Monday, April 04, 2005

 

GAs and stocks

Sky Yin at Pig Lord's Happy Garden reports on some preliminary results of a portfolio analysis system he designed. He says:

The latest result of optimization test on 10 major Canadian stocks during the past 4 years(based on monthly historical data from Yahoo! Finance) shows that we could get 8%/year higher in return from this system than the "index portfolio"(the weights are determined as how index funds do) including the same stocks.


GAs have been used in determining when to buy or sell which stocks for some years (just do a Google search to see examples - including this paper).

As an example, check out the Trading Solutions financial analysis package that integrates GA technology into their analysis. They report a 60-85% accuracy rate for their trading. Not bad for the stock market.

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Online Trading

To become profitable doing online trading, you must develop strict emotional discipline. In contrast to traditional broker trading, online trading has simplified the process into a few mouse clicks. Due to the human inclination to instant gratification, it is easy to execute orders without a thorough analysis.

If you find yourself doing hours and hours of research on one stock and end up buying another totally unrelated stock, you are falling into the traps of online trading. Impulses are usually the cause of bad trades. Unfortunately, it is deadly easy to indulge impulses through online trading.

Another trap of online trading is high frequency of trades. Because orders get executed so rapidly, it is possible to carry out multiple trades in a short time. Multiple trades incur a lot of commission costs, making profits further from reality. To avoid this pitfall, it is wise to reduce the number of trades you place online. If you like to set tight stop losses, make sure you study the variance of the price movement so that your stop price cannot be breached easily. If you are a day trader, do not use the normal discount online brokerage because you are up against professional day traders in New York who can place an order for a few cents in commission. If you are a momentum player, make sure the momentum is backed up by some fundamental analysis. The beauty of trading is you can pick your hand before you play the game, and you should not discard this inherent advantage by entering positions without any theoretical backup.

If you find yourself taking positions without thorough research, I suggest you just buy the index fund. Index fund saves the commissions, and statistically it will yield the same results in the long term.

Many people also fall into the gambling mentality when trading online. Because the easy of use and pretty interface, it is easy to forget that the money displayed are real. Sometimes when people make a huge profit, they become less disciplined and start making stupid trades to satisfy their “gambling” impulse. Most of the time, they can have the same satisfaction if they cash out 1% of the profit and go spend it in a casino. So please remind yourself constantly, “online trading is not online gaming”.

About the Author: Zheng Fang is the creator of Advance Stock Pattern Scanner of www.cisiova.com and the owner of several stock picking blogs:

1. Optimal Portfolio
2. Candlestick Stock Picks
3. Cup and Handle Stock Picks
4. Technical Analysis

This Article's Official URL:

Online Trading
 
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