Two methods of capital management on the stock market are conventionally distinguished. These are portfolio investment and speculation. The portfolio investment method deals with long-term investments and the speculative method on the contrary is designed for active intraday trading. Both the methods can hardly be used over short and medium terms. The portfolio method does not generate profit over a short period of time and the speculative method is too risky.
In our approach we combine advantages of both. We call it a speculative portfolio. The speculative portfolio works on the principle that the capital is distributed among a number of securities (portfolio management) while securities in the portfolio change constantly and fast (speculative management). This approach allows us to invest in securities the prices of which have a clear trend at a particular moment. We invest in a number of such securities simultaneously so that temporary price fluctuations of an individual security do not affect the portfolio significantly.
Obviously, with this approach much will depend on the effectiveness of search for securities with steady trends in prices. To solve this problem we use thoroughly developed methods of technical analysis. However, it is not enough to constantly analyze a few securities with various techniques of technical analysis. Clear trend in a security price is quite a rare occasion and it is rather hard to detect. In order that all the capital works, it is necessary to analyze a multitude of securities for the appearance of a trend.
Thus, to put this approach into life it is essential to continuously monitor a large number of liquid instruments (at least 50). All these peculiarities have been implemented in our "Steady Trading" software system.
Eventually, "Steady Trading" gives advice on which security to buy and which to sell. Advice is given on a number of securities which have been chosen on the basis of formulas of technical analysis. The list of recommendations is arranged in accordance with their priority. This allows an analyst or a trader to further analyze the instruments, particularly to listen to the latest news.
However, in order to get advice it is necessary to adjust the system to actual investment conditions, develop your trading method and strategy. The terms we use have the following meaning:
Trading method is a set of formulas used to work out signals to buy and to sell. A formula is a parametrical logical expression which is composed of indicators of technical analysis. Parameters of the formula are often periods of indicators of technical analysis.
Trading strategy is a set of parameters of a trading method which are individual for each financial instrument. Thus, a trading strategy is a precise technique for working out signals to buy and sell built on the basis of history of quotes.
As can be seen from the diagram, it is necessary to make some preliminary settings:
- Develop a trading method and determine a set of variable parameters
- Obtain historical data on each security which will be analyzed
- Analyze the method using historical data. After this, create a set of all possible method parameters for each financial instrument with which the method proved to be profitable
- Develop a trading strategy. The trading strategy is developed using statistics obtained on the basis of historical data. For each instrument, select method parameters which produced the best results in terms of risk/profitability ratio within a certain historical period.
- Check the performance of the developed strategy in the portfolio management mode using available historical data. This will allow you to decide on the best possible number of securities in the portfolio and acceptable level for stop signals depending on the available capital, cost of transaction, etc.
After this has been done, the strategy can be used for getting advice on the real market.
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