Trading straregy

#Contemporary Trading Strategies

Contemporary investors generally believe that:

The stock market has a long-term law, that is, in the long run, the price will be close to the value.
Stock prices are affected by short-term major news events, or in other words, by people’s emotions.
Policies, especially monetary policies in recent years, such as the Fed’s quantitative easing, have a great impact on the stock market, whether it is short-term or long-term.

Therefore, the current popular trading strategies in the market also revolve around these factors.

It should be noted that experienced investors will consider various factors when trading, such as the fundamentals and technical aspects of stock companies, etc.

#Value Investing Strategy

Value investing is currently the most famous investment method. Its idea is to find undervalued securities and hold them patiently until their price returns to value.

In 1934, Graham and Dodd published the famous book “Security Analysis”. Dodd was a fledgling young scholar at the time, a diligent student copying notes while Graham taught at Columbia University. These class notes later became the prototype of the book “Security Analysis”. With countless reprints, the book has become the most evergreen bestseller in history and is the “Bible” in the eyes of value investors.

Later, Graham’s student Buffett carried forward value investing even more. Buffett and his good friend Charlie Munger advocate not only looking for undervalued companies in stock investment, but also finding those great companies and holding them for a long time.

As for great companies, today’s investors generally believe that there are two characteristics:

A company with a strong moat is difficult for other companies to replace or surpass. Such companies, even if some are already super giants, will not grow rapidly in a year, but they can continue to grow for a long time, so the final returns will be very amazing.
High-speed growth companies, as the name suggests, may not have been established for a few years and have no stable profits, but they grow rapidly, and may reach the peak of an industry in just a few years and form a strong moat.

It is generally said that the first type is called value stocks, and the second type is called growth stocks, but in fact the two characteristics do not conflict, and both belong to value investing.

#Technical Analysis Strategy

Technical analysis is the use of charts to predict future prices. The technical analysis school summarizes how the price trend has changed in the past, and believes that once certain patterns appear, the market will have a concept of how much the price will go next and how the odds will go.

Technical analysis is very popular in general, especially believed by retail investors. On the one hand, reading ordinary technical indicators is much less difficult than reading the company’s financial statements. On the other hand, technical analysis pays attention to following the trend, focusing on the short-term and short-term, and feedback from operation to results. It is faster to invest in value. A “thrill of the transaction”.

#Event Driven Strategy

An event-driven strategy is a strategy for trading based on events. This strategy requires close attention to events and news. It is generally used for short-term and medium-term. At the same time, if you can seize the opportunity, you can get huge profits in the short term.

#Quantitative Strategy

Quantitative strategy is a trading strategy based on quantitative analysis of data, which generally involves a lot of data and requires the use of computers.

Taking quantitative stock trading as an example, the strategy generally consists of the following steps:

The first step is to use quantitative factors to select a batch of stocks. Quantitative factors can include stock fundamental data, chart trend data, and even emotional data such as news and public opinion. Some strategies omit this step, but manually delineate A group of stocks, such as 500 stocks in the S&P 500.
The second step is to determine the timing of buying and selling and the size of the position based on quantitative factors, including whether to cover the position, chase the rise, etc.

As far as stocks are concerned, quantitative investment generally operates dozens or even hundreds of stocks, so the risks are relatively dispersed. Generally speaking, stable profitability is a goal of quantitative investment.

The advantage of a quantitative investment strategy is that it makes decisions based entirely on data and avoids subjective emotions.

#multi-asset strategy

This strategy emphasizes risk diversification, so multiple types of assets will be allocated at the same time, such as the four major mainstream assets:

stock
bond
Alternative investments, such as real estate, industrial
cash

Generally, large institutional investors, such as pension funds and insurance companies, are multi-asset investors.

Some investment institutions will implement international multi-asset allocation. They analyze the global economic situation to make decisions. This is also called “global macro strategy”.

Based on the method of multi-asset allocation, there are also many derived strategies.

#Multi-Asset Balanced Strategy

When allocating multiple assets, the amount of different asset allocations can be changed regularly or at the right time. This strategy is called a multi-asset balance strategy. The more famous one is the all-weather strategy of Bridgewater Fund.

Take the more popular equity-debt balance strategy as an example. This strategy believes that if you want high risk and high return, you will invest more in stocks and less in bonds; otherwise, you will invest less in stocks and more in bonds. Therefore, if you allocate a little investment funds in stocks and bonds according to risk assessment, Then the income should be relatively stable. This method of allocating assets according to risk and controlling the overall risk to a certain extent further develops the risk parity theory, which is also used by many global macro multi-asset strategies.

Of course, in reality, it is not uncommon to find that stocks and bonds fall at the same time. But for long-term funds, short-term retracement is not concerned, and at the same time, options and other means can be used for hedging if necessary.

#Relative Value Strategy

A relative value strategy is a hedging strategy that utilizes the correlation of the values of two or more financial assets to profit.

#Market Neutral

One of the goals of the relative value strategy is market neutrality, that is, to achieve a hedging effect, without judging the overall ups and downs of the market, but only judging the price gap between the two assets.

For example, if you find two stocks with relatively consistent price movements, after analysis, you find that A is undervalued or will get better, while B is overvalued or will get worse, then you can go long on A and short B, So if B keeps going up, then A should go up more and faster, and if A goes down, then B should go down more and faster too, best case A goes up and B goes down, then both directions are right . This strategy is also called pair trading.

Of course, there are certain risks in pair trading. For example, A and B are amd and intel. Both companies are leading chips. You think that amd will get better and intel will get worse. It is also possible that both directions are wrong. The problem here is that the correlation between A and B may not be very strong.

In response to this situation, some people will choose to go long on stocks that are very promising, and at the same time short the market or a certain sector, because the volatility of the market and sector ETFs is lower than that of individual stocks. For example, buying Apple and Microsoft is bullish on technology stocks, and at the same time thinks that airline stocks or energy stocks will generally be inferior to technology stocks, then you can short the ETFs of these two sectors.

#Statistical Arbitrage

Using a computer to calculate the correlation between two assets, and then monitor, once the gap is found to be too large, start trading. This method is called statistical arbitrage. For example, the gold-silver ratio measures the ratio of gold to silver. When it is found that gold has skyrocketed and silver is still at a low level, the gold-silver ratio index has soared to a historical high. If you think the skyrocketing gold is reasonable, you can bet on silver Will follow up and short gold at the same time.

Statistical arbitrage, generally speaking, is the result of analysis based on historical data, which does not mean that there is no risk. For example, the price gap between gold and silver is very large, but it is also possible that the gap will be even larger in the future.

Arbitrage can also be risk-free arbitrage, such as long S&P 500 ETF funds and short S&P 500 stock index futures at the same time, earning the price difference between them.

There are many ways to play arbitrage, such as convertible bond arbitrage, fixed income arbitrage, LOF fund arbitrage, tiered fund arbitrage, etc., but it is always a relative value strategy.

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