Speculative Stock Trading

The investment portfolio will be solely on stock market because of the liquidity for speculative trading. For long term investment, stock market shows a characteristic of secular growth in value. In short term period, the movement as well as volatility is highly unpredictable. Therefore the scenario of short-term speculative stock trading is like a zero-sum game with the possibility of wealth transfer among the participants. In the very long term, stock investment can create wealth from the appreciation of equity.

Since the investment objective is aggressive in order to recoup the significant loss in prior trading activities, the growth potential in portfolio value by long term equity appreciation is not an important factor to be considered. However, it is believed that the fall in stock market has overshot in early 2009. The stock market has since then recovered some of the drop from the peak in 2007. There is still potential for stock value appreciation in medium term.

The long term growth in stock market is driven by innovations in technology. The living standard of human beings is advancing over the years and in history. The growth in stock market is a symptom of wealth accumulation through the process of improved productivity. Based on this argument, the longer term trading strategy is a positive outlook on stock movement direction.

Since the trading strategy is aggressive and the use of leverage amplifies the gain/loss, each investment decision is risky and has significant impact on the result. The market condition and participants sentiment has to be thoroughly analyzed in order to increase the probability of correct decision and timing. Some means of hedging is used to reduce the negative impact of a wrong decision. Therefore if the ratio of correct versus wrong investment decision is larger than unity as in random event and evenly distributed, the overall result will be growth in the portfolio. Appropriate hedging will help to minimize the impact of overly aggregate wrong decisions on portfolio performance.

In speculative stock trading, the strategy is to consider two factors. The first is the short term movement trend of a stock on which an investment decision is made. The second is the longer term in movement trend. This property is exploited in the hedging process against an immediate wrong investment decision.

In summary, the trading strategy is to make an investment decision based on a stock immediate movement trend. Hedge against wrong decision is made based on a longer term perspective of relevant stock movement.

The quality of investment decision is critical to the success of strategy. Market information and participants competition have to be assimilated in the decision thinking. The selection of appropriate hedging tools is important to the defensive protection against wrong decision.