Trading Plan: Robotic Investing Market Beliefs

Trading Plan: Robotic Investing Market Beliefs

July 30, 2018 0 By Jeremy


Trading Plan: Robotic Investing Market Beliefs

This is post #2 in a series of posts outlining my Robotic Investing Trading Plan.  This post covers the Robotic Investing Market Beliefs. The series of posts is based on the Van K. Tharp business plan methodology as outlined in:

Robotic Investing Market Beliefs

Following on from my Mission and Goals and Objectives post, I now want to outline the market beliefs I have.  Most people think that they trade the markets.  This is actually wrong according to Van K. Tharp.

What we actually do as traders and investors, is we trade based on our beliefs.  I found this statement to be true in my experience:

…whatever your beliefs are about the markets, they will direct your thinking and subsequent actions.

I have done a lot of thinking about this based on my experiences in the market, ideas about how things work, and what my emotional makeup leads me to do.  Here are the major influences on the way I trade within my Robotic Investing portfolio:

What are the “Secrets” to Making Money in the Markets?

  • One of the secrets to making money in the market is to have a solid process and rules for each investment I make.
  • I believe I need to use systems and their processes to tell me what to buy and sell, and when.
  • Trading based on “gut” and “instinct” does not work.
  • I believe that the big real money is in medium to long-term trends.
  • I believe that returns can also be captured with shorter term movements like opening drives, anticipation and mean reversion setups.
  • Scalping can be a way to make quick money, if rules and process are followed.
  • I believe you cannot predict which way the market will move, but there are signals that can statistically help you decide on a short-term move.
  • I believe that price is all that matters; the trend of prices is what makes money.

What Trading Concepts Do I Believe Work?

  • I believe that markets trade in trends: Up, Sideways, or Down.
  • I believe that markets that are moving higher, can and will continue to move higher.
  • I believe that trending markets will have pullbacks, and that can be an opportunity to capture shorter term profits.
  • I believe that the momentum of the market – up, down, or sideways – will continue to move in that direction until a significant event breaks that.
  • I believe that moving averages (i.e. 10-month simple moving average, MOBO bands, hull moving averages) are a good indicator of a market trend.
  • I believe that market breadth as defined as the ratio between the number of stocks up and down 20% in a quarter is important to identifying market situational awareness.
  • I believe that trailing returns – and a combination of those returns (i.e. 1-month+3-month+6-month) – are also a good indication of future trends.
  • I am comfortable that I may get whipsawed when new trends are trying to form.
  • I believe that assets with the strongest previous returns, will have the strongest returns going forward.
  • I believe that assets with the weakest previous returns, will have the weakest returns going forward.
  • I believe that when trailing returns are below 0, that is a bad trend and it is better to hold cash or bonds.
  • I believe that when an ETFs price moves above or below a moving average, that is a good indicator of a break in trend.
  • I believe that trading based on monthly trends is better than daily trends.
  • I believe that investing in individual stocks based on fundamentals is much too risky, and opens you up to individual stock risks that are impossible to identify.
  • I believe that buying a basket (~10) of individual stocks works if they are bought in a systematic way – based on price action.
  • I believe ETFs are the best investment choices because they provide built in diversity and do not allow one asset or stock to dominate performance.
  • I believe that there is a place for leveraged ETFs in a portfolio, provided there is good risk management practices in place.

What Risk Management Practices Work?

  • I believe that money is made on the exits, and not the entries.
  • I believe that protecting capital and risk management is more important than returns; Stop Losses are Key.
  • I am comfortable that I may lose money from time to time.
  • I believe that using risk management practices like exits based on moving averages can minimize the losses I take.
  • I believe that whenever you enter a trade, you must have a rule that will tell me when to get out.
  • I believe that when a ETF or stock breaks a daily moving average, that is a good time to go to cash.
  • I believe that when equities do not have positive trailing returns, going to cash or bonds helps protect capital.
  • I believe I need to use multiple trading strategies to be successful.  This diversifies my holdings and does not leave me exposed to just one strategy which may go through a rough period.
  • I believe that trades place on the recommendations of others will consistently lose money because you do not know the reason to trade them.
  • I believe that tracking investment performance (i.e. Edgewonk, Google Sheets) are critical to improving investment performance and managing risk.

What Do I Believe About the Markets?

  • I believe that over time, markets tend to go up.
  • I believe that the best traders trade by finding a niche that fits them and they can perfect that niche.
  • I believe I cannot predict the future, but I can determine the market trend.
  • I believe that there are better alternatives to a buy and hold portfolio.
  • I believe I can obtain better risk adjusted returns than the market.

Next Steps for the Robotic Investing Trading Plan

These market beliefs, combined with my mission and goals & objectives, guide my trading and investing.  Stay tuned for Part 3, where I m going to explain the process I use to understand the big picture with the market.

To make sure you get notified when I post Part 3 in this series, please subscribe to my newsletter.

I would love to hear your market beliefs.  Please use the comments below to answer the following three questions:

  1. What are the “Secrets” to Making Money in the Markets?
  2. What Trading Concepts Do I Believe Work?
  3. What Do I Believe About the Markets?

Featured Image: Notre-Dame by Paul Bica

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