An Anatomy of Trading Strategies

Conrad and Kaul find that the profitability of a momentum strategy can be attributed to return dispersion. Another idea is to calculate recent price swings and average them out to get a relative price target. Wait for the Breakout Finding a good candidate does not mean a trade should be taken prematurely. Never give a loss too much room. A triangle breakout Source: They use weekly returns of ten size-based portfolios over the 5 period and find that 1 the variation through time in expected returns is well characterized by a stationary first-order

In this paper, we use a single unifying framework to analyze the sources of profits to a wide spectrum of return-based trading strategies implemented in the literature. We show that less than 50 percent of the strategies implemented in the paper yield statistically significant profits and, unconditionally, momentum and contrarian strategies are .

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Ioannis mname Psaradellis Jason mname Laws. Some of the existing studies analyze the profitability of the trading strategies based on a variety of technical indicators, including moving averages Brock et al.

These studies however, do not specifically analyze the predictability of EPR, which has been the focus of literature on ERP based on macroeconomic variables. There are two technical trading strategies retrieved by comparing current prices with past prices of the stock i.

If stock's current price increases than the level of 9 to 12 months before then trading rules recommend buy i. Naveed Ul Hassan Bilal Aziz. These are generally divided into two main streams: While there have been numerous attempts to explain momentum profits with more complex risk models including three-and four- factor models , all attempts have largely failed.

Evidence from the Indian Stock Market. Supriya Maheshwari Raj S. This study makes the following contributions to the existing studies in momentum and contrarian strategies: Previous research Conrad and Kaul ; Jegadeesh and Titman ;and Liu, Strong, and Xu tend to consider a special time slot, for example, quarterly basis which inadvertently does not fully capture the elasticity of momentum and contrarian strategies. This article extends the holding period to a monthly basis from month 1 to 12 thereby allowing the trend of momentum or contrarian profit to be observed with the increasing holding period.

Although evidence of momentum is observed across the world, determining its cause is still inconclusive. The proponents of a rational explanation relate momentum to common risks and firm-specific and industry-specific factors Conrad and Kaul , Chordia and Shivakumar , Dittmar et al.

However, the proponents of behavioral finance explain momentum profits through investors behavioral biases, such as underreaction and overreaction to information Barberies et al.

Mostafa Saidur Rahim Khan. Return dispersion also seems related to asset pricing factors. Conrad and Kaul find that the profitability of a momentum strategy can be attributed to return dispersion. Bhootra confirms their result that return dispersion is a potential source of momentum profit. Connolly and Stivers link return dispersion with return momentum and reversal. Weeks with extremely high low dispersion are followed by a mo Empirical evidence was provided in favor of underreaction momentum and contrarian overreaction hypothesis in ESX.

Conrad and Kaul present evidence regarding short and long-term contrarian strategy in US market while momentum strategy works well over medium horizon. The returns from momentum trading strategies are now well accepted and in much practice, there is still confusion about the reasons of momentum profits. Literature also explains that the momentum profits may represent the reward for bearing systematic risk e. Does time-varying residual conditional heteroscedasticity in index returns affect trading behaviour of institutional investors in Indian Stock Market?

Discover more publications, questions and projects in Trading. As volatility contracts during these timeframes, it will typically expand after prices move beyond the identified ranges. Regardless of the timeframe, breakout trading is a great strategy. Whether you use intraday , daily or weekly charts, the concepts are universal.

You can apply this strategy to day trading, swing trading or any style of trading. Finding a Good Candidate When trading breakouts, it is important to consider the underlying stock's support and resistance levels. The more times a stock price has touched these areas, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the stock price finally breaks out see Figure 2.

For related reading, see: Support and Resistance Basics. As prices consolidate , various price patterns will occur on the price chart. Formations such as channels, triangles and flags are valuable vehicles when looking for stocks to trade. Aside from patterns, consistency and the length of time a stock price has adhered to its support or resistance levels are important factors to consider when finding a good candidate to trade.

For more insight, see: After finding a good instrument to trade, it is time to plan the trade. The easiest consideration is the entry point. Entry points are fairly black and white when it comes to establishing positions on a breakout.

Once prices are set to close above a resistance level, an investor will establish a bullish position. When prices are set to close below a support level, an investor will take on a bearish position. To determine the difference between a breakout and a fakeout , wait for confirmation. If an investor acts too quickly or without confirmation, there is no guarantee that prices will continue into new territory. For related reading, see Trading Failed Breaks.

Predetermined exits are an essential ingredient to a successful trading approach. When trading breakouts, there are three exits plans to arrange prior to establishing a position.

Another idea is to calculate recent price swings and average them out to get a relative price target. If the stock has made an average price swing of four points over the past few price swings, this would be a reasonable objective.

These are a few ideas on how to set price targets as the trade objective. This should be your goal for the trade. After the goal is reached, an investor can exit the position, exit a portion of the position to let the rest run, or raise a stop-loss order to lock in profits. Where to Exit With a Loss It is important to know when a trade has failed.

Breakout trading offers this insight in a fairly clear manner. After a breakout, old resistance levels should act as new support and old support levels should act as new resistance.

This is an important consideration because it is an objective way to determine when a trade has failed and an easy way to determine where to set your stop-loss order. After a position has been taken, use the old support or resistance level as a line in the sand to close out a losing trade.

As an example, study the PCZ chart in Figure 4. After a trade fails, it is important to exit the trade quickly. Never give a loss too much room. If you are not careful, losses can accumulate.

The process is fairly mechanical. When considering where to set a stop-loss order, had it been set above the old resistance level, prices wouldn't have been able to retest these levels, and the investor would have been stopped out prematurely. Setting the stop below this level allows prices to retest and catch the trade quickly if it fails. Simple and Effective Exit Trading Strategies. Breakout trading welcomes volatility. The volatility experienced after a breakout is likely to generate emotion because prices are moving quickly.

Using the steps covered in this article will help you define a trading plan that, when executed properly, can offer great returns and manageable risk.

Entry Points

Request PDF on ResearchGate | An Anatomy of Trading Strategies | In this article we use a single unifying framework to analyze the sources of profits to a wide spectrum of return-based trading. trading strategies because it is assumed in the literature that time-series patterns in stock prices are the sole basis of return-based trading strategies. Conrad and Kaul () found that the latter source plays an important role in the expected profits to trading strategies in the US stock market. Regardless of the timeframe, breakout trading is a great strategy. Whether you use intraday, daily or weekly charts, the concepts are universal. You can apply this strategy to day trading, swing trading or any style of trading.