BAFI1029: A news trading Strategy is a Strategy in Trading that I am Using: Risk Management Report, RMIT, Singapore

Assessment 3 – Individual Risk Management Report

Account and Portfolio Creation (Please strictly follow the instruction below or you may result in zero marks for this assessment)
1. Create an account (with your real first & surname) on www.marketwatch.com
2. Create two watchlists of Portfolios A and B on Tuesday, March 23 rd, 2021
3. Create a watchlist of Portfolio A ($400,000) consisting of TWO stocks.

a. Choose One stock from the S&P500 index plus Amazon.com (AMZN)

b. Make the number of shares for AMZN equal to “Last two digits of your student number” if these two digits are larger than 19.

c. Make the number of shares for AMZN equal to “First two digits of your student number” if your last two digits are smaller than or equal 19.

d. Example: For student S7777777, you need to hold 77 shares of AMZN in your Portfolio A For student S6660011, you need to hold 66 shares of AMZN in your Portfolio A

e. Determine the weight and shares for the other stock you chose in step a.

f. You have $400,000 USD for Portfolio A.

4. Create a watchlist of Portfolio B ($1 million) consisting of Four stocks from the S&P 500

a. Choose any Three stocks from the S&P500 index plus Tesla (TSLA) 1

b. Make the number of shares for TSLA equal to “Last three digits of your student number” if they are larger than 99.

c. Make the number of shares for TSLA equal to “First three digits of your student number” if your last two digits are smaller than or equal 99.

d. Example: For student S7777777, you need to hold 777 shares of TSLA in your Portfolio B For student S6660011, you need to hold 666 shares of TSLA in your Portfolio B

e. Determine the weights and shares for the rest of the stocks you chose in step

f. You have $1 million USD for Portfolio B.

Trading philosophy- News Trading Strategy

A news trading strategy is a strategy in trading that I am using. It involves trading on both market expectations and news that is trending regarding the stocks. This strategy requires a skilled mindset as news can travel very quickly on the platforms that we use such as digital media. Traders will need to access news immediately after the release and make quick decisions and judgments on how to trade it. The key considerations in this strategy include;

• Is the news or information in the market partially or fully factored in the price of the instrument or the share?
• Does the news match market expectations

Understanding the difference between market expectations and information is fundamental when using the news trading strategy. The news trading strategy tips include;

1. Treat each news and market release as an individual entity
2. Develop specific trading strategies for new news releases
3. Market reactions and market expectations can be more important than a news release.

When trading using news releases as a strategy, it is vital that the trader is aware of how to operate in the market. It is common that news is factored into the prices of assets and this results in traders attempting to predict the prices of the future. Doing so may protect the trader from future volatilities (Accastello,, Blanc, and Brun, 2019).

The trends are such that more and more people are now beginning to engage in exchange trading in the US. This is facilitated by the availability of such trading, the interest of the state in this (individual investment accounts that attract financial flow to the US stock market), as well as the fact that the exchange, at first glance, seems to be a very simple and profitable business.

Statistics assert that within a year after the start of trading, from 90 to 95 percent of traders lose their money.

Why do people end up losing their money?

As a rule, the main reason is a banal lack of basic knowledge, as well as an understanding of the processes that take place in the stock market. Even worse, the average novice trader has no idea in which direction he needs to develop, what to learn in order to ultimately achieve a positive trading result.

This book is not a textbook in the usual sense of the word. I tried to create a guide, which, on the one hand, will give a beginner trader most of the necessary basic knowledge, highly recommended for studying before starting trading, and on the other hand, will suggest directions for further development(Adnan, et al,  2020.).

Portfolio Construction

Portfolio A

Consists of two stocks -$400,000 (Amazon.com AMZN and GOOGL of Alphabet.com) There are 77 shares of AMZN

Portfolio B

Consists of 4 stocks worth $1 million. They include Tesla (TSLA), Coca-Cola Company (KO), Domino’s Pizza (DPZ), and FedEx Corporation (FDX).

Deposit volume for different types of trading.

Coming to the S&P 500, most people quietly, but almost immediately, begin to engage in dangerous self-deception. In addition, for those, who have just got acquainted with the exchange, the meaning of trading, unfortunately, is shifting more towards excitement, gambling, and not purposeful profit-making. These are the very majority of those very beginners who now furrow their brows angrily, or at least think that this is not about them. Oh well.

Ask yourself a question – how much time did you spend on training before you started seriously trading on the exchange? For example, the author has been preparing for this for five years. Of course, with interruptions and often even long ones. But from the moment he decided to enter the stock exchange to the moment he started trading on a serious account that much has passed. If you are also in the process of studying at the moment, then I think you will succeed. You are on the right track. If you entered the stock exchange without spending time on serious training, it is the excitement that drives you, and not the desire to earn income. I constantly see a lot of people who are passionate about the game do absolutely crazy things, say, buy stocks after a huge rally, hoping for eternal growth, or grab the bankrupt paper, hoping that there will be a reversal from something (Berner,  and Flage,  2017.).

In both cases, they may be lucky – the growth may continue, but the decline may stop. But this is no longer trade. This is the game that I mentioned above. Playing on the stock exchange is the same as playing at a casino. The longer you play, the more likely you are destined for the fate of that same 95 % of the unfortunate who lost their money. They work at the exchange. And the first signs of a serious trader are constant self-education, risk assessment in investments, as well as the principle “the main thing is not to lose money”.

News and the overall market and macroeconomic condition

The overall market and macroeconomic conditions in the US have favored the stock traders and many companies. However, an economic crisis has caused a deep disruption of normal economic activity which is accompanied by the destruction of the usual economic ties. The decrease in business activity causes the inability to pay off debts in businesses and the accumulation of debt obligations. Everyone who goes to the exchange has an initial task – to earn or increase money. This logically leads to a more comprehensive desire – to only trade on the stock exchange and not work anywhere else. Be free from bosses, subordinates, clients, and partners.

This is a great goal, but many are going the wrong way by not considering at least the minimum requirements to achieve it.

And the most important mistake is that people start planning income from the exchange before they have received it. In their dreams, they quit their jobs, burn the car of their beloved boss, and leave for Bali, where, basking in a sun lounger under the gentle sun, lazily make a profit on shares.

Some even really quit their jobs and put their last money on the stock exchange, believing that they have found a treasure that will now regularly provide them with finances.

While to begin with, they should have at least roughly imagined the potential that opens on the exchange precisely for their deposit.

The initial weightings of the portfolio and the rationale for that composition

As a rule, it is not a problem for a successful trader to earn 100% of the deposit per year. It is quite possible and not so difficult to double your deposit during this time if you trade wisely. Let’s assume, for a greater idyll, that a trader should earn 100% in six months. This is also real, but it happens much less often.

Everyone once started something. Studying at the university, training, work. Usually, no one starts school right away from the fourth year, does not run a marathon on the second day of classes in the gym, and does not take the position of director of Gazprom at the age of twenty. As a rule, at first, all the same – the first course, half a kilometer on a treadmill, “free box office!”

The situation is exactly the same in trading. You should not sell an apartment in order to turn around a couple of million on the stock exchange from the very first day. Better to try it on cats first.

Why is a demo account good and bad? Its definite plus is that you are technically learning to trade. Understand how your trading terminal works. You study the types of orders, poke different buttons, look smartly into the glass of quotes and think what is happening there. By working with the demo, you will not lose anything. So, from the very beginning, the demo is a wonderful thing.

There is only one minus here, but it is global and all-embracing. Demo trading simply has nothing to do with real trading.

What is the main problem of a trader? No, this is not a technical analysis or the political situation in the country. These are emotions. When you trade, you get greedy when you look at a promising position, fear losing money when the market goes against you, greed when stocks start to bring you profit. You fuss, do incomprehensible actions, do not follow your own trading plan.

It is very easy to watch with a cool head-on demo of how a jumped stock brings you hundreds of thousands of income, and then carefully fix the profit. But many simply cannot do this in a real situation – after all, profits continue to grow! How can you go out, real money all comes and comes! As a result, it often happens that the stock falls back and the profit literally disappears before our eyes.

Therefore, a demo account is in the furnace. It is of little use for serious training. Only in order to understand the very basics.

Personal recommendation – train on a real account, the amount on which will not be any burdensome loss for you. Ten to thirty thousand, in general, is quite normal capital for training. You will face a slight excitement, trying to earn two hundred dollars for children for ice cream, with sadness that there is a minus, with pride that there is a plus. Believe me, these sensations are not exactly what awaits you in the future with serious trading. Far from it. But it’s still an order of magnitude better than the emotionless demo.

A little about choosing a broker. There are many options here. The most common are Amazon, Finam, BCS, Alfa-Bank, VTB,. Basically, there is not much difference. All of them sometimes freeze, give ridiculous recommendations, their trading terminals have some unnecessary restrictions or lack some important functions.

Personally, in my opinion, the ideal broker is a bank in which you have accounts and with which you work closely. Then the brokerage account will organically fit into your business with the bank, and replenishment of the account or withdrawal of profit will become easier and more convenient.

Agree, if you have all the accounts and cards in Alfa-Bank, it is rather stupid to open a brokerage account with VTB.

4 Risk identification

1. The risk profile of a portfolio

a. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio A using model building approach

A risk profile is an analysis and evaluation of an individual’s willingness to take risks when trading in stocks. A risk profile is important in determining the proper investment in asset allocation for a portfolio and mitigate potential threats and risks.

VaR​=[Expected Weighted Return of the Portfolio− (z-score of the confidence interval× standard deviation of the portfolio)]× portfolio value​

As for training with a broker, attending specialized courses, and more. I will now express my point of view, which does not pretend to be the ultimate truth, but since you have undertaken to read this book, it is worthy of attention. How does the broker make money? Perhaps you did not pay much attention to this but in vain. In addition to their own trading operations, the main income of brokers is commissions on clients’ transactions and interest for using leverage by these same clients. And this affects what exactly brokers recommend doing on the exchange. And they usually recommend the following:

– make a lot of transactions, trade within a day or within an interval of 1-5 days maximum.

– to use shoulders without much hesitation and to trade highly liquid securities of the first echelon, on which, in fact, these shoulders give.

– listen to the broker’s analytics. It goes without saying.

We will talk about analysts later, but now we will focus on the first two points.

The standard brokerage commission per trade is 0.03%. If you have more, then you have some wrong broker or wrong tariff.

Having a million and fully using it in trade, you pay 300 dollars for one transaction. By connecting the leverage (borrowed funds) x3, you are already operating with three million and, accordingly, you are already paying 900 dollars for one transaction.

b. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio B using a historical simulation approach

In itself, this is neither bad nor good, it is usually.

But what happens when you start increasing the number of trades? That’s right, the commission grows proportionally. If you buy and sell shares ten times a day, you will receive a minus on your account of 18,000 dollars.

 

If you have traded with a big plus, there is nothing to worry about – both you and the broker are happy. In the event that you traded at zero or minus, the broker is still satisfied, like an elephant, but you will see not very pleasant in numbers.

Market manipulation. Analytics and analysts. ‘Huts’ and ‘dolls’.

We are slowly moving on to something more interesting. I think each of you deeply suspects that the exchange is a platform where some people lose money, while others acquire it. But, most likely, you did not attach much importance to this thought. But in vain.

Remember clearly and clearly. The exchange is a place where everyone wants to make money from you. Just because it’s his job. Each. Until you understand and feel that there, on the other side of the monitor, is not a computer that mechanically gives out a graph line, but hundreds and hundreds of focused people who want to make money from people like you, success will most likely be very much from you. Trading is based primarily on fundamental indicators, and secondly on the psychology of traders. Most people, observing price fluctuations, do not succumb to the arguments of reason, but to their emotions. This usually entails a loss of money, which then settles in the pockets of more experienced market participants(Chang, Hwang,  Deng, and Zhao,  2018.).

Your opponents’ job is to get you to either buy the stock at a very high price or sell it at a very low price. Basically, these are the only two goals.To achieve these goals, a variety of methods are used that bring sadness, sadness, confusion, and misunderstanding into the trader’s soul.

5. Hedging using Futures:

In order to protect yourself from the influence of manipulators, you need, first of all, to thoroughly understand what is happening in the action yourself. Understand what information is really important and what is not. Equally important is a personal assessment of the company’s foundation and the correct entry point on the chart. I will talk about all this a little later.

The stock exchange is a tedious analytical job, not a game.

A little about what analytical summaries of all well-known companies specializing in brokerage are. When I started trading, I perceived such articles on the website of one company as revelations from above. I didn’t always follow the recommendations, but I always read carefully what they said. For the last year, I have not done this in principle (Duong, Brewer, Luck, and Zander, 2019.).

Let’s take a closer look at the situation.

As a rule, when you just come to the exchange, you really don’t know-how. Moreover, initially, you do not even have the desire to resort to fundamental analysis. Why, “nevertheless, you can see on the chart, just now there was a black candlestick, which means that there will also be a black one … or a white one …” – this is how many not very conscious traders think. The first and most important thing I would like to note in this chapter is one of the basic principles of trading. Translated from eloquent into US, this means: do not hesitate to take profit and do not be overly greedy. And also never regret the lost profit. Remember, your goal is a trade that will bring you profit, not a loss. If you received it, you are already well done and it does not matter that someone earned five, ten or one hundred percent more.

Although, I do not argue, sometimes it is very insulting.

Ideally, when you enter a position, you should have an exit target. I would even say you should have three exit goals.

The first is literally a percent or two of profit (sometimes the breakeven point is considered such a goal – in the event that a stock after opening a position has gone against you and does not want to come back for now). Upon reaching this goal, you should relax, breathe deeply and calm down – the minimum task is completed, you have already earned!

The second is a realistic and easily achievable goal, according to your analysis of the stock. If you calculated everything correctly, then this goal will be fulfilled quickly enough. And at this moment, in theory, you should take profit and look for new ideas.

The third is the super goal. If you trade from levels, then these are the levels opposite to your position. If you are trading with a dividend strategy, then this is the price value at which the dividend yield is five or ten percent (for different stocks – differently). If you bought a slag stock with huge potential, then this is 300-500-1000% of the profit.

b. Calculate the European option price using the option specification you chose in the previous section

Whether or not to wait for a super goal is a very controversial issue. With that said, I would give you two tips. The first is not to go out of your way to hold on to a stock if the chart, contrary to your predictions, goes below your very first and most modest target. You can, of course, wait for a little, but, in general, if your first goal is not met, then you are mistaken. Lock in while you are in plus or breakeven (or even slightly minus) and wait. Four times out of five, you will be able to buy paper cheaper than you bought it the first time. In the fifth case, if the chart does go up, you may well buy the stock again slightly higher than your previous purchase.

Below I will take a closer look at trading stocks of different echelons and you will be able to imagine what different categories of securities are capable of, as well as assess which of them is more appropriate to fix losses and which ones are not.

Here I would like to point out a few principles regarding losses.

First. You need to think about a loss before opening a position, not after. If you correctly assessed the fundamental of the paper, looked at the levels and growth potential, took into account the news background, then the possible minus, in principle, cannot be too large and it makes sense to wait it out.

Second. If, nevertheless, your head turned on later than necessary, then you should do the same as in the first case – look at the company’s fundamentals, as well as at the chart. If this is just a correction or an ongoing hike to the level, that’s okay. The correction will end, the level will push the chart away – and everything will be fine. If the level is not visible, the fundamental is blurred and the prospects are not very clear – it is better to fix the loss and stand on the sidelines. Admitting that you made a mistake will be much easier at a loss of five percent than at twenty (Sarfraz, et al, 2018).

c. Provide a review of these option prices based on the comparison between the European option price from your calculation and the actual option price you observed in the market

In general, if you can put money on a deposit in a bank, then you can afford to buy securities on the stock exchange. These are just two different ways to make free money work. Professionals recommend trading for amounts of 30 thousand or 35 thousand dollars. You can start trading with such capital. With it, you can invest money in different assets, and not in one, and form a full-fledged portfolio. And this is the first step towards portfolio investment.

2. Trading on the stock exchange is like playing at a casino

Many are convinced that the movement of the value of shares on the stock exchange has little to do with rationality, and investments are more like gambling. Far from it. In a short period, the value of shares on the stock exchange, of course, can change irrationally. But if we talk about the prospect – for example, from one year – then a company with a well-established business cannot lose its shares for a long time. And if for some period negative events shake the quotes, most often the firmly standing issuers find a way to return to growth.

A certain element of similarity is that the total investment is not known in advance. Plus, more risky investments can result in both a large income and a large loss. But the purchase of securities is an operation with a non-zero result. You buy securities of operating companies – the company makes a profit, which means that sooner or later the investor will be able to count on the profit. At least in the form of dividends.

3. There is nothing difficult in trading

There is an opinion that to trade on the stock exchange, it is enough to conclude an agreement with a brokerage company – and off you go, you can trade. Technically, this is true, but in practice, this attitude can be dangerous. The exchange requires a responsible approach. If you decide to trade on the stock exchange, you need to prepare yourself for the need to study not only the technical side of the stock markets. For example, you will have to dive into multi-page financial reports in order to understand the state of affairs of a particular company, study the markets, and be interested in economics. In other words, a certain amount of thought is required from the investor. A regular contract with a brokerage company implies that you make all decisions about operations on the exchange yourself. Overconfidence or lack of basic knowledge will lead to poor decisions and loss of money. Therefore, in the early stages, you may need a consultant who can be provided by brokerage companies. It will take additional funds, but the losses from illiterate decisions can hit your capital much more tangibly (Vij, 2019).

4. Only professional’s trade

Another myth arises from the previous myth: if you are not an expert, then it is better not to go to the stock exchange at all. It does take knowledge to trade on the exchange – but all this knowledge is available. You do not need to get an economics or mathematics education. Everyone becomes an investor: students, housewives, engineers, doctors – anyone. To immerse yourself in the topic, it is worth reading thematic blogs, sites dedicated to investments and exchanges, as well as books for those who are just going to trade on the stock exchange.