"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
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Sun Tzu

Q&A

Certain questions about my trading come up frequently. The following Q&A hopefully helps to better understand my investment style:

What is Hedge Fund Type Trading?
Hedge Funds are investment funds, which apply a broader range of strategies and investment vehicles than traditional mutual funds. Often, they include short selling, leverage or Futures trading. Various Hedge Fund classes exist, but one common goal is to generate returns, which are uncorrelated to the general market.

One class of Hedge Funds is called Long/Short Equity and includes directional investments on rising as well as falling asset prices through short selling.

Hedge Fund Type Trading means to apply an active trading strategy, short selling and at certain times leveraging, similar to Long/Short Equity Funds. As a result of very low transaction fees and easy access to information through the internet, private investors can now apply strategies that were only possible for Hedge Funds in the past.

What is your principal investment style?
I’m a short-term stock trader, who is holding US stocks between two days and two months.  I’m trying to combine momentum strategies with counter trend approaches.

In that time frame, you are competing with big hedge funds. Why do you think you can outperform or in other words “what’s your edge”?
First of all, the individual investor has a huge edge on certain time frames as a result of relatively small position sizes: I am able to move in and out of stocks without actually influencing the stock price. Theoretically, I can switch from 100% long to 100% short within minutes, so my flexibility gives me an edge.
Another point is my trading approach: I’m trying to buy counter trend moves in trending stocks and markets. A popular saying is “buy the dips, sell the rips”.  I have statistically verified that approach with historical data and found out that the strategy can create abnormal returns. Actually, this is logical: you want to buy when others sell and a stock is temporarily depressed, but sell when everyone is jumping on the wagon and the crowd is becoming too excited. When everybody is positive on a stock, there is no one left to buy because everyone already owns it.
A third point is my top-down approach: research has shown that shifts between major asset classes need some time to unfold. By analyzing changes in relative strength, I am able to exploit price inefficiencies in various sectors. The key is to trade a security when it is not obvious to everyone that the stock will raise. Relative strength analysis has the ability to “look under the hood” and identify promising price action before everybody sees it.

With these short holding periods, aren’t you paying a lot of commissions?
I’m executing between 300 and 500 trades per year, so lower broker fees are key. I’m using Interactive Brokers, who has  a very low fee structure. I’m paying less than 0.1% per trade. Since my average win per trade is around 4%, fees indeed can be neglected.

You do not have a financial background. Isn’t that a disadvantage?
I would even say it is a positive: the most important trait of a stock trader is to be able to admit that he is wrong. Since I do not follow any economic textbook approach and consider myself a permanent student of the markets, I have no problem admitting being wrong and cutting my losses short. The probability that a trade goes against you are quite high: even the best traders are wrong maybe 40% of the time. My trades only work out around 55% of the time, so without cutting losses short, I wouldn’t be able to outperform the market.
In addition, my mathematical background helps me to see investments in a more quantitative way.

Over 80% or individual stock traders lose money. Why do you think you are NOT one of them?
I have over 20 years of investing experience and quite frankly, my Covestor track record indicates that my strategy is working: I’m among the top 20 investors from over 40.000 individuals since inception. To be honest, I lost money in my eartly years. I guess that’s what most of retail traders have to go through.

Can everyone learn to trade stocks?
Trading stocks is not rocket science (but even rocket science isn’t rocket science :-) ). I think from the intellectual standpoint, it is absolutely feasible for many people. You do not need to be a genius. More important is a high level of discipline but not everybody has that. Finally, the amount of work one has to put into this is significant. You cannot become a stock trader just with the purpose to get rich. You need to have the passion for the game, otherwise you will not be willing to make the sacrifices needed and devote the time required to learn trading.

What is your #1 tip for new traders?
See trading as a statistical process, where you know your odds. If you don’t, you are in trouble. It is like in poker: if you don’t know from whom the money comes after 15 minutes of playing, it is probably you.