Reflection on Stock Trading Simulations
Introduction
Even though equity attracts maximum investment amongst all of the asset classes, however, the same also carries a high risk and if traded without understanding the fundamentals,an investor may lose his entire investment. Therefore, to gain an insight about the real-world of stock trading, me and my partner initiated the trading while we divided the role as a media analyst and investment analyst. This report will be a concise documented version of our experience and will include sections detailing the critical evaluation of the performances, trading strategy, constructive suggestion and some learning experience. The report will finally be culminated with the appraisal of efficient market hypothesis and technical analysis.
2. Reflection as a media analyst
2.1 Critical evaluation of all performance
We classify ourself as risk-takers, but we also knew the importance of calculated risk and portfolio diversification. Therefore, we initiated the trade on Monday morning with the objective of keeping the risk factor low by achieving diversification in our portfolio with the investment in three(3) stocks and one(1) commodity. Additionally, when we did not see any opportunity in commodities, we included four stocks in the portfolio, each from different industry to ensure diversification.
Following the above plan, we initiated the trade Monday with a fund value of £500,000 and by the end, the closing value of our fund was £503,375. During the day, our ROI was 0.675% and we ended the trading period on a profitable note.
2.2 In-depth and critical analysis of trading strategy
My strategy as a media analyst was simple and clear. Knowing the theoretical knowledge of how quickly the stock market absorbs the new information relating to the stock prices, I was sure that in order to earn profits, I will need to be quick on grabbing useful information relating to the stocks and commodities. Therefore, a night before the trade, I searched through investment portals and read about the stocks and commodities that are likely to gain a bullish run in the initial trading hours.
Then, after collecting the information, I passed on the report to my partner who took final decision related to inclusion of stock in the portfolio. However, while collecting the media information, I did not look for risky stocks as me and my partner stick to our plan of low risk and diversified investments.
Fortunately, our strategy worked and within an hour of the trading, our portfolio was in high profits. Thereafter, I continued to reinvest our funds (along with the profits) following the same strategy throughout the day as I was aggressively searching for information on investment portals and then passing on the recommendation to my partner, who was taking the final investment decision relating to the number of units to be bought and the number of units to be sold. Important to note, I strictly refrained from reinvesting in any stock until I had a productive information about the same. For instance, even though we made a profit of in Simentol, I was not suggesting my partner to retake a long position just on speculative basis.
2.3 Constructive suggestions
Having gained a real-time experience as a media analyst, I have understood the importance of speed with which information is reflected in the stock prices. Therefore, in future, as a media analyst, I would like to gain access to the stock related information in a rapid way and would also like to share the same with my partner through an automated system rather than sharing the same verbally or printed versions. Moreover, I would also search for premium analyst reports containing any information or forecasts relating to the stocks.
Therefore, if exposed to advanced tool of gathering stock related information, I would be able to collect more information about the stocks and accordingly,will be able to offer more stocks that will enhance our portfolio diversification.
2.4 Learning experience
In this round, I learned how a diligent media analyst provided with an advanced tool to analyze the stock related information, can play a crucial factor in generating high returns for the portfolio. The most important aspect here was learning about the company and its company profile because until the media analyst learns about the company’s profile, he will not be able to quantify the possible effect of the news on the stock performance.
3. Reflection as an investment analyst
3.1 Critical evaluation of all performance
On Tuesday, we began trade with the opening value of the portfolio at £503,375 . Excited with the previous day performance, my partner had set a day-target of earning profit of £25000 although I settled for a target of £5000.By the end of the trading period, we were able to multiply our portfolio value to £50,9960 as we earned ROI of 0.061%. However, even though our profits were higher than the previous day trade, but together as a team, we slipped to lowest position while other teams surpassed our return percentage.
3.2 In-depth and critical analysis of trading strategy
We did not change our trading strategy and stick to the plan of keeping the risk low and adding diversified stocks to our portfolio. My partner was providing me with the media information related to the stock and I was checking the price trends to take the investment decisions. Just like the previous day, we were holding three stocks and one commodity,and when we did not find any enticing media or price trend in the commodities, we added one more stock to the portfolio.
Important to note, even though our strategy was successful, but the only fault in my trading strategy during the trades was that I forgot that we were having units available. Therefore, out of this negligence, I was changing my position within ten (10) minutes and was thus deprived of the possible profits. For instance, even though my partner had provided optimistic media reports relating to Plosion, I started selling the stocks within seven minutes of its purchase. Consequently, we were not able to cash higher profits that were possible for the majority of our holdings.
Therefore, although we earned profit on Tuesday also, but had I been more diligent in my analysis, we would have earned a much higher ROI than our mates.
3.3 Constructive suggestions
Diversification is the king!. This age old concept of portfolio management allowed us to earn profits on both days. Moreover, I also learned that if the media analyst has a useful information relating to the stock, then a prudent investment analysts can result in early-bid entry into the stocks. Stated otherwise, analysts should always look for the right time to exit or enter from the stock and all his actions should be supported by fundamental and stock related news.
3.4 Learning experience
Even though I was satisfied with my stock picking ability on the basis of past price trends and media analysis report offered by my partner, however, I learnt the importance of timing of trades. I learnt that investment is not buying low-selling high activity, but the investor should also understand the right time to buy and the right to sell. All the trade actions should be undertaken on the basis of stock fundamentals and related news, and not on self-belief or overconfidence
4.0 Appraisal of EMH and Technical Analysis
One of the most important factors that we wanted to learn was the efficiency of the markets and technical analysis. Originally developed by Professor Eugene Fama, Efficient Market Hypothesis theory asserts that capital markets are informationally efficient and the current price of any security fully, quickly and rationally reflects all the information in the security. In short, EMH asserts that, ‘In the long run, it is impossible to beat the market’. Important to note, one form of EMH, Weak-form market efficiency, asserts that the current security prices fully reflect all the market data, and information relating to past price and stock trade volume will offer no assistance in predicting the future path of the stock prices. Therefore, relying forever on technical analysis for generating the positive risk-adjusted returns will be useless in a weak-form efficient market.
For instance, even though we made healthy profits on the basis of media news and analyzing the past price trend, however, according to EMH, the same will not hold forever as it is impossible to predict what will happen to the stocks in the long run. In other words, Short-term trend sometimes can be predicted, but the long period is not. For instance, on Monday we made significant profits in Sinventol on the basis of optimistic media news related to the stock, but the same cannot be expected in the long-term as future is uncertain. Therefore, we strongly agree that technical analysis sometimes can predict short-term trend, but for long period trend it will not be possible for any market participant to use technical analysis and earn positive risk-adjusted returns.
Conclusion
Overall, the trading experience was a great learning experience for both of us. However, even though we made profit, but due to some inexperience and negligence, we could not earn the profit that we could have done so. Me, being an investment analyst forgot about the units available and hence, traded our stocks within 10 minutes and was thus deprived of potential profits from our portfolio.
Bibliography
Jonathan Clarke, T. J. (2010). Efficient Market Hypothesis.
Kaplan. (2011). Market Efficiency. In K. Inc., Scheweser Notes for CFA Exam-Equity Investments (pp. 189-208). USA: Kaplan Inc.
Lo, A. (2007). Efficient Market Hypothesis. Massachesutes Institute of Technology.
Sewell, M. (2012). The Efficient Market Hypothesis: Empirical Evidence.
Shaker, A. (2013). Efficient Market Hypothesis: Empirical Evidence.
Appendix
Monday:
Tuesday:
