How to beat Trading Algorithms

In USA over 80% while in India over 50% of trades are executed by trading algorithms. Beating trading algorithms, also known as algos, can be challenging, as these computer programs are designed to execute trades based on a set of pre-determined rules and conditions, and they can execute trades faster and more efficiently than humans. However, there are a few strategies that traders and investors can use to try to gain an edge over algos:

Use fundamental analysis: Algos are typically based on technical analysis, so focusing on fundamental analysis and understanding the underlying value of a security can provide a different perspective that algos may not be able to replicate.

Use market knowledge: Algos cannot account for market nuances such as emotions, politics and other market factors that may affect the market. By keeping informed on market events and understanding how they may affect the market, traders can gain an edge over algos.

Use diverse data sets: Algos may only use a specific set of data, so by using a diverse set of data, such as alternative data, traders can gain insights that algos may not be able to replicate.

Be flexible: Algos are based on a set of pre-determined rules, so they may not be able to adapt to unexpected market conditions. By being flexible and willing to adjust strategies as needed, traders can gain an edge over algos.

Trade less liquid markets: Algos tend to focus on highly liquid markets, so by trading in less liquid markets, traders can gain an edge over algos.

It's important to keep in mind that these strategies are not guaranteed to be successful, and that the performance of algos can be influenced by a variety of factors such as market conditions, the quality of data, and the design of the algorithm. Additionally, it's important to keep in mind that beating algos is not the only goal, it's important to focus on creating a profitable strategy.

Limitations of Trading Algos: Trading algorithms are designed to automatically execute trades based on a set of pre-determined rules and conditions. While algos can provide many benefits, such as executing trades faster and more efficiently than humans, they also have certain limitations. Here are a few examples:

Lack of human judgement: Algos do not have the ability to exercise human judgement or interpret market conditions in the same way that a human trader might. This can lead to missed opportunities or mistakes.

Complexity: Some algos can be very complex, and require a high level of expertise to design, test, and implement. This can limit their accessibility to traders and investors.

Data dependency: Algos rely on accurate and up-to-date data to function properly, so if the data is inaccurate or not current, the algorithm may make incorrect decisions.

Lack of flexibility: Algos are based on a set of pre-determined rules and conditions, so they may not be able to adapt to unexpected market conditions or changes.

Limited decision making: Algos can only make decisions based on the information and rules programmed into them, so it may not take into account other important factors such as emotions, politics and other market nuances.

Risk of over-fitting: Algos can be over-fitted to the historical data, which means they may not work well in real-world situations and may lead to poor performance.

Lack of transparency: Some algos can be proprietary and not transparent, which makes it difficult to understand how they make decisions and evaluate their performance.

Common Algo Trading Strategies: There are many different types of algorithmic trading strategies, but some of the most common ones include:

Market making: This strategy involves using algorithms to automatically buy and sell securities to create liquidity in the market.

Statistical Arbitrage: This strategy involves using algorithms to identify and take advantage of statistical anomalies in the market.

High-Frequency Trading (HFT): This strategy uses algorithms to execute a high volume of trades in a very short time period, typically taking advantage of small price discrepancies.

Trend Following: This strategy involves using algorithms to identify and follow trends in the market.

Mean Reversion: This strategy involves using algorithms to identify and take advantage of securities that are under- or over-valued.

Event-Driven: This strategy involves using algorithms to identify and take advantage of market-moving events such as earnings announcements, mergers and acquisitions.

Pair trading: This strategy involves using algorithms to identify pairs of securities that are highly correlated and buying and selling them to profit from their relative performance.

Risk Management: This strategy involves using algorithms to monitor and manage risk in a portfolio.

It's important to keep in mind that these strategies are not mutually exclusive, and many algorithmic trading strategies involve elements of multiple strategies. Additionally, new strategies are constantly being developed, and the effectiveness of a strategy can change over time depending on market conditions, competition, and other factors.

Bull vs Bear Markets

Phases of an Asset Price Bubble

Phases of an asset Price bubble

From South Sea bubbles or tulip mania of 16th century to dot com crash of 2000 and housing bubble of 2008, a typical asset price bubble consists of 4 major phases:

5 Trading Advise From The Best

"Most people approach trading to make a lot of money, and that is one of the primary reasons they lose." -  Van Tharp (Trading Coach)

"There is no need to rush into any position, wait for your signal. Rushing into a position and chasing a stock is one of the main reasons that traders lose money. Follow your trading plan not your emotions and impulses." -  Marty Schwartz

"Trading offensively is trying to grow you capital while defense is protecting what you have. Winning trades are how many points you score and losing trades is how many points you give up to the other team. While offense is great for a show defense wins championships." - Paul Tudor Jones

How to approach stock market and what to expect?

A must must watch video for all my dear readers who can understand Hindi. This video can change the way you approach stock markets and set your expectations right. Having the right expectation is the key ingredient for long term success in any business including stock market which is nothing but a business of businesses.

How to choose between Fixed Deposits and Equity for investments?

Stocks Vs Fixed Deposits - Which one is better for you?

If your Investment horizon is  less than 3 years, fixed deposits are better investments than equities as cyclicality might create huge volatility in stock prices in short term while if you have surplus that you can set aside for more than 5 years, diversified equity portfolio or Index ETF such as Nifty BeeS are much better choice as per the performance of different asset classes over the last century.

Valuation in Nutshell - By Aswath Damodaran

The Great Humiliator

My Favorite page from the book " Beat the Crowd" by Ken Fisher.

Dangers of watching every tick

One of the biggest mistake you can ever do as a trader or investor. Watching every tick make you right or wrong every other moment and is highly fatal for your eyes, health and financial well being. 

Investment Advise from Martin Sosnoff

An insight into the life of a lesser known but great investor "Martin Sosnoff"and bunch of advise to take home. Enjoy

4 Bad Behavioral Mistakes in Investing

Source: investopedia

Remember them as ROOM : 
Regret Theory - Overconfidence - Over & under reacting - Mental Accounting

You don't need a bear market to lose money

In past 2 years what I've hated most is people telling me I should be making lot of money as market is going up since then. In fact it hasn't been that very different than my past performance. 2015 specially was quite bad for my equity investment portfolio as I am overweight some commodity companies in oil & aluminium space which had a terrible year in-spite of Nifty Sensex almost flat. That is exactly the biggest problem with general investors. When market goes up they don't participate cursing the market as gone up so much while when it comes down they wait indefinitely to catch the bottom.

You can make or lose money in any kind of market. So you don't need only a bull market to make money while even a raging bull market can make you lose a great deal of money. 

For example in a bull market you lose money if:

LIC & Goldman Sachs backed Amtek Auto destroyed 80% of Investors Wealth in a Month

We all feel safe in stocks which are backed by strong Institutions and get good sleep while owning them believing nothing too bad will happen there. We assume that these institutions that pay huge salaries to hire best in class research analysts have done thorough analysis before putting money into the stock and we can safely follow them. Well in investing world nothing is safe and especially in Stocks where all the analysis is on paper while the actual show is run by the management / promoter. While following Institutions is relatively better than doing personal analysis (if you are not a very seasoned analyst), following them blindly and committing all or major portion of your capital to one single stock could bring you disaster.

Amtek Auto is one such example which is backed by some renowned institutions such as LIC & Goldman Sachs. As on 30^th June 2015 LIC held more than 8.4 million shares while Goldman Sachs had 4.2 million shares of the company. Together Institutions held over 15% of the company as on 30^th June 2015. 

Pitt Bull's Marty Schwartz Interview 2015

Must Watch Q&A session with Pitt Bull's author Marty Schwartz. The 70 years old legendary trader who was featured in the first edition of Market Wizards by Jack Schwager shares tons of wisdom and some key strategies he employed in 80's and 90's and how his trading styles have evolved with the advent of algo trading and HFTs. A bit lengthy interview but worth a watch.

Stock Exchange explained for layman

A 3 minute video tutorial to explain the working of a typical stock exchange. If you are a beginner and want to understand what is a share, how it's traded and what role do stock exchanges play in functioning of stock market then the following video tutorial can be quite helpful. 

Stock Investing Wisdom from India's top Investors

Rakesh Jhunjhunwala, Ramesh Damani, Sujoy Bhattacharya, Ramdeo Agarwal and some of the India's most successful equity investors have learned from the likes of Benjamin Graham, Warren Buffett, Peter Lynch and have applied that knowledge in Indian Stock Markets for creating significant amount of wealth for themselves. 

Following article published in Forbes India features 20 of the most successful investors sharing their investing philosophy and success formula. 

Investing in what you understand, spotting price value mismatch during panic & euphoria, playing for the long term and sticking to quality companies & management are some of the common points mentioned by each of them.

Peter Lynch Interview on How to Pick Stocks

In this exclusive video published by Fidelity investments in 2012, Peter Lynch, the author of hugely popular and bestseller book, "One up on wall street", has shared his philosophy and process of picking stocks and building portfolio that can outperform markets by a wide margin. 

As part of his role at Fidelity Investments, he managed the Magellan Fund between 1977 and 1990 averaging a 29% return, making it the best 20-year return of any mutual fund over the period. About an hour long video is full of valuable lessons from one of world's most successful stock picker.

Consequence of chasing stock prices: The live example

When stock prices move people become impatient both on upside as well as  downside. After 16th may people went crazy and bought whatever they can feeling they should not get left out. The consistent rising prices created perfect trap which sucked in most people. Today some of those junk names are down 50 - 60% from their June 2014 high.

In a post titled "Stocks to avoid under BJP govt." two stocks were specifically highlighted in bold that must have been avoided. But euphoria was so high that those stocks went up significantly over next 1 month. People were excited and still bought those stocks at higher levels without understanding the consequences. Today one of that stock is down 35% from it's level on 16th may and 50% from it's June 2014 high, while the other stocks is flat since 16th may but down 40% from June high.

You can check that post here

Moral: Never chase a running or falling stock price. List 5 solid reasons why you are buying or selling a particular stock. By this practice alone you will be ahead of many stock market pundits on street and achieve superior results. It must be remembered that succeeding in investing or trading doesen't require MBA degree in  finance. People with reasonable knowledge but with very high self discipline and control over emotions are likely to achieve much better result than people with MBA & Phds with fickle psychology and emotions. 

Want to succeed in investing? - Stop believing in God

Why only investing, if you want to succeed in anything you should stop relying on God for outcomes. Whether God exist or not, that's a controversial question but personally I started doing much better in all respect when I stopped praying for outcomes. 

My mother spends 4 hrs in prayer and since childhood I was also a strong believer in God and thought whatever is happening to me is because what god or fate has decided for me until one morning in 2000 when I went up at 4 A.M in the morning, just before my IIT entrance exam, for  a hawan (as suggested by my mother) to crack the exam. No wonder I couldn't secure even last rank in the prelim itself. Inside I knew I was not prepared and asked for support of god to help me pass the exam. I was blamed that without preparation even God doesen't help. I thought if I am fully prepared then why should I  ask the support of God. It's like asking  for wheel chair when your legs are absolutely fine.

When I started Investing in Stocks, my Mother started suggesting me the stones to wear, the days I should trade and above all the days I should not trade at all. I was even recommended stocks to buy based on my favorable stars. Though I occasionally followed her tip in the beginning out of self doubt but I was increasingly getting convinced that stocks in long terms move on fundamentals and in short term based on sentiments. 

Do's and Don'ts of Investing in IPOs

Worldwide, IPO markets are often viewed as a lottery, wherein successful allottees are able to sell their holdings at a huge premium on listing. While this went well till 2008, this arbitrage has faded over time at least in India.

Post 1992 the promoters are free to price their offering as per the market demand, which resulted in promoters realizing the maximum value of the issuance. Unlike secondary market, primary market is a promoter to investor transaction where like any other business the seller tries to realize maximum value by adopting all sorts of strategy. Reliance Power was hugely subscribed and then was a huge failure because the company had nothing on ground but the promoters through their Investment bankers tried very hard to sell the future value at an exorbitantly high price. The stock is still languishing below it's IPO price. 

However it's not that always bad to go for an IPO provided you approach them as investments rather than lotteries. One should always consider following points before going in for an IPO: