I Had to Develop an iPhone App to Understand Swing Trading | Hacker News Reader

I Had to Develop an iPhone App to Understand Swing Trading

chartingninja.com

67 pointsriveralabs50 comments

Good for this guy for making this app.

However, this makes me worried for him...

> There’s a 50% chance that I can lose $50.00 in a few days, but there’s also a 50% chance that I can make $100.00 or more in a few days. Why 50% chance? This number will be different for every person depending on his profit & loss history.

Ummm..... This doesn't seem true to me. What if the stock just stays flat? That's more often than not the default for many stocks.

if you make the dubious assumption that all three outcomes are equally valid then you loose 2/3s of the time.

If the stock stays flat then you lose as you have to pay commissions to enter into the trade and to exit the trade. Lots of people model algorithms, very few model them accurately, sometimes myself included unfortunately:)

> But swing traders need to win at least 50% of the time in order to be profitable.

If you don't pay any commissions or have any overhead, sure. But I'm guessing you pay commission and I'm guessing you have overhead.

I would read up on the Kelly Criterion to imporove your capital allocation. http://en.wikipedia.org/wiki/Kelly_criterion

> You should stay away from stocks priced below $5.00 because these are Penny Stocks and involve a higher risk. You might consider stocks between $5.00 and $10.00, but again, they involve higher risk and even worse, they might go into Penny Stock territory.

This is just plain false. Being under $5 is one of 3 criteria that make up a penny stock, its a necessary but not sufficent condition. There are plenty of good companies with stock prices under $5.

The price of a stock isn't a good indicator of its risk.

> The reality is that it’s easier said than done! It’s actually very hard to make money in the stock market! You will win but you will also lose a lot! To put it into perspective

Full points to the author for realizing this! I'm still amazed at the number of people who think they can slap together some machine learning, nlp or deep learning and make money. People literally spend all their time doing this, if there was free money to be made someone would be making it:)

> People literally spend all their time doing this, if there was free money to be made someone would be making it:)

I agree with everything you said above, including this. I want to add though, that there is effectively free money in the stock market. For example, just by buying a low-fee index fund (e.g. something from Vanguard), you're almost guaranteed to do better than most investors and probably better than nearly all speculators. (And there are other investment strategies that typically outperform the indices as well). I guess the reason people do poorly in the stock market is similar to why people start dumb startups that don't really have any hope of being profitable: The idea of rapidly creating an enormous amount of money for very little effort in a very short amount of time is much more appealing than making 12+% per year indefinitely, even though this strategy is much more likely to net you a higher return in the long-run... plus you actually have to save money if you want to invest this way :)

Edit: It's also interesting to learn about how some of the big quant trading firms started. D.E. Shaw, for example, originally had some bond trading algorithms they used. It was very profitable and the hours were short compared to the rest of the Wall Street/Finance world. Then they got greedy and tried some more aggressive strategies, blew up, and nearly lost the fund. Fortunately for them they seem to be doing much better now, though I'm not sure what their current strategy is.

> People literally spend all their time doing this, if there was free money to be made someone would be making it:)

I used to think this, then I worked on a trading system in an investment bank. Don't underestimate how quickly and easily you can learn and exceed people who should know what they're doing, given sufficient motivation.

There are thousands of buy side firms all over the world stocked with stone cold geniuses who do this all day every day after having trained in maths and science all their lives.

The fact that you saw some people you perceived to be clowns once, does not demonstrate the market is anyone's for the taking.

Those people are usually managing a lot of money, though. Warren Buffet has said he has to trade completely differently nowadays due to size. So those people are not working the same opportunities most people here are going for.

Sure, even small hedge funds and propriety trading firms are generally working with millions of dollars.

I agree there must be some niches are that are amenable to exploitation by small independent traders (perhaps anything to do with nanocap stocks).

I have not had success finding niches where I thought I would be successful, but I could very well be insufficiently clever.

But trading highly liquid equities on a multi-day timescale (the strategy proposed here) is certainly not prohibitively hostile territory for large, sophisticated buy side operations.

A lot of HFT shops (if not most), don't "manage" any money in the conventional sense. They close the books at night and don't hold any positions when there isn't active trading.

What Buffet does and what HFT do are completely different. The reason why Buffet has to change how he trades is because of HFT. If Buffet puts in an order for 100,000 shares of Coke (KO) while it's at $40 a share, he would not stand a chance. HFT bots would swarm in and scoop every last share of KO that's available and then sell it back for incrementally more. All within a fraction of fraction of a fraction of a second.

So true. When you have a small account you can be much more agile and make some good returns simply by being able to trade without moving prices...

Note that you are somehow arguing in favor and against the efficient market hypothesis at the same time.

By arguing for ETFs, you are implicitely assuming that there is not much to gain by doing your own research because markets are efficient and have already priced in everything.

By arguing that most people underperform the market, you are implicitely assuming that it is easy to underperform the market - something that should in fact be hard if markets were efficient and everything priced fairly.

> By arguing that most people underperform the market, you are implicitely assuming > that it is easy to underperform the market - something that should in fact be hard > if markets were efficient and everything priced fairly.

I think the argument is that many people (including fund managers) trade too actively, which generates costs that cause them to underperform an efficient market.

No, I'm arguing that the market is efficient most of the time and that most people don't have the time and inclination to find underpriced securities.

Also, most people underperform the market because of fees. If you invest in a mutual fund with a 2% management fee, then the fund needs to outperform the index by 2% to breakeven. It needs to do significantly better than that if you're invested in a hedge fund with a typical 2-and-20 fee.

Edit: in particular, small-cap stocks tend to be inefficiently priced because it doesn't make sense for institutional investors to research them heavily since they cannot allocate a large percentage of funds to them without: 1) significantly disturbing the market price 2) in some cases owning a significant percentage of shares (5% or 10% I think) that requires filing with the SEC.

My wife (a PhD holder in the field) would smile and say "that is of course because markets aren't efficient".

no, what you describe is not an argument against EMH; not defending the poster, I have no idea if the poster understands this, but your critique is faulty and is explained by standard finance theory.

>>> The idea of rapidly creating an enormous amount of money for very little effort in a very short amount of time is much more appealing than making 12+% per year indefinitely, even though this strategy is much more likely to net you a higher return in the long-run.

Just as a side note, I was watching the excellent ESPN series "30 for 30" and they were describing why so many athletes have gone bankrupt so quickly after retiring, even though they supposedly made millions when they were playing.

Your quote is the key. They had several financial planners and they said the same thing, "It's not cool for these guys to their money in an index fund and watch it grow over 20 years. They want bars, dance clubs, music studios, and other frivolous stuff. THAT'S why they broke."

The stories the athletes tell are pretty jaw dropping by the way: http://www.youtube.com/watch?v=TSOAwNSv8EM

12%! I would love to join this fantasy world of yours :)

Vanguard Vanguard Vanguard.

Don't try to be clever. Just invest your money in a few different indexes and let it be.

Last year my account grew ~30%, it's increased 16.1% so far this year (the market isn't as crazy as it was in 2013 but it's not bad, either). You need to be disciplined enough to let your money sit and resist the temptation to do dumb things when the market dips.

It's not rocket science, the best way to fuck it all up is to try and manage your money yourself and play the market. Don't do that. There are thousands of bankers out there working 12-14 hours each day to take advantage of people who don't know what they are doing. Don't be a sucker.

Your 20 months of returns hardly make a compelling argument.

We are in the midst of a 3 year old bull market. We are just barely off all time highs in the S&P and Dow. Nasdaq is also killing it -- even after some pullback in high beta (volatility) stocks.

Your returns the last 2 years are not typical of an average year. A return approaching double digits over a long trendline is not beyond reach, but it would be a mistake to bank on a 12% return IMHO, and even more of one to suggest other people could expect the same.

There are tons of calculators where you can play with average returns over time, check one out.

All of the vanguard funds have graphs charting the returns year over year since the fund was created.

The ones that crashed and burned in the recession are the ones most likely to provide a high return in a bull market, there are plenty that were largely unaffected by the recession (mostly securities) but you won't benefit as much from a bull market with those.

I have a blend of different funds.

All ETFs and mutual funds have this, I believe it's SEC mandated. Regardless, your points may or may not be true but how something performs in a bull market isn't strictly the point. You need to average your returns over a long timeline.

There is nothing special about Vanguard ETFs, and even if you feel you are diversified there's an old saying that in a severe downturn the correlation of everything goes to 1. So most likely, in a downturn, everything you hold will go down, even if you feel you're diversified. This of course is not a law, just a probability.

(And just as a helpful FYI, both stocks and bonds are securities)

>Last year my account grew ~30%, it's increased 16.1% so far this year

Everyone looks smart during a bull run-up. That same SPY allocation would have been crushed in 2008-2009. On average, you'll get average results.

The CAGR of SPY for the past 100 or so years is about 6.5%, inflation adjusted. Good, but not 30% good.

I know the 30% return was an anomaly, but the 10 year returns on one of my funds is still in the ~10% range (even accounting for the recession), so I'm not really worried about it. It's better than a savings account, that's for sure.

Very helpful post. I'd like to add that "Fooled by Randomness" [1] by Taleb should be required reading for investors and speculators alike.

A couple other good quotes to remember by one of my favorite investors, Ray Dalio. "Just because something hasn't happened recently doesn't mean it's implausible." "Always ensure that the improbable outcome is still acceptable."

[1] http://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incer...

> But swing traders need to win at least 50% of the time in order to be profitable.

That's not true. It completely depends on your strategy/system. You can be highly-profitable with a 30% win-rate (or any number) granted the amount you win is far higher than the amount you lose. If my average win is $1000 and my average loss is $100, I can be profitable with only 10% wins (excluding commissions).

A tangential question: It seems that a lot of smart people believe in technical analysis, but to me it sounds like telling the future from tea leaves. Does it really work or are successes just part of the standard randomness of stock investing?

I believe there's efficacy to it as one input; it's not an exact science.

Technical analysis is just acknowledging that while price moves are random (and if you plot daily price moves, they represent a bell curve with fat ends), there are still patterns that reappear. And if you have tight stops in place to manage risk, you can (try to) take advantage when a pattern emerges.

This is a good question, and I don't think you'll get a definitive answer.

If by technical analysis do you mean watch for patterns to appear, then yes it works. There are patterns all over the place.

Renaissance Technologies is famous for its pattern matching AI. They hired 2 key employees out of IBM many years ago that layed the base for their technology and the rest has been money making history. See: http://www.businessinsider.com/bob-mercer-peter-brown-2010-3 and http://en.wikipedia.org/wiki/Renaissance_Technologies

The world of trading has been a cat and mouse game of pattern matching for awhile. One of the earliest attempt at hiding large orders was an algorithm called POV( Percent of Volume). It's an order that would slice up a big order into smaller chunks and sell it throughout the day. The first variations would just sell every 10 minutes. Its easy to see how someone could find this pattern (Hmm, it seems like 1,000 MSFT are being sold at market every 10 minutes by Goldman Sachs) and exploit it which lead to more intelligent order spreading, and the cycle continues.

However, if by technical analysis you mean looking for patterns like "head and shoulders" (http://www.investopedia.com/terms/h/head-shoulders.asp) then it might be true only in that if so many people/computers believe in it that it becomes a self fulling prophecy. For example, if every one believes that when a stock crosses above its 20 and 50 day moving average then its going to fall, then it will fall just because everyone will start selling because they believe it will fall, which causes it to fall which reinforces everyone's belief that the pattern works and you have a positive feed back cycle.

Does that mean technical analysis works? IMHO this type of investing doesn't work, but who am I to say...

I've come to the conclusion that those who successfully employ technical analysis (i.e. chart reading, etc.) are practicing a form of risk management (knowingly or unknowingly), but do so consistently. In short, they are quickly out when they are wrong (taking small losses) and allow their 'winners to run'.

Pov would be an execution strategy. And exploiting it seems almost by definition not technical analysis.

The rest seems accurate.

Yes, I meant the latter version, i.e. manual detection of patterns from the price charts. Given how optimized modern trading is, I find it hard to believe that a crude method like this would work.

I totally believe that with algorithm trading you can detect patterns, but I would assume that the sweet spot - like you described - would be detecting and exploiting patterns of individual actors (or a cluster of actors) instead of the patterns of the chaotic mass.

The most compelling argument I've heard is that technical analysis is a self-fulfilling prophecy. I.e. If a large enough segment of players believe the accuracy of a certain indicator, and they all take positions reflecting this belief, and the sum of actions can move the market. Personally I've grown fond of behavioral analysis (I suppose that's a subsection of technical analysis), in the form of the candle stick technique. I think it works more often than not

It really depends how you use it. "Technical analysis" refers to techniques that are as disparate as "cooking". There is evidence of some technical stuff being quite valid--the relevance of momentum to returns, for example--but there are also plenty of people who misuse it.

My own view is that it's a window into the pricing process and adds depth to the practice of reading the market that many analysts go through. Ignoring technical analysis when looking through charts is kind of like watching TV in standard definition instead of HD. Even though it's kind of still the same thing, I enjoy it.

If you're doing technical analysis yourself it's a joke and indeed reading tea leaves. However, technical analysis is essentially what high-frequency trading automates and has made many people billions of dollars. You have no chance competing though, by the time you have identified your Fibonacci retracement or whatever other snake oil you're looking for, there have already been millions of actions taken by hundreds of HFT firms that have likely already eaten your lunch before you knew you were hungry.

"The reality is that it’s easier said than done! It’s actually very hard to make money in the stock market!"

There should be a follow on sentence... It can be very difficult to make money in the stock market IN THE SHORT TERM. You should not do this... most people should not do this.

See this:

https://personal.vanguard.com/us/insights/investingtruths/in...

I'll go a step back from that to something simpler:

You can use the stock market to make money. You can't use the stock market to make free money.

There's a number of different ways to pay for your money. You can pay for it by doing intensive in-depth research and figuring out undervalued stocks. You can pay for it in cash up front (buying a bond or index fund) and make it back over time while other people do the work (your returns will be lower). You can pay for it by taking crazy risks with your money, hoping the market will swing in your favor (not necessarily gambling if you accurately understand the risks involved and don't overpay for risky assets).

It's just like a lot of other business, when you get down to it, except the really crazy risks are easier to find and harder to analyze.

The chances of the stock moving from {$25 - $24 = 4.00%decrease} is much more likely than a move from {$25 - $27.5 = 10% increase}-plain intuition. To be brutally honest, it will most likely hit both of those price targets assuming the stock has been trading between that range and they are within one standard deviation of the historical price records.

The most important part of being a trader is TIMING and the second most important part is being able to make decisions based off of analysis of technical parameters and NOT based off of your emotions.

This type of analysis tells me that you are not comfortable emotionally with losing more than $50 on one trade which I see as a sign that you should be looking into more traditional investment practices.

I would suggest you analyze the opportunity cost for the amount of research, training, and actual trading it will take before you become profitable. Don't forget about taxes!

As a seasoned trader, I can assure you this is the type of analysis that will result in lost money and unimaginable negative emotions. It is too simplistic and lacks both fundamental theory and actual technical analysis.

While this is interesting, it's pretty much useless. Traders can do the basic maths in their head, in a split second. If they can't, they have no chance of making sense of any sort of financial numbers and indicators.

Furthermore, the price of the stock doesn't really matter for anything above a penny stock. 100 shares at $25 is the same as 10 shares at $250, all else equal (for instance, market cap).

I also think larger positions are better, for instance $10K per trade is a good number. It's high enough that commissions are trivial, so you can make money off a 1-2% swing, rather than needing to make 3-4%. Of course, the ideal is 5-10% (well, more is ideal, but 5-10% is a realistic enough number for a short time frame, say a week or two), but it's nice to exit out of a trade that turned against you and still take a small profit at the end.

And of course, this app ignores the most important part - picking and timing stocks. Some understanding of technical analysis as well as sentiment is required, and basic market dynamics (supply vs. demand, volume, etc...).

>> I have the potential to make a higher 2R profit, with the same amount of risk as before, because I’m simply buying more shares.

What he's really doing here is demanding a much larger percentage gain in the stock price to get that higher return. It has nothing to do with the number of shares.

"Successful swing traders win only 50% of the time."

Save yourself a lot of effort, toss a coin.

The development of this app, and the technical know-how gained is really something positive. However, doesn't it worry anyone how the Stock Market seems to be reduced to a mobile game? It`s not even about adding value to the market, but just piggy backing on this humongous money machine for the sake of individual gain... Please correct me if my perspective is missing some 'optimism'.

Since even lots and round numbers don't matter anymore in the stock market, seems a strategy would be to _not_ follow the $10-25 guide.

Nice job. This looks like a much better and more complete position sizing tool then the one I built (more of a learning exercise for me.) I wonder if the William Eckhardt position sizing algorithm was used.

http://powerful-reaches-1118.herokuapp.com/ [very much a work in progress.]

Sounds like this type of trading could generate near 1000 taxable events per year. How do you manage this data for your tax filing?

Computers... Your broker does the math and you get a form in the new year that details your various gains and losses (mainly capital gains and then dividend income, which may not apply if you're not holding positions).

It is certainly not 50%, each stock will have an implied volatility that will statistically determine the likelihood of a move.

Weird idea for an app, but at least it's pretty. Swing trading probably isn't for you if you can't do basic math in your head.

> It’s actually very hard to make money in the stock market!

Can't you just buy an index fund, forget about it and come back to ~8% per year gain?

Good for you for knowing this. It's true, and it's something brokers wish people wouldn't point out. If you're simply interested in making money in equities and not gambling, index funds are the way to go.

http://arachnoid.com/equities_myths

> Successful swing traders win only 50% of the time.

Is this better than just picking stocks at random instead of carefully selecting them?

So won't high frequency traders discover your limits (by posting and canceling orders rapidly) and drive you into them, costing you money? I thought this was the simplest kind of fish for them to catch.

I don't think you know what HFT is...

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