Select Page

Long/Short Basics

Trading Plans

Sponsored Content

steemit

Visit on Steemit!

Support us on Steemit!

bitcoinlgoo

Visit on D.Tube!

Support us on D.Tube!

Curriculum Content

There are three kinds of risk in the market. There is Market Risk incurred by all instruments in a market, Sector Risk incurred by all instruments in a sector, and Asset risk specific to the asset. Asset risk is especially derived from the way the underlying company is managed. The goal of a successful long/short equity portfolio is reducing all three to some or a major degree while simultaneously beating the market. If you can repeatedly do this, you will be a successful investor.

To reduce market risk, you must reduce the standard deviation of a portfolio. The volatility of the swings within the portfolio are a measure of risk, with higher violent swings in portfolio value being riskier, especially if you’re taking losses on those swings. If you are making gains those swings are still risky since they could easily have occurred against you in the reverse position. Under some methods of measurement, like Sortino, asset return deviations in your favor are not included as risk.

The goal of diversification is reducing the standard deviation of a portfolio. If you utilize 1 equity position your standard deviation should be 50%. As you add more positions that have low or no correlation, your standard deviation declines since they don’t all move up or down together. Note that diversification also diversifies returns. If you had 1 equity investment and that investment beat the market by 10%, your portfolio would beat the market by 10%. But if your single investment tanked, so would your portfolio. After diversification, your portfolio is less individual asset driven.

At 50 equity positions you will have roughly 20.2% standard deviation. Around 20% you will find it extremely hard to diversify market risk. If you build a long only portfolio of 1,000 equities (essentially a very large mutual fund) you will still have a standard deviation in the upper teens. Most of this is due to all positions being long market positions. When the market crashes, people pulling their money out of the market, especially funds that own large amounts of shares, sell shares and force funds to sell off. This selloff drags down the value of almost all equity shares in that marketplace.

Long/Short Equity & Risk Mitigation

By utilizing diversification with long/short equity positions you can minimize almost all market risk. If the market moves down your long positions suffer losses that are reduced or canceled out by your short positions’ gains. If the market moves up your short positions suffer losses that are reduced or exceeded by your long positions’ gains. This reduces the effect of market risk. After this point, your only concern is being absolutely certain the probability of long positions increasing in price and short positions decreasing in price are maximized. This reduces the chance of long and short trades “surprising” you. When they do diversification kicks in and reduces the effect on your portfolio.

Success is merely an issue of stacking probabilities, eliminating losses quickly, adding more winning trades, and adding capital to winning trades. Your goal is to eliminate nearly all market risk by any measurement, ensure that sector risk is either eliminated or in your favor, and then ensure you are on the correct side of asset risk. If retaining sector risk, you want your long investment sectors to be trending up for economic reasons, and your short sectors to be trending down for economic reasons. Afterwards, you want the assets held long to be economically, fundamentally, and technically trending up. Assets held short are economically, fundamentally, and technically trending down.

The Long/Short Equity Process

To pick successful long and short equity positions, start with the macroeconomic, market sentiment, and sector levels. This lets you identify profitable investment themes. You filter out bad potential equity positions by utilizing fundamental and technical screens, leaving only highly likely ideas for long and short positions. Finally, you measure risk by calculating several quantitative measurements to ensure that your portfolio won’t be melted by a breakdown in one asset or industry. Your goal is to screen companies by their appropriateness for your system driven positions. Longs take advantage of positive trends while shorts take advantage of negative trends.

Did we help you? Vote with a Crypto-Donation!
steemit

Visit on Steemit!

Support us on Steemit!

bitcoinlgoo

Donate Bitcoin

141FSmuHkMSZVsQQtE9GHSPyj6gAonqqWR

bitcoinlgoo

Donate Dash

Xr4fdtP78Mh3gnVwAUjjuZRCq3kubaHZ5o

bitcoinlgoo

Donate Litecoin

LcrxGsshB2j9SddnZNdLfYMsDqAtw3Dr9v

bitcoinlgoo

Donate Iota

LXIVNBVHRYBOHRWNGMBNHOYMT9GBEFTPQMKDUZUYYHGMPXOOEYETMUQZXWXCGWBMTFERLW9LMCKNUDCKAMDOQCNDNZ

bitcoinlgoo

Visit on D.Tube!

Support us on D.Tube!

bitcoinlgoo

Donate Bitcoin Cash

14NCVeGCZfHf7tiy9N2Yz1mrBNi9m2mQ4S

bitcoinlgoo

Donate Ethereum

0xAF7d66B09F34833Ccec1Ed9e4D356D40c09698e5

bitcoinlgoo

Donate Ripple

raiZ2rCXLeBTUh2A4voKALZpMxQ88KxZxm

bitcoinlgoo

Donate Monero

42byh9AjzB3XXRptSeSfzAGC588HRZgVXAGMay6yYKjjAHinUxdQkxw3Ay1XcziXV86XY57aRqG5kGnJ8LFWmSjmAnUEnYh

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

Storefront

Investment and Finance, Serviced by Amazon

No Results Found

The page you requested could not be found. Try refining your search, or use the navigation above to locate the post.

WealthCE FX + Equity Analysis

Major 8 Economic Summaries
Economic Performance Index
Currency Market Sentiment
Equity Index Market Sentiment
Sector Strength Tracking
Equity EPS/PEG Estimates
Fundamental Firm Analysis
Trend Following Trading Plans

Robinhood is a SEC, FINRA, & SIPC member brokerage that lets you to buy and sell U.S. stocks/ETFS with ZERO commission. Sign up and get a free stock!

coinbase

Coinbase is a digital brokerage specializing in currencies. They allow you to trade US Dollars and Euros for Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

coinbase

MyFxChoice is a regulated brokerage offering 200:1 Leverage on Foreign Exchange, Gold, and Silver. They offer 33:1 on Crude oils and up to 50:1 on equity indices like the FTSE100, DAX30, S&P500, and Nikkei.

Forex Tester 3 is a technical analysis back testing and simulated trading platform that serves as a testing platform for trading strategies.

Ledger Nano S - The secure hardware wallet

Sponsored Content