Tuesday, January 27th, 2015

Different Markets Working in Stock Market

Section One discusses some of the considerations involved in the decision to specialize in a stock market or trade a diversified portfolio of market. proper diversification can go a long way toward reducing your risk of ruin. It is known that some trading markets similarly others do not. The extent to which two different markets trade in a similar way is known as its “correlation.” A statistical function known as the “correlation” coefficient can tell how closely the price fluctuations of two markets reflect each other. Two markets that trade exactly the same would have a correlation coefficient of 1. At the other end of the spectrum, two fair trade markets that otherwise would have a correlation coefficient of -1. Market whose price movements have no correlation would have a correlation coefficient of 0. Oh correlation between markets provides an opportunity for clever traders to minimize fluctuations in the equity in your account. Let us illustrate this by looking at two different portfolios. Consider a portfolio of trade T-Bonds, 10 years and T-5-Year T-notes using the same approach. Each of these contracts fluctuates based on changes in interest rates. These contracts generally will rise or fall along with the main difference is the magnitude of price movement. If you trade all using the same approach, it is likely that sometimes it is far short of the three contracts and three contracts. If interest rates are generally increasing, each of these contracts is likely to fall in price. If interest rates are falling, each of these contracts, which rises in the price. As a result, when you’re on the right side of the market which undoubtedly will make some great profits. However, if you are long the three contracts and higher interest rates bill is likely to take a significant success. You can make profitable trading portfolio, but in terms of risk control that must be recognized is that it is almost certain to experience some sharp swings in account equity. If these changes are more than they can handle may be forced to stop work before reaping the full benefits of its approach. Now consider a trading account of a portfolio of bonds, Natural Gas and the Japanese yen. These markets fluctuate according to different variables. If you trade all using the same approach as there is no inherent reason to expect that trade in a similar manner. Sometimes we all can rise or fall in unison, but more often that rise and fall independently of each other. There may be times when two of the three markets are trading in a narrow band with few profitable trends. At the same time, the third market may be strong trend, thus giving the dealer an opportunity to make money trading the contract sufficient to offset their losses in the other two contracts. Equity curves of these two portfolios using a particular system are shown in Figures 3-1 and 3-2. Note that the trading book only three interest rate contracts to make more money during a period of four and a quarter test year that the diversified portfolio. In retrospect, one would say that this was the “best” portfolio, as it made more money. But having a close look at the choppiness of these two curves on equity. Whereas the portfolio interest rate was only one series of drawdowns strong and some flat out periods, the diversified portfolio largely slipped consistently superior in everything. Most traders have a much easier time following a trade exchange program diversified portfolio in this example, although scored fewer benefits.

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