MARKET-NEUTRAL TRADING Other Books by Dr. Carr Trend Trading for a Living Micro-Trend Trading for Daily Income MARKET-NEUTRAL TRADING Combining Technical and Fundamental Analysis into 7 Long-Short Trading Systems DR. STOXX”) New York Chicago San Francisco Athens London Madrid Mexico City Milan New Delhi Singapore Sydney Toronto Copyright © 2014 by Dr. All rights reserved.
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McGraw-Hill Education has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill Education and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. Contents ACKNOWLEDGMENTS vii INTRODUCTION What This Book Is About ix PAR T ONE alpha: PRELIMINARY CONSIDERATIONS CHAPTER 1 Why Neutralize the Market? 3 CHAPTER 2 Going Beyond Technical Analysis 27 CHAPTER 3 Moving Toward a Synthesis 45 CHAPTER 4 New Tools for the Trader’s Toolkit 67 PAR T T WO intermission: THE ONE THING NECESSARY CHAPTER 5 The Two Types of Trading Failure.
and How to Avoid Them 127 CHAPTER 6 A Brief Look at My Trading Routine 145 v vi CONTENTS PAR T THREE beta: FUNDAMENTALS-BASED TRADING SYSTEMS CHAPTER 7 The Piotroski F-Score System 167 CHAPTER 8 The Earnings Estimate Revision System 187 CHAPTER 9 The O’Neil CAN-SLIM System 209 CHAPTER 10 The Carr Hybrid System 237 PAR T FOUR gamma: TECHNICALS-BASED TRADING SYSTEMS CHAPTER 11 The Blue Sky/Blue Sea System 259 CHAPTER 12 The Pullback/Relief Rally System 275 CHAPTER 13 The Mean Reversion System 299 PAR T FIVE delta: FINAL WORDS CHAPTER 14 Never, Ever Give Up! 325 Notes 329 Index 335 Acknowledgments It has been my distinct pleasure to work again with McGraw- Hill and its associates on this third of a three-part series on trading strategies. Everyone involved in these projects has been fantastic. I wish especially to thank Mary Glenn, associate publisher, along with Cheryl Ringer, Charu Khanna, Lisa McCoy, and everyone else involved in the editing, production, and marketing processes. You have been consummately professional, kind, and appropriately thorough.
I wish also to thank the many readers from around the world who took the time to e-mail me comments on the first two books. What a joy it has been to connect with new and experienced traders in China, Korea, Japan, Malaysia, Thailand, New Zealand, and so many other places around the world. Trading has truly become a global phenomenon! Thank you, new friends. Your words of encouragement are singly responsible for this present volume, and your helpful comments have made it a better read.
My wife, Ina, deserves an enormous “thumbs up” for the many evening hours she spent watching the kids while vii viii ACKNOWLEDGMENTS I was chained to the keyboard. Thanks, sweetie, you’re awesome and I am truly blessed! To my beautiful daughters, Natasha and Nadia, and my handsome son, Nathan, I need to say sorry for being so preoccupied during these months of research and writing. Thank you for patiently waiting to play! You are all my true treasure. I am so proud to be your dad! INTRODUC TION What This Book Is About I hated every minute of training, but I said, “Don’t quit! Suffer now and live the rest of your life as a champion!” —Mohammed Ali There are many ways to trade stocks.
Some traders rely exclusively on technical analysis. Each night, they scan through hundreds of price charts, searching for just the right combination of technical indicators and price patterns. They run their preset technical scans, isolating stocks making pullbacks, breakouts, relief rallies, and consolidations. They check watch lists of charts for candlestick formations, mov- ing average crossovers, and indicator to price divergence.
They scroll up to the weekly chart then down to the hourly chart, making sure there is nothing in either the macro or micro picture that would hinder their technical assessment. This book teaches a better way. Other traders rely exclusively on fundamental analy- sis. They spend countless hours poring through reams of company-specific financial data, comparing price multi- ples with growth metrics, checking their financial rankings relative to industry and competitor standards, all in search ix x INTRODUCTION of companies on the verge of dynamic growth.
They read reports from financial analysts and research services. They listen in on conference calls and speak to investor relations personnel. They tease out from the news cycle any macro- economic change—changes in commodity prices, currency exchange rates, new tax legislation, etc.—that might affect profit margins, and thus net earnings, of the companies they follow. This book teaches a better way.
This book will teach you seven strategic methods for building a winning portfolio of stocks without having to rely exclusively on either of the previously mentioned research methods. Our approach is to combine the two. We have found that technical and fundamental analyses, long thought to be independent disciplines, complement each other’s effectiveness when integrated into the same trad- ing system. Furthermore, we have found that the ideal way to manage such systems is to use the volatility-reducing, returns-enhancing power of bidirectional positioning (i., being long and short the market at the same time).
The trading systems taught in this book are thus structured in this two-fold, market-neutralizing way: They utilize both technical and fundamental analysis, and they come in two versions, long and short. They are also fully automated, tak- ing advantage of preprogrammed scanning services for true ease of use. These new systems offer traders the following poten- tial benefits: INTRODUCTION xi ● Never again will you have to spend long hours scanning through charts to find the best setups. ● Never again will you have to spend long hours reading through financial reports to find the best companies.
● Never again will you have to guess at future market direction to figure out whether you should be long or short the market. ● Never again will you have to figure out when to put on or take off hedge positions. Imagine the following scenario: It is a Sunday night and you go to your computer to see what trades you need to make the following day. You log in to your technical scanning software and open the encoded filter you are currently using.
With two or three clicks of the mouse, a list of 14 stocks pops up on your screen. These satisfy the technical parameters of the long side of the system. With a couple more clicks, you run the short screen for the same system, and 11 more stocks pop up that satisfy the parameters of the short side of the same system. Your next step is to open a web browser and go to two websites that offer fundamentals-based research.
You run the remaining 21 stocks through the predetermined grid on one website, then the other. You quickly see that of the 11 remaining longs, only 5 pass muster on the first site, and of those, only 3 pass through the grid of the second site. Of the 9 shorts, only 4 pass both fundamental grids. You are now left with xii INTRODUCTION 7 ideal candidates, 3 longs and 4 shorts, that have passed the full range of your system’s filters.
Your next step will be performed on Monday morn- ing. A good hour or so before the opening bell, you log in to your trading account platform. Once you are in, you see that you already own three of the seven stocks that came through your trading system’s grid (two longs and one short). You already own these three stocks because you performed the same selection process last week and, of the stocks you entered positions in, three of them still satisfy the system’s parameters.
You now have your trading map for the day: Prior to the open, you will put in orders to close the positions from last week that did not show up in your selection process this week. Last week, they were great candidates.