In a previous column, I discussed how the world's greatest investor - Jim Simons of Renaissance Technologies - owes his remarkable investment success to short-term swing trading. Renaissance has crushed the returns of other investment approaches by relying on swing trades generated by computerized algorithms. You may have never heard of Simons. But are you a fan of the late, great Jack Bogle, the founder of Vanguard and index investing? Well, $1 invested in a Vanguard S&P 500 index fund in 1988 would have turned into $20. Do you admire Warren Buffett? The same $1 invested in Berkshire Hathaway would have grown to $107. But had you been lucky enough to invest in Simon's Medallion Fund, your $1 would have been worth about $27,000 now. What's the most important conclusion for you as an investor? A quantitative approach to short-term swing trading is by far the best way to make the most money over the shortest period. The "Inhuman" Success of Quantitative Trading This headline on CNBC highlighted Renaissance's greatest edge: "The secret behind the greatest modern day moneymaker on Wall Street: Remove all emotion." Put another way... Quantitative investing algorithms are superior to human investors in every way. They can pick up on predictable patterns no human could. And they use these patterns to collect massive profits over very short periods. Algorithms act on only cold, hard logic. Never emotion. As The Wall Street Journal's Gregory Zuckerman, author of a book on Renaissance Technologies, put it, "Too often we get caught up in stories when it comes to stocks... By deferring to models and the scientific method, you don't fall for things like behavioral biases." In short, quantitative trading solves the problem of cognitive biases that typically cloud an investor's judgment. The Secrets of Successful Swing Trading Swing trading is key to successful short-term trading. Yet the secret behind this approach is surprisingly simple. Like the ebb and flow of water washing against an ocean shore, stocks move in waves. So getting in tune with a stock's rhythm is essential. In the past, human traders like Paul Tudor Jones II relied on their finely honed instincts to trade these movements. But today, quant traders take swing trading to another level. They translate these ebbs and flows into computer algorithms. These algorithms then home in on the few potential swing trades with the highest probability of success. Instead of following a trader's instincts, swing trading has become all about playing the odds. |
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