Are You a Tourist Trader?
Sunday, March 20, 2011 at 9:23AMSeth Godin published a blog post titled Idea Tourism. The following paragraph caught my attention:
It's possible to do a drive-by of some of the big ideas of science or politics or technology and see only what you want to see. I don't think there's a lot of point in that. If you want to truly understand Darwin, then go to a lab and do some experiments. If you want to understand a gun lover, go to a shooting range for an afternoon. If you want to see how social networking will actually change the way ideas spread, go use it. Intensely, and with a purpose in mind.
In my book How Traders Achieve Creative Flow I give you this simple exercise to start experimenting with your algorithmic trading ideas:
Try the following experiment: In a sandbox account, create a notional neutral (long notional-short notional=0) portfolio of stocks using the best methods you have developed to find long and short candidates. Track the return of the portfolio and see how it performs over time.
As you run the experiment, ask the following questions:
- Should you rebalance your portfolio at specific intervals of time to account for changes in your selection criteria or changes in the value of each position?
- Can you think of any ways to improve your results?
- Are you learning anything?
- Have you observed anything unusual in how the portfolio is performing?
- Are you generating alpha? If not, why not?
The real shame here is that most readers of the book won't do the exercise. They miss out on the opportunity to move forward in amazing ways.
Michael Bigger. Follow me on Twitter and StockTwits.
Reader Comments (3)
Michael,
Lets say for example I love to get short stocks that just run up too much. An example today is I made a short on AAPL at $343. (3/22) If I stick to your method of a notional neutral portfolio, where do I look to find a long opportunity right away to balance the portfolio out?
Similarly if I went long AAPL at $326 on 3/16 where do I find a short opportunity quickly to balance that out?
I think this is an area I'm a bit confused. Thank you.
Eric
Eric,
If you don't have single stock candidate for the long side why not hedging with your benchmark? (qqqq, spy, whatever it is). This is an experiment, so find something, it should not be that hard.
Michael, thanks. Will update on the experiment. Trying small size, real money.