply a combination of mathematical and behavioural analysis to this space. I am planning on giving this area a lot of my investing attention over the next 6-12 months and see how I fare. I will only be taking my risk capital (10% of my portfolio) for this venture/experiment.

I am only in the early stages of my short-term trading education, and have started to read as much as possible on the subject. I am planning on picking up a couple of books that look at the behaviour of short-term traders, rather than the “Here’s how to make big bucks day/options trading” type of literature. I am also looking at some academic papers on the subject as well, and will post some thoughts on what I read. So far, I’ve come across some interesting conjectures:

• Most amateur speculators are poor predictors and get their bets wrong. Thus, if you can determine what they’re doing, do the opposite.
• Irregular options volume can be a predictor of stock performance in the near term
• Large jumps in stock prices based on news results typically overshoot the ‘true’ revaluation price, and thus will correct somewhat in the following days/weeks (my take: there’s no true value to correct to, but some profit taking occurs on large movements which swings the momentum in the other direction).

I’ve set up a personal trading journal to record my thoughts, analysis and trades that I make. As I mature in this area, I’ll start to post some of those entries here as well.

If any readers have experience in this area (good or bad), I’d like to hear what you think.