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"Stocks on the Move" by Andreas Clenow Book Review: Profile Traders

Beating the markets isn’t difficult, and Andrew brings you a worthy read in managing your assets.


“Stocks on the Move” takes you behind the scene with a Momentum strategy for equities that can beat the funds at their game.


So what are you waiting for? Let’s get in for a sneak peek into the book.


Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies by  Andreas F Clenow


Mutual Funds, can I Trust Them?


Andreas says Mutual funds have become an alternate and logical solution for an individual to invest in equity markets. Even if you don’t invest in equities directly in individual stocks, you could do the same by investing in Mutual funds, which usually invest the collective fund into a basket of stocks.


Mutual funds are hailed by the government, universities, and banks as a perfect solution for individuals to participate in the equity market. Well, Mutual funds look to replicate the performance of an index the same way you would aim to do when you invest in the financial markets.


The author, however, warns that you should be very cautious when investing in Mutual funds. Taking a close look at their past performance will show that not all of them have done a great job in the long run. Past performances can be easily accessible over the internet.


The kind of fees that you unknowingly pay when investing in Mutual funds can be mind-boggling at times. These are the times when Mutual funds fail to beat the benchmark index.


Trend following and the pain in equity for the common man


The author claims that most people invest in companies that they feel they understand them. You may like having a cup of coffee at Starbucks or that new iPhone that’s launching.


However, investing in them is a different ball game. You cannot invest in a company because you use its products. That’s an illusion.


Investing in publicly traded companies is a more difficult game than just liking a company's products. Driving your investing decisions requires you to go deeper to analyze its fundamentals and future growth prospects.


The effort and study that you need to put into studying a company probably push you to choose an easy way out, Mutual funds.


Andreas claims that trend following is a dumb strategy. Yes, you read it right, dumb. The reason he claims it to be dumb is that it does not take into a large number of factors or complex strategies. He, however, agrees with the fact that trend following has shown strong results in the past 30 years.


If a strategy is as simple as buying when the prices are moving higher and selling when the prices are moving lower are yielding good returns, what is the harm in using it? You may still have to look at the overall market sentiment to take that call though.


The core premise of trend following, therefore should be based on diversification. By trading different asset classes at the same time, the probability will be high that something makes enough money to compensate for losses in other asset classes.


The author discusses some trend-following strategies in the book that you would want to give a second look at. These strategies are discussed with charts of individual stocks and an array of data to support the claims. The following are some of the models discussed.

  1. Standard trend following model on stocks.

  2. Standard trend following compared with total return index.

  3. All-time high model.

  4. Standard trend following, long only.

  5. Standard long/short trend following on stocks.


Momentum Trading Hacks With Market Trend


The author feels when a stock is in a trend, you will also see the momentum coming in at frequent intervals. This normally happens when the stock is moving in the same trend as the general market momentum, and shorts keep covering at important levels.


You should avoid shorting such stocks when they are moving in the same trend as the general markets. Momentum investing requires some deep study, critical thinking, and analysis. It sure does pay you good results, and we will look at some rationales behind momentum investing.


1. Transactions by HNIs and fund houses that buy past winners and sell past losers temporarily move the prices away from their long-run values. This will create an overreach, and bringing the price back to where it started the momentum will take a great deal.


2. Another theory was that the markets underreact to information about the short-term prospects of firms but overreact to information about their long-term prospects.


3. A stock may appear to be moving by its force independently. However, it is impacted to an extent by the overall state of the market. Once the market sentiment gears back to that of the stock, you will see momentum pick up quickly in such stocks. You may also want to trade the momentum in such stocks by reviewing the market movement.


4. It doesn’t matter how strong a stock is; it is sure to see the brunt of the Bears in a Bear market. If the stock has some strong fundamentals, it may not have the same impact as the overall market/Index. Shorting such stocks may not result in the same kind of returns a stock with weak fundamentals gives.


5. The key to success in momentum trading of stock on the move is position sizing. It may differ from person to person, account size, and risk appetite. However, you need to always remember that you are not allocating money to trade but allocating risk. If you understand the importance of allocating risk, you will eventually trade the right position size.


6. Trend followers normally use a trailing stop loss rather than a fixed stop loss. That means that you stay in a position as long as it doesn’t move down a certain distance.


The author shares a complete strategy on Momentum trading along with performance and year-on-year review. The strategy shared is in-depth and with a lot of data to back the strategy; you don’t want to miss getting your hands on it.


Conclusion


“Stocks on the move” has been true to its word, with the author sharing a momentum strategy that you can try and replicate.


Momentum is all that is required for a trader to make money, which is discussed in this book.


Get your copy of the book now if you would like to get detailed insights on the complete momentum strategy discussed in this book.




(Amazon paid link)


Guest Post - Written by Mr. Lal Bajaj, Bangalore




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