Finding A Winning Strategy On Uk Stock Market Finance Essay - Free Essay Example

Sample details Pages: 6 Words: 1871 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? 1.0 Introduction Warren Buffett is considered the most successful among investment community of experts. Actually his words and deeds are treated as a golden rule by the global investors. There are two secrets of success according to Buffett: First, the long-held strategy; the second is ignore market . Don’t waste time! Our writers will create an original "Finding A Winning Strategy On Uk Stock Market Finance Essay" essay for you Create order Buffett is a model of long-term investment. When making investment choice, he never treats himself as market analysts, but as business operators. Buffett buying stocks before, do a lot of good lessons in advance, know about this stock the companys products, financial condition, future growth, and even potential competitors. One interesting point is that Buffett strongly opposed to short-term trading, saying that it is just a waste of time and money, and it will affect the operating performance of your body. Buffett said: I do not intend to buy the shares the next day to make money, I buy stocks, always assume that exchange will be closed tomorrow, 5 years before they re-open and resume trading. He warned investors, for the stock of any file, if you not sure if you can hold for 10 years, then do not even consider holding for 10 minutes. Buffett has $ 10,600,000 in 1972 to buy the Washington Post stock, and the value has been added to 9.3 billion dollars in 1999. In 27 years the Washington Post shares rose 86 times, although 27 years in the United States in the market went through ups and downs, Washington Post also had a severe shock, diving and surge appears countless times. However, the final proof of the fact that long-term and patience as Buffett has brought considerable gains. According to Buffett, the second key to success is: Ignore the market, the so-called Ignore the market is that not to read too much short-term market volatility, investor sentiment about the market not to be and not too be over sensitive on market behavior, or Image. In a word, do not be assertive in time with Mr. Market dance. Since he holds long-term investment patterns, Buffett advocates should ignore all the market, including price volatility and all market information, of course, do not bother economists, analysts, and the stock brokers proposal, as securities brokers provides some so-called views and reasons to lure investors buying and selling stocks, which investors earn fees and commissions. The report is organized as follows: It first introduces some basic rules in trading to be aware of in Section 2. Then two technical trading strategies: Momentum strategy and MACD strategy are illustrated in Section 3 and 4. Also, the implementation of these strategies on UK stock market in my model investment is explained. Finally, Efficient Market Hypothesis is briefly discussed and my results provide weak support for it. 2.0 Some basic rules in investing Here are some advices from Richard Rhodes before I enter the stock market. The first and also the most important rule to be keep in mind is that a long position is to be hold in bull markets. This may sound obvious, but a lot of people have sold the first rally in every bull market, saying that the market has moved too far. The next is to buy that which is showing strength sell that which is showing weakness. The public continues to buy when prices have fallen. However, the professional buys because prices have rallied. The rule of survival is not to buy low, sell high, but to buy higher and sell higher. So never be afraid of seemingly high prices. Furthermore, be patient. This means that when an opportunity to buy is missed, waiting for another instead of trying to catch up with the trend in a hurry. Another interesting one is that never adds to a losing trade to reach the average effects in the position. To put it in another word, for long position holders, each new buy price must be higher than the previous buy price. 3.0 Momentum trading strategy Jegadeesh and Titman (1993)s study showed that experience in the U.S. stock market over the past 3 to 12 months good or poor performance of stocks (winners or losers) in the next 3-12 months will continue to perform better or worse, the construction of arbitrage portfolios using this phenomenon (winner to buy, short selling losers) yields abnormal returns that can be sustained. This shows that changes in stock prices show a rise or decline inertia, namely, the existence of momentum effects. This phenomenon is contrary to the traditional risk-based asset pricing theory. The existence of momentum effect that changes in stock prices there is a pattern, which means the practice of technical analysis in investment has some value, its trading strategies of investors have a significant impact. The momentum trading strategies based on the momentum effects catches many market participants attention. From the investors point of view, only knowing the benefits of momentum strategies is not enough, they must also examine the profit net of transaction costs. Jegadeesh and Titman (1993) hold the view that, on average, the half-year turnover rate for momentum trading strategy is 84.8%. 4.0 Technical trading strategy: using MACD The investment philosophy hold by most people can be divided into two categories, one is the so called buy-hold, the main representative of this view is Malkiel ¼Ãƒâ€¹Ã¢â‚¬  1990 ¼Ãƒ ¢Ã¢â€š ¬Ã‚ °, contending that the stock prices are random walk and is not predictable, so the analysis is often trying to predict stock trend is not valid. Therefore the best way is to buy and hold; The second is active operational, according to this method of analysis, the trend is predictable, they or the use of fundamental analysis, or to use technical analysis, or combine the two methods together to analyze information so as to predict stock movements, which take advantage of favorable earnings trend, and also avoid the negative trend. Because technical analysis is easy to understand, simple to use, it gains popularity among the majority of active operational investors. The technical analysis moving average method is an important indicator and it is widely used. According to W. K. Wong, M. Manzur and B. K. Chew ¼Ãƒâ€¹Ã¢â‚¬  2003 ¼Ãƒ ¢Ã¢â€š ¬Ã‚ °, there are many ways to calculate the moving average. Most widely used among them are the following three ways: simple arithmetic mean, linear weighted moving average method and the exponentially weighted moving average method. The core idea of the latter two methods is to give greater weight to the prices close from now, and then two methods is based on the simple arithmetic mean method, they are actually the changed form of simple arithmetic average, the basic ideas are contained in the simple among the arithmetic mean law. To analyze the moving average trading strategy, we must first model the trading strategy, clearly they relate to the indicators, parameters and trading signals. First, the use of moving average method, we must clearly define the moving average line. Here, we directly use a simple weighting method, the first x days moving average value on the t day is: Where, I is the closing price. Second, the use of moving average method, we must determine whether the transaction rules. In accordance with the technical analysis theory, we assume that when the closing price of the upward moving average line, the value increased to above the moving average, it sends the signal to buy; when closing prices are down across the moving average, moving average value decreased to below, it issued a sell signal. That is: If and then it is a strong signal to buy on the t day. If and then it is a strong signal to sell on the t day. If then the investor should hold the position unchanged. Based on these strategies and advices, I bought BP, RBS and LLOY. And the attached excel file includes transactions in detail. The result turns out that the return on this portfolio closely resembles that of FTSE100, however, it still can not beat the market. This may be a supporting evidence for Efficient Market Hypothesis, while its effects are not that strong. 5.0 Brief discussion of EMH Efficient Market Hypothesis (EMH) originated from the securities laws of price change. By examine the securities prices time series analysis, which is combined with random walk theory, the use of the theory has been greatly developed. In 1970, the American economist Fama ¼Ãƒâ€¹Ã¢â‚¬  1970 ¼Ãƒ ¢Ã¢â€š ¬Ã‚ ° proposed the efficient market hypothesis, and thus there is a systematic summary of past research results, he propose a more complete theoretical framework. Efficient market means that in a stock market, securities prices fully reflect all the information possible to obtain or use, the price of each security will always be equal to its intrinsic value, no one can continue to reap excessive profits. The essence is that the stock price series reflect the efficiency of the relevant information (the degree of response and reaction efficiency), which requires the current stock price fully reflect all relevant information. Only when new information is received, the price wil l change. The previous days information will not lead to price changes. The amount of investors in the market is large enough to ensure fair prices, the market role of the collective production of the equilibrium price. Fama(1970) in the study of the issue, took note of the securities of two problems: First, stock price information and the relationship between changes in how that information caused by price changes; the second is related with the price of securities the types of information. Different information has different impact on the price level of securities, relevant information will be divided into three categories: historical information, public information and internal information, and according to these three defined three different levels of information efficiency of markets: weak efficient market, semi-strong efficient market and strong efficient market. From the three levels of the efficient market point of view, from weak to semi-strong efficient and effective and t hen to a strong and effective, is a progression from low to high relationship, and not vice versa. Efficient market theory is built on three theoretical assumptions: First, investors are considered to be rational, they take utility maximization as the goal, which is based on the known information for processing in accordance with Bayes rule, and thus give unbiased estimation of the market to make, so they can make a reasonable valuation of the securities; Second, in a way some investors are not rational, but because of securities transactions between them is carried out randomly, so they non-rational will cancel each other out, so the price of the securities will not be affected; Third, according to Shleifer(2000). In some cases, non-rational investors make the same mistakes, but they will be affected by the arbitrage of rational investors, which will eliminate the former on the prices. 6.0 Conclusion In the field of investment, there are some golden rules suggested by famous economists as well as successful investing tycoon to be kept in mind. This report adopts mainly technical methods to decide the right timing to buy. A bundle of large cap stocks and well-known companies are chosen. The technical strategy used here are momentum trading and MACD. The return turns out nearly to beat the market, that is, the return during the trading days on FTSE100. This provides weak support for the efficient market hypothesis.