Stock Exchange: What Are Your Odds Of Trading Success?

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Includes: ATHM, BA, DLPH, USO
by: Jeff Miller

Summary

Most people shouldn’t even try to trade. Depending on who you ask, the success rate is very low.

However, you can be successful if you’re willing to put in the time.

Our regular participants offer specific trading ideas reflecting contrasting styles.

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: The Most Costly Trading Mistakes To Avoid

Our previous Stock Exchange reviewed some of the most costly trading mistakes to avoid. We acknowledged the road to trading success is long, challenging, and filled with many common, yet costly, pitfalls and mistakes. A glance at your news feed will show that the key points remain relevant.

This Week: What Are Your Odds of Trading Success?

According to SMB Training Blog, The Failure Rate of a Proprietary Trader varies depending on who you ask:

“Numbers abound about what the failure rate is. Some say 95 percent. Others claim 80. We had a college student fly across the country to visit us who was writing his college thesis on this very subject. He came in at 90 percent. At a big bank the whisper number is 55 percent.”

Importantly, the article goes on to say:

“These numbers above include far too many people who should have never tried.”

And after explaining some of the reasons why they fail:

  • some are not qualified
  • most are poorly trained
  • many do not have a passion for trading and cannot sustain the energy to improve daily
  • the learning curve is too difficult
  • they are not good enough

The article states the following:

“I agree with Charles Kirk from the awesome The Kirk Report that you can become a solid trader if you are willing to put in the time.”

Arguably, another reason many traders fail is simply because the markets have become much more efficient over time. In an interesting article by Dr. Brett Steenbarger, he shares this analogy from David H. Bailey, Ph.D. of Lawrence Berkeley National Laboratory (retired):

”Centuries ago, gold could be found near the surface of the earth and could be mined by enterprising individuals with shovels and pick axes. As the visible gold supply dwindled, it became necessary to utilize complex techniques for detecting microscopic gold and gold hidden far beneath the earth's surface. The days of the California gold rush, where individuals could strike out and find their fortune, are long gone. Do you foresee the same in finance? Have we reached a point where the "alpha" at the surface of the market has been thoroughly mined and we now need complex tools to extract the "gold" within financial markets?”

On one hand, if the failure rate really is so low, and markets really have become so much more efficient, then maybe it’s time to find a newer market to trade? For example, some people argue that mining cryptocurrency is an attractive market full of proverbial gold mines. This article explains that many bright traders are quitting their day jobs to trade crypto full time:

And as our regular readers know, we have a view on crypto-currency, Bitcoin in particular:

And while cryptocurrencies are creating some “interesting” opportunities, there continue to be trading opportunities in traditional markets that have evolved beyond the “wild west” days that many believe exist in crypto. For example, momentum trading is a field the academics are finally latching on too (see: Nobel Prize Winner Eugene Fama on the Discovery of Momentum), but that traders have been implementing (in evolving fashions) for decades. And it’s one we have refined in our own trading models (such as Felix and Athena), and you can see some of the results in our performance table below.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models. Our trading models have shown excellent performances over the last weeks as you can see below:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger; (Blue Harbinger is a source for independent investment ideas).

Road Runner: I purchased Boeing (BA) back on May 1st for $328, and I sold it at above $351 this week on May 29th. What do you think about that, Blue Harbinger?

Blue Harbinger: No one likes a bragger, Road Runner. But I do appreciate your profitable trade. Care to explain your rationale?

Road Runner: It’s the same process I explain to you every week. I like to buy stocks in the lower end of a rising channel, and I sell them after 4-weeks. It’s a little more complicated and technical than that, but you get the idea. Here is a chart to help you visualize what’s basically happening with these trades:

BH: Fine. Thanks for explaining. And as I’m sure you are aware, Boeing’s EPS has been, and is expected to continue, rising, as shown in Chuck Carnevale’s excellent Fast Graph, below.

Road Runner: Yes, I am aware. And thank you for sharing. However, I’m not very interested in what the fundamentals are expected to be in 2020. I trade based on technicals, and I hold my positions for only 4-weeks, typically.

BH: Fine. Got it. Thank you. And how about you, Felix—any trades this week?

Felix: I bought Delphi Technologies (DLPH) on Tuesday. Here is a chart (below). Are you familiar with the company?

BH: Yes. Delphi Technologies is a spin-off from Delphi Automotive (now Aptiv). The company basically makes automotive drivetrains. Here is a look at the Fast Graph.

Felix: I bought it because it has momentum that will carry it higher over the next 66 weeks.

BH: Sixty-six weeks! Wow—you hold your positions a lot longer than the other traders. Do you hold for exactly 66-weeks?

Felix: No—that’s an average. I have a price target in mind, and I consider macro factors and use dynamic stops to control risks.

BH: Well, Delphi announced strong earnings earlier this month. I hope this one works out for you.

Felix: Thanks for the “hope,” but let’s not forget, I am a technical model designed specifically to avoid emotions—and all of the silly mistakes that go along with them.

BH: Alrighty then, Felix. And for non-emotional trading models, you and Road Runner sure do seem to have plenty of—eh hem—confidence.

Felix: And that’s not all. I also ran the entire Russell 1000 large cap universe through my model, and I have included the top 20 ranked stocks in the following list:

BH: Thanks, Felix. How about you Athena—any trades this week?

Athena: This week I bought Autohome (ATHM). Any thoughts?

BH: Yeah—it’s been on fire in terms of performance over the last year. Let me guess, you’re a momentum trader?

Athena: Yes—I am a momentum trader, and I typically hold my positions for about 17 weeks. And as you can see in the chart above, Autohome has been sailing above its 50-day and 200-day moving averages fairly consistently over the last year.

BH: Yes, it has. It’s also expected to grow earnings per share pretty dramatically over the next 2 years—that could have something to do with it too. You can see the Fast Graph below. And by the way, you are aware that this company basically develops automobile websites for consumers in China, right?

Athena: Yes, I am aware. However, as mentioned previously, I typically hold for only about 17 weeks, and I exit when either my price target or stop price hits.

BH: Are you also aware that you can buy cars from vending machines in China? Here is a picture:

Image result for china automobile vending machine

Athena: Interesting. Thanks for sharing. How about you, Oscar—any trades?

Oscar: No trades to share, but I did run our Comprehensive and Diverse ETFs Universe through my model, and the top 20 rankings are shown in the following list.

BH: You still like oil (USO), I see. I realize your picks are more complicated than simply what has been going up, but the list still makes a lot of sense from a momentum standpoint. Thank you for sharing.

Conclusion:

Trading is challenging, and most people shouldn’t even try. Depending on who you ask, the success rate is very low. Nonetheless, you can become a successful trader if you’re willing to put in the time.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their "Stock Exchange." (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

17 weeks

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

Long term

Risk signals

Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to "etf at newarc dot com." Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Trade Alongside Jeff Miller: Learn More.

Disclosure: I am/we are long ATHM, DLPH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.