n00b question
Hi guys, i'm a newbie and i don't understand why this basic strategy won't work.
just buy a stock at the open, and have a soft stop loss of .5% (or whatever)
if the stock goes up, just hold it till the end of the day and then sell it at the end of the day.
If the stock goes down, sell it, losing .5%
If the stock hovers around -.5% then, get in and out of it as it moves up and down. (this part is what kills you with commissions?)
If commissions are minimal, can this strategy work, or is there something else fundamentally wrong about this?
Thank you for your insight and explaining why this strategy sucks :)
Start here - http://www.amazon.com/The-Intelligent-Investor-Definitive-Investing/dp/…
[quote=PaulOwen]Start here - http://www.amazon.com/The-Intelligent-Investor-Definitive-Investing/dp/…]
Your answer doesn't help.
[quote=PaulOwen]Start here - http://www.amazon.com/The-Intelligent-Investor-Definitive-Investing/dp/…]
You probably haven't even read it.
Model it out in excel on SPY, then compare to a direct investment. Even if it looks good in a backtest, I see no reason why this should generate any alpha consistently. There's no edge in this strategy whatsoever.
It's not a strategy, it's just blindly flipping coins. Although I guess it depends on what you mean by "work".
Right, I assume that 50% of the days the stock goes up 1% and the other 50% of the time the stock goes down 1%.
The days the stock goes down, i only lose .5% but on the days it goes up. I gain 1%.
obviously there is no "edge" in this strategy, i'm curious if the reason is transaction costs or something more simple.
Again, i'm a noob and recognize that this strategy doesn't work, but i'm curious WHY. Thanks guys! :)
First question: do you know that tomorrow's opening price does not equal today's closing price?
Yes, I would just buy 5 minutes after the open or then sell 5 minutes before the close.
You repeat the process each day. The hypothesis is on good days you make 1%, on bad days you lose .5%. On average it shouldn't suck? 50% of days are good and 50% are bad. That's all.
But, you won't believe it until you run the numbers yourself. So, just run the numbers. If you want to do it properly, buy at the open, see if the low ever breaches negative 0.5%, and get the closing price. If it breaches negative 0.5% during the day, put that number in, otherwise the closing price. You can get these numbers off of Yahoo! Finance or equivalent. Most likely, you will see at this point that it doesn't work. If it does work, you need to manually check the days where you breached the negative 0.5% stop and see if the stock gapped down. If it gapped down, you need to replace the -0.5% number with the number it gapped down to. If you are any good with excel, this should take you 15 minutes to run, tops.
I promise you it won't work if you run the numbers correctly.
I have backtested this before using an automatic trading strategy. It doesn't work. Don't waste your time. In theroy it seems to work, but you get in trouble when the stock gaps your stop. Also when the stock it volitile around your stop commisions rack up quick even if it is .01c a share.
Why is anyone even considering this...
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