Can someone point out the flaws in my theoretical investing strategy?
So basically I can not think of a problem with this strategy, and need y'alls input as to why it is flawed.
Let's say I have $50k and use it all to buy a stock with a high moving average and put a sell limit order in at say +8%-10% of the average daily moving average. If I sold it that day, I would be done for the day to avoid exposure to news events that would change the intrinsic value of the stock. If it didn't sell, I'd hold it for up to one year at which I would sell it. The strategy here is to make small profits off of the random walk where I invest in volatile stocks. After commissions, I estimate that I could make about 46 basis points per successful day. If I had 1 successful day per week (which I think is conservative), I'd get about 24% annual returns.
What is wrong with this strategy? Other than the obvious firm specific risk, to which I could use this strategy on 5-10 more firms.
I think I'm misunderstanding, so please help clarify.
Are you saying throwing all 50k (AKA all your capital) on a single position and hoping to turn a small gain each time and if it moves against you just holding on to it? If I'm understanding that right, that strategy would need literally a 100% win ratio otherwise your capital is tied up for a full year while you wait for a recovery--and there's no guarantee in a year that the position would bounce back, especially with highly volatile companies.
In fact, trying to disseminate that, I'm positive I've misconstrued your strategy. That or you're about to pay out thousands in "Trading Tuition" to the smart money.
I mentioned the firm specific risk in the last stanza, I'd do this with multiple stocks at once for some diversification. If all or most stocks were down, implying a recession, I would just hold it until the S&P bounces back in a year or two
If you've had success and you're aware of market dynamics (sounds like you are), paper/simulation trade it (investopedia.com has a free simulator) and see if your hypothesis holds up. It sounds similar to a scalping strategy, and anecdotally I know it can occasionally work--though I have yet to meet anyone who can repeatedly do it cycle after cycle.
If yours does though, more power to ya. Best of luck man...
I tried it with a simulator for 5 months with just one stock (a risky one though which I regret). I made 35% but that is too micro of a sample obviously. I need to commit a full year at least to multiple stocks though
Exactly. Keep in mind a market cycle is 8-10 years as well so even a hot year can be an anomaly. If you haven't already, look up Ray Dalio's Fair Weather strategy, Scalping, Dogs of the DOW theory, Buffet's value investing style, learn basic options strategies (Iron condors, butterfly spreads, etc.), and read some horror stories on investing in micro caps-- should help to continue to refine your style and philosophy.
edit: to be clear I'm not endorsing any of these, but each has a unique style of investing that'll help broaden your trading acumen.
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