5 Reasons You Should Create or Follow a Trading Strategy on Zignals.com

Creating a trading strategy on Zignals can help overcome behavioral bias that have been detrimental to traders and investors over the years. I'll discuss a few and talk briefly how using Zignals, you can overcome these.

1. Loss aversion

People typically give more weight to losses than to corresponding gains

For example, consider an investor who needs cash and must sell one of two stocks that he/she owns; one of the stocks has gone up and the other has gone down. Odean [1998a] studied trade records for 10,000 individual investors and shows that investors are much more likely to sell the stock that went up.

Reason- Strategies on Zignals employ a stop loss percentage allowing you to overcome loss aversion and views stocks independently regardless of them being up or down.

2. Endowment effect

People place a higher value on objects they own than objects that they do not. Or the fact that people often demand much more to give up an object than they would be willing to pay to acquire it

Reason - Exits are viewed from a unbiased view and consistent from stock to stock.

3. Over optimism and Overconfidence

People overestimate their ability.

The classic behavioral example is when members of a random group are asked if they are above, below, or average drivers. The results invariably reveal a majority of above-average drivers, a statistical impossibility. Over certain types of questions, answers that people rate as "99% certain" turn out to be wrong 40% of the time.

Reason- You can follow someone with a proven track record to negate over optimism and overconfidence biases.

4. Anchoring

Anchoring occurs when we become stuck to a particular reference point as a basis for making judgments and decisions. Traders commonly anchoring themselves to an entry point after entering a position.

Nobel laureates, Amos Tversky and Daniel Kahneman, using a rigged wheel similar to roulette, but one which always stops at either 10 or 65. Two groups asked the same percentage-based question responded differently depending on which number they saw after spinning the wheel.

Low anchor (10) leads to low estimate (25%)
High anchor (65) leads to high estimate (45%)

Reason – This bias is over come with our Trailing targets and stops, stopping you anchoring your decision to the entry point.

5. Herd instinct

Common tendency to adopt the opinions and follow the behaviors of the majority to feel safer and to avoid conflict.

5.1 Regret theory: The fear of being wrong may outweigh the cost in objective economic terms, and lead individuals or groups to non-optimal conclusions.

Study - http://en.wikipedia.org/wiki/Asch_conformity_experiments

Reason – Your strategy cannot be influenced by other peoples trades or journalism, unless you change it!

These are just some of the reasons you should create/follow a Trading Strategy at Zignals.com


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Equally weighted ETFs

Most index ETF’s bought by investors today, including SPY, QQQ, FTSE 100, ISEQ 20, are market-capitalization weighted. A company's weight in an ETF is determined by its total market capitalization, or the share price multiplied by total shares outstanding. Therefore, the returns of large-cap stocks in the index play a much greater role in the overall index performance than small caps. When large-caps are Performing their dominance is overwhelming and can mask the overall health of the ETF. And the opposite is also true (eg BP).

While and Equal weighted Index ETF is just as it sounds. Every stock in the index has the same weight, regardless how large or small the company is. So in the S&P 500 equally weighted portfolio Microsoft will have an equal weighting with Paychex Inc.

1. Kenneth French from Dartmouth's Tuck School and the University of Chicago's Eugene Fama, have shown that small cap outperformed other securities over most significant historical periods, so an equal weighted ETF sould take advantage of this finding and should produce larger returns. (link to academic paper)

2. In an equal weighting ETF when rebalancing you are essentially selling your winners and buying loosers. So it’s a play on the market reverting to the mean. mean reversion refers to the tendency of extreme performers, (either high or low), in one period to perform the opposite in the future.( for more on mean reversion)

Disadvantage

1. For equal weighting, large transaction are incurred for the constant re-weighting back to the original equal dollar amounts, (From 2002 to 2008, the amount of average annual turnover for the Equally Wweighed version of the S&P500 was about 22%, versus 4% for Index.

But we can use the Equal weighting as a proxy for the health of the Cap weighted EFT.

I'll have a look of I can get some get the correct data to come try and test this hypothesis.

Fundamentally weighted Indexes could provide better returns? Intresting
Chart of SPY vs RSP.


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Creating and Managing a Stock Chart on Zignals.com

This post will be a 'how to' on creating and managing a stock chart at Zignals.com .

[1] Go to Tools-Charting.

[2]You can then select Markets and Countries you want to include in your search, from the filter list.



[3] Type in your stock name or Ticker code in the input box. I picked a SLV A Silver ETF

[4] Click on the draw button to access the drawing toolbar.



[5] You can then decide what indicators you would like to overlay on the chart. You can also apply indicators on indicators ,eg moving averages on Volume, etc.



[6] You can then compare you chart to others by clicking on Chart->Compare.



[7] You can then save your chart for easy access later on. Or 'save as image' to post to your blog or trading diary.



[8] When your done you can submit a new trading idea based on the chart. Your ideas will be then saved and will appear on the chart.




These are just a few of the things you can do on the stock charting software at Zignals.com . If you have any particular functions you like or would like to see, you can post them in the comments section.

Thanks,

-Chris
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