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FINA 408 > Lecture 10 (selection of markets and issues: Trading strategies & portfolio management) > Flashcards

Lecture 10 (selection of markets and issues: Trading strategies & portfolio management) Flashcards

1
Q

What are the 3 select issues to trade based on?

A

1) performance
2) larger trends
3) diversifications

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2
Q

What are the 6 factors to keep in mind in order to choose the right market (security) to trade on?

A

1) Costs
2) Personal risk tolerance
3) Suitability
4)Volatility
5) Liquidity
6) Volume

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3
Q

What does COST refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on? Hint: think cost physical and mental

A

-the cost of the learning curve (time consumption, opportunity costs, trading losses)
-Set up costs: computers, high speed internet, trading platforms, order execution, chart service
-Commission, slippage, missing order in fast market
-unexpected events

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4
Q

What does PERSONAL RISK TOLERANCE refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?

A

Leverage use; futures vs. stock, going on margin, etc

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5
Q

What does SUITABILITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?

A

-based on your experience and personality

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6
Q

What markets should you choose when first starting in trading?

A

-choose “slower” or lower risk markets when starting

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7
Q

What does VOLATILITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?

A

-the more volatility, the more potential gains but the more potential losses
-the breakout from low to high volatility is where most profits are made

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8
Q

What does LIQUIDITY refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?

A

-Ability to transport a large number of shares without bringing about a large price change
-dependent on bid-ask size, as narrow spreads does not always guarantee liquidity

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9
Q

What does VOLUME refer to in the 6 factors to keep in mind when choosing the right market (security) to trade on?

A

-you want issues with heavy volume that have liquidity

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10
Q

What are time horizons?

A

the amount of time someone holds a security before selling it

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11
Q

What is needed to trade on different time horizons

A

different experience levels and strategies

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12
Q

What are the 3 types of trading for different time horizons?

A

1) scalping
2) day trading
3) swing trading

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13
Q

What is SCALPING

A

-taking very small profits between bid-ask spreads and accumulating liquidity credits

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14
Q

What does scalping require (4 things)?

A

-time
-excellent order system
-experience
-direct market access to not waste any time

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15
Q

How quick is scalping?

A

Extremely short term (minutes) and fast paced

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16
Q

What is DAY TRADING

A

implies that you start the morning with no positions and end the day with no positions (sell them at or before close of markets)

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17
Q

What is SWING TRADING

A

-Trying to capture small trends or counter trends over several days or weeks
-Try to capture bulk of trade (approx 50-70%)

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18
Q

What two approaches are used to select which issues to invest in?

A

1) top down
2) bottom up

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19
Q

What is TOP DOWN selection?

A

-Section starting from the type of markets (stocks, bonds) -> country -> industry sector -> security

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20
Q

What is BOTTOM UP selection

A

-security -> industry sector -> country
-look for undervalued stocks: Low P/E stocks

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21
Q

What is industry sectors and sector rotation theories

A

-selecting sectors based on the business cycle
-ratio (relative strength) analysis

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22
Q

What is relative strength?

A

-a simple but effective method of stock screening
-Calculate a ratio between two investments, sectors, industry groups, indexes, etc, to see which is outperforming the other

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23
Q

What is Kirkpatrick stock screen selection methods of the Pros

A

-calculated all relative price ratios to each other; P/S, 6 month RS
-used a multifactor model of the above relative rankings
-uses fundamental and technical analysis

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24
Q

What is value line stock screening selection methods of the Pros

A

-Analysis service that uses a proprietary relative strength ranking 1 to 5 the “timeliness of stocks”
-also incorporates: earnings trends, recent earnings, earnings surprises

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25
Q

What is Wyckoff stock screening selection methods of the Pros

A

Method where it is believed that stock prices are determined by supplu and demand, and influenced by wealthy individuals and large institutional insiders

26
Q

What are the important factors to remember about the O’Neil CANSLIM

A

1) Technicals and fundamentals go hand in hand
2) Focuses on “leading” growth stocks
3) stocks are ranked according to the 12 month relative price strength, with 3 month price strength weighted more heavily in percentiles from 0-99, 99 being the best
4) uses a 7-8% strict stop loss rule
5) hold position if stock rises greater than 20% within 1-3 weeks
6) PATTERNS used:
-cup and handle
-flat base
-double bottom (ideal: lower low on the second low)
7) allow a min of 7 weeks for pattern to develop
8) best time to buy is in a breakout form a pattern with at least 50% increase in volume

27
Q

What does each letter in the world CANSLIM signify

A

C = current quarterly earnings
A = annual earnings
N = New product/management/highs
S = supply & demand
L = leaders choosing to win
I = institutional sponsorship
M = Market direction

28
Q

What is the C (current quarterly earnings) in CANSLIM mean?

A

+25% or more in recent quarters

29
Q

What is the A (annual earnings) in CANSLIM mean?

A

+25% or more in each of the past three years

30
Q

What is the N (new product/management/highs) in CANSLIM mean?

A

Biggest stock winners had new. products, new management or new conditions in an industry that propelled the company to astounding height

31
Q

What is the S (supply & demand) in CANSLIM mean?

A

-Low supply of shares outstanding
-strong demand for a limited supply of available shares will push price up

32
Q

What is the L (leaders: choosing to win) in CANSLIM mean?

A

-Leading companies that are merging

33
Q

What is the I (institutional sponsorship) in CANSLIM mean?

A

-Big institutional investors: insiders have a lot of their stock. This takes away the actual shares outstanding that are trading in the system

34
Q

What is the M (market direction) in CANSLIM mean?

A

It is hard to go against the direction of the market

35
Q

What is the base of CANSLIM method

A

-Before a stock can launch a big price run up, ut must have a solide base pattern to build upon

36
Q

What is your insurance policy in CANSLIM? Hint: think of the stop loss method

A

7% insurance

37
Q

What are some pitfalls of trading?

A

-Getting rich quick/tale big risks for big gains
-Education

38
Q

Below this card is on Elliott wave theory, Fibonacci, and Gann

A
39
Q

What is the Fibonacci Sequence

A

Two previous numbers add up to the next number
1,1,2,3,5,8,13,21,34,55,89,144

40
Q

What is the idea behind Fibonacci Sequence?

A

Is it natures law of growth structures?
If this ratio appears so much in nature and in growth patterns, does it also appear in the way prices grow?

41
Q

What are the retracement levels using horizontal lines in Fibonacci sequence

A

38.2%, 50%, 61.8%, 100%

42
Q

If you break one level in Fibonacci, what needs to be done?

A

If you break one level you have to move to the lower level

43
Q

In a bear market, what level (%) of retracement can be expected

A

The market can retrace 50% of the down move, and retraced 61.8% and once this is done, it retraced to 100%

44
Q

In a bull market, what level (%) of retracement cn be expected?

A

It is normal for the market to retrace 38.2% in a strong, or even 50% of the up move

45
Q

**What does the EWT (Elliott wave theory) state?

A

States that stock prices are governed by irregulr cycles founded upon the Fibonacci series (1-2-3-5-8-13-21…)

46
Q

**How do impulse waves move? and how do corrective waves move with these impulse waves?

A

Impulse waves (move with the trend) with corrective (counter trend) eaves against trend

47
Q

**What are the 5 motive waves

A

Waves: 1,2,3,4,5

48
Q

**What are the 3 impulse waves?

A

Waves: 1,3,5

49
Q

**What are the 3 corrective waves?

A

A,B,C

50
Q

How does the market move in EWT (Elliott wave theory)

A

Market moves with “three steps forwards and two steps back”

51
Q

In a BULL market how does the wave up and the counter wave move?

A

In a bull market, the 5 wave up trend is then corrected and reversed by 3 wave counter trends (down)

52
Q

In a BEAR market how does the wave up and the counter wave move?

A

5 wave down and then corrected 3 waves counter trend (up)

53
Q

What is important to know about the waves in Elliott wave theory?

A

Each wave (wave 1 and 2) is made up of impulse (smaller) waves
-> there is 5 impulse waves on wave 1
-> there is 3 impulse waves on wave 2

54
Q

What are the 3 types of corrective waves?

A

1) Zig zags
2) Flats
3) Triangles

55
Q

What are zig zag waves?

A

A-B-C, A&C impulse, B corrective (look at slide 28 for clarifications)

56
Q

What are flats

A

A-B-C moves sideways with overlapping sub waves (look at slide 28)

57
Q

What are triangles

A

Like triangle patterns with five waves A-B-C-D-E

58
Q

What are the 3 basic rules of EWT (Elliott wave theory)

A

Rule 1) Wave 2 may not break below the origin wave 1
Rule 2) Wave 3 is never shorter than wave 1 and 5, but it does not necessarily have to be the longest wave
Rule 3) Wave 4 cannot overlap the termination of wave 1

59
Q

What are the 3 guidelines of EWT (not always expected)

A

Alternation: Types of corrective waves in wave 2 and 4 alternate ( a flat is followed by a zig-zag or triangle)

Equality: At least 2 of 3 impulses sub waves in a sub of 5 wave sequence are often equal in length

Truncation: Occasionally the fifth wave fails to exceed the third wave, and gets truncated

60
Q

Name 3 projected targets and retracements using EWT

A

-Channel lines can be drawn connecting waves 1&3, parallel to trend line starting from the low of wave 2, and this can be used to forecast waves 4 and the end of wave 5
-Wave projections become targets based on Fibonacci ratios
-Corrective waves tend to correct approx 61.8 or 36=8.2% of their corresponding impulse waves and are related to each other

61
Q

Name 6 downsides to using EWT

A

-Difficult to interpret , especially corrective waves
-much debate as to which wave we are in? where is the wave?
-Tendency to over analyze
-Waves are fractal
-Waves known after the fact (after they are formed)
-Wave movements are related to the Fibonacci ratio

62
Q

What are the 4 characterisitcs of Gann

A

1) Forecasted time and price: Time is more important than price
2) Fan lines
3) Price targets according to cycles and degrees of a circle
4) time from cycle high/low, to the next cycle high low can be related

FINA 408 (15 decks)

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