Alpha

What is alpha? For those who spent their time in college perfecting the art of keg stands and discussing the finer points of beerpong, alpha may merely mean the first letter in the greek alphabet. For high priced lawyers and corporate rockstars, alpha provides a convenient description for their position at the top. However, to active investors and traders, alpha has special significance.

The alpha we are looking for is that extra return to be found in a market where inherent and predictable behavioral biases among both retail investors and fund managers result in mispriced assets. Classic economists and other academics would tell us that alpha is a myth. That the market is efficient and any additional returns we earn are due to luck or increased risk. I’d like to explore and challenge that assumption by discussing theories, strategies and by testing ideas both on paper and with my own money. Please join me in my quest to beat market averages over the long run.

Wednesday, October 20, 2010

testing the Heikin Ashi

Ok,
I haven't successfully posted pictures in previous posts, but with my last post I committed. I just ran a test for some of my holdings using the 8 and 21 period EMA and the Heikin Ashi chart.  Let's make a paper trade today based on real world prices.

Here is the 3 mo. chart for Silver Weaton (SLW).  I've owned SLW since march 30, 2009:  Now I have an 11% trailing stop order placed on the shares that aren't already covered by a call.






If we squint and look at the far end of the chart, we can see that we have two red bars, signaling a potential end to the 3 month upward trend (i had to chop a month off... sorry).  In addition, the 8 period EMA has turned downward.  This seems to indicate a potential trend reversal.  At this point, I'm supposed to reduce my stop order to 4% from 11%.  Ok.  But for a test, we probably want something a little more exciting.  Let's simulate a sale of calls, so there is some teeth in us being wrong in the direction.  I'm going to simulate selling 3 contracts of SLW nov. 28 calls. currently selling for .86-.88.  Since the stock stands at 26.68 right now, we have a little error on the upside.  Selling 3 contracts nets me $253.74 (my brokerage charges me $5 per order, and .75 per option contract).  For simplicity, we'll ignore profit potential in the next couple weeks, and look at the trade on expiration date (Nov 20).

Below is ARCC:

This time we see a continuation of close to a month long trend.  Since we see a strong trend up, we'll go ahead and sell 3 contracts of puts this time.We'll sell 3 Nov 20 16.00 strike puts for .25 a piece, netting us $67.74.
Note:  if you notice the highlighted spot, you can see a spot where an overeager trader may have exited his position and missed out on a run from 15- to the current price of 16.42.



Next: we'll test the australian ETF (EWA).
Looking at EWA we see another trend reversal.  Again 3 contracts of Nov EWA (26.00 strike price) calls.  EWA sell at .20 will net us 58.74.
The next test will be SCCO.





ok.  You know the drill. We have a trend up, so we'll sell puts.  We can sell puts with an strike price of 41.00 at 1.70, netting us $502.74.

To save time I won't post DSX, QQQQ, DJX, but will track them as well.  I realize 7 different test subjects do not a scientific study make.  If this proves promising I will probably do a more extensive study come Nov. 20.  Until then...

Cheers,
T.R.
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