There are many ways to invest and trade stocks, but only one has the potential to generate significant wealth. Contrary to common misconceptions, the goal of systematic investing and trading is to preserve wealth. Access the full report with a Premium Articles or All-in-One subscription.
Almost every day, I notice a few posts on financial social media by aspiring speculators that demonstrate most people do not understand the essence of trading. The only way for someone to make it big trading the markets is through leverage. With leverage comes the risk of ruin. The result is that for every lucky trader who makes it big, thousands are ruined. This much everyone with skin in the game of trading knows already.
Trading has a low rate of success, and when done correctly, it can provide, on average, a reasonable alpha above the risk-free return. Survivorship bias deceives those who believe trading can make them rich. Some famous traders made it for one reason or another, but the probability of a random person repeating their success is close to zero. Reading about the stories of successful traders is not only a waste of time but can also impose biases. The unique time-domain paths of the big winners cannot be replicated in the future. Adopting bits and pieces from partially revealed methodologies may do more harm than good because essential information may be missing. Traders must develop their methodology and navigate their time-domain path.
Many also misunderstand investing. The objective of both strategic and tactical investing is to preserve wealth, lower risks, and, if possible, realize returns above what some passive investment in a market index can offer. This is also hard because both strategic and tactical investing attempt to maximize risk-adjusted returns, not absolute returns.
Reasonable risk-adjusted returns are what most wealthy investors are looking for. The financial mainstream media claims, in a copy-and-paste fashion every year, that most hedge funds underperform passive investing, but that is exactly their objective because these funds attempt to realize the highest possible return at the lowest possible risk. Passive investors in the S&P 500 have faced several periods of uncle point risk in the last 23 years, but most hedge fund investors have elected to accept lower returns for lower risks, and this is the reason they decided to pay fees.
Then, there is a special class of investors who make it big. They have a method for identifying opportunities with spectacular growth potential. They are not traders or investors in the usual sense of these words. They may spend several years trying to identify the next opportunity while doing nothing and enjoying life. Those are some of the true winners on Wall Street. This is how they do it, with specific examples.
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Specific disclaimer: This report includes charts that may reference price levels determined by technical and/or quantitative analysis. No charts will be updated if market conditions change the price levels or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data